M.R.A. Ansari, J.
1. These two income-tax references and the two income-tax cases are disposed of by a common judgment as the questions which arise for determination in all these cases are almost identical.
2. In Income-tax Reference No. 46 of 1970, which relates to the assessment year 1956-57, the following question was referred by the Income-tax Appellate Tribunal, Delhi Bench (hereinafter referred to as 'the Tribunal'), under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 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. 2,30,832 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)?'
3. In Income-tax Reference No. 52 of 1970, which relates 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)?'
4. The Mahalaxmi Sugar Mills Co. Ltd., which will be hereinafter referred to as the assessed-company, is a public limited company carrying on business of manufacturing and sale of sugar. The assessed-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 aud sale of sugar. But its profits were wholly taxable in Pakistan. In the previous year relevant to the assessment year 1956-57, the assessed-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 assessed-company, however, sustained a loss of Rs. 20,30,006 from its business in India. In the assessment year 1957-58, the assessed-company received a gross dividend income of Rs. 3,30,868 from its holdings in the Pakistan company and also derived capital gains of Rs. 50,892 in India. The assessed-company, however, sustained a loss of Rs. 9,11,728 from its business in India. The assessed-company claimed that the entire loss sustained by it in India in both the years should be carried forward for being set off against its business profits in India in the future years. The assessed-company's contention was that its dividend income from the Pakistan company was not liable to tax in India, as it was wholly taxed in Pakistan and that, thereforee, the dividend income was not liable to be deducted from its business loss in India. With regard to the capital gains also, its contention was that the capital gains were assessable to tax at a lower rate than the rate at which the business income was taxable and that, thereforee, the capital gains also should not be deducted from the business loss in India. The Income-tax Officer negatived both these contentions and deducted the dividend income from the Pakistan company as well as the capital gains from the business loss shown by the assessed-company and after making certain other deductions from the business loss which are not in dispute at this stage, the Income-tax Officer determined the total loss of the assessed-company for the assessment year 1956-57 at Rs. 16,51,120 and for the assessment year 1957-58 at Rs. 3,78,661.
5. The net loss determined by the Income-tax Officer for the assessment year 1956-57 was confirmed by the Appellate Assistant Commissioner, but in respect of the assessment year 1957-58, the Appellate Assistant Commissioner determined the dividend income from the Pakistan company at Rs. 2,27,472 as against Rs. 3,30,868 determined by the Income-tax Officer and reduced the net loss accordingly. The Tribunal confirmed the orders of the Appellate Assistant Commissioner.
6. The assessed-company filed applications before the Tribunal under Section 256(1) of the Act of 1961 requiring the Tribunal to refer certain questions of law said to arise out of the orders of the Tribunal in respect of the two assessment years. For the assessment year 1956-57, the asses-see-company required the Tribunal to refer the following four questions :
'1. 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 dividend income of Rs. 2,30,832 in respect of shares held by the assessed 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 assessed-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 assessed-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 assessed-company and abatement as provided in the Agreement for Avoidance of Double Taxation made between India and Pakistan be allowed to the assessed-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. 5,120 have been rightly deducted from the business loss of the assessed-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 ?
4. Whether, on the facts and in the circumstances of the case, it has been rightly held that rectification order determining the carried forward losses could not be made under Section 154 of the Income-tax Act, 1961 ?'
7. The Tribunal declined to refer question No. 4 stated above as, in the view of the Tribunal, it was concluded by the decision of the Supreme Court in Maharana Mills (Private) Ltd. v. Income-tax Officer : [1959]36ITR350(SC) . With regard to the other three questions suggested by the assessed-company the Tribunal referred only 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 question as framed by the Tribunal.
8. In its application under Section 256(1) of the Act of 1961 in respect of the assessment year 1957-58, the assessed-company required the Tribunal to refer the following three questions ;
'1. 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 dividend income of Rs. 2,27,472 in respect of shares held by the assessed 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 assessed-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. 2,27,472 earned in respect of shares held by the assessed-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 assessed-company and abatement as provided in the Agreement for Avoidance of Double Taxation made between India and Pakistan be allowed to the assessed-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 assessed-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 ?'
