(i) only proportionate credit of tax paid in USA can be claimed in India; and (ii) credit of State income-tax cannot be claimed as it is not a ‘tax covered’.

The assessee was a resident of India and had earned salary
income in the USA and in India. It also earned income from interest. The
assessee had paid Federal income-tax and State income-tax on his USA salary
income. He had claimed deduction u/s.80RRA in respect of his salary income from
the USA. He claimed credit in respect of Federal income-tax and State income-tax
by relying on provisions of Article 25(2)(a) of India-USA DTAA. The AO allowed
credit of taxes paid in the USA only to the extent of tax attributable in India
to the income earned in the USA.

In appeal before CIT(A), the assessee contended that while
allowing credit of taxes paid in the USA, not only the Federal income-tax but
also the State income-tax should be allowed. He further contended that
notwithstanding the deduction u/s.80RRA in India, as per India-USA DTAA, the
whole of the tax paid in the USA in respect of his salary income is eligible for
credit against Indian taxes payable. The CIT(A) accepted the contention that
credit should be given also for State income-tax. However, he did not accept the
other contention regarding grant of credit of whole of tax paid in the USA.

The Tribunal referred to the provisions of S. 90 of the
Income-tax Act, Article 25(2)(a) of India-USA DTAA and commentaries on OECD and
UN Model Conventions. It also referred to the decisions in CIT v. Dr. R. N.
Jhanji, (1990) 185 ITR 586 (Raj.) and CIT v. M. A. Mois, (1994) 210
ITR 284 (AP) wherein in the context of relief u/s.91(1) of the Income-tax Act,
the Courts had held that where the assessee is entitled to special deduction
u/s.80RRA to the extent of 50%, his entitlement to relief would be only to the
extent of tax paid on 50% of the foreign income. The Tribunal observed that
though these decisions were in the context of S. 91, the spirit of their ratio
would also apply to claim of credit u/s.90, as there cannot be payment of taxes
outside India and claim of refund in India if there is no liability of paying
taxes in India.

The Tribunal held that :

(i) the assessee is entitled only to the proportionate tax
credit and not the credit for the entire tax paid in the USA on the salary
income.

(ii) in terms of Article 2 (taxes covered) of India-USA DTAA, credit can be
claimed only in respect of Federal income-tax and not State income-tax.