Commissioner of Income-Tax, Delhi Vs.
Mahalaxmi Sugar Mills Co. Ltd. [1986] INSC 133 (15 July 1986)
PATHAK, R.S.
PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION: 1986 AIR 2111 1986 SCR (3) 150 1986
SCC (3) 544 JT 1986 228 1986 SCALE (2)166
ACT:
Total world loss, computation of-Deduction of
dividend received from the holding company in Pakistan from its business losses
in India by an assessee, whether in order- Income Tax Act, 1922, section 24(1)
read with Notification No. 28 dated 10.12. 47-Agreement for the Avoidance of
Double Taxation of Income between India and Pakistan, scope and effect.
HEADNOTE:
The respondent assessee is a public limited
company carrying on the business of manufacturing and selling sugar.
During the assessment years 1956-57 and
1957-58 the company also held shares in the Premier Sugar Mills and Distillery
Co. Ltd., Mardan, West Pakistan. The Pakistan company also carried on the
business of manufacturing and selling sugar.
The assessee company earned dividend income
of Rs.2,30,832 and Rs.3,30,868 from the holdings in the respective previous
years relevant to the assessment years aforesaid, while it incurred a business
loss of Rs.20,30,006 and Rs.9,11,728 respectively from its 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 in as much as the dividend income derived by it from the Pakistan
company was not liable to tax in India by virtue of the Agreement for the
Avoidance of Double Taxation between India and Pakistan.
The Income Tax Officer rejected the said
contention and determined the total loss in the relevant assessment years by
making certain adjustments. The appeals before the Appellate Assistant
Commissioner and the Income Tax Appellate Tribunal failed. However, in the
reference made at the instance of the assessee the Delhi High Court answered
the questions relating to the Pakistan dividend in favour of the assessee and
against the revenue. Hence the appeals by certificate.
Allowing the appeals, the Court, 151 ^
HELD: 1.1 The dividend income received from
the Pakistan company is deductible in arriving at the total world loss of the
assessee under sub-section (1) of section 24 of the Indian Income Tax Act,
1922. [160F-G]
1.2 Under sub-section (1) of section 24 of
the Indian Income Tax Act, 1922 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. 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. The statute does not contemplate a setting off
of loss against income which is not assessable at all under the Act. [157A-C]
1.3 For the purposes of the assessment under
the Indian Income Tax Act, the income of the assessee must be determined in the
ordinary way under the Indian law. Having regard to the relevant entry 8 of the
Schedule to the Agreement for the Avoidance of Double Taxation between the two
Dominions of India and Pakistan, the Dominion of India is not entitled to
charge the dividend income at all.
Article IV of the Agreement makes it clear
that each Dominion is entitled to make assessments in the ordinary way under
its own laws. The process of determining the assessable income of the assessee
is not affected by the Agreement. What the Agreement does is to give relief
against double taxations. [156F-G; 157D-E] Ramesh R. Saraiya v. Commissioner of
Income Tax, Bombay City 1 [1965] 55 ITR 699 referred to.
1.4 The agreement for the Avoidance of Double
Taxation functions in a 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 operation of the tax law of each Dominion. All that the
Agreement does is to permit a Dominion to retain the tax recovered by it
pursuant to an assessment under its law to the extent that an abatement is not
allowed under the provisions of the Agreement. Article IV specifically provides
that each Dominion shall make assessment in the ordinary way under its own
laws. Such assessment includes the determination of the consequential tax
liability. Thereafter, the Agreement takes over and the Dominion must allow an
abatement in the degree mentioned in Article IV. Clause (b) of Article VI
permits the 152 Dominion to make a demand without allowing the abatement if the
tax payable on the total income in the other Dominion is not known, but the collection
of the tax has to be held in abeyance for a period of one year at least to the
extent of the estimated abatement. If the assessee produces the certificate of
assessment in the other Dominion within the period of one year or any longer
period allowed by the Income Tax officer, the uncollected portion of the demand
has to be adjusted against the abatement allowable under the Agreement. But if
no such certificate is produced, the abatement ceases to be operative and the
outstanding demand can be collected forthwith. Clause (a) of Article VII makes
absolutely clear that nothing in the Agreement can be considered as modifying
or incorporating in any manner the provisions of the relevant tax laws in force
in either Dominion. Therefore, the Agreement cannot be construed as modifying
or superseding in any manner the provisions of the Indian law in that regard.