9. Instead of referring the above three questions as suggested by the assessed-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 question as 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.
10. Being dissatisfied with the questions as framed by the Tribunal in respect of the two assessment years, the assessed-company has filed two applications, namely. Income-tax Cases Nos. 9 and 10 of 1971, under Section 256(2) of the Act of 1961 with a prayer that the Tribunal should be directed to refer all the questions which have been suggested by the assessed in its applications under Section 256(1) of the Act of 1961 along with a statement of the case containing all the relevant facts. For reasons which will be stated hereafter, we are of the view that it is not necessary to direct the Tribunal to refer any further questions as suggested by the assessed-company or to submit any further statement of the case. These petitions are, thereforee, dismissed.
11. We shall first dispose of the claim of the assessed-company in respect of the capital gains, because this claim is quite untenable and as a matter of fact, this claim has not been seriously pressed before us by Shri S.T. Desai, learned counsel for the assessed-company, although he was not prepared to specifically give up this claim. Capital gain is one of the heads of income which is assessable to tax, although at a different rate from the rate applicable to other heads of income. Capital gain is, thereforee, an assessable income and the assessed is entitled to set off its business loss against its income under the head 'capital gains' under Section 24(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'). If any authority is required for this proposition, it is to be found in the decision of the Madras High Court in Commissioner of Income-tax v. S.R.M.S. Narayanan Chettiar : [1969]74ITR329(Mad) . We, thereforee, hold that just as the assessed was entitled to have its business losses set off against its capital gains the Income-tax Officer was within his powers to deduct the capital gains from the business loss of the assessed-company in order to arrive at the net loss which was liable to be carried forward under Section 24(1) of the Act. We have, thereforee, to answer the questions referred to us in respect of the two years in favor of the revenue and against the assessed so far as the deduction of the capital gains from the business loss of the assessed-company is concerned.
12. The claim of the assessed-company which has been vehemently pressed before us by Shri Desai and equally vehemently opposed by Mr. Dhebar, learned counsel for the revenue, is in respect of the dividend income received by the assessed-company from the Pakistan-company. The contentions advanced by Shri Desai in respect 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 49A 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, thereforee, not an assessable income under the Act and the assessed's business loss cannot be set off against such income. By deducting the dividend income from the business loss of the assessed-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 assessed-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 counsel, sufficient evidence was produced before the Income-tax Officer to prove not only that the dividend income from the Pakistan-company was wholly taxed in Pakistan but also that the rate at which it was taxed in Pakistan was higher than the rate at which the dividend income would have been taxable in India.
13. Shri Dhebar, learned counsel for the revenue, has raised a preliminary objection to the effect that neither the contentions now raised on behalf of the assessed-company nor the relevant facts which support these contentions were placed before the Tribunal and that it is not open to the assessed to raise these contentions at this stage. According to the learned counsel for the revenue, the only contention that was raised before the Tribunal in respect of the present claim of the assessed was whether the Income-tax Officer was justified in deducting the Pakistan dividend income from the business loss in India in computing the loss under Section 24(1) of the Act. For the purpose of finding out the nature of the contentions that were raised by the assessed-company before the Tribunal, it is necessary not only to look to the appellate order of the Tribunal but also to the order of the Appellate Assistant Commissioner, because in the statement of the case submitted by the Tribunal it has been stated that-
'In the second appeal taken before the Tribunal, the company reiterated its contentions before it. '
14. In the context in which this statement is made, it can only mean that the contentions which the assessed-company had reiterated before the Tribunal were the same contentions which the company had urged before the Appellate Assistant Commissioner. The contentions raised by the assessed-company before the Appellate Assistant Commissioner as appear from his order are as follows :
'(a) So far as Pakistan income is concerned, the Income-tax Officer should not have taken the gross dividend income of Rs. 3,30,868, and he should not even have taken the net dividend income of Rs. 2,27,472, but he should have considered only the net proceeds of such dividends after deduction of tax, i.e., Rs. 1,44,755 (net dividends--Rs. 2,27,472 and super tax levied and paid in Pakistan--Rs. 82,717).
