The Judgment of the Court was delivered by

Sinha, C.J:— This is an appeal which relates to the interpretation of certain articles in the “agreement for avoidance of double taxation between India and Pakis tan” This agreement was entered into between the Dominions of India and Pakistan under the powers granted by Section 49-AA of the Income-tax Act 1922, (hereinafter referred to as the ‘said Act’) Section 11-A of the Excess Profits Tax Act, 1947 and Section 18-A of the Business Profits Tax Act 1947, as adopted by the India (Adaptation of Income-tax, Profits tax and Rent Recovery Acts) Order 1947 Section 49-AA of the said Act runs as follows:

“The Central Government may enter into an agreement with Pakistan for the avoidance of double taxation of Income, profits and gains under this Act and under the law in force in Pakistan and may by notification in the Official Gazette make such provision as may be necessary for implementing the agreement”.

2. The question posed in this appeal is in respect of the income assessment of the appellant for the assessment year 1947-1948. The reason why Section 49-AA was inserted in the said Act, is as follows: partition of British India in the year 1947 raised the problem as to how to avoid excessive or double taxtation of assessees who had income in both the Dominions. This question has of course been rendered more acute by the separation of India and Pakistan into two separate sovereign States. In order to guard against the possibility of excessive or double taxation, Section 49-AA was introduced in the said Act.

3. Section 49-AA was amended by the Income-tax and Business Profit Tax (Amendment) Act 1948 and the words ‘or the United Kingdom’ were inserted after the word ‘Pakistan’ wherever appearing in the section. Thereafter, there was an agreement for avoidance of double taxation in India and Pakistan, entered into between the two countries (then two Dominions) and the said agreement was notified, on December 10, 1947. In this Rule, we are concerned with Articles IV, V and VI of the said agreement which are set out below:

“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 source or categories of transactions specified in Column I of the Schedule to this Agreement (hereafter 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 pay bale on such excess in (their) Dominion as provided for in Article VI (Underlined here in) by me for the purpose of the discussion hereinafter stated).

Article V. — Where 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 Articles IV and V, the tax pay bale in each Dominion on the excess or the doubly taxed income, as the case may be, shall be such proportion of the tax pay bale 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 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 assessee produces the certificate of assessment in the other Dominion within the period of one year or any longer period allowed by 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”.

4. Of the schedule referred to in Article IV, we are concerned in this case with Item only there of which is set out below:—

Source of Income of nature of transaction from which income is derived Percentage of income which each Dominion is entitled to charge under the Agreement. Remarks. 1 2 3 4 9. Any income derived from a source or category of transaction not mentioned in any of the foregoing items of this schedule. 100 per cent by the Dominions in which the income actually accrues or arises. Nil by the other Dominion.

5. In tins case, we are called upon to interpret the provision of Articles IV, V and VI of the said Agreement. The language of the Agreement is confused, inapt and extremely difficult to decipher. It is, therefore, all the more necessary to have a judicial interpretation of it. In Commissioner Of Income-Tax, Bombay City Ii…Applicant; v. Shanti K. Maheshwari,….. (1958) 33 ITR 313 at p. 317 : (AIR 1958 Bom 478 at p. 479) Tendolkar, J. observes that in respect of the said agreement a cynic will say that the language has been employed to conceal the thoughts of its authors. This Court has on numerous occasions commented on the manner in which legal drafting is being done. These comments have however fallen on deaf ears. In construing such a document, we can only do our best, the result may not be entirely satisfactory.