[158F-H;159A-D]
1.5 So long as it does not constitute the
subject of exemption under any of the provisions (Sections 14 to 16) of the
Indian Income Tax Act, the dividend income, in as much as it is taxable under
the Indian Income Tax Act by virtue of sub-clause (ii) of clause (b) of
sub-section I of section 4, must be brought into the net of income for
assessment under the Indian law. [159G-H; 160A-]
1.6 Merely because the assessee fails to
claim the benefit of a set off cannot relieve the Income-tax officer of his
duty to apply section 24 in an appropriate case for the purpose of determining
the true figure of the assessee's taxable income and the consequential tax
liability. How ever in the instant case a perusal of the assessment orders for
two years shows clearly that the assessee did claim a set off of the Pakistan
dividend against the losses of the Indian business. [160D-E]
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 1350-51 (NT) of 1974 From the Judgment and order dated 19th October. 1973
of the Delhi High Court in Income Tax Reference Nos 46 and 52 of 1970 Dr. V.
Gauri Shankar and Miss A. Subhashini for the Appellant.
Bishambar Lal, R.P. Gupta, S.K. Gupta and
V.K. Jain for the Respondent.
153 The Judgment of the Court was delivered
by PATHAK, J. These appeals by certificate granted by the Delhi High Court are
directed against a common judgment of that High Court disposing of two
income-tax references relating to the assessment years 1956-57 and 1957-58 on
the question whether the assessee's dividend income from a Pakistan company was
deductible against its business loss in India.
The assessee is a public limited company
carrying on the business of manufacturing and selling sugar. During the
relevant period it also held some shares in the Premier Sugar Mills &
Distillery Co. Ltd Mardan, West Pakistan. The Pakistan company also carried on
the business of manufacturing and selling sugar. In the previous year relevant
to the assessment year 1956-57 the assessee earned a dividend income of
Rs.2,30,832 from its holdings in the Pakistan company. It sustained a loss of
Rs.20,30,006 from the business in India. Likewise, in the previous year
relevant to the assessment year 1957-58 the asses- see 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 p Rs.16,51,129 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
the appeals failed, except that in the case for the assessment year 1957-58 the
Appellate Assistant Commissioner determined the dividend income from the
Pakistan company at Rs.2,27,472 and reduced the net loss accordingly. In second
appeal the Income-tax Appellate Tribunal confirmed the orders of the Appellate
Assistant Commissioner. Thereafter, at the instance of the assessee the
Appellate Tribunal referred the following questions in the two cases to the
Delhi High Court for its opinion:
154 "1. 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.2,30,832 received from a Pakistan Company and the
capital gains of Rs.5,120 were not deductible in arriving at the total world
loss under section 24(1)?"
2. 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 High Court answered the questions relating to
the Pakistan dividend in favour of the assessee and against the revenue.
So far as the question in each case refers to
the deduction of capital gains against the total world loss for the year,
learned counsel for the parties jointly state that it is not subject matter of
these appeals.
It is necessary to mention at the outset that
the Dominion of India and the Dominion of Pakistan concluded an Agreement for
the Avoidance of Double Taxation of Income chargeable in the two Dominions in
accordance with their respective laws, and in exercise of the powers conferred
by s. 49AA of the Indian Income-tax Act 1922 and the corresponding provisions
of the Excess Profits Tax Act, 1940 and the Business Profits
Act, 1947 the Government of India directed by Notification No. 28 dated
December 10, 1947 that the provisions of the Agreement would be given effect to
in the Dominion of India. As the scope and effect of the Agreement is
intimately involved in the resolution of the controversy between the parties,
the material provisions may be set forth immediately:
"Article IV-Each Dominion shall make
assessment in the ordinary way under its own laws; and, where either Dominion
under the operation of its laws charges any income from the sources or
categories of transaction specified in column I of the Schedule of this
Agreement (hereinafter referred to as the Schedule) in excess of the amount
calculated according to the percentage specified in columns 2 155 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 each 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 n tax payable on the total income in the other Dominion is not
known, the first Dominion shall make a demand without allowing the abatement,
but shall hold in abeyance for a period of one year (or such longer period as
may be allowed by the Income-tax officer in his descretion) the collection of a
portion of the demand equal to the estimated abatement. If the assessee
produces a certificate of assessment in the other Dominion within the period of
one year or any longer period allowed by the Income-tax officer, the
uncollected portion of the demand 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 156
any reference to the treatment of such income in assessment made by the other
Dominion.