(b) It is next contended that this Pakistan income should not go to reduce the Indian business loss for purposes of determining the amount of business loss to be carried forward under Section 24(2). '
15. 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.'
16. Rejecting this contention, the Appellate Assistant Commissioner observed as follows:
'In the appellant's cast, 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 df 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.'
17. 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 Agreement for the Avoidance of Double Taxation in India and Pakistan. The Appellate Assistant Commissioner has also referred to the said agreement at various other places in the course of his appellate order. The orders of the Appellate Assistant Commissioner, thus, indicate that contentions were raised before him based upon the Agreement for the Avoidance of Double Taxation in India and Pakistan. Apart from the observation made by the Tribunal ir, its statement of the case to the effect that the assessed-company had reiterated before the Tribunal the contentions which it had urged before the Appellate Assistant Commissioner, the appellate order of the Tribunal also indicates that such contentions were actually raised before the Tribunal. In paragraph 3 of its appellate order for the assessment year 1957-58, this is what the Tribunal has observed :
'It is pointed out that under Section 24(1), it was the assessed who was entitled to have the amount of loss set off against his income, profits or gains under any other head in that year and that as the dividend declared in Pakistan had already borne tax on which no tax was livable under the Indian Income-tax Act....it was not correct on the part of the department to have disallowed the claim of the assessed for not adjusting this amount against business loss of the assessed.'
18. The Tribunal has also referred to the various decisions cited on behalf of the assessed as well as on behalf of the department, namely, R.B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income-tax , Commissioner of Income-tax v. Trilokchand Kalyanmal : [1960]39ITR131(MP) and Seth jamnadass Daga v. Commissioner of Income-tax, : [1961]41ITR630(SC) .
19. The reference to these decisions would only mean that the contentions based upon the agreement for the avoidance of double taxation in India and Pakistan had been actually urged before the Tribunal.
20. The objection of the learned counsel for the revenue with regard to the contentions based upon the rate of tax levied by Pakistan being higher than the rate of tax livable in India is equally untenable. The assessment order of the Income-tax Officer, Lahore, which is annexed to the statement of the case as annexure 'A' not only proves that the entire Pakistan income had been taxed in Pakistan but also that it was taxed at a higher rate than the one applicable in India. If there was any dispute on either of these two points, the Income-tax Officer would have been the first person to raise such a dispute and disallowed the assessed'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 assessed's claim.
21. thereforee, we find sufficient material on record to come to the conclusion that the contentions which have now been raised on behalf of the assessed-company had been raised before the Tribunal also and that, thereforee, the assessed is entitled to raise these contentions before us.
22. 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 traveling beyond the scope of these questions if it were to consider the contentions raised on behalf of the assessed-company. In considering the scope of the questions referred by the Tribunal, we have to take note of the questions which the assessed-company had required the Tribunal to refer in its applications under Section 256(1) of the Act of 1961. These questions have already been stated at the beginning of this judgment. Except the question regarding Section 154 of the Act of 1961, which the Tribunal declined to refer as having been concluded by a decision of the Supreme Court, the other questions must be deemed to have been referred by the Tribunal in the form of a single question in respect of each of the assessment years. While referring these questions the Tribunal has observed thus:
'The assessed raised as many as three questions. As in our opinion the real dispute between the parties is brought out in the question as framed by us precisely and clearly, we refer the question as framed above by us to the High Court in preference to the question framed by the assessed.'
23. We construe these observations to mean that the scope of the questions referred by the Tribunal is wide enough to include the questions which had been suggested by the assessed in its applications under Section 256(1) of the Act of 1961. This is how we construe the question referred even in respect of the assessment year 1956-57 in view of the following observations in the appellate order of the Tribunal for that assessment year :
'As regards the question of adjustment also, we find that there is no merit in the assessed's application. This question has been considered by us in the assessed's case in I.T.A. No. 1465 of 1967-68 and we have dismissed the assessed's appeal on this point. '
and also in view of the following observations in the statement of the case submitted for this assessment year:
' But, since the Tribunal has expressed its opinion on merits also and applied its earlier decision in I.T.A. No. 1465 of 1967-68, we propose to refer the same question of law as is referred in R.A. No. 222 of 1969-70. Excepting for the figures, the facts remain. '
24. In view of the above discussion, the preliminary objections raised by the learned counsel for the revenue against the contentions urged on behalf of the assessed-company have to be overruled and we have to proceed to consider these contentions on merit.
