January 2011
Foreign tax paid by an assessee cannot be claimed as a deductible expense but is an appropriation of income, eligible for double taxation relief.
By Geeta Jani
Dhishat B. Mehta
Chartered Accountants
Reading Time 3 mins
fiogf49gjkf0d
New Page 2
13. DCIT v. Tata Sons Ltd. (unreported)
ITA No. 4776/Mum./2004
S. 2(43), S. 37(1), S. 40(a)(ii), S. 90,
Income-tax Act
A.Y. : 2000-01. Dated : 24-11-2010
Foreign tax paid by an assessee cannot be claimed as a
deductible expense but is an appropriation of income, eligible for double
taxation relief.
Facts :
ICo was an investment company and a resident of India. ICo
was also engaged in the business of export of software and provision of
engineering consultancy. ICo paid taxes in the USA on income earned from the
USA. ICo had claimed tax credit in respect of foreign taxes paid by it. In terms
of S. 80HHC, ICo claimed exemption in respect of the income earned in the USA
and thus attracted no tax liability in India.
While computing its taxable income, apart from tax credit,
ICo also claimed deduction of foreign taxes as normal business expenditure. In
this respect, ICo relied on favourable ITAT decision in its own case for earlier
years against which the High Court had rejected the appeal.
As per the Tax Authority, income tax paid, whether in India
or overseas, was an application of income and not a charge on income which
qualified as deductible business expenditure. Also, ICo was entitled to tax
credit in respect of foreign taxes paid by it and foreign taxes were
specifically not allowable as a deduction, either u/s.37(1) or u/s. 40(a)(ii).
Held :
The Tribunal held as follows :
(i) By claiming overseas taxes as deduction in computing
taxable profits, ICo had treated foreign taxes as a ‘charge’ on income. By
claiming tax credit in respect thereof, it had also treated them as an
‘application’ of income. There cannot be any justification for making such
contradictory claims and obtaining overall tax relief larger than actual taxes
paid overseas.
(ii) In Lubrizol India Ltd. v. CIT, (1991) 187 ITR 25
(Bom.), the High Court has held that tax as defined is not restricted to tax
as levied under the Income-tax Act, but also includes taxes as levied by the
foreign country. In view of such direct precedent of the jurisdictional High
Court, it would not be correct to accept that foreign taxes on profit are not
tax covered by the restriction provision.
(iii) Referring to the said decision, the Tribunal observed
that “there is a categorical observation to the effect that the tax deducted
is a local tax and not a tax on profits, whereas in the present case it is an
undisputed position that the tax levied abroad, being income tax, is a tax on
profits of the assessee — whether on presumptive basis or on the basis of
actual profits earned by the assessee.
(iv) The foreign taxes paid by ICo are covered by S. 37(1)
or S. 40(a)(ii) and deduction of the same from taxable profits is not allowed
under the Income-tax Act.
