COMMISSIONER OF INCOME-TAX, DELHI versus MAHALAXMI SUGAR MILLS CO. LTD.

Citation: [1986] 3 S.C.R. 150 · Decided: 15-07-1986 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
COMMISSIONER OF INCOME-TAX, DELHI 
v. 
MAHALAXMI SUGAR MILLS CO. LTD. 
B 
JULY 15, 1986 
" 
[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.) 
.1 
Total world loss, computation of-Deduction of dividend received 
c 
from the holding company in Pakistan from its business losses in India 
by an assessee, whether in order-Income Tax Act, 1922, section 24( I) 
read with Notification No. 28 dated I0.12. 47-Agreementfor theAvoi-
_> 
dance of Double Taxation of Income between India and Pakistan, scope 
and effect. 
D 
The respondent assessee is a public limited company carrying on 
the business of manufacturing and selling .'ugar. During the assessment 
years 1956-57 and 1957-58 the company also held shares in the Premier 
Sugar Mills and Distillery Co. Ltd., Mardan, West Pakistan. The 
Pakistan company also carried on the business of manufacturing and 
~ 
selling sugar. The assessee company earned dividend income of 
E 
Rs.2,30,832 and Rs.3,30,868 from the holdings in the respective previ-
ous years relevant to the assessment years aforesaid, while it incnrred a 
business loss of Rs.20,30,006 and Rs.9, 11, 728 respectively from its busi· 
ness in India. The assessee claimed that the entire loss sustained by it in 
India in each year should be carried forward and set off against its 
\ 
business profits in India in future years in as much as the dividend 
( 
F 
income derived by if from the Pakistan company was not liable to tax in 
, India by virtue of the Agreement for the Avoidance of Double Taxation 
• 
between India and Pakistan. The Income Tax Officer rejected the said 
contention and determined the total loss in the relevant assessment years 
by making certain adjustments. The appeals before the Appellate As-
sistant Commissioner and the Income Tax Appellate Tribunal failed.' 
G 
However, in the reference made at the instance of the assessee the Delhi 
High Court answered the questions relating to the Pakistan dividend in 
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favour of the assessee and against the revenue. Hence the appeals by 
" 
certificate. 
Allowing the appeals, the Court, 
H 
C.I. T. v. MAHALAXMI SUGAR MILLS 
151 
r 
HELD: 1.1 The dividend income received from the Pakistan com-
pany is deductible in arriving at the total world loss of the assessee under 
A 
sub-section (1) of section 24 of the Indian Income Tax Act, 1922. [160F-G I 
1.2 Under sub-section (1) of section 24 of the Indian Income Tax 
Act, 1922 an assessee who has sustained a loss of profits or gains in any 
B 
year under any of the heads mentioned in section 6 is entitled to have ·the 
/ 
amount of the loss set off against his income, profits or gains under any 
other head in that year. The income, profits or gains against which the loss 
is set off must he such income, profits or gains as is assessable under the 
Indian Income Tax Act. The statute does not contemplate a setting off of 
loss against income which is not assessable at all under the Act. [157A-C] 
c 
1.3 For the purposes of the assessment under the Indian Income 
""---
Tax Act, the income of the assessee must he determined in the ordinary 
way under the Indian law. Having regard to the relevant entry 8 of the 
Schedule to the Agreement for the Avoidance of Double Taxation bet-
ween the two Dominions of India and Pakistan, the Dominion of India is 
D 
not entitled to charge the dividend income at all. Article IV of the 
Agreement makes it clear that each Dominion Is entitled to make assess-
ments In the ordinary way under its own laws. The process of determin-
ing the assessable income of the assessee is not affected by the Agree-
ol 
ment. What the Agreement does is to give relief against double taxa-
tions. [156F-G; 1570-E] 
E 
Ramesh R. Saraiya v. Commissioner of Income Tax, Bombay City 
I, [1965] 55ITR699referred to. 
I 
1.4 The agreement for the Avoidance. of Double Taxation func-
' 
tions in a different plane altogether. It enjoys no role in the application 
of the Indian law for the purpose of determining the total income of an 
F 
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assessee and the tax liability consequent upon such assessment. On the 
contrary, the provisions of the Agreement clearly envisage that full 
effect must he given to the operation of the tax law of each Dominion. 
All that the Agreement does is to permit a Dominion to retain the tax 
recovered by it pursuant to an assessment under its law to the extent 
G 
that an abatement is not allowed under the provisions of the Agreement. 
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Article IV specifically provides that each Dominion shal

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