6. It is necessary now to come to the facts of this case A bank called the Imperial Bank of India was constituted under the Imperial Bank of India Act (Act 47 of 1920) and took over the undertaking of the then existing Presidency Banks at Bombay, Madras and Calcutta. The said Imperial Bank of India, had numerous branches all over British India including the territories now comprised in Pakistan. On July 1, 1955 the State Bank of India Act (22 of 1955) came into force and by virtue of the said Act the entire undertaking of the Imperial Bank of India along with all its properties, rights and liablities devolved on and vested in, the State Bank of India. The Income-tax authorities therefore, proceeded to assess the State Bank of India as the successor of the Imperial Bank of India for the year 1947-1948. In that year, the said Imperial Bank of India was resident both in India and Pakistan. Consquently, under the said Act, the income accruing in both the countries, together with foreign income outside the countries were included in the “world income” of the assessee. We are concerned in this case with the assessment of the tax of the said assessee in India and Pakistan, which brings it within the mischief of the said agreement. Since the assessee had income in both the countries as well as in foreign countries, the question arose as to the abatement that it was entitled to, as a result of Section 49-AA of the said Act read with the said agreement. The abatement that has been allowed by the income-tax officer, who is the appellant in this case, is set out at pages 8 and 9 of the paper book. According to the respondent, this computation of abatement is not correct. It preferred objection against the said abatement, after paying in the whole amount of the tax as assessed. A comparative chart of the assessment as made by the appellant and the calculations, as ought to be made, in the opinion of the assessee are set out in a comparative chart, set out in annexure ‘H’ to the petition, printed at pages 20 and 21 of the paper book. In the present application, two objections have been raised. The (first) is with regard to the amount of the not Pakistan income which has been taken into account for the purposes of abatement and the (second) is as to the amount of foreign income assessed in Pakistan which should be taken into account for the purpose of abatement. Before we decide these two questions it is necessary to interpret the provisions of Articles IV, V and VI of the said Agreement which are set out above. Before we proceed further, there is one aspect of the matter which has to be disposed of. In Article IV the word “their” appears between the words “in” and “Dominion”, as bracketed by me in the extract set out above. Read literally this is meaningless. In the Bombay case mentioned above (1958) 33 ITR 313 : (AIR 1958 Bom. 478) (Supra) Tendolkar, J. has held that this word “their” is a mistake and should read as “either”. The learned Judge was fortunate because both parties before him conceded that this must be so. In the court below. Banerjee, J. was not so lucky because at that stage the parties did not concede the point, and as such, his Lordship had to determine judicially that the conclusion arrived at by Tendolkar, J. was correct. We are, however more fortunate, inasmuch as before us the parties have conceded that this must be so, and we shall therefore proceed to read the word “their” as “either”.

7. At least in one respect, the inter pretation of the said Agreement has been finally determined by the Supreme Court. In Ramesh R. Saraiya v. Commissioner of Income-Tax, Bombay City I, (1965) 55 ITR 699 : (AIR 1965 SC 1263) it has been decided that under the said Agreement it is the duty of each Dominion (now State), in the first instance, to make an assessment in the ordinary way, regardless of the agreement. The restriction which has been imposed under the agreement was not on the power of assessment but on the liberty to retain the tax assessed. Nor does the schedule to the agreement limit the power of each Dominion to assess in the normal way all the income that is liable to taxation under its laws. Sikri, J. said 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 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.”

8. The matter has been put thus by Kapur, J. in a Division Bench Judgment of the Punjab High Court in Seth Satya Paul Virmani v. Commissioner of Income-Tax, Punjab, (1955) 27 ITR 109 at p. 117 : (AIR 1955 Punj 60 at p. 62):—

“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.”

9. The next thing to notice is the difference between Articles IV and V. Article IV deals with sources or categories of transactions specified in column 1 of the Schedule to the Agreement which may have arisen in one Dominion, and has been assessed in the other Dominion under its own laws in excess of the amount caclulated according to the percentage specified in columns 2 and 3 thereof. This has been designated as “excess”. Article V however, deals with the case where any income accruing or arising outside the territories of the two Dominions is chargeable to tax in both the Dominions and has been so assessed. For example, in the present case, foreign income which accrued in Colombo and the United Kingdom was chargeable to tax in both the Dominions and this would come under Article V.