xxx xxx xxx The Schedule (See Article IV)
____________________________________________________________ Source of Income
Percentage of Remarks or nature of Income which each transaction from Dominion
is en- which income is titled to charge derived. under the Agreement.
(1) (2) (3) (4)
____________________________________________________________ xxxx xxxx xxxx
xxxx S. Dividends By each (As in Relief in respect of Dominion preceding any
excess income-tax in pro- column) deemed to be paid by portion to the
shareholder shall the profits be allowed by each of the Dominion in proportion
company to the profits of the chargeable company chargeable by by each each
under this Dominion Agreement.
under this Agreement.
xxx xxxx xxx xxx"
___________________________________________________________ It is apparent that
in the case of dividend income the percentage of income which each Dominion is
entitled to charge under Agreement is in proportion to the profits of the
company chargeable by each Dominion under that Agreement. The relevant entry in
the Schedule indicates that as the factory is situated in Pakistan the Dominion
of Pakistan is entitled to charge 100 per cent of the income and that the
Dominion of India is not entitled to charge any percentage of the Income.
Therefore, the dividend income derived from the Pakistan Company by the
assessee is, by virtue of the Agreement, liable to charge wholly by the
Dominion of Pakistan, and the Dominion of India is not entitled to charge the
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, without reference to the Agreement, the dividend income, even
though accruing or arising abroad, is liable to tax under the Indian law.
157 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- s. (1) of s. 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-s. (1) of s. 24 an assessee who has sustained a loss of profits
or gains in any year under any of the heads mentioned in s. 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. The statute does not contemplate a
setting off of loss against income which is not assessable at all under the
Act. But in order to determine whether the income in question is assessable
under the Act regard must be had to the provisions of the Act itself. The High
Court erred in taking into consideration the circumstance that the Agreement
between the two Dominions prohibited the Dominion of India from charging
income-tax on dividend income earned in Pakistan and treating it as exempt from
the process of assessment to tax under the Act. It will be apparent from
Article IV of the Agreement that each Dominion is entitled to make assessments
in the ordinary way under its own laws.
The process of determining the assessable
income of the assessee is not effected by the Agreement. What the Agreement
does is to give relief against double taxation, and as is clear, from Article
lV, V and VI it is the charge levied by a Dominion on the income of an assessee
that is involved in the relief. For Article IV goes on to say that where either
Dominion under the operation of its laws charges any income from the sources or
categories of transactions specified in column 1 of the Schedule to the
Agreement 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 the Dominion as
provided for in Article VI. The Agreement was considered by this Court in
Ramesh R. Saraiya v. Commissioner of Income-tax Bombay City-I, [1965] 55 lTR
699 and the position was summed up clearly as follows.
