Double taxation relief under the India-Ceylon treaty applies only as abatement, not as a general exemption from Indian tax.

A double taxation agreement that requires each country to assess income under its own laws does not create a general exemption from Indian tax; it only operates at the relief stage by permitting abatement for double taxation, so Indian taxation remained valid. For computing that abatement, the relevant deduction was the tax actually payable in Ceylon on the same income, not a hypothetical amount calculated on a non-resident basis; the relief was therefore confined to tax actually levied there.

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Issues: (i) Whether the assessee was exempt from taxation in India by reason of the India-Ceylon double taxation agreement. (ii) Whether, for granting abatement under the agreement, the Indian tax had to be reduced by the tax actually payable in Ceylon or only by the amount that would have been payable there as a non-resident.

Issue (i): Whether the assessee was exempt from taxation in India by reason of the India-Ceylon double taxation agreement.

Analysis: The agreement required each country first to make assessment in the ordinary way under its own laws. The restriction created by the agreement operated only at the stage of allowing abatement and did not take away the power to assess income otherwise taxable under domestic law. The Schedule was intended to regulate relief from double taxation and not to grant a general exemption from Indian tax.

Conclusion: The issue is answered against the assessee and in favour of the Revenue; the assessee was not exempt from taxation in India.

Issue (ii): Whether, for granting abatement under the agreement, the Indian tax had to be reduced by the tax actually payable in Ceylon or only by the amount that would have been payable there as a non-resident.

Analysis: The relevant treaty language, read with the Schedule, required deduction of the tax attributable to the same income in the other country. The expression was construed to mean the tax actually payable under the other country's law after taking account of exemptions and allowances, not a hypothetical non-resident computation. The court treated the amount ultimately levied in Ceylon as the proper measure of the abatement.

Conclusion: The issue is answered against the assessee and in favour of the Revenue; the abatement was confined to the tax actually levied in Ceylon.

Final Conclusion: The agreement did not bar Indian taxation, and the relief from double taxation had to be worked out by deducting the tax actually payable in Ceylon from the Indian tax computed under domestic law.

Ratio Decidendi: A double taxation agreement that requires each country to assess income under its own laws does not prevent domestic assessment; it only limits retention of tax by allowing relief in the form of abatement for the tax actually payable on the same income in the other country.

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