25. The relevant portion of Section 24 of the Act under which the Income-tax Officer has to compute the loss or under which an assessed is entitled to claim a set-off or carry-forward of his losses is as under :
'24. (1) Where any assessed 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 assessed 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 assessed had no other head of income shall be carried forward to the following year.'
26. 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 * is a loss, the assessed shall be entitled to have the amount of such loss set off against his income from any other source under the same head.......
71. (1) Where in respect of any assessment year the net result of the computation under any head of income other than 'capital gains' is a loss and the assessed has no income under the head 'capital gains', he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.......
72. (1) Where for any assessment year, the net result of the computation under the head 'profits and gains of business or profession' is a loss to the assessed, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of Section 71, so much of the loss as has not been so set off or, .... where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and-
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :.. ..
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :. ...'
27. The underlining in Sections 71(1) and 72(1) is ours.
28. Under Section 24(1) of the Act, thereforee, the loss sustained by an assessed may be set off only against his income which is assessable to tax and the loss cannot be set off against the income which is not assessable to tax. In case the assessed has no assessable income in a particular year against which his loss in that, year may be set off, he is entitled to have his entire loss of that year carried forward to the next year for being set off against his assessable income of that year. On a parity of reasoning, an assessed is not entitled to set off his loss from a source the income from which is not assessable to tax against his profits which are assessable to tax.
29. In Seth Jamnadas Daga v. Commissioner of Income-tax, the assessed was a partner in two registered firms and also an unregistered firm. Daring the relevant period, the registered firms incurred losses and the unregistered firm showed profits which was taxed on the firm in accordance with Section 23(5)(b) of the Act. The share of the assessed 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 assessed 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.
30. The Supreme Court while negativing the first contention of the assessed, however, upheld the second contention and held that the loss sustained by the assessed in the registered firms was not liable to be set off against the profits from the unregistered firm and that the assessed 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(1) 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 assessed could carry forward loss from the registered firms in the subsequent year or years. The High Court came to the conclusion that they could not carry forward the loss. Indeed, the Tribunal had earlier stated that if the profits from the unregistered firm were to be set off against the losses of the registered firms, such losses would not be carried forward to the following year, and that that would be contrary to Section 24. The High Court rejected this ground in dealing with the question as to the rate applicable to the other income, and pointed out--and, in our view, rightly--that under Sections 14(2) and 16(1)(a) the profits and losses had to be set as against each other to find out the total income. The High Court, however, held that once losses were set off against profits, they were to that extent absorbed, and that : [1961]41ITR630(SC) . there was nothing to carry forward. In our opinion, this conclusion does not follow. Section 24 provides for a different situation altogether; it provides for the carrying forward of a loss in business to the subsequent year or years till the loss is absorbed in profits, or till it cannot be carried forward any further. That has little to do with the manner in which the total income of an assessed has to be determined for the purpose of finding out the rate applicable to his income, taxable in the year of assessment. In our opinion, to read the provisions of Sections 14(2) and 16(1)(a) in this extended manner would be to nullify in certain cases Section 24 altogether. Neither is such an intention expressed ; nor can it be implied. In our opinion, though the decision of the High Court on the main issue and on one aspect of the question posed for its opinion was correct, it was in error in deciding that the losses of the registered firms could not be carried forward because they had been absorbed by the profits of the unregistered firm.'
31. The Supreme Court considered the scope of Section 24 of the Act in a later case, namely, Indore Malwa United Mills Ltd. v. Commissioner of Income-tax : [1962]45ITR210(SC) . In that case, the assessed-company carried on the business of manufacture and sale of textile goods. Its mills were situated in Indore, an Indian State, and sales were made in various places in India within and outside the taxable territories. Up to the assessment year 1949-50 the assessed was treated as a non-resident. In the next two assessment years, Indore became part of the taxable territories, and the assessed 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 assessed'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(1) 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 India or the taxable territories. It has no reference to income accruing or arising without British India or without the taxable territories which were not liable to be assessed as in the case of non-residents and the loss claimed could not be carried forward and set off.'
