DCIT 2(3), V. M/s. Tata Sons Ltd.,

ITA 4776/MUM/2004

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6260 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 19-08-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 09-06-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Business expenditure; Residential status; Double taxation relief; Capital expenditure
• Section: 37(1); 37; 90

Judgement Text

ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 1 OF 31 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, MUMBAI [CORAM : N V VASUDEVAN JM, AND PRAMOD KUMAR AM] ITA NO: 4776/MUM/04 ASSESSMENT YEAR: 2000-01 DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2 (3), MUMBAI .. APPELLANT VS. TATA SONS LIMITED ... RESPONDENT BOMBAY HOUSE, HOMI MODY STREET, MUMBAI 400 001 B SENTHILKUMAR, FOR THE APPELLANT DINESH VYAS, ALONG WITH B TARAPOREWALA, FOR THE RE SPONDENT DATE OF HEARING : NOVEMBER 11, 2010 DATE OF ORDER : NOVEMBER 24, 2010 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE APPELLANT ASSESSING O FFICER HAS CALLED INTO QUESTION CORRECTNESS OF COMMISSIONER (APPEALS)S OR DER DATED 29 TH MARCH 2004, IN THE MATTER OF ASSESSMENT UNDER SECTION 143 (3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). G RIEVANCE OF THE ASSESSING OFFICER IS TWO FOLD FIRST , AGAINST CIT(A)S RESTRICTING THE DISALLOWANCES, UNDER SECTION 14 A, IN RESPECT OF EXPENSES INCURRED IN EARNING DIVIDEND INCOME, BY RESTRICTING THE INTEREST DISALLOWANCE TO RS 30.35 CRORES, AND DELETING THE ADMINISTRATIVE EXPENSES DISALLOWANCE O F RS 1.58 CRORES; AND - SECOND, AGAINST CIT(A)S DELETING THE DISALLOWANCE OF RS 67 .89 CRORES IN RESPECT OF OVERSEAS TAXES PAID. ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 2 OF 31 2. WE WILL FIRST TAKE UP THE ISSUE REGARDING DEDUCT ION OF OVERSEAS TAXES PAID. THE RELEVANT GROUND OF APPEAL IS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE AMOUNT OF RS 67,89,30,514 IN RESPECT OF OVERSEAS TAXES PAID. 3. THE ISSUE IN APPEAL IS SET OUT IN A NARROW C OMPASS OF MATERIAL FACTS. WHILE THE ASSESSEE IS MAINLY AN INVESTMENT COMPANY IN THE SENSE THAT IT HOLDS MAJOR INVESTMENTS IN EQUITY SHARES OF TATA GR OUP OF COMPANIES, THE ASSESSEE IS ALSO ENGAGED IN THE BUSINESS OF EXPORTS OF SOFTWARE THROUGH ONE OF ITS DIVISION, NAMELY TATA CONSULTANCY SERVI CES, AND IN ENGINEERING CONSULTANCY THROUGH ITS OTHER DIVISION. ON 30 TH NOVEMBER, 2000, THE ASSESSEE FILED RETURN OF INCOME DISCLOSING AN INCOM E OF RS 110.26 CRORES. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS 85,36,04,000 IN ITS PROFIT AND LOSS ACCOUNT IN RESP ECT OF OVERSEAS TAXES PAID, OUT OF WHICH RS 24,89,36,449 REPRESENTED OVER SEAS TAX LIABILITY WHICH HAS REMAINED UNPAID. IN THE COURSE OF ASSESS MENT PROCEEDINGS, THE ASSESSEE RESTRICTED THE DEDUCTION TO RS 67,89,30,51 4 ON DETERMINATION OF ACTUAL OVERSEAS TAX LIABILITY. AS NOTED BY THE ASSE SSING OFFICER, THE ASSESSEE ALSO CLAIMED DIT RELIEF AMOUNTING TO RS 60 ,86,92,067 UNDER SECTIONS 90/91 OF THE ACT. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, IT WAS, INTER ALIA, EXPLAINED BY THE ASSESSEE THAT THE DEDUCTION WAS ADMISSIBLE TO THE ASSESSEE IN VIEW OF TRIBUNALS DE CISIONS, IN ASSESSEES OWN CASES FOR THE ASSESSMENT YEARS 1978-79,79-80,80 -81, 81-82, 82-83 AND 83-84, 84-85 AND 85-86, AND IN VIEW OF THE FACT THAT HONBLE BOMBAY HIGH COURT HAS REJECTED THE REFERENCE, UNDER SECTIO N 256(2) VIDE ITA NO. 89 OF 1989, AND THUS PUT A SEAL OF FINALITY TO THE STAND SO TAKEN BY THE TRIBUNAL. THE ASSESSEE ALSO SUBMITTED THAT EVEN THO UGH SECTION 43 B HAS NO APPLICATION IN RESPECT OF PAYMENTS OF FOREIGN TA XES, AND, THEREFORE, THE ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 3 OF 31 DEDUCTION IN RESPECT THEREOF NEED NOT BE RESTRICTED TO THE ACTUAL PAYMENTS DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS CLAIMED DEDUCTION ONLY IN RESPECT OF THE AMOUNTS ACTUALLY PAID. IN EFFECT, THUS, IT WAS SUBMITTED THAT THE ASSESSEE HAS CLAIMED LESSER DEDUCTION THAT THE DEDUCTION ADMISSIBLE TO THE ASSESSEE. THE ASSESSEE CLAIMED DE DUCTION OF TAXES PAID ABROAD AS A NORMAL BUSINESS EXPENDITURE INCURRED TO EARN THE INCOME WHICH HAS BEEN OFFERED TO TAX IN INDIA. 