10. Let us now come to the method of computation under Articles IV and V. I shall first take up Article IV. I am confining myself to an assessment in the Indian Dominion. As I have stated above, the first thing to do is to make the assessment according to the said Act irrespective of the agreement. Having done so, the first question to ask is, has any income arising in either Dominion been taxed in excess of what has been laid down in the Schedule. Coming to the Schedule, we find that collumn 1 lays down the source of income or nature of transaction from which the income is derived. It is the second and third column which lay down the percentage of income which each Dominion is entitled to charge under the Agreement. Let us take Item 7(a) which is as follows:—

Source of income or nature of transaction from which income is derived. Percentage of income which each Dominion is entitled to charge under the agreement. Remarks 1 2 3 4 7. (a) Goods purchased in one Dominion and sold in the other in the same condition without any manufacturing process so as to change the identity of the goods. 10 per cent. of the profits by the Dominion in which goods are purchased provided there is a branch or regular purchasing agency in the Dominion. 90 per cent. by the other. If there is no regular by the purchasing agency, 100 per cent. shall be chargeable by the Dominion in which goods are sold and nil by the other.

11. 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 per cent and 90 per cent will be charged by Pakistan. Suppose India has charged income on the whole amount, that is to say 100 per cent. It has then charged 90 per sent 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 per cent 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 per cent of the income accruing or arising in Pakistan can only be assessed ??? Pakistan and if assessed in India will be an excess under Article IV. Therefore, the whole amount of the excess will have to be given credit for, under Article IV. Now I come to the actual figures which are to be found in Ext. ‘H’ to the petition. According to the assessment made in India, the Pakistan income, amounts to Rs. 13,88,543/-. The whole of this amount can only be ‘charged’ by Pakistan, under the Schedule. There is a further argument in respect of this figure which I shall presently deal with. The next thing that we must find out is the “tax payable” on this amount both in India and in Pakistan. The “tax payable” is to be calculated according to the principle laid down in Article VI and not according to the ordinary law. The “tax payable” for purposes of abatement laid down under Article IV is the proportion of the tax payable in each Dominion as the excess bears to the total income of the assessee in each Dominion. We have already found that the excess calculated under Article IV is Rs. 13,88,543/-. The total income is Rs. 3,20,71,256/-. Therefore, the ‘tax payable’ on the excess for purposes of abatement to be allowed in India is the tax payable on the total income of the assessee in India. But the abatement that has to be allowed is not equal to this figure. We have next to ascertain the tax payable on the excess in the other Dominion, namely in Pakistan. In order to do so, we must necessarily know the assessment in Pakistan. We must know the total income of the assessee in Pakistan according to the Pakistan assessment and then calculate the “tax payable” in Pakistan in the same proportion, that is to say as the excess bears to the total income of the assessee in Pakistan. The actual abatement that should be allowed is the lower of these two figures.

12. I now come to Article V. The calculation under this article is somewhat different. As I have stated above, this deals with any income accruing or arising without the territories of the Dominion where it is chargeable to tax in both the Dominions. In this case also, the “tax payable” in either Dominion has to be calculated according to the principle laid down under Article VI, namely the proportion which the doubly taxed income bears to the total income of the assessee in each Dominion. After this is ascertained, 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.

13. In the instant case, a point arises which has not arisen in any case previously, and is as follows: I have already stated that for purposes of both Articles IV and V, we have to consider the income accruing or arising in either Dominion. What happens when one Dominion does not agree with the other as to the income which has arisen in the other Dominion? In the instant case, what has happened is that in the Indian assessment, in respect of which an abatement is claimed, the net Pakistan income has been assessed at Rs. 13,88,543/-, but for the same assessment year the income in Pakistan has been assessed by the Pakistan authorities at Rs. 10,37,086/-. The dispute between the two parties is this: The income-tax authorities say that they will consider the lower figure arrived at in Pakistan, namely Rs. 10,37,086/- and not the higher figure Rs. 13,88,543/- and the argument is that, as the assessee has paid income-tax in Pakistan on the lower figure, it cannot put forward the claim that for the balance there has been double taxation, and if the higher figure is accepted then the balance of income entirely goes free from taxation in either country. Plausible as this argument sounds, it cannot be accepted and the learned Judge in the court below is right in rejecting it.