32. If the dividend income from the Pakistan company was not liable to assessment in India, then it was in the nature of an income which was exempt from assessment in India and the assessed's loss in India cannot be set off against the dividend income from the Pakistan company. The effect of deducting the dividend income from the assessed's loss in India would be in effect to deprive the assessed of the benefit of the exemption in respect of the dividend income from the Pakistan company and, in addition, it would deprive it of the benefit of having its entire loss carried forward to the next year. That such an indirect taxation was not permissible has been held by the Court of Appeal in Australian Mutual Provident Society v. Inland, Revenue Commissioners [1946] 1 All E.R. 528. In the words of Somervell L. J.:
'This, and the earlier cases, lay down quite clearly that, if an exemption is conferred, the Crown must not get the tax either directly or indirectly .... In so far as the rule, if taken in isolation, would have the effect of indirectly depriving the company of any part of the benefit of the exemption, its operation must be cut down so as to prevent any such result, and to allow the exemption to operate to its full extent.'
33. It is not necessary to refer to other decisions cited at the Bar on this point, because it has not been seriously disputed by the learned counsel for the revenue that the assessed's loss can be set off only against its assessable income and that if the dividend income from the Pakistan company does not come under the category of assessable income in India, then the assessed's loss could not be set off against such income. The main question, thereforee, for consideration is whether the dividend income from the Pakistan company is income which is assessable in India.
34. Section 3 of the Act, which is the charging section, provides for the charging of tax on the total income of an individual company, etc., in accordance with and subject to the provisions of the Act and the total income is defined in Section 2(15) of the Act as meaning 'total amount of income, profits and gains referred to in Sub-section (1) 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..... '
35. 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 the Government of any country outside India for the avoidance of Double Taxation of income, profits and gains under this Act and under the corresponding law in force in that country ;
and may, by notification in the Official Gazstte, make such provisions as may be necessary for implementing the agreement.'
36. One of the agreements which was entered into by the Government of India under Section 49A of the Act is the Agreement for the Avoidance of Double Taxation between India and Pakistan.
37. The preamble to this agreement states that :
'Whereas the Government of the Dominion of India and the Government of the Dominion of Pakistan desire to conclude an Agreement for the Avoidance of Double Taxation of income chargeable in the two Dominions in accordance with their respective laws.'
38. The relevant provisions of the agreement are Articles IV, VI and VII which read as under :
'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 transactions specified in column 1 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 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 assessed 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 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 discretion) the collection of a portion of the demand equal to the estimated abatement. If the assessed 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 any reference to the treatment of such income in the assessment made by the other Dominion. '
39. 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 of 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 each Dominion in proportion to the profits of the company chargeable by each Dominion under this Agreement.'
40. The third column states 'as in preceding column'. The following remarks are made under column 4 :
'Relief in respect of any excess income-tax deemed to be paid by the shareholder shall be allowed by each Dominion in proportion to the profits of the company chargeable by each under this Agreement.'
41. In the present case, it is not disputed that under the agreement 100 per cent. of the dividend income received by the assessed-company from the Pakistan company was chargeable to tax by Pakistan and the tax chargeable by India on such income was nil.
42. The effect of this Agreement on the assessment of income which is chargeable either wholly or partly by the two countries has been considered by the Supreme Court as well as by some of the High Courts. In Ramesh R. Saraiya v. Commissioner of Income-tax, : [1965]55ITR699(SC) , the Supreme Court interpreted the agreement 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 owa laws clearly shows that each Dominion can make an assessment regardless of the Agreement. But a restriction is imposed on 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 chargeable by each Dominion under this Agreement'. This refers us back to the other items. For instance, in respect of goods manufactured by the assessed 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 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 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.'
