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C.A.P Andiappan v. Cit, Madras And Another
Factual and Procedural Background
The appellant, an Indian resident who carried on business exclusively in Ceylon, was assessed to Indian income tax for the Assessment Years (AY) 1959-60 and 1960-61. His only Indian asset was a house with an annual rental value of Rs 38; all other income accrued in Ceylon. On those Ceylonese earnings he paid Ceylon income tax of Rs 5,919 (AY 1959-60) and Rs 6,036 (AY 1960-61). Under Indian law, his tax liability was calculated at Rs 10,282.62 and Rs 9,521.35, respectively. The Indian authorities granted him an abatement equal to the actual tax paid in Ceylon and demanded the balance.
Contending that larger relief—or total exemption—was warranted under the Indo-Ceylon “Agreement for Relief or for Avoidance of Double Taxation” (notified by SRO 456 of 6 February 1957), the appellant filed Writ Petitions Nos. 1030 and 1031 of 1963 in the Madras High Court. The High Court dismissed the petitions but certified the matter for appeal under Article 133(1)(c) of the Constitution. These consolidated appeals were heard by the Supreme Court of India.
Legal Issues Presented
- Whether, under Article 3 and Item 8 of the Schedule to the Indo-Ceylon Double Taxation Agreement, the appellant was liable to be taxed in India at all on income arising in Ceylon.
- If such liability existed, what was the correct method of computing the abatement/credit for Ceylonese tax—viz., should it equal (a) the actual tax paid in Ceylon as a resident, or (b) the hypothetical higher tax payable by a non-resident in Ceylon?
Arguments of the Parties
Appellant's Arguments
- The Agreement, read with Section 49-A of the Indian Income-tax Act, 1922, completely immunised him from Indian tax on income earned in Ceylon.
- In the alternative, the abatement should equal the tax that would have been payable in Ceylon had he been assessed there as a non-resident (Rs 9,889 and Rs 9,983 for the two years), not the lesser amounts actually levied after resident-status concessions.
- He conceded that, absent the Agreement, his full Indian tax would be Rs 10,282.62 (AY 1959-60) and Rs 9,521.35 (AY 1960-61).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ramesh R. Saraiya v. CIT, (1965) 1 SCR 287; AIR 1965 SC 1263 | Interpreting an Indo-Pakistan Double Taxation Agreement (textually similar) to hold that each country may assess income under its own laws, the Agreement only limiting the tax retained via an abatement mechanism. | The Court treated the Saraiya ratio as governing, concluding that India’s power to assess remained intact and only the quantum collectible was curtailed by Article 3 of the Indo-Ceylon Agreement. |
Court's Reasoning and Analysis
Justice K.S. Hegde analysed Article 3 of the Agreement in two parts:
- First limb: ordinary assessment. The clause that “each country shall make assessment in the ordinary way under its own laws” validated the Indian assessment. Consequently, the appellant’s plea for total exemption failed.
- Second limb: abatement calculation. The Article next stipulates that where either country taxes income “in excess of” the percentage allocated in the Schedule (Item 8 allocates 100 % taxing rights to the country of accrual), it must grant an abatement equal to “the lower of the amounts of tax attributable to such excess in either country.”
The Court interpreted “attributable” to mean “payable,” i.e., the actual tax ultimately levied under the foreign country’s complete tax code, inclusive of exemptions and allowances. Therefore, only the tax of Rs 5,919 and Rs 6,036 actually levied in Ceylon could be credited, not the higher hypothetical non-resident figures urged by the appellant.
In support of this construction, the Court relied on the Saraiya decision, emphasising that the Agreement operates as a limitation on tax retention, not on the power of assessment. The Court also rejected any differential treatment for the appellant vis-à-vis other Indian-resident assessees.
Holding and Implications
APPEALS DISMISSED. The Supreme Court affirmed the High Court’s view that: (1) the appellant is taxable in India on his Ceylon income, and (2) the appropriate abatement equals the actual Ceylonese tax paid as a resident, already allowed by the assessing authorities. No costs were awarded.
Implications: The ruling clarifies that, under the Indo-Ceylon Double Taxation Agreement, Indian residents earning foreign income receive credit only for the foreign tax actually paid, not for hypothetical liabilities. The decision reinforces existing precedent rather than creating a new one.
K.S Hegde, J.— These appeals by certificate arise from the decision of the High Court of Madras in Writ Petitions Nos. 1030 and 1031 of 1963. Therein the petitioner invoked the extraordinary jurisdiction of the High Court under Article 226 of the Constitution to quash the orders of the respondents wherein he was not granted the abatement he sought to obtain in Assessment Years 1959-60 and 1960-61. The High Court came to the conclusion that the appellant is not entitled to any more abatement than that was given by the authorities under the ‘Assessment for Relief or for Avoidance of Double Taxation in India and Ceylon’ which will be hereinafter referred to as the “agreement”. It accordingly dismissed the writ petitions but gave a certificate under Article 133(1)(c) of the Constitution of India certifying that this is a fit case for appeal to this Court.
