In a significant Judgment, a division bench of the Bombay High Court held that the foreign taxes which are not entitled for double tax relief under sections 90 and 91 of the Income Tax Act can be allowed as deduction u/s 40(a)(ii) of the Income Tax Act.
The division bench comprising of Justices A.K. Menon and M.S. Sanklecha observed that such taxes not eligible to be credited under s. 91 of the Act are not hit by s. 40(a)(ii) and the real income theory can be applied in such a case.
In the instant case, the assessee, Reliance Infrastructure Ltd, executed some projects in Saudi Arabia. The assessee paid income tax in Soudi Arabia for the income earned there. While filing return, the assessee claimed the benefit of Section 91 of the Act, which gives relief from double taxation on the same income.The claims were rejected by the AO on ground that the benefit is available when the amount of tax paid under foreign income is again included in the taxable income earned in India i.e. the same income must be taxed in both the countries. Both the appellate authorities dismissed the appeal filed by the assessee.
The assessee put an alternative claim that, if benefit of s. 91 is not given, the tax paid in Saudi Arabia must be allowed as a deduction.The claim was rejected by the ITAT mainly on two grounds. Firstly, the assessee had not raised the same contention before the assessing authority or the first appellate authority. Secondly, the assessee is not entitled to such a benefit in view of the decision of the Bombay High Court in the case of Inder Singh Gill v/s. CIT, in which it was held that the tax paid by an assessee in a foreign country cannot be deducted in computing income under the Indian Income Tax Act, 1922.
The High Court noted that it is only when the Income has paid tax abroad and also bears the burden of discharging tax thereon under the Indian Act that it would become such doubly taxed income.Reliance was placed on the Apex Court decision in KVALM Ramanathan Chettiar, in which the Court emphasized that the foreign income which has been subjected to tax must also be the same income which is subjected to tax under the Indian Act. The amounts claimed as deduction under Section 80HHB and Section 35B of the Act admittedly do not bear any tax in India, therefore, no relief can be granted under Section 91 of the Act to the deduction claimed under sections 80HHB and 35B of the Act.
Accepting the contentions of the assessee, the bench observed, “the decisions of Karnataka High Court in Stumpp, Schuele & Somappa (P) Ltd.(supra) as approved by the Apex Court relied upon by the applicant were rendered under the Sur Tax Act and can have no application while construing Section 91 of the Act. The words “suchdoubly taxed income” as found in Section 91 of the Act which arises for consideration was not a subject matter of consideration while considering the provisions of Sur Tax Act. Similarly, reliance upon the decision of the Karnataka High Court in Wipro Ltd. (supra) dealing with the manner in which the benefit under Section 10A of the Act is to be treated under Section 90 of the Income Tax Act. We find that the question of law framed for consideration before the Karnataka High Court was only with regard to application of Section 90 of the Act i.e. cases where there was Double Taxation Avoidance Agreement (DTAA). In the circumstances, even though there may be certain observations with regard to Section 91 of the Act, the same are in the nature of obiter, as it was not at all necessary for the Karnataka High Court to deal with Section 91 of the Act, when the question posed for its consideration was the entitlement for the relief under section 90 of the Act.”
Regarding the allowability of deduction of foreign tax paid, the bench noted that the case of Inder Singh Gill is not applicable to the present case since the definition of the term “tax” under the Act covers the tax which is payable under the Act alone on the profits and gains of business are not allowed to be deducted notwithstanding Sections 30 to 38 of the Act.
“However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides / clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the tax paid abroad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expenditure on account of not being covered by Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India under Sections 90 or 91 of the Act, were also claiming deduction of the tax paidabroad as it was not tax under the Act. In view of the above, Explanation inserted in 2006 to Section 40(a)(ii) of the Act, would require in the context thereof that the definition of the word “tax”under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from themeaning of the word “tax” as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word “tax” as defined in the Act to include all taxes on income / profits paid abroad.”
“Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Income Tax Act, the tax paid in Saudi Arabia on income which has accrued and / or arisen in India is not eligible to deduction under Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India.”
Read the full text of the Judgment below.