43. 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. thereforee 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. '
44. In Income-tax Officer v. State Bank of India [1960] 69 I.T.R. 833, the Calcutta High Court, following the interpretation of the Agreement by the Supreme Court in the case of Ramesh R. Saraiya, and of the Punjab High Court in the case Seth Satya Paul Virmani, gave the following illustration by way of explaining the terms of the Agreement :
'Suppose the goods were purchased in India and sold in Pakistan so as to come within the mischief of item 7(a). Then. India will only be entitled to charge 10% and 90% will be charged by Pakistan. Suppose India has charged income on the whole amount, that is to say, 100%. It has then charged 90% in excess of what it was entitled to do under the Agreement. This would be the excess. The instant case comes under item 9 which has been set out above. In such a case, 100% is to be charged by India and nil by Pakistan in respect of income accruing or arising in India, and vice versa. In other words, 100% of the income accruing or arising in Pakistan can only be assessed in Pakistan, and if assessed in India will be an excess under Article IV. thereforee, the whole amount of the excess will have to be given credit for, under Article IV. '
45. The above cases are cases of the interpretation of the Agreement for the Avoidance of Double Taxation between India and Pakistan. We may, however, notice some other cases which though not interpreting the said Agreement, however, deal with similar situations. In R.B. Bansilal Abir-chand Spinning and Weaving Mills v. Commissioner of Income-tax, the assessed was a registered firm and derived income from sources in British India as well as Indian States. Its income from British India was computed at a loss amounting to Rs. 1,15,309 and its income from the Indian States at Rs. 10,424. The assessed contended that the income of Rs. 10,424 should not be set off against the loss of Rs. 1,15,309. The contention of the department was that the loss of Rs. 1,15,309 should be set off against the income of Rs. 10,424 and only the balance of Rs. 1,04,885 should be apportioned between the partners of the firm under Section 24(2) of the Act. The Nagpur High Court upheld the contention of the assessed and observed as follows :
'Under Section 16(1) of the Act, the exempted sums are to be included only for the puipose of computing the total income of the assessed. The question of set-off under Section 24(1) arises only if there is taxable income and not otherwise. That section entitles the assessed and not the department to claim a set-off of loss against profits to determine the marginal taxable income. It does not, thereforee, entitle the Income-tax Officer to minimise the loss by setting off the profits.'
46. It may be noted at this stage that the income which accrued in the Indian States was exempt from tax under the law in force on the relevant date.
47. In Commissioner of Income-tax v. Trilokchand Kalyanmal, which is the authority relied upon by the Tribunal for disallowing the assessed's claim, the assessed 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 assessed 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 assessed on such proportion of the dividend as the non-taxable profits of the company arising in the State bear to the total income of the company.'
48. In the year of account the business in Part A States resulted in the loss of Rs. 9,156 and there was also a loss in business in Part B States amounting to Rs. 1,19,026. The dividend income from the companies registered in Part A and Part B States was respectively Rs. 10,675 and Rs. 64,926. The income from other sources in Part A and Part B States amounted to Rs. 81,233. In determining the net income which was found to be Rs. 28,652, the Income-tax Officer set off the loss from business in Part B States against the dividend income from the companies registered in Part B States. The assessed's claim that the loss could not be set off against the dividend income which was exempt from tax under paragraph 12 of the Part B States (Taxation Concessions) Order, 1950, was rejected by the Income-tax Officer. The Appellate Assistant Commissioner upheld this set-off. The Tribunal differed from the view taken by the Income-tax Officer and the Appellate Assistant Commissioner and came to the conclusion that the business loss in Part A and Part B States could not be set off against the dividend income from the companies registered in Part B States as the dividend income was exempt from tax under paragraph 12 of the Order. The Tribunal, however, held that the dividend income had to be included in the total income for rate purposes. When the matter came up before the Madhya Pradesh High Court on reference, the High Court first considered the meaning of paragraph 12 of the Order of 1950. According to its interpretation, this paragraph did not exempt dividend income from tax. It only stated that no income-tax shall be payable by the assessed on such proportion of the dividend as the non-taxable profits of the company arising in the State bear to the total income of the company. This was not a provision granting exemption from