TaxTMI 
TaxTMI 
1986 (7) TMI 83
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....in the Pakistan company. It sustained loss of Rs. 20,30,006 from the business in India. Likewise, in the previous year relevant to the assessment year 1957-58, the assessee received a dividend income of Rs. 3,30,868 from the holdings in the Pakistan company, but sustained a loss of Rs. 9,11,728 from the business in India. The assessee claimed that the entire loss sustained by it in India in each year should be carried forward and set off against its business profits in India in future years. It contended that the dividend income derived by it from the Pakistan company was not liable to tax in India as it was wholly taxed in Pakistan and, therefore, it could not be set off against the business loss in India. The Income-tax Officer rejected the contention and deducted the dividend income received from the Pakistan company from the business loss in India disclosed by the assessee and after making certain other adjustments, he determined the total loss of the assessee for the assessment year 1956-57 at Rs. 16,51,120 and for the assessment year 1957-58 at Rs. 3,78,661. The assessee appealed to the Appellate Assistant Commissioner of Income-tax in respect of each assessment year, but ....
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....y income from the sources or categories of transactions specified in column I of the Schedule to this agreement (hereinafter referred to as " the Schedule ") in excess of the amount calculated according to the percentage specified in columns 2 and 3 thereof, that Dominion shall allow an abatement equal to the lower amount of tax payable on such excess in their Dominion as provided for in article VI. Article V : Where any income accruing or arising without the territories of the Dominions is chargeable to tax in both the Dominions, each Dominion shall allow an abatement equal to one-half of the lower amount of tax payable in either Dominion on such doubly taxed income. Article VI : (a) For the purposes of the abatement to be allowed under article IV or V, the tax payable in each Dominion on the excess or the doubly taxed income, as the case may be, shall be such proportion of the tax payable in such Dominion as the excess or the doubly taxed income bears to the total income of the assessee in each Dominion. (b) Where at the time of assessment in one Dominion, the tax payable on the total income in the other Dominion is not known, the first Dominion shall make a demand....
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....dividend income at all. But this, it must be noted, is the position obtaining pursuant to the agreement. If regard be had to the provisions of the Indian Income-tax Act, 1922, without reference to the agreement, the dividend income, even though accruing or arising abroad, is liable to tax under the Indian law. The High Court held that because of the operation of the aforesaid agreement, dividend income derived by the assessee in Pakistan was not assessable under the Income-tax Act in India and, therefore, could not be set off under sub-section (1) of section 24 of the Indian Income-tax Act, 1922, against the business loss suffered by the assessee. Now, there can be no doubt that under sub-section (1) of section 24, an assessee who has sustained a loss of profits or gains in any year under any of the heads mentioned in section 6 is entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year, and that the income, profits or gains against which the loss is set off must be such income, profits or gains as is assessable under the Indian Income-tax Act, 1922. The statute does not contemplate a setting off of loss against incom....
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.... partly in one Dominion and partly in the other, each Dominion is entitled to charge on 50% of the profits. Bat the Schedule does not limit the power of each Dominion to assess in the normal way all the income that is liable to taxation under its laws. The Schedule has been inserted only for the purpose of calculating the abatement to be allowed. Article VI also leads to the same conclusion. For if no assessment could be made on the amount on which the abatement is to be allowed, there could be no question of making a demand without allowing the abatement and holding in abeyance for a period the collection of a portion of the demand equal to the estimated abatement." On the basis of the agreement, the High Court came to the conclusion that the dividend income was not liable to charge by the Dominion of India. The High Court omitted to note that the agreement functions on different plane altogether. It enjoys no role in the application of the Indian law for the purpose of determining the total income of an assessee and the tax liability consequent upon such assessment. On the contrary, the provisions of the agreement clearly envisage that full effect must be given to the opera....
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....the dividend income from the Pakistan company. The High Court has fallen into the fallacy of treating the setting off of the dividend income against the business loss as an infringement of the Agreement. It has lost sight of the provisions of the Agreement itself which provide that the Indian Income-tax Act must be applied without regard to the Agreement for the purpose of determining the total income and the consequential tax liability of the assessee. Once it is accepted that the Agreement preserves the right of each Dominion to determine the assessable income in accordance with the operation of its own laws and it is concerned only with the question of the degree of retention of the tax charged by it consequent upon such assessment, it becomes abundantly clear that the dividend income, inasmuch as it is taxable under the Indian Income-tax Act, by virtue of sub-clause (ii) of clause (b) of sub-section (1) of section 4, must be brought into the net of income for assessment under the Indian law. It has not been shown to us by learned counsel for the assessee that it constitutes the subject of exemption under any provision of the Indian Income-tax Act. Sub-section (3) of section ....