Sections 37, 40(a)(ii) — Taxes levied in foreign countries whether on profit or gain or otherwise are deductible u/s.37 — Payment of such taxes does not amount to application of income.

Sections 37, 40(a)(ii) — Taxes levied in foreign countries whether on profit or gain or otherwise are deductible u/s.37 — Payment of such taxes does not amount to application of income.

The assessee had, in its accounts, debited Rs.42,57,297 on account of taxes paid in Belgium and claimed this amount as a deduction u/s.37 on the ground that all taxes and rates were allowable irrespective of the place where they are levied i.e., whether in India or elsewhere. The exception to this being Indian income-tax which is not allowable by virtue of provisions of section 40(a)(ii). The Assessing Officer (AO) held that the term ‘tax’ u/s.40(a)(ii) is not limited to tax levied under the Indian Incometax Act, but is wide enough to include all taxes which are levied on profits of a business. He disallowed the entire amount of Rs.42,57,297 charged to P & L Account. Aggrieved the assessee preferred an appeal to the CIT(A) who held that the amount is allowable u/s.37 of the Act. He allowed this ground of the appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

Taxes levied in foreign countries whether on profits or gains or otherwise are deductible u/s.37(1). Such taxes are not hit by section 40(a)(ii). It is also not application of income. The Tribunal noted that in the case of South East Asia Shipping Co. (ITA No. 123 of 1976) the Mumbai Bench of ITAT has held that tax levied by different countries is not a tax on profits but a necessary condition precedent to the earning of profits. In this case reference application of the Revenue was rejected by the Tribunal which has been upheld by the Bombay High Court in ITA No. 123 of 1976. The Tribunal also noted that in the case of Tata Sons Ltd. (ITA No. 89 of 1989) the Department’s reference applications u/s.256(1) and 256(2) were rejected and the issue has reached finality. The Tribunal upheld the order passed by the CIT(A) on this ground. The Tribunal decided this ground in favour of the assessee.