Double taxation relief is limited to covered income categories; foreign agricultural loss cannot reduce abatable business income.

Relief under the India-Pakistan double taxation arrangement was confined to income categories actually covered by the agreement and had to be computed source-wise for taxable Pakistan business income. Agricultural income in Pakistan was outside the agreement because it was not taxable under the relevant income-tax law, so the related agricultural loss could not be set off to reduce the abatable manufacturing business income. The later statutory relief for foreign agricultural income under section 49D(3) reinforced the separation between covered business income and income outside the treaty scope. The assessee was therefore entitled to abatement on the full Pakistan manufacturing business income without adjustment for the agricultural loss.

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Issues: Whether relief under the Agreement for Avoidance of Double Taxation between India and Pakistan had to be computed on the assessee's Pakistan manufacturing business income without setting off the loss from agricultural operations in Pakistan.

Analysis: The Agreement applied only to taxes imposed under the income-tax, excess profits tax and business profits tax laws referred to in it, and abatement under article IV had to be granted source-wise in respect of income falling within the scheduled categories. Agricultural income in Pakistan was not taxable there under the relevant income-tax law and therefore did not form part of the income covered by the Agreement. Since the agricultural loss was outside the scope of the double taxation arrangement, it could not be brought in to reduce the amount of Pakistan business income on which relief was otherwise available. The later statutory relief for foreign agricultural income under section 49D(3) also supported the distinction between taxable Pakistan business income and agricultural income outside the Agreement.

Conclusion: The assessee was entitled to abatement on the full Pakistan manufacturing business income without setting off the Pakistan agricultural loss, and the answer was in the affirmative in favour of the assessee.

Ratio Decidendi: Relief under a double taxation agreement must be confined to the income categories actually covered by the agreement, and income or losses outside that scope cannot be used to diminish the abatable amount.

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