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TMI Blog1973 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... lates to the assessment year 1957-58, the following question was referred by the Tribunal under section 256(1) of the Act of 1961 : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the net dividend income of Rs. 2,27,472 received from a Pakistan company and the capital gains of Rs. 50,829 were not deductible in arriving at the total world loss under section 24(1) ? The Mahalaxmi Sugar Mills Co. Ltd., which will be hereinafter referred to as the assessee-company, is a public limited company carrying on business of manufacturing and sale of sugar. The assessee-company also held some shares in the Premier Sugar Mills & Distillery Co. Ltd., Mardan, West Pakistan, which will be hereinafter referred to as the Pakistan company. The said Pakistan company also carried on business of manufacturing and sale of sugar. But its profits were wholly taxable in Pakistan. In the previous year relevant to the assessment year 1956-57, the assessee-company earned a dividend income of Rs. 2,30,832 from its holdings in the Pakistan company and also derived capital gains of Rs. 5,120 in India. The assessee-company, however, sustained a loss of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances of the case, in determining the loss to be carried forward for being set off against future profits, the dividend income of Rs. 2,30,832 in respect of shares held by the assessee in the capital of the Premier Sugar Mills & Distillery Co. Ltd., Mardan (West Pakistan), of which the profits are wholly taxable in Pakistan and which dividends have been taxed by the Income-tax Officer, Lahore (West Pakistan), at rates higher than the rate applicable in India have been rightly deducted from the business loss of the assessee-company in terms of the provisions of the Indian Income-tax Act, 1922, read with the statutory Agreement for Avoidance of Double Taxation made between India and Pakistan ? 2. Whether the net dividend of Rs. 2,30,832 earned in respect of shares held by the assessee-company in the capital of the Premier Sugar Mills & Distillery Co. Ltd., Mardan (West Pakistan), can be taxed separately in terms of section 3 of the Indian Income-tax Act, 1922, in the hands of the assessee-company and abatement as provided in the Agreement for Avoidance of Double Taxation made between India and Pakistan be allowed to the assessee-company ? 3. Whether, on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Agreement for Avoidance of Double Taxation made between India and Pakistan be allowed to the assessee-company ? 3. Whether, on the facts and in the circumstances of the case, in determining the loss to be carried forward for being set off against future profits the capital gains of Rs.50,829 have been rightly deducted from the business loss of the assessee-company and the same could not be assessed separately in terms of section 3 of the Indian Income-tax Act, 1922, at rates and in the manner prescribed in section 17(7) of the said Act ? " Instead of referring the above three questions as suggested by the assessee-company, the Tribunal only referred one question which has already been set out above as, in its opinion, the real dispute between the parties was brought out precisely and clearly in the questions framed by the Tribunal. We may at this stage notice that the word "not" appearing before the word "deductible" in both the questions appears to be a mistake and that this word "not" should be omitted. Being dissatisfied with the questions as framed by the Tribunal in respect of the two assessment years, the assessee-company has filed two applications, namely, Income-tax Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of this claim are as follows : Under section 24(1) of the Act, a business loss can be set off only against assessable income and it cannot be set off against an income which is not assessable under the Act by virtue of section 49A of the Act and the Agreement for Avoidance of Double Taxation between India and Pakistan which was entered into by the Central Government in exercise of its powers conferred by section 49 A of the Act. The dividend income from the Pakistan-company was not assessable to tax under the Act as it was wholly assessable by Pakistan. The dividend income from the Pakistan company was, therefore not an assessable income under the Act and the assessee's business loss cannot be set off against such income. By deducting the dividend income from the business loss of the assessee-company, the latter was deprived of the benefit to which it was entitled under the said Agreement and the effect of the deduction of the dividend income from the business loss of the assessee-company was to subject the dividend income to double taxation which was not permitted by reason of section 49A of the Act and the Agreement entered into under this section. According to the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 24(2). " The Appellate Assistant Commissioner has further stated these contentions as follows : " In view of the fact that the appellant has paid tax in Pakistan in respect of the Pakistan dividend income and in view of the Agreement for the Avoidance of Double Taxation in India and Pakistan, the appellant would not be called upon to pay any tax in respect of the same dividend income in India. " Rejecting this contention, the Appellate Assistant Commissioner observed as follows : " In the appellant's case, the capital gain as well as the Pakistan net dividends are not items which are at all exempt from tax. In fact, they are actually included in the total income of the appellant, and are liable to tax, though at rates below the full Indian rates, in the one case because of the provisions of section 17(6) and in the other because of the existence of the Agreement for the Avoidance of Double Taxation in India and Pakistan. The Appellate Assistant Commissioner has also referred to the Circular of the Central Board of Revenue being Circular No. 26 dated July 7, 1955, which is the Circular explaining the provisions of the meat for the Avoidance of Double Taxation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first person to raise such a dispute and disallowed the assessee's claim on the ground that the Pakistan income had not been wholly taxed in Pakistan or that the rate of tax in Pakistan was lower than that in India. Even if the Income-tax Officer had overlooked these points, the Appellate Assistant Commissioner would certainly have noticed them and would have referred to them while disallowing the assessee's claim. Therefore, we find sufficient material on record to come to the