Case Law Details
Pritesh Rajesh Kotak Vs ITO (ITAT Hyderabad)
Conclusion:
Assessee was eligible to claim tax credit both federal as well as state taxes paid on the income earned during the year as section 91 did not discriminate between State and Federal taxes, and in effect provides for both the types of Income-taxes to be taken into account for the purpose of tax credits against Indian Income-tax liability.
Held:
Assessee was employed for a part of the year in USA and paid taxes in USA which included federal and state with holding taxes. Assessee claimed the same u/s 90. AO allowed the tax credit to the extent of federal taxes paid and did not allow the state tax paid. Following the decision in case of Tata Sons Ltd., wherein it was held that the provisions of section 91 were to be treated as general in application and these provisions could yield to the treaty provisions, only to the extent the provisions of the treaty were beneficial to assessee,’ that was not the case so far as question of tax credits in respect of State Income-taxes paid in USA were concerned. Accordingly, even though the assessee was covered by the scope of India US and Indio Canada tax treaties, so far as tax credits in respect of taxes paid in those countries were concerned, the provisions of section 91, being beneficial to the assessee, held the field. As section 91 did not discriminate between State and Federal taxes, and in effect provided for both the types of Income-taxes to be taken into account for the purpose of tax credits against Indian Income-tax liability, assessee was, in principle, entitled to tax credits in respect of the same. Of course; as was the scheme of tax credit envisaged in section 91, tax credit in respect of foreign Income-tax was restricted to actual Income-tax liability in India, in respect of income on which taxes had been so paid abroad. It was clear that assessee was eligible to claim tax credit both federal as well as state taxes paid on the income earned during the year. AO was directed to allow the credit to the extent of state taxes paid by the assessee along with the federal taxes paid. The Medicare and Disability taxes were not in the nature of income-tax, hence, this might be disallowed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against the order of CIT(A) – 1, Hyderabad, dated 23/08/2017 for AY 2013-14.
2. Brief facts of the case are, assessee was employed for a part of the year in USA and paid taxes in USA which includes federal and state with holding taxes. Assessee claimed the same u/s 90 of the Income-tax Act, 1961 (in short ‘the Act’). AO allowed the tax credit to the extent of federal taxes paid and did not allow the state tax paid.
3. Aggrieved, assessee filed appeal before the CIT(A), ld. CIT(A) dismissed the appeal of the assessee.
4. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal:
1. The Order of the Commissioner (Appeals) of Income Tax is in gross violation of the provisions of law and hence is bad in law.
2. The Commissioner of Income Tax (Appeals) has erred in upholding the restriction of Foreign Tax Credit of Income tax remitted to the State of New York of United States of America.
3. The Commissioner of Income Tax (Appeals) has erred in upholding the restriction of Foreign Tax Credit to Rs.4,50,273/-
4. The Commissioner of Income Tax (Appeals) has erred in dismissing the appeal.
5. Any other ground that may be urged at the time of hearing.”
5. Before us, ld. AR submitted the fcats of the case and submitted that this issue is fairly covered by the following decisions:
1. Tata Sons Ltd. Vs. DCIT, [2011] 10 Taxmann.com 87 (Mum.)
2. Wipro Ltd. Vs. DCIT [2015] 62 Taxmann.com 26 (Karnataka)
6. Ld. DR, on the other hand, relied on the orders of revenue authorities.
7. Considered the rival submissions and perused the material on record. We notice that the assessee has paid federal tax, state tax and medicare-cum-disability tax in USA. Accordingly, assessee claimed tax credit of all the tax paid in USA, relying on the decision of Tata Sons Ltd. (supra). In this case, the coordinate bench held as under:
“It was indeed an incongruous position that payment of State Income-taxes in US and Canada were not allowed deduction as those were treated as in the nature of taxes 071 income, in terms of the provisions of domestic tax law in India, and those payments were also not being taken into account for granting credit, for taxes paid abroad by the assessee, as only Federal Income-tax was eligible for tax credit in terms of the Indo-US and Indo-Canada tax treaty. If that approach was adopted, the assessee would not get a deduction of State taxes so paid abroad, nor would he get the tax credit for the same, and If those two’ propositions were correct, there was clearly an inherent contradiction in those propositions on tax treatment for State Income-taxes paid abroad. There cannot obviously be a tax payment which is neither treated as admissible expenditure, because it is treated as an Income-tax, nor is it taken into account for tax credits, because it is not to be treated as Income-tax. It was incorrect to proceed on the assumption that State Income-tax paid in USA, or in Canada, cannot be taken into account for the purposes of computing admissible tax credits. It was so for the elementary reason that the provisions of a tax treaty, based on which tax credits are said to be inadmissible, cannot be pressed into service to decline a benefit to the assessee, which is otherwise available to him, even in the absence of such a tax treaty, under the provisions of the Income-tax Act.