tax. By paragraph 12, the dividend income of the type referred to therein was made subject to tax. But partial relief in respect of the tax payable on such dividend income was given by saying that no income-tax shall be payable by the assessed on a certain proportion of the dividend. The object of the paragraph was obviously to give concession in the matter of the amount of tax payable on such dividends included in the total income of the assessed 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 assessed 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, thereforee, under Section 24 is against income on which tax can be levied and collected, that is to say, against taxable income. It follows, thereforee, that under Section 24(1) it is not permissible to adjust taxable profits against loss under a head which is not taxable. If a loss under a non-taxable head cannot be adjusted for reducing the profits under a taxable head, the non-taxable loss cannot be added to the loss incurred under the taxable head so as to inflate the right of the assesseds to carry forward the loss under Section 24(2). It was on this principle that it was decided in the case of R.B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income-tax, that the losses made in British India could not be reduced by the department by adjusting against them the profits in the Indian States which were exempted under Clause (c) of Sub-section (2) of Section 14 (which has now been deleted). In Commissioner of Income-tax v. Ratanshi Bhavanji : [1952]22ITR82(Mad) , also it was held that Section 24(1) speaks of set-off against income which has not already suffered tax but income in respect of which tax could be levied and collected.'
49. It would thus be seen that the Madhya Pradesh High Court did not dissent from the rule laid down by the Nagpur High Court in the case of Bansilal Abirchand Spinning and Weaving Mills; but, on the other hand, adopted the rule laid down in that case. It only distinguished the facts in that case from the facts of the case before it inasmuch as in its view income from dividend from companies registered in Part B States was not exempt from tax under paragraph 12 of the Concessions Order, 1950. We fail to see how this decision of the Madhya Pradesh High Court supports the action of the Income-tax Officer or the finding of the Tribunal.
50. In Keshardeo Shrinivas Morarka v. Commissioner of Income-tax, : [1963]48ITR404(Bom) the assessed derived income from two sources, namely, as a partner of a registered firm as well as a partner of an unregistered firm. For the assessment year 1950-51, his share of loss in the registered firm amounted to Rs. 51,936 and his share of profits in another registered firm was Rs. 2,414 and his share in the profits of an unregistered firm was Rs. 11,860. He also derived income from other sources amounting to Rs. 16,729. The Income-tax Officer computed the net business loss at Rs. 37,662 and after set-off against his income from other sources determined the amount of loss to be carried forward at Rs. 20,933. The assessed contended that his loss from the registered firm could not be set off against the profits from the unregistered firm. This contention 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 hold by the Supreme Court that the assessed 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 assessed might have received in the said year. The profit from the unregistered firm, which is exempt from tax in the hands of the assessed, 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.'
51. 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 circular is reproduced in the Law and Practice of Income-tax by Shri N.A. Palkhivala, 6th edition, volume 1, at page 617. It reads as follows ;
'In respect of assessments to which the Agreement applies, the avoidance basis will operate as follows :--
Each Dominion will determine the total income of the assessed in the ordinary way under its own law laws, but in respect of the sources of income or categories of transaction specified in the Schedule to the Agreement, it is entitled to retain tax on such portion of the income there from as is calculated according to the percentages shown in the Schedule. The remaining portion can be included in the total income for purposes of rate if it is so includible. And, if it is actually charged, the Dominion which is not entitled to retain the tax thereon, will give credit for the lower amount of the tax payable thereon in either Dominion, In the case of income chargeable under the head 'Salaries', 'Interest on securities', 'Property', etc., where 100 per cent. is liable in one Dominion and nil in the other, no difficulty would ordinarily arise. But in the case of goods in respect of which operations resulting in profit are partly performed in one Dominion and partly in the other, difference of opinion may arise as to the category in which the income falls and the percentage of profit chargeable by either Dominion. Under Article VII(b) of the Agreement each Dominion is to decide this question independently of the other and the assessed who feels aggrieved by the assessment in any Dominion will pursue the remedies open to him under the law of that Dominion. .....