conclusion that the contentions which have now been raised on behalf of the assessee-company had been raised before the Tribunal also and that, therefore, the assessee is entitled to raise these contentions before us. The learned counsel for the revenue has next contended that even if it is assumed that these contentions had been raised before the Tribunal, the questions that have been referred by the Tribunal are limited in scope and that this court would be travelling beyond the scope of these questions if it were to consider the contentions raised on behalf of the assessee-company. In considering the scope of the questions referred by the Tribunal, we have to take note of the questions which the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year ....... (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year. The corresponding provisions in the Act of 1961 are sections 70, 71 and 72 and in order to understand the true scope of sub-sections (1) and (2) of section 24 of the Act, it would be useful to refer to the corresponding sections of the Act of 1961. The relevant portions of the said sections are as under : " 70. (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income other than 'capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered firm showed profits which was taxed on the firm in accordance with section 23(5)(b) of the Act. The share of the assessee in the profit of the unregistered firm amounted to Rs. 26,110 and his share of the losses in the registered firms amounted to Rs. 13,167. The assessee contended-- (i) that his share of the profit in the unregistered firm should be ignored entirely in ascertaining the total income ; and (ii) that he was entitled to carry forward the loss of Rs. 13,167 to the succeeding year under section 24(2) of the Act. The Supreme Court while negativing the first contention of the assessee, however, upheld the second contention and held that the loss sustained by the assessee in the registered firms was not liable to be set off against the profits from the unregistered firm and that the assessee was entitled to have the entire loss of Rs. 13,167 carried forward to the next year. After referring to the provisions of sections 14(2)(a), 16(1)(a) and 24(l) of the Act, the Supreme Court observed as follows : " The question, however, arose before the High Court as to whether, in view of this decision, the assessee could carry forward loss from the registered firms in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed in the assessment proceedings for 1950-51 that it was entitled to carry forward and set off the loss of the assessment year 1948-49 against the assessee's business income for the assessment years 1950-51 and 1951-52. The claim was resisted by the income-tax department on the ground that section 24 was applicable only to such loss of profits and gains which if they had been profits and gains would have been assessable in British India or the taxable territories and that, in the case of non-residents, income accruing or arising without British India or without the taxable territories not being liable to be assessed, the loss of such profits and gains could not be set off under section 24(1) and (2) of the Income-tax Act. The High Court upheld the contention of the department and the Supreme Court confirmed the decision of the High Court. It observed that : " Reading the provisions of section 24 with the provisions of section 4(1)(a) and (c) and section 14(2)(c) it seems clear that section 24(l) when it talks of profits or gains refers to taxable profits or taxable gains; in other words, it has reference to such profits and gains as would have been assessable in British Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of section 4 computed in the manner laid down in this Act". The relevant portion of section 4(1) of the Act provides that : Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-- (a) are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or (b) if such person is resident in the taxable territories during such year,- (i) accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or (ii) accrue or arise to him without the taxable territories during such year ......." It would thus be seen that the total income of a person is to be charged in accordance with and subject to the provisions of the Act. The total income has to be charged subject to section 49A of the Act which provides as under : " The Central Government may enter into an agreement-- (a) with the Government of any country outside India for the granting of relief in respect of income on which have been paid both income-tax (including super-tax) under this Act and income-tax in that country, or (b) with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd will be adjusted against the abatement allowable under this agreement; if no such certificate is produced, the abatement shall cease, to be operative and the outstanding demand shall be collected forthwith. Article VII : (a) Nothing in this Agreement shall be construed as modifying or interpreting in any manner the provisions of relevant taxation laws in force in either Dominion. (b) If any question arises as to whether any income falls within any one of the items specified in the Schedule and if so under which item, the question shall be decided without any reference to the treatment of such income in the assessment made by the other Dominion. " The Schedule referred to in Article IV to the Agreement consists of four columns. The first column relates to the source of income or nature of transaction from which income is derived. The second and third columns relate to the percentage or income which each Dominion is entitled to charge under the agreement and the fourth column provides for remarks, Item No. 8 in the first column of the Schedule relates to dividend income with which we are concerned in the present case. Under the second column, it is stated as follows : " By ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and holding in abeyance for a period the collection of a portion of the demand equal to the estimated abatement. " In Seth Satya Paul Virmani v. Commissioner of Income-tax the Punjab High Court interpreted the Agreement in the following manner : " Now, under this Agreement the object of which, as I have said, is avoidance of double taxation, each Dominion was authorised to make the assessment in the ordinary way under its own laws and where either Dominion under this agreement charges any income from any source in excess of the amount calculated according to the percentage given in columns 2 and 3, that Dominion is to allow abatement equal to the lower tax payable on such excess in their Dominion and