4. THE ASSESSING OFFICER, HOWEVER, WAS NOT IMPR ESSED BY THE STAND SO TAKEN BY THE ASSESSEE. HE WAS OF THE VIEW THAT INC OME TAX REPRESENTS SOVEREIGNS SHARE IN THE PROFITS OF THE ASSESSEE, A ND WHETHER INCOME TAX IS PAID IN INDIA OR ABROAD, IT IS ONLY AN APPLICATION OF INCOME AND NOT A CHARGE ON INCOME. THE ASSESSING OFFICER WAS ALSO OF THE VIEW THAT UNDER THE SCHEME OF THE ACT, THE TAXES PAID ABROAD ARE EL IGIBLE FOR ADMISSIBLE TAX CREDIT UNDER THE APPLICABLE DOUBLE TAXATION AVOIDA NCE AGREEMENT, IF ANY, UNDER SECTION 90 OF THE ACT, OR FOR APPROPRIATE TAX RELIEF UNDER SECTION 91 OF THE ACT IN CASE THERE ARE NO SUCH AGREEMENTS IN EXISTENCE WITH THE RESPECTIVE COUNTRY. SECTION 90, IT MAY BE MENTIONE D, DEALS WITH THE RELIEF FROM DOUBLE TAXATION OF AN INCOME IN INDIA AS ALSO IN SOME OTHER COUNTRY, THROUGH THE MECHANISM OF DOUBLE TAXATION AVOIDANCE AGREEMENTS BETWEEN INDIA AND SUCH OTHER COUNTRY, AND SECTION 9 1 DEALS WITH RELIEF FROM SIMILAR DOUBLE TAXATION OF AN INCOME IN INDIA AS ALSO IN A COUNTRY WITH WHICH INDIA DOES NOT HAVE A DOUBLE TAXATION AV OIDANCE AGREEMENT. THE ASSESSING OFFICER TOOK NOTE OF THESE STATUTORY PROVISIONS AND HELD THAT UNDER THE SCHEME OF THE ACT, THE INCOME TAX PA ID ABROAD ARE ENTITLED TO RELIEF UNDER SECTION 90 OR UNDER SECTION 91, AND THAT THESE TAXES CANNOT BE ALLOWED AS DEDUCTION UNDER SECTION 37 OF THE ACT. THE ASSESSING OFFICER FURTHER OBSERVED THAT, IN ANY CA SE, FOREIGN INCOME TAX CANNOT BE ALLOWED AS A DEDUCTION UNDER SECTION 37 AND, AS SUCH, FOREIGN INCOME TAX ARE LEVIED AT A RATE OR AS PROPORTION OF INCOME EARNED ABROAD, ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 4 OF 31 SUCH AMOUNTS PAID ARE ALSO HIT BY SECTION 40(A)(II) . SECTION 40(A)(II) INCIDENTALLY PLACES A RESTRICTION ON DEDUCTIBILITY OF ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LEVIED ON THE PROFITS OR GAINS OF ANY BUSINESS OR PROFESSION OR ASSESSED AT A PROPORTION OF, OR OTHERWISE ON THE BASIS OF, ANY SUCH PROFITS OR GAINS IN COMPUTATION OF BUSINE SS INCOME OF AN ASSESSEE. THE ASSESSING OFFICER THUS DISALLOWED TH E CLAIM OF DEDUCTION AMOUNTING TO RS 60,46,67,551 ON ACCOUNT OF INCOME T AX PAID OVERSEAS. AGGRIEVED BY THE DISALLOWANCE SO MADE BY THE ASSESS ING OFFICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). THE CIT(A) UPHELD THE CLAIM OF THE ASSESSEE IN VIEW OF TRIBUNALS DECISIO NS, IN ASSESSEES OWN CASES FOR THE EARLIER ASSESSMENT YEARS, AND IN VIEW OF THE FACT THAT HONBLE BOMBAY HIGH COURT HAS REJECTED THE REFERENCE, UNDER SECTION 256(2) VIDE ITA NO. 89 OF 1989, AGAINST TRIBUNALS ORDERS, PUTT ING A SEAL OF FINALITY TO THE STAND SO TAKEN BY THE TRIBUNAL. THE ASSESSING O FFICER IS AGGRIEVED OF THE STAND SO TAKEN BY THE CIT(A) AND IS IN APPEAL B EFORE US. 5. WHEN THIS APPEAL WAS CALLED OUT FOR HEARING, LEARNED COUNSEL FOR THE ASSESSEE INITIALLY SUBMITTED THAT THIS ISSUE IS NO LONGER RES INTEGRA INASMUCH AS THERE ARE DIRECT DECISIONS, BY CO ORDI NATE BENCHES OF THIS TRIBUNAL IN ASSESSEES OWN CASE AGAINST WHICH HO NBLE HIGH COURT HAS DECLINED TO ENTERTAIN REFERENCE UNDER SECTION 256(2 ) OF THE ACT, IN FAVOUR OF THE ASSESSEE. LEARNED COUNSEL ALSO FILED A LIST OF JUDGMENTS BY WHICH THE ISSUE IS COVERED, AND ALSO FILED COPIES OF THES E JUDICIAL PRECEDENTS. HOWEVER, IN RESPONSE TO BENCHS QUESTIONS, HE FAIRL Y ADMITTED THAT THESE DECISIONS HAVE NOT TAKEN INTO ACCOUNT EXPLANATION 1 TO SECTION 40(A)(II), INSERTED BY FINANCE ACT, 2006, AND, THAT THE REASO NED ORDER WAS PASSED WELL BEFORE THIS LEGISLATIVE AMENDMENT WAS BROUGHT ABOUT. WE MAY MENTION THAT EXPLANATION 1 TO SECTION 40 (A)(II) PR OVIDES THAT, FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR T HE PURPOSES OF THIS SUB- CLAUSE, ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LEVIED INCLUDES AND ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 5 OF 31 SHALL BE DEEMED ALWAYS TO HAVE INCLUDED ANY SUM ELI GIBLE FOR RELIEF OF TAX UNDER SECTION 90 OR, AS THE CASE MAY