2. The appellant is a resident in this country. But he is carrying on business in Ceylon. During Assessment Year 1959-60 he earned a gross income of Rs 39,473 and in Assessment Year 1960-61 he earned a gross income of Rs 39,047. He had only a house in India whose annual rental value was Rs 38. The entire assessable income of his was that what he earned in Ceylon. On his income in Ceylon, he was taxed in a sum of Rs 5919 for Assessment Year 1959-60 and in a sum of Rs 6036 for Assessment Year 1960-61. For the same income, in India, under the Indian Law his tax was computed for Assessment Year 1959-60 at Rs 10,282.62 P. and for Assessment Year 1960-61 at Rs 9521,35 P. The tax payable by him in Ceylon was given as abatement and he was called upon to pay only the balance. The tax payable by him in Ceylon as a non-resident would have been Rs 9889 in Assessment Year 1959-60 and Rs 9983 in Assessment Year 1960-61. But in view of Section 45(2) of the Ceylon Income tax Ordinance, 1932, and also in view of the ‘Agreement’ he was taxed as if he was a resident in Ceylon.
3. Two questions arising for decision are whether he was not liable to be taxed at all in India and if he was liable to be taxed in India, what should have been the proper abatement given to him.
4. Mr Ramachandran appearing for the assessee contended firstly that in view of the ‘Agreement’ entered into between India and Ceylon as provided in Section 49-A of the Indian Income Tax Act, 1922, he was not liable to be taxed in India at all. In the alternative, he contended that while determining the tax payable by him in this country, the department should have deducted the entire tax that he would have had to pay had he been taxed as a non-resident. For this contention also he relies on the terms of the agreement entered into between India and Ceylon. He does not dispute the fact but for the agreement the assessee would have been liable to pay in this country a tax of Rs 10,282.62 p. in Assessment Year 1959-60 and Rs 9521.35 p. in Assessment Year 1960-61.
5. In order to consider the correctness of the contentions advanced by Mr Ramchandran, we will now turn to the relevant provisions of the “Agreement”. That “Agreement” was notified in Notification SRO 456, dated February 6, 1957. The portion of the notification which is relevant for our present purposes is contained in Article 3 and Column 8 of the Schedule to that agreement. Article 3 reads :
Each country shall make assessment in the ordinary way under its own laws; and where either country 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 percentages specified in Columns II and III thereof, that country shall allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country.
SCHEDULE
Sources of income or nature of transaction from which income is derived Percentage of income which each country is entitled to charge under the Agreement Remarks I II III IV 8. Any income derived from a source or category of transactions not mentioned in any of the foregoing items of the Schedule 100 per cent by the country in which the income actually accrues or arises Nil by the other.
6. The first portion of Article 3 says that “each country shall make an assessment in the ordinary way under its own laws”. This means to begin with both India and Ceylon were required to assess the assessee in accordance with law prevailing in each of these countries. Thus far it is plain. From this it is clear that the first contention advanced on behalf of the assessee has no basis. Hence it must fail. Now we come to the second part of that article to the extent necessary for determining the second contention. It reads :
and where either country under the operation of its laws charges any income from the sources or categories of transactions specified in column I of the schedule to this Agreement ... in excess of the amount calculated according to the percentages specified in columns II and III thereof, that country shall allow an abatement equal to the lower of the amounts of tax attributable to such excess in either country”.
The language employed in this part of the article is quite confusing. That part of the article has to be read with the schedule. On a proper reading of that provision along with the schedule, which means in the present case, Item 8 of the schedule, it appears to us that what it says is :
“From out of the amount ascertained under the first part of the article deduct the tax payable by the assessee in the other country in respect of the whole or any portion of the amount brought to tax under the first part of the article. The word ‘attributable’ in that article merely means ‘payable’. Applying the principle mentioned above to the facts of the present case, the following result is reached. The tax payable under the Indian law as seen earlier was Rs 10,282.62 p. in Assessment Year 1959-60. The tax payable under the Ceylones law in that year was Rs 5919. That has to be deducted from the tax computed under the Indian law. The balance alone is leviable. Similarly in the Assessment Year 1960-61, the tax computed under the Indian law is Rs 9521.35 p. and the tax levied under the Ceylones is being Rs 6036. In levying tax in this country the tax payable in Ceylone has to be deducted. It was urged by Mr Ramchandran that what we have to take into consideration is not the actual tax levied in Ceylon but the tax leviable in Ceylon on a non-resident. He says that the deduction given under Section 45(2) of the Ordinance promulgated in Ceylon is only an allowance. Hence the same does not form part of the actual taxation. We are unable to accede to that contention. In considering what taxes are attributable to the tax laws of a particular country, one has to take into consideration all the provisions of the statutes levying tax. In other words for determining the tax due from an assessee, we have not merely to look to the charging section but also to the provisions providing exemptions and allowances. If so read, it is quite clear that the amount of tax attributable to the Ceylonese law is that which was ultimately levied on the assessee.
7. The agreement that was entered into between India and Pakistan is similar in terms with the agreement, with which we are concerned in these appeals, except that in Article 4 therein which corresponds to Article 3 in the agreement before us in the place of the word “attributable” the word “payable” is used. But this change does not make any difference in substance. Interpreting that agreement this Court in Ramesh R. Saraiya v. CIT (1965) 1 SCR 287, AIR 1965 SC 1263, (1965) 1 SCJ 348 held that Article IV of the Indo-Pakistan Agreement for the Avoidance of Double Taxation clearly shows that each Dominion can make an assessment in the ordinary way regardless of the Agreement. The restriction which is imposed on each Dominion under the Agreement is 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. The Schedule has been appended only for the purpose of calculating the abatement to be allowed by each Dominion. The ratio of this decision, in our opinion, governs the facts of this case.
8. We also do not see any reason, for treating the appellant in a manner different from other assessees, who are resident in this country.
9. In the result these appeals fail and the same are dismissed. No costs.
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