according to Article VII the agreement was not to be construed in any manner modifying the relevant taxation laws. Therefore all that this agreement was meant for was that a person was not to be subjected to double taxation and if he was charged income-tax in one Dominion on certain income he was to be allowed to have abatement to that extent in the other Dominion. In Income-tax Officer v. State Bank of India the Calcutta High Court, following the interpretation of the Agreement by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits to determine the marginal taxable income. It does not, therefore, entitle the Income-tax Officer to minimise the loss by setting off the profits. It may be noted at this stage that this income which accrued in the Indian States was exempt from tax under the law in force on the relevant date. In Commissioner of Income-tax v. Trilokchand Kalyanmal, which is the authority relied upon by the Tribunal for disallowing the assessee's claim, the assessee derived income from various sources in Part A and Part B States and the income was taxable under the Indian Income-tax Act read with the Part B States (Taxation Concessions) Order, 1950. Under paragraph 12 of the said Order, it was provided : " Where the total income of an assessee chargeable to tax for the assessment for the year ending on the 31st day of March, 1951, includes any income from dividends paid by a company registered in a State in which there was no State law relating to the charge of income-tax and super-tax and the dividend is paid out of profits which were not liable to be taxed, in whole or in part, either in the State or in the taxable territories, no income-tax shall be payable by the assessee on such proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee and not to exempt it from total tax. In the view of the High Court, if there was no net income or gain on which income-tax had to be paid and thus no question of payment of income-tax, there could be no question of the assessee being given any relief in the payment of income-tax as provided by paragraph 12 on the dividend income. The High Court then proceeded to consider the scope of section 24(1) of the Act and observed as follows : " Section 24(1) does not relate to set-off of losses against profits under the same head. It applies in terms only to the set-off of losses under one head against income under any other head mentioned in section 6 of the Act ...... The question of setting off of losses against profits under another head can arise only if after the adjustment of loss against profits from the same source and the adjustment of loss from one source against profits from another source under the same head the net result is still a loss. The set-off, therefore, under section 24 is against income on which tax can be levied and collected, that is to say, against taxable income. It follows, therefore, that under section 24(1) it is not permissible to adjust tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was rejected by the Income-tax Officer as also by the Appellate Assistant Commissioner and the Tribunal. Following the decision of the Supreme Court in Seth Jamnadas Daga v. Commissioner of Income-tax referred to above, the Bombay High Court held as follows: " It has been held by the Supreme Court that the assessee would be entitled to carry forward his share of the loss in the registered firm to the succeeding year under section 24(2). It is clear from this decision that the said loss is not liable to be diminished by the amount of the profit from the unregistered firm which the assessee might have received in the said year. The profit from the unregistered firm, which is exempt from tax in the bands of the assessee, although it has to be included to ascertain his total income, in order to determine the rate applicable to his other income, cannot be taken to reduce the loss to be carried forward. " Before applying the principles enunciated in the above decisions to the facts of the present case, we may also refer to a circular of the Central Board of Revenue containing directions to the department for the purpose of applying the terms of the agreement to assessments. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case. If the assessee does not produce a certificate of assessment in the other Dominion within that period, the whole demand should be collected." The rest of the circular is not relevant. Coming to the facts of the present case, we find that the entire dividend income from the Pakistan company had accrued in Pakistan and that, according to the Schedule to the Agreement, the whole of this income was liable to be taxed in Pakistan and no part of it was liable to be taxed in India. We further find that as a matter of fact the whole of the dividend income was taxed in Pakistan at a rate which was higher than the rate applicable in India for the assessment of such income. Under the Agreement, the Income-fax Officer here had to make the assessment of the total income of the assessee-company under the Act in the first instance. In other words, he has to include the dividend income from the Pakistan company in the total income of the assessee-company. He has then to find out whether under the Schedule to the Agreement any portion of this income is liable to be taxed in India. Then when he finds that the entire dividend income is assessable in Pakistan and no portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect. For, in reality, it is absorbing that Indian loss which, if not so absorbed, would have been carried forward to the following assessment year and set off against the profits and gains, if any, assessable for that assessment year. By adjusting the Indian loss against the Pakistan dividend income, the Indian income of the following year, if equal to or less than the loss of the current year, has been exposed to taxation. In outward appearance, it is the Indian income of the following year, which would be taxed. But, in substance, it would be taxing the Pakistan dividend income, which has prevented the Indian loss to be carried forward. This is clearly contrary to the terms of the Agreement. We are, therefore, of the view that the Income-tax Officer was not right in deducting the dividend income from the Pakistan company from the business loss in India and the Tribunal was wrong in upholding such deduction. We, therefore, answer the question relating to the Pakistan dividend income in favour of the assessee and against the department. Before concluding, we would like to draw the attention of the authorities concerned to the difficulty experienced by the income-tax authorities, ..... 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