The double taxation avoidance basis differs from the double taxation relief basis inasmuch as the assessed has not to pay tax first and then claim relief. When the total income of an assessed is the same in the two Dominions and the rates of tax are also the same, the Dominion in which a part or whole of any income is not chargeable, should include such income as is not chargeable by it for purposes of rate only. But when the total income or the rate of tax in the other Dominion is not known, the Income-tax Officer should make the full demand without allowing any abatement, but the collection of an amount equal to the estimated abatement should be held in abeyance for one year or such longer period as the Income-tax Officer may in his discretion determine in the circumstances of the case. If the assessed does not produce a certificate of assessment in the other Dominion within that period, the whole demand should be collected.'
52. The rest of the circular is not relevant.
53. 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-tax Officer here had to make the assessment of the total income of the assessed-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 assessed-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 be finds that the entire dividend income is assessable in Pakistan and no portion of it is assessable in India, then he has to give abatement of tax in respect of the entire dividend income. The result would be that while the dividend income from the Pakistan company is liable to be included in the total income of the assessed for the purpose of applying the rate for taxing the assessed's Indian income, it has to be excluded from the taxable income of the assessed. As the net result of the assessed's income in India is a loss, there is no question of including the dividend income from the Pakistan company even for the purpose of applying the rate of tax on the Indian income. What the Income-tax Officer has done in this case is that while not subjecting the dividend income from the Pakistan company to any tax, he has, however, deducted this income from the business loss of the assessed in India. In our view, this amounts to indirectly subjecting the dividend income from the Pakistan company to tax, which the Income-tax Officer was not entitled to do by virtue of the Agreement. This would be clear from the following illustration. Supposing the dividend income from the Pakistan company is Rs. 6 lakhs and the business loss in India is Rs. 2 lakhs. If the Indian loss is set off against the Pakistan income, then the net Pakistan income would be determined at Rs. 4 lakhs. According to item 8 in the Schedule to the Agreement for Avoidance of Double Taxation between India and Pakistan, the entire dividend income from the Pakistan company was chargeable by Pakistan and nil percentage of this income was chargeable by India. But, as income of Rs. 4 lakhs would be determined by the Indian authorities after allowing the aforesaid set-off, this sum of Rs. 4 lakhs would be in excess of the per-enlarge specified in the said Schedule. The abatement allowed by India would be on this Rs. 4 lakhs, although the entire sum of Rs. 6 lakhs dividend income from the Pakistan company would have been assessed. In other words, the dividend income from the Pakistan company to the extent of Rs. 2 lakhs would have been assessed without any abatement being allowed in respect thereof, thereby subjecting it to double taxation both in Pakistan and India.
54. The argument advanced on behalf of the revenue is that this is not taxing the Pakistani dividend income ; it is merely absorbing the Indian loss in the dividend income from Pakistan. This argument is misleading and not quite correct. 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, thereforee, 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, thereforee, answer the question relating to the Pakistan dividend income in favor of the assessed and against the department.
55. Before concluding, we would like to draw the attention of the authorities concerned to the difficulty experienced by the income-tax authorities, the Tribunal as well as the courts in interpreting the terms of the agreement and to suggest to them the desirability of revising the agreement with a view to express the terms of the agreement in clear language. In Commissioner oj Income-tax v. Shanti K. Maheshwari, : [1958]33ITR313(Bom) , Tendolkar J. expressed the difficulty in the interpretation of the agreement by saying that:
'A cynic will say that the language has been employed to conceal the thoughts of its authors.'
56. In Income-tax Officer v. State Bank of India D. N. Sinha C.J. commented upon the difficulty in the interpretation of the agreement. Ho observed:
'The language of the agreement is confused, inept and extremelydifficult to decipher. . . . This court has on numerous occasions commentedon the manner in which legal drafting is being done. These comments have,however, fallen on deaf ears. In construing such a document, we can onlydo our best; the result may not be entirely satisfactory.'
57. It is unfortunate that in spite of the pointed attention of the authorities concerned having been drawn by the courts to the difficulty in interpreting the terms of the agreement, no action has been taken to remove this difficulty by revising the agreement. In view of this difficulty in the interpretation of the agreement, we make, no order as to costs.