Even as it was held that, in principle, State Income-taxes paid in USA are eligible for being taken into account for the purpose of computing admissible tax credit under section 91, but the fact that section 91 refers to a situation in which the assessee has paid tax ‘in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation’ and that was indeed an agreement under section 90 withi United States of America, as also with Canada, could not be ignored. If one adopts a literal interpretation of such provisions, and bearing in mind the undisputed position that tax credit provisions under section 91 are more beneficial to the assessee vis-a-vis the tax credit provisions in related tax treaties inasmuch as while section 91 permits credit for all Income-tax paid abroad – whether State or Federal, relevant tax treaties permit credits in respect of only Federal taxes, it will result in a situation that an assessee will be worse off as a result of the provisions of tax treaties. That certain Iv is not I permissible under the scheme of the Income-tax Act. Circular No. 621, dated 19-12-1991 issued by the Central Board of Direct Taxes, which is binding on the Assessing Officer under section 119(2), inter alia. observes that “Since the tax treaties are intended to grant relief and not put residents of a Contracting State at a disadvantage vis-a-vis other taxpayers, section 90 of the Income-tax Act had been amended to clarify any beneficial provisions in the law will not be denied to a resident of a contracting country merely because corresponding provisions in a tax treaty is less beneficial. In the instant case, however, tax credit provisions in Indo US tax treaty were admittedly less advantageous to the assessee, but just because then; was a tax treaty between India and USA, the benefits of the domestic law provisions were being declined to the assessee. That was an interpretation which led to absurdity and called for an interpretation harmonious with the scheme of the Income-tax Act. In case of any conflict between the provisions of the agreement and the Act, the provision of the arrestment would prevail over the provision of the Act, as is also clear from the provision of section 90(2). Section 90(2) makes it clear that ‘where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee’ meaning thereby that the Act gets modified in regard to the assessee insofar as the agreement is concerned if it falls within the category stated therein. It would thus appear that the treaty override is only restricted to the extent it is beneficial to a taxpayer. In other words, the fact that a taxpayer is entitled to make a particular claim, in accordance with a tax treaty provisions, does not disentitle him to make the claim in accordance with the provisions of the Act. In such view of the matter it was held that the provisions of section 91 are to be treated as general in application and these provisions can yield to the treaty provisions, only to the extent the provisions of the treaty are beneficial to the assessee,’ that was not the case so far as question of tax credits in respect of State Income-taxes paid in USA were concerned. Accordingly, even though the assessee was covered by the scope of India US and Indio Canada tax treaties, so far as tax credits in respect of taxes paid in those countries were concerned, the provisions of section 91, being beneficial to the assessee, held the field. As section 91 does not discriminate between State and Federal taxes, and in effect provides for both the types of Income-taxes to be taken into account for the purpose of tax credits against Indian Income-tax liability, the assessee is, in principle, entitled to tax credits in respect of the same. Of course; as is the scheme of tax credit envisaged in section 91, tax credit in respect of foreign Income-tax is restricted to actual Income-tax liability in India, in respect of income on which taxes have been so paid abroad.”
From the above decision, it is clear that assessee is eligible to claim tax credit both federal as well as state taxes paid on the income earned during the year. Respectfully following the above decision, we direct the AO to allow the credit to the extent of state taxes paid by the assessee along with the federal taxes paid. The Medicare and Disability taxes are not in the nature of income-tax, hence, this may be disallowed. Accordingly, ground raised by the assessee is allowed.
8. In the result, appeal of the assessee is allowed.
Pronounced in the open court on 20th March, 2019.