14. The fallacy in the reasoning of the income-tax officer is that, for purposes of abatement, one single figure of a net total income is to be taken and not two. If two figures are taken naturally the result will be different and there cannot be two different standards of abatement. In calculating the proportion which the excess bears to the total income if we take into account the Pakistan income as calculated in India, in calculating the excess as also the total income, and yet give abatement on the footing of the Pakistan income as calculated in Pakistan then the result can not be accurate and cannot be properly compared with the “tax payable” in Pakistan bacause that must necessarily be governed by the Pakistan figures. The two figures of income as assessed in India and Pakistan might have tallied immediately at the time of separation but this may not continue to be so, particularly as the law for deductions etc. in Pakistan may not continue to be the same in India. Therefore, what has to be done is to calculate on one or the other figure for arriving at the amount of abatement that has to be allowed. If the excess is calculated on the Pakistan income as assessed in India, then abatement must be allowed upon the ratio that it bears to the total income assessed on the same footing. If, however, the Pakistan figure is taken into account, then abatement is to be allowed upon the entire calculation being based on that figure. It is only when we come to the comparison that we can and must consult the Pakistan figure to calculate the tax payable on the excess in Pakistan, and then take the lower of the two figures. This exigency, namely that the Pakistan income as calculated in India and as calculated in Pakistan may be different was probably not realised when the Agreement was arrived at, and the time might have come to re-examine it in a new light. But until that is done we are of the opinion that the appellant is right in insisting that this figure of Rs. 10,37,085/- which is the Pakistan income as assessed in Pakistan, cannot be used for purposes of calculating the abatement, inasmuch as the assessment in India has already been done on the footing of the Pakistan income being Rs. 13,88,543/- and the excess and the total income have been calculated upon that footing. In other words, it is the Pakistan income as assessed in India, that must be taken into account, namely Rs. 13,88,543/- and not the amount as assessed in Pakistan, namely Rs. 10,37,085/-. for the purpose of calculating the abatement.

15. I have not dealt with the deductions for E.P.T and B.P.T upon which there is no dispute as to the figures. The second point raised relates to foreign income and the calculation of abatement is under Article V. The assessee had income, during the period of assessment in Ceylon, U.K and Burma. This income, as assessed in India is Rs. 8,19,347 and as assessed in Pakistan is Rs. 10,46,037. What will have to be calculated is one-half of the lower amount of tax payable in either Dominion, on the doubly taxed income. In calculating this, the appellants have proceeded on the footing that the foreign income included in Pakistan assessment is one-half of Rupees 10,46,037 namely 5,23,018 and have come to the conclusion that the Pakistan tax is lower and they have taken 50 per cent of the Pakistan tax. I don't know why the appellant should consider only half the foreign income included in the Pakistan assessment. This is an obvious mistake in the interpretation of Article V. In calculating the abatement under Article V the whole income and not half the Pakistan income should bp considered for comparing the taxes payable in that Dominion with that payable in India and then, only one-half of the lower tax is payable. Again, I am not considering the proportionate B.P.T that should be deduced because the method of calculation adopted is not disputed, only the dispute is as to the amount of foreign income included in the Pakistan assessment, and this alone falls to be considered.

16. For the reasons aforesaid, we find that the learned Judge in the court below has rightly quashed the assessment. The Income-tax Officer will accordingly proceed to recalculate the abatement on the principles indicated in our judgment.

17. The appear is accordingly dismissed with the direction given above. No order as to costs.

Arun K. Mukherjea, J.:— I agree.

VGW/D.V.C

18. Appeal dismissed.