"It seems to us that the opening
sentence of Article IV of the Agreement that each Dominion is entitled to make
assessment in the ordinary way under its own laws clearly shows that each
Dominion can make an assessment regardless of the Agreement. But a restriction
is imposed on 158 each Dominion and the restriction is not on the power of
assessment but on the liberty to retain the tax assessed Article IV directs
each Dominion to allow abatement on the amount in excess of the amount
mentioned in the Schedule. The scheme of the Schedule is to apportion income
from various sources among the two Dominions In the case of dividends each
Dominion is entitled to charge "in proportion to the profits of the
company charge able by each Dominion under this agreement." This refers us
back to the other items For instance, in respect of goods manufactured by the
assessee partly in one Dominion and partly in the other, each Dominion is
entitled to charge on 50% of the profits But the Schedule does not limit the power
of each Dominion to assesss 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 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
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 a 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 operation of the tax law of each Dominion All that the
Agreement does is to permit a Dominion to retain the tax recovered by it
pursuant to an assessment under its law to the extent that an abatement is not
allowed under the provisions of the Agreement Article IV, it may be reiterated,
specifically provides that each Dominion shall make assessment in the ordinary
way under its own laws. Such assessment includes the determination of the
consequential tax liability.
Thereafter, the Agreement takes over the
Dominion must allow an abatement in the degree mentioned in Article IV. It will
also be noticed that clause (b) of Article VI permits the 159 Dominion to make
a demand without allowing the abatement if the tax payable on the total income
in the other Dominion is not known, but the collection of the tax has to be
held in abeyance for a period of one year at least to the extent of the
estimated abatement. If the assessee produces the certificate of assessment in
the other Dominion within the period of one year or any longer period allowed
by the Income-tax officer, the uncollected portion of the demand has to be
adjusted against the abatement allowable under the Agreement. But if no such
certificate is produced, the abatement ceases to be operative and the
outstanding demand can be collected forthwith. Clause (a) of Article VII makes
absolutely clear that nothing in the Agreement can be considered as modifying
or incorporating in any manner the provisions of the relevant tax laws in force
in either Dominion. Therefore, having regard to what is expressly stated in
Article IV of the Agreement, and re-emphasised in cl. (a) of Article VII, there
can be no escape from the conclusion that for the purposes of the assessment
under the Indian Income-tax Act, the income of the assessee must be determined
in the ordinary way under the Indian law, and in no way can the Agreement be
construed as modifying or superseding in any manner the provisions of the
Indian law in that regard.
The High Court has proceeded on the basis
that for the purpose of giving abatement of tax in India the dividend income
from the Pakistan Company can be excluded from the taxable income of the
assessee. It has reasoned that by requiring the dividend profits accruing or
arising in Pakistan to be set off against the business loss of the assessee in
India there is, in the result, a taxing of 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 cl. (ii) of
d. (b) of sub. s. (1) of s. 4, must be brought into the net 160 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 Subs. (3) of s. 4 sets forth the cases
in which income is not includible in the total income of the person receiving
it. And ss. 14 to 16 detail the cases where the statute grants exemption from
tax. No provision in the Act has been pointed out from which we may infer that
the dividend income in question is not liable to inclusion in determining the
total income of the assessee.
Learned counsel for the assessee has placed a
number of cases before us which deal with the application of the Indian
Income-tax Act, and where it has been held that for the purpose of sub-s. (t)
of s. 24 of that Act income which does not fall within the purview of the Act
at all cannot be set off against a loss arising under the Act. These are cases
which are wholly inapposite, and have no bearing, at all upon the role played
by the Agreement. It is also urged that it is open to the assessee to claim or
not to claim the benefit of s. 24 of the Act, and that if he does not do so no
question arises of applying s. 24. In the first place, a perusal of the assessment
orders for the two years shows clearly that the assessee did claim a set off of
the Pakistan dividend against the losses of the Indian business.
In the second place there is a duty cast on
the Income-tax officer to apply the relevant provisions of the Indian
Income-tax Act for the purpose of determining the true figure of the assessee's
taxable income and the consequential tax liability. Merely because the assessee
fails to claim the benefit of a set off cannot relieve the Income-tax officer
of his duty to apply s. 24 in an appropriate case.
In the result the appeals are allowed, the
judgment of the High Court is set aside and the questions referred by the
Income-tax Appellate Tribunal to the High Court are answered in favour of the
Revenue and against the assessee in so far that we hold that the dividend
income received from the Pakistan company is deductible in arriving at the
total world loss of the assessee under sub-s (1) of s. 24 of the Indian
Income-tax Act, 1922. The Revenue is entitled to its costs.
S.R. Appeals allowed.
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