BE, DEDUCTION FROM THE INDIAN INCOME-TAX PAYABLE UNDER SECTION 91. LEARNED COUN SEL ALSO FAIRLY ACCEPTS THAT WHILE HONBLE BOMBAY HIGH COURTS JUDGMENT WAS PASSED ON 2 ND APRIL 2004, THE RELEVANT EXPLANATION TO SECTION 40(A)(II) WAS INSERTED MUCH LATER IN 2006. HE, HOWEVER, HASTENS TO ADD THAT TH ERE ARE DECISIONS OF THIS TRIBUNAL, EVEN AFTER THE SAID EXPLANATION 1 WAS INT RODUCED, SUCH AS ORDER DATED 4 TH JUNE 2007, FOR THE ASSESSMENT YEARS 1997-98 TO 199 9-2000, WHEREIN THE TRIBUNAL HAS FOLLOWED THE SAME VIEW, AS WAS TAKEN EARLIER, AND HELD THAT THE TAXES PAID ABROAD CONSTITUTE ADMI SSIBLE DEDUCTION. WITHOUT PREJUDICE TO THIS ARGUMENT, HE FURTHER SUBM ITS THAT THE SAID EXPLANATION 1 ONLY DEALS WITH SUCH TAXES WHICH ARE ELIGIBLE FOR RELIEF UNDER SECTION 90 OR SECTION 91, AND SINCE STATES INCOME T AXES PAID IN USA AND CANADA ARE NOT ELIGIBLE FOR RELIEF UNDER EITHER OF THESE SECTIONS, THE EARLIER JUDICIAL PRECEDENTS WILL CONTINUE TO HAVE BINDING E FFECT SO FAR AS DEDUCTIBILITY OF STATES INCOME TAXES PAID IN USA AN D CANADA ARE CONCERNED. LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT TH E EARLIER DECISIONS OF THE TRIBUNAL, ON WHICH RELIANCE HAS BEEN PLACED BY THE LEARNED COUNSEL, ARE CLEARLY CONTRARY TO THE BASIC SCHEME OF THE ACT AND THIS FACT HAS BEEN UNAMBIGUOUSLY BROUGHT OUT BY INSERTION OF EXPLANATI ON 1 TO SECTION 40(A)(II) WHICH, THOUGH INTRODUCED IN 2006, IS CLAR IFICATORY IN NATURE. LEARNED DEPARTMENTAL REPRESENTATIVE ALSO INVITES OU R ATTENTION TO EXTRACTS FROM CHATURVEDI & PITHISARIAS COMMENTARY ON INCOME TAX LAW WHICH, ACCORDING TO HIM, SHOW THAT, EVEN WITHOUT THIS LEG ISLATIVE AMENDMENT, INCOME TAX PAID ABROAD DOES NOT CONSTITUTE ADMISSIB LE DEDUCTION IN COMPUTATION OF INCOME. IT IS VEHEMENTLY ARGUED, WIT H THE HELP OF AN ELEMENTAL ANALYSIS OF SCHEME OF THE ACT, THAT A DED UCTION IN RESPECT OF FOREIGN INCOME TAX IS CONTRARY TO THE FUNDAMENTAL S CHEME OF THE INDIAN INCOME TAX ACT, AND IT ALSO SUBMITTED THAT THE DOU BTS, IF ANY, HAVE BEEN SET AT REST BY THE INSERTION OF EXPLANATION 1 TO SE CTION 40 (A)(II). WE WERE URGED TO DEVIATE FROM THE JUDICIAL PRECEDENTS CITED BY THE ASSESSEE, AND DECIDE THE MATTER ON MERITS. LEARNED COUNSEL FOR THE ASSESSEE THEN ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 6 OF 31 SUBMITTED THAT WHILE HE DOES NOT HAVE ANY OBJECTION TO THE MATTER BEING ADJUDICATED AFRESH ON MERITS, SO FAR AS DEDUCTIBILI TY OF OVERSEAS TAXES IN RESPECT OF WHICH RELIEF UNDER SECTION 90 OR SECTION 91 IS CONCERNED, WITHOUT BEING BOUND BY THE EARLIER JUDICIAL PRECEDE NTS WHICH ADMITTEDLY DONOT TAKE INTO ACCOUNT THE LEGAL POSITION AS IT PR EVAILS NOW, WE MUST FOLLOW THE EARLIER DECISIONS WITH REGARD TO DEDUCTI BILITY OF OVERSEAS TAXES IN RESPECT OF WHICH RELIEF UNDER SECTION 90 OR SECT ION 91 IS NOT ADMISSIBLE. IN OTHER WORDS, STATE INCOME TAXES PAID IN USA AND CANADA MUST BE HELD TO BE ADMISSIBLE DEDUCTION UNDER SECTION 37(1). THERE IS NO CHANGE IN LAW, ACCORDING TO THE LEARNED COUNSEL, SO FAR AS DEDUCTI BILITY OF OVERSEAS INCOME TAX, OTHER THAN TAXES IN RESPECT OF WHICH RELIEF UN DER SECTION 90 OR SECTION 91 IS AVAILABLE. IN SUBSTANCE THUS, LEARNED REPRESE NTATIVES AGREE THAT THE QUESTION OF DEDUCTIBILITY OF OVERSEAS INCOME TAXES IS TO BE DECIDED AFRESH, THOUGH EARLIER DECISIONS WILL CONTINUE TO FOLD FIEL D TO THE LIMITED EXTENT OF ADMISSIBILITY OF DEDUCTION UNDER SECTION 37(1) IN R ESPECT OF TAXES PAID ABROAD FOR WHICH NO RELIEF IS ADMISSIBLE UNDER SECT ION 90 OR 91 OF THE ACT. LEARNED COUNSEL ALSO PRAYS THAT IN CASE WE ARE TO H OLD THAT THE OTHER INCOME TAXES PAID ABROAD ARE NOT DEDUCTIBLE IN COMP UTATION OF INCOME, WE MAY DIRECT THE ASSESSING OFFICER TO GRANT TAX CRED IT IN RESPECT OF THE SAME IN COMPUTATION OF ASSESSEES TAX LIABILITY. LEARNED DEPARTMENTAL REPRESENTATIVE, AS ALSO LEARNED COUNSEL FOR THE ASS ESSEE, THEN ADDRESSED US ON THE MERITS, AND REITERATED THEIR RESPECTIVE STAN DS. 6. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 7. LET US DEAL WITH SOME FUNDAMENTALS FIRST. THE PA YMENT OF INCOME TAX IN OVERSEAS TAX JURISDICTIONS, IN ADDITION TO TAXAB ILITY IN THE HOME JURISDICTION, IS AN INEVITABLE COROLLARY OF INHERE NT CONFLICT BETWEEN THE SOURCE RULE AND RESIDENCE RULE. THIS CONFLICT DEVEL OPS WHEN A PERSON ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 7 OF 31 RESIDENT IN ONE OF THE TAX JURISDICTIONS EARNS INCO ME WHICH IS SOURCED FROM ANOTHER TAX JURISDICTION. AS PER THE RESIDENCE RULE, IRRESPECTIVE OF THE GEOGRAPHICAL LOCATION OF A PLACE WHERE A PERSON EARNS INCOME, THE INCOME IS TAXABLE IN THE TAX JURISDICTION IN WHICH A PERSON IS RESIDENT. THE SOURCE RULE, HOWEVER, LAYS DOWN THAT AN INCOME EARNED IN A TAX JURISDICTION, IRRESPECTIVE OF THE RESIDENTIAL STATU S OF THE PERSON EARNING THE SAID INCOME, IS LIABLE TO BE TAXED IN THE TAX J URISDICTION WHERE THE INCOME IS EARNED. THEREFORE, A TAX OBJECT, I.E., THE INCOME WHICH IS TO BE TAXED, AS A RULE ATTRACTS TAXABILITY IN THE SOURCE JURISDICTION, AND A TAX SUBJECT, I.E. THE PERSON WHO IS TO BE TAXED, IS TAX ED IN THE RESIDENCE JURISDICTION. THESE COMPETING CLAIMS PUT THE TAXPAY ER TO RISK OF BEING TAXED MORE THAN ONCE IN RESPECT OF THE SAME INCOME, AND A SOLUTION TO AVOID SUCH DOUBLE TAXATION IS THUS TO BE FOUND WITH IN THE FOUR CORNERS OF TAX SYSTEMS. WHILE SOURCE RULE AS ALSO THE RESIDENC E RULE CONTINUE TO BE INTEGRAL PART OF MOST OF THE TAX SYSTEMS, A MECHANI SM IS PROVIDED IN THE DOMESTIC TAX LEGISLATIONS TO RELIEVE A TAXPAYER OF SUCH DOUBLE TAXATION. IN TAX LAW DESIGN AND DRAFTING, AN INTERNATIONAL MONETARY FUND PUBLICATION (ISBN 90-411-9784-2), PROF RICHARD VAN N, AT PAGE OF 756 OF VOLUME II, DEALS WITH THIS ISSUE BY OBSERVING AS F OLLOWS : IT IS NECESSARY TO DISTINGUISH AMONG FOUR BASIC MET HODS IN THIS AREA. THE FIRST IS FOR A COUNTRY NOT TO ASSERT JURISDICTI ON TO TAX FOREIGN- SOURCE INCOME OF RESIDENTS (EITHER AT ALL OR FOR SE LECTED TYPES OF INCOME). THIS TERRITORIAL APPROACH TO TAXATION (TAX ING ONLY INCOME SOURCED IN THE COUNTRY) MEANS THAT THE COUNTRY IS N OT FOLLOWING THE USUAL INTERNATIONAL NORM OF WORLDWIDE TAXATION OF R ESIDENTS AND SO IS NOT STRICTLY A METHOD FOR RELIEVING DOUBLE TAXATION AS RESIDENCE- SOURCE DOUBLE TAXATION WILL SIMPLY NOT ARISE FOR IT S RESIDENTS. THE SECOND METHOD IS THE EXEMPTION SYSTEM, UNDER WH ICH FOREIGN- SOURCE INCOME IS EXEMPTED IN THE COUNTRY OF RESIDEN CE. IF THE EXEMPTION IS UNCONDITIONAL AND THE EXEMPTED INCOME DOES NOT AFFECT IN ANY WAY THE TAXATION OF OTHER INCOME, THEN IN SU BSTANCE THE RESULT IS THE SAME AS A PURELY TERRITORIAL SYSTEM. MOST EX EMPTION SYSTEMS ARE NOT OF THIS KIND AND SO ARE TO BE DISTINGUISHED FROM TERRITORIAL SYSTEMS. MOST COUNTRIES USING AN EXEMPTION SYSTEM A DOPT EXEMPTION ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 8 OF 31 WITH PROGRESSION, UNDER WHICH THE TOTAL TAX ON ALL INCOME OF A RESIDENT IS CALCULATED, AND THEN THE AVERAGE RATE O F TAX IS APPLIED TO THE INCOME THAT DOES NOT ENJOY THE EXEMPTION. EXEMP TION SYSTEMS ARE ALSO INCREASINGLY SUBJECT TO VARIOUS CONDITIONS TO ENSURE SATISFACTION OF THE ASSUMPTION UNDERLYING THE SYSTEM (THAT THE I NCOME HAS BEEN TAXED IN THE SOURCE COUNTRY AT ITS ORDINARY RATES). THESE CONDITIONS CAN CONSIST OF SUBJECT-TO-TAX TESTS (INCLUDING THE SPECIFICATION OF TAX RATES) OR SELECTIVE APPLICATION OF EXEMPTION TO FOR EIGN COUNTRIES UNDER DOMESTIC LAW OR TAX TREATIES. IN PARTICULAR, THE EXEMPTION IS USUALLY NOT GIVEN WHERE THE SOURCE TAX HAS BEEN RED UCED OR ELIMINATED BY A TAX TREATY. THE RESULT IS THAT THER E ARE NO COUNTRIES ASSERTING JURISDICTION TO TAX WORLDWIDE INCOME THAT GIVE AN EXEMPTION FOR ALL KINDS OF FOREIGN INCOME; WHERE A COUNTRY IS REFERRED TO AS AN EXEMPTION COUNTRY, THIS GENERALLY MEANS THAT IT PROVIDES SOME FORM OF EXEMPTION TO BUSINESS INCOME, DIVIDENDS RECEIVED FROM DIRECT INVESTMENTS IN FOREIGN COMPANI ES, AND OFTEN EMPLOYMENT INCOME, WITH A CREDIT BEING USED IN OTHE R CASES. THE THIRD SYSTEM IS THE FOREIGN TAX CREDIT SYSTEM U NDER WHICH A CREDIT AGAINST TOTAL TAX ON WORLDWIDE INCOME IS GIVEN FOR FOREIGN TAXES PAID ON FOREIGN INCOME BY A RESIDENT UP TO THE AMOUNT OF DOMESTIC TAX ON THAT