Source-wise double tax relief under the India-Pakistan agreement excludes agricultural loss from set-off against business income.

Under the India-Pakistan double taxation agreement, abatement had to be computed source-wise on the income covered by the Schedule, not on an overall net figure. Agricultural income and loss in Pakistan fell outside the agreement's abatement scope, so that loss could not be set off against Pakistan business income for relief purposes. The Indian relief provision dealing separately with agricultural income taxed in Pakistan did not apply where no Pakistani tax on that income was shown. Relief was therefore available on the Pakistan business income alone, without deduction of the agricultural loss.

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Issues: Whether, for abatement of tax under the Agreement for Avoidance of Double Taxation between India and Pakistan, agricultural loss incurred in Pakistan could be set off against Pakistan business income, or whether relief had to be computed on the business income alone.

Analysis: The Agreement governed taxation only of the incomes and categories of transactions specified in its Schedule, and its scheme was distinct from the statutory relief mechanism under section 49D of the Indian Income-tax Act, 1922. Agricultural income arising in Pakistan did not fall within the scope of the Agreement for abatement, though such income or loss had to be taken into account in computing the assessee's total income under the Indian Act. Relief under section 49D(3) dealt separately with agricultural income taxed in Pakistan and did not apply where no Pakistani tax was shown on that income. The proper construction of article IV required separate consideration of the business income covered by the Agreement, without setting off the agricultural loss against it.

Conclusion: The agricultural loss in Pakistan could not be set off against the Pakistan business income for the purpose of abatement under the Agreement, and the assessee was entitled to relief on the entire Pakistan business income.

Ratio Decidendi: Where a double-taxation agreement provides abatement only for specified sources or categories of income, relief must be computed source-wise in accordance with the agreement, and income or loss from an excluded source cannot be brought into that computation merely because it forms part of the assessee's overall taxable income.

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