INCOME. THIS LIMIT IS DESIGNED TO ENSURE THAT FOREIGN TAXES DO NOT REDUCE THE TAX ON THE DOMESTIC INCOME OF RESIDENTS AND IS CALCULATED BY APPLYING THE AVERAGE RATE OF TAX ON THE WORLDWID E INCOME BEFORE THE CREDIT TO THE FOREIGN-SOURCE INCOME. IN ITS SIM PLEST FORM, THIS LIMIT IS APPLIED TO FOREIGN INCOME IN ITS ENTIRETY, WITHOUT DISTINGUISHING THE TYPE OF INCOME AND THE COUNTRY W HERE IT IS SOURCED. THE FOURTH SYSTEM IS TO GIVE A DEDUCTION FOR FOREIG N INCOME TAXES IN THE CALCULATION OF TAXABLE INCOME. WHILE THIS SYSTE M IS USED IN SOME COUNTRIES, OFTEN AS A FALL BACK FROM A FOREIGN TAX CREDIT WHERE THE CREDIT MAY NOT BE OF USE TO THE TAXPAYER, IT IS NOT WIDELY ACCEPTED AS A METHOD FOR USE ON ITS OWN AND, MORE SPECIFICALLY IS NOT USED IN TAX TREATIES. IT CAN BE ARGUED THAT RELIEF OF DOUBLE TAXATION IN EITHER CREDIT OR EXEMPTION FORM INVOLVES A NUMBER OF COMPLEXITIES TH AT ARE BEST AVOIDED BY DEVELOPING OR TRANSITION COUNTRIES. PURE TERRITORIAL TAXATION, HOWEVER, SIMPLY INVITES TAX AVOIDANCE THR OUGH THE MOVING OF INCOME OFFSHORE, AND ONCE QUALIFICATIONS ON THE PURE TERRITORIAL PRINCIPLE ARE ADMITTED, SUCH AS LIMITING IT TO CERT AIN KINDS OF INCOME, IT IS HARD TO SEE THAT ANY GREAT SIMPLICITY IS ACHI EVED AS PROBLEMS OF CHARACTERIZATION OF INCOME ARISE, AS WELL AS INCENT IVES TO CONVERT INCOME FROM ONE FORM TO ANOTHER. SIMILAR DIFFICULTI ES ARISE WHEN A CONDITIONAL EXEMPTION SYSTEM IS USED. FOR THIS REAS ON, A SIMPLE FOREIGN TAX CREDIT SYSTEM IS PROBABLY SUITABLE FOR MOST SUCH ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 9 OF 31 COUNTRIESIT ASSERTS THE WORLDWIDE JURISDICTION TO TAX INCOME OF RESIDENTS AND DOES NOT REQUIRE SIGNIFICANT REFINEME NTS OF CALCULATION. IT LEAVES OPEN THE GREATEST SCOPE FOR ELABORATION O F THE SYSTEM BY DOMESTIC LAW AND TAX TREATIES IN THE FUTURE WITHOUT HAVING TO REPEAL OR MODIFY ANY EXEMPTION (OFTEN A DIFFICULT PROCESS POLITICALLY BECAUSE OF ENTRENCHED INTERESTS). GIVEN THAT TAX TREATIES A RE PREMISED ON AN ITEM-BY-ITEM FOREIGN TAX CREDIT LIMIT, RATHER THAN ON A WORLDWIDE LIMIT AGGREGATING ALL FOREIGN INCOME OF THE TAXPAYE R, THE ITEM-BY- ITEM LIMIT IS PROBABLY EASIEST TO USE IN DOMESTIC L AW. WHICHEVER DOUBLE TAX RELIEF SYSTEM IS ADOPTED, SOME METHOD OF APPORTIONING DEDUCTIONS BETWEEN DOMESTIC AND FOREIG N INCOME WILL BE NECESSARY. WHERE DEDUCTIONS ALLOCATED TO FOREIGN INCOME EXCEED THAT INCOME, THE LOSS SHOULD NOT BE AVAILABLE FOR U SE AGAINST DOMESTIC INCOME. 8. THERE ARE THUS FOUR METHODS IN WHICH RELIEF CAN BE GRANTED TO A TAXPAYER IN THE RESIDENCE COUNTRY IN RESPECT OF INC OME TAX PAID ABROAD. IT IS ALSO IMPORTANT TO BEAR IN MIND THE FACT THAT THESE FOUR METHODS ARE MUTUALLY EXCLUSIVE METHODS IN THE SENSE THAT EACH O NE OF THESE METHODS, ON STANDALONE BASIS, IS MEANT TO GRANT REQUISITE RE LIEF FROM DOUBLE TAXATION OF AN INCOME. APPLICATION OF MORE THAN ONE OF THESE METHODS, IN A PARTICULAR SITUATION, CAN THUS ONLY RESULT IN GRA NTING RELIEF GREATER THAN THE DOUBLE TAXATION ITSELF. TO SUM UP EVEN AT THE C OST OF AN ELEMENT OF REPETITION, THESE METHODS ARE AS FOLLOWS: IN THE FIRST METHOD, RESIDENCE COUNTRY FOLLOWS PURE TERRITORIAL METHOD OF TAXATION AND BRINGS TO TAX ON LY SUCH INCOMES AS ARE SOURCED IN THE RESIDENCE JURISDICTIO N ITSELF. THERE IS THEN NO CONFLICT BETWEEN THE SOURCE RULE A ND THE RESIDENCE RULE INASMUCH AS THE RESIDENCE RULE IS NO T STRICTLY FOLLOWED. GLOBALLY, HOWEVER, THERE ARE NOT MANY TAK ERS FOR THIS SYSTEM, AND QUITE REASONABLY SO, BECAUSE, AS P ROF VANN RIGHTLY PUTS IT, IT SIMPLY INVITES SHIFTING OF INCO ME OFFSHORE TO EVADE TAXES COMPLETELY. THE SECOND METHOD IS TO GRANT TAX EXEMPTION TO THE INCOME TAXED ABROAD. THE EXEMPTION METHOD IS USUALLY CON DITIONAL IN THE SENSE IT PROVIDES PROGRESSIVE RELIEF, ON AVE RAGE RATE BASIS, AND IS CONTINGENT UPON THE RELATED INCOME NO T BEING EXEMPTED FROM TAX, OR SUBJECTED TO LESS AT A LESS T HAN ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 10 OF 31 ORDINARY TAX RATE, UNDER A TAX TREATY ARRANGEMENT. EFFECTIVELY THUS IT IS NOT A SIMPLICITOR EXEMPTION OF INCOME TAXED ABROAD, BUT AN EXEMPTION OF INCOME SUBJECT TO SEVERAL RIDER S. IN THAT SENSE, IT IS DISTINCT FROM THE PURE TERRITORIAL MET HOD OF TAXATION. IN THE THIRD METHOD, TAX CREDIT IS GIVEN, IN COMPUT ATION OF TAX LIABILITY OF THE TAXPAYER IN RESPECT OF HIS WORLDWI DE INCOME, IN RESPECT OF TAXES PAID ABROAD. HOWEVER, THE CREDI T SO GIVEN, IN RESPECT OF TAXES PAID ABROAD, DOES NOT EXCEED TH E DOMESTIC TAX LIABILITY IN RESPECT OF THE INCOME EARNED ABROA D. IN PRINCIPLE, THUS, EVEN INCOME TAX PAID ABROAD IS SEE N AS APPROPRIATION OF INCOME TOWARDS STATES SHARE IN IN COME OF A TAXPAYER AND THE CREDIT IS GRANTED, IN COMPUTATION OF DOMESTIC TAXES, IN RESPECT THEREOF. IN THE FOURTH METHOD, DEDUCTION IS ALLOWED IN RESPE CT OF THE INCOME TAXES PAID ABROAD. IT IS THUS SEEN AS A CHAR GE OF INCOME, RATHER THAN APPROPRIATION OF INCOME, AND IS SEEN AS AN EXPENSE INCURRED IN EARNING THE INCOME ABROAD. T HAT IS IN SHARP CONTRAST WITH ALL OTHER METHODS WHERE INCOME TAX PAID ABROAD IS SEEN AS AN APPLICATION OF INCOME TOWARDS SOVEREIGNS SHARE IN INCOME EARNED BY A TAXPAYER. 9. LET US NOW DEAL WITH THE LEGAL PROVISIONS IN TH E INDIAN INCOME TAX ACT, 1961, DEALING WITH DOUBLE TAXATION RELIEF, AND EXAMINE THE MANNER IN WHICH THE INDIAN INCOME TAX ACT PROVIDES RELIEF FRO M TAXATION OF AN INCOME IN MORE THAN ONE TAX JURISDICTION. THESE PRO VISIONS ARE SET OUT IN CHAPTER IX OF THE ACT, AND ARE REPRODUCED BELOW FOR READY REFERENCE: CHAPTER IX : DOUBLE TAXATION RELIEF AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRI TORIES. 90. (1) THE CENTRAL GOVERNMENT MAY ENTER INTO AN AGREE MENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIE D TERRITORY OUTSIDE INDIA, ( A ) FOR THE GRANTING OF RELIEF IN RESPECT OF ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 11 OF 31 ( I ) INCOME ON WHICH HAVE BEEN PAID BOTH INCOME-TAX UN DER THIS ACT AND INCOME-TAX IN THAT COUNTRY OR SPECIFIE D TERRITORY, AS THE CASE MAY BE, OR ( II ) INCOME-TAX CHARGEABLE UNDER THIS ACT AND UNDER TH E CORRESPONDING LAW IN FORCE IN THAT COUNTRY OR SPECI FIED TERRITORY, AS THE CASE MAY BE, TO PROMOTE MUTUAL ECONOMIC RELA TIONS, TRADE AND INVESTMENT, OR ( B ) FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME UN DER THIS ACT AND UNDER THE CORRESPONDING LAW IN FORCE IN THAT COUNTR Y OR SPECIFIED TERRITORY, AS THE CASE MAY BE, OR ( C ) FOR EXCHANGE OF INFORMATION FOR THE PREVENTION OF EVASION OR AVOIDANCE OF INCOME-TAX CHARGEABLE UNDER THIS ACT O R UNDER THE CORRESPONDING LAW IN FORCE IN THAT COUNTRY OR SPECI FIED TERRITORY, AS THE CASE MAY BE, OR INVESTIGATION OF CASES OF SUCH EVASION OR AVOIDANCE, OR ( D ) FOR RECOVERY OF INCOME-TAX UNDER THIS ACT AND UND ER THE CORRESPONDING LAW IN FORCE IN THAT COUNTRY OR SPECI FIED TERRITORY, AS THE CASE MAY BE, AND MAY, BY NOTIFICATION IN THE OFFICIAL GAZETTE, M AKE SUCH PROVISIONS AS MAY BE NECESSARY FOR IMPLEMENTING THE AGREEMENT. (2) WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO A N AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIE D TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) FOR GRANT ING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. (3) ANY TERM USED BUT NOT DEFINED IN THIS ACT OR IN THE AGREEMENT REFERRED TO IN SUB-SECTION (1) SHALL, UNLESS THE CONTEXT OTHERW ISE REQUIRES, AND IS NOT INCONSISTENT WITH THE PROVISIONS OF THIS ACT OR THE AGREEMENT, HAVE THE SAME MEANING AS ASSIGNED TO IT IN THE NOTIFICATION ISSUE D BY THE CENTRAL GOVERNMENT IN THE OFFICIAL GAZETTE IN THIS BEHALF. EXPLANATION 1. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT THE CHARGE OF TAX IN RESPECT OF A FOREIGN COMPANY AT A RATE HIGHER THAN THE RATE AT WHICH A DOMESTIC COMPANY IS CHARGEABLE, SHALL NOT B E REGARDED AS LESS FAVOURABLE CHARGE OR LEVY OF TAX IN RESPECT OF SUCH FOREIGN COMPANY. EXPLANATION 2. FOR THE PURPOSES OF THIS SECTION, SPECIFIED TERRI TORY MEANS ANY AREA OUTSIDE INDIA WHICH MAY BE NOTIFIED AS SUCH BY THE CENTRAL GOVERNMENT.] ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 12 OF 31 ADOPTION BY CENTRAL GOVERNMENT OF AGREEMENT BETWEEN SPECIFIED ASSOCIATIONS FOR DOUBLE TAXATION RELIEF. * 90A. (1) ANY SPECIFIED ASSOCIATION IN INDIA MAY ENTER IN TO AN AGREEMENT WITH ANY SPECIFIED ASSOCIATION IN THE SPECIFIED TER RITORY OUTSIDE INDIA AND THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFI CIAL GAZETTE, MAKE SUCH PROVISIONS AS MAY BE NECESSARY FOR ADOPTING AND IMP LEMENTING SUCH AGREEMENT ( A ) FOR THE GRANTING OF RELIEF IN RESPECT OF ( I ) INCOME ON WHICH HAVE BEEN PAID BOTH INCOME-TAX UN DER THIS ACT AND INCOME-TAX IN ANY SPECIFIED TERRITORY OUTSIDE INDIA; OR ( II ) INCOME-TAX CHARGEABLE UNDER THIS ACT AND UNDER TH E CORRESPONDING LAW IN FORCE IN THAT SPECIFIED TERRIT ORY OUTSIDE INDIA TO PROMOTE MUTUAL ECONOMIC RELATIONS, TRADE A ND INVESTMENT, OR ( B ) FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME UN DER THIS ACT AND UNDER THE CORRESPONDING LAW IN FORCE IN THAT SPECIF IED TERRITORY OUTSIDE INDIA, OR ( C ) FOR EXCHANGE OF INFORMATION FOR THE PREVENTION OF EVASION OR AVOIDANCE OF INCOME-TAX CHARGEABLE UNDER THIS ACT O R UNDER THE CORRESPONDING LAW IN FORCE IN THAT SPECIFIED TERRIT ORY OUTSIDE INDIA, OR INVESTIGATION OF CASES OF SUCH EVASION OR AVOIDA NCE, OR ( D ) FOR RECOVERY OF INCOME-TAX UNDER THIS ACT AND UND ER THE CORRES- PONDING LAW IN FORCE IN THAT SPECIFIED TERRITORY OU TSIDE INDIA. (2) WHERE A SPECIFIED ASSOCIATION IN INDIA HAS ENTE RED INTO AN AGREEMENT WITH A SPECIFIED ASSOCIATION OF ANY SPECIFIED TERRI TORY OUTSIDE INDIA UNDER SUB-SECTION (1) AND SUCH AGREEMENT HAS BEEN NOTIFIE D UNDER THAT SUB-SECTION, FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGRE EMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT TH EY ARE MORE BENEFICIAL TO THAT ASSESSEE. (3) ANY TERM USED BUT NOT DEFINED IN THIS ACT OR IN THE AGREEMENT REFERRED TO IN SUB-SECTION (1) SHALL, UNLESS THE CONTEXT OTHERW ISE REQUIRES, AND IS NOT INCONSISTENT WITH THE PROVISIONS OF THIS ACT OR THE AGREEMENT, HAVE THE SAME MEANING AS ASSIGNED TO IT IN THE NOTIFICATION ISSUE D BY THE CENTRAL GOVERNMENT IN THE OFFICIAL GAZETTE IN THIS BEHALF. EXPLANATION 1. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT THE CHARGE OF TAX IN RESPECT OF A COMPANY INCORPORATED IN THE SPECIFIED TERRITORY OUTSIDE INDIA AT A RATE HIGHER THAN THE RATE AT WHI CH A DOMESTIC COMPANY IS ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 13 OF 31 CHARGEABLE, SHALL NOT BE REGARDED AS LESS FAVOURABL E CHARGE OR LEVY OF TAX IN RESPECT OF SUCH COMPANY. EXPLANATION 2. FOR THE PURPOSES OF THIS SECTION, THE EXPRESSIONS ( A ) SPECIFIED ASSOCIATION MEANS ANY INSTITUTION, AS SOCIATION OR BODY, WHETHER INCORPORATED OR NOT, FUNCTIONING UNDER ANY LAW FOR THE TIME BEING IN FORCE IN INDIA OR THE LAWS OF THE SPE CIFIED TERRITORY OUTSIDE INDIA AND WHICH MAY BE NOTIFIED AS SUCH BY THE CENTRAL GOVERNMENT FOR THE PURPOSES OF THIS SECTION; ( B ) SPECIFIED TERRITORY MEANS ANY AREA OUTSIDE INDI A WHICH MAY BE NOTIFIED AS SUCH BY THE CENTRAL GOVERNMENT FOR THE PURPOSES OF THIS SECTION.] COUNTRIES WITH WHICH NO AGREEMENT EXISTS. 91. (1) IF ANY PERSON WHO IS RESIDENT IN INDIA IN ANY PREVIOUS YEAR PROVES THAT, IN RESPECT OF HIS INCOME WHICH ACCRUED OR ARO SE DURING THAT PREVIOUS YEAR OUTSIDE INDIA (AND WHICH IS NOT DEEMED TO ACCR UE OR ARISE IN INDIA), HE HAS PAID IN ANY COUNTRY WITH WHICH THERE IS NO AGRE EMENT UNDER SECTION 90 FOR THE RELIEF OR AVOIDANCE OF DOUBLE TAXATION, INC OME-TAX, BY DEDUCTION OR OTHERWISE, UNDER THE LAW IN FORCE IN THAT COUNTRY, HE SHALL BE ENTITLED TO THE DEDUCTION FROM THE INDIAN INCOME-TAX PAYABLE BY HIM OF A SUM CALCULATED ON SUCH DOUBLY TAXED INCOME AT THE INDIAN RATE OF TAX OR THE RATE OF TAX OF THE SAID COUNTRY, WHICHEVER IS THE LOWER, OR AT THE IND IAN RATE OF TAX IF BOTH THE RATES ARE EQUAL. (2) IF ANY PERSON WHO IS RESIDENT IN INDIA IN ANY P REVIOUS YEAR PROVES THAT IN RESPECT OF HIS INCOME WHICH ACCRUED OR AROSE TO HIM DURING THAT PREVIOUS YEAR IN PAKISTAN HE HAS PAID IN THAT COUNTRY, BY DE DUCTION OR OTHERWISE, TAX PAYABLE TO THE GOVERNMENT UNDER ANY LAW FOR THE TIM E BEING IN FORCE IN THAT COUNTRY RELATING TO TAXATION OF AGRICULTURAL INCOME , HE SHALL BE ENTITLED TO A DEDUCTION FROM THE INDIAN INCOME-TAX PAYABLE BY HIM ( A ) OF THE AMOUNT OF THE TAX PAID IN PAKISTAN UNDER A NY LAW AFORESAID ON SUCH INCOME WHICH IS LIABLE TO TAX UNDER THIS ACT A LSO; OR ( B ) OF A SUM CALCULATED ON THAT INCOME AT THE INDIAN RATE OF TAX; - WHICHEVER IS LESS. (3) IF ANY NON-RESIDENT PERSON IS ASSESSED ON HIS S HARE IN THE INCOME OF A REGISTERED FIRM ASSESSED AS RESIDENT IN INDIA IN AN Y PREVIOUS YEAR AND SUCH SHARE INCLUDES ANY INCOME ACCRUING OR ARISING OUTSI DE INDIA DURING THAT PREVIOUS YEAR (AND WHICH IS NOT DEEMED TO ACCRUE OR ARISE IN INDIA) IN A COUNTRY WITH WHICH THERE IS NO AGREEMENT UNDER SECT ION 90 FOR THE RELIEF OR ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 14 OF 31 AVOIDANCE OF DOUBLE TAXATION AND HE PROVES THAT HE HAS PAID INCOME-TAX BY DEDUCTION OR OTHERWISE UNDER THE LAW IN FORCE IN TH AT COUNTRY IN RESPECT OF THE INCOME SO INCLUDED HE SHALL BE ENTITLED TO A DE DUCTION FROM THE INDIAN INCOME-TAX PAYABLE BY HIM OF A SUM CALCULATED ON SU CH DOUBLY TAXED INCOME SO INCLUDED AT THE INDIAN RATE OF TAX OR THE RATE O F TAX OF THE SAID COUNTRY, WHICHEVER IS THE LOWER, OR AT THE INDIAN RATE OF TA X IF BOTH THE RATES ARE EQUAL. EXPLANATION. IN THIS SECTION, ( I ) THE EXPRESSION INDIAN INCOME-TAX MEANS INCOME -TAX CHARGED IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT; ( II ) THE EXPRESSION INDIAN RATE OF TAX MEANS THE RAT E DETERMINED BY DIVIDING THE AMOUNT OF INDIAN INCOME-TAX AFTER DEDU CTION OF ANY RELIEF DUE UNDER THE PROVISIONS OF THIS ACT BUT BEF ORE DEDUCTION OF ANY RELIEF DUE UNDER THIS CHAPTER, BY THE TOTAL INC OME; ( III ) THE EXPRESSION RATE OF TAX OF THE SAID COUNTRY MEANS INCOME-TAX AND SUPER-TAX ACTUALLY PAID IN THE SAID COUNTRY IN ACCORDANCE WITH THE CORRESPONDING LAWS IN FORCE IN THE SAID COUNTRY AFTER DEDUCTION OF ALL RELIEF DUE, BUT BEFORE DEDUCTION OF ANY RELI EF DUE IN THE SAID COUNTRY IN RESPECT OF DOUBLE TAXATION, DIVIDED BY T HE WHOLE AMOUNT OF THE INCOME AS ASSESSED IN THE SAID COUNTRY; ( IV ) THE EXPRESSION INCOME-TAX IN RELATION TO ANY CO UNTRY INCLUDES ANY EXCESS PROFITS TAX OR BUSINESS PROFITS TAX CHARGED ON THE PROFITS BY THE GOVERNMENT OF ANY PART OF THAT COUNTRY OR A LOC AL AUTHORITY IN THAT COUNTRY. * THIS SECTION WAS NOT IN FORCE IN THE RELEVANT ASS ESSMENT YEAR AS IT WAS ALSO INTRODUCED WITH EFFECT FROM 1 ST APRIL 2006 VIDE FINANCE ACT 2006, BUT IT IS REPRODUCED NEVERTHELESS FOR THE SAKE OF COMPLETENES S. SIMILARLY, THERE ARE CERTAIN OTHER VARIATIONS IN THE STATUTORY PROVISION S AS PREVAILING IN THE ASSESSMENT YEAR 2000-01 VIS--VIS THE STATUTORY PRO VISIONS AS ON NOW, BUT THESE VARIATIONS ARE NOT RELEVANT IN THE CONTEXT OF ISSUE UNDER CONSIDERATION IN THIS APPEAL. 10. THE SCHEME OF RELIEF FROM DOUBLE TAXATION OF AN INCOME, AS EVIDENT FROM A PLAIN READING OF THE ABOVE PROVISIONS, IS LI KE THIS. UNDER SECTION 91 OF THE ACT, WHEN A PERSON RESIDENT IN INDIA EARN S ANY INCOME OUTSIDE INDIA, WHICH IS NOT DEEMED TO ACCRUE OR ARISE IN IN DIA, AND HE SUFFERS INCOME TAX THEREON IN SUCH SOURCE COUNTRY, THAT PER SON IS ENTITLED TO DEDUCTION FROM HIS DOMESTIC INCOME TAX LIABILITY TO THE EXTENT OF DOMESTIC ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 15 OF 31 TAX LIABILITY IN RESPECT OF SUCH FOREIGN INCOME OR TAXES ACTUALLY PAID ABROAD IN RESPECT OF SUCH INCOME WHICHEVER IS LES S. IN OTHER WORDS THUS, IF AT ALL A TAXPAYER IS ALSO TAXED IN INDIA IN RESP ECT OF THE INCOME TAXED ABROAD, IT IS ONLY TO THE EXTENT THE TAX RATE ABROA D FALLS SHORT OF INDIAN TAX RATE. EACH FOREIGN SOURCED INCOME IS THUS TREATED AS A SEPARATE BASKET OF INCOME, AND FOREIGN TAX RELIEF IN RESPECT OF THAT B ASKET OF INCOME IS RESTRICTED TO THE INDIAN INCOME TAX ACTUALLY LEVIED ON THE SAME. THIS ACTION ALSO PROVIDES RELIEF IN THE CONTEXT OF AGRIC ULTURAL INCOME TAX IN PAKISTAN AND ALSO IN THE CONTEXT OF TAXATION OF A N ON-RESIDENTS SHARE OF INCOME FROM A RESIDENT INDIAN PARTNERSHIP FIRM, WHI CH INCLUDES INCOME EARNED OUTSIDE INDIA, EXCEPT INCOME DEEMED TO ACCRU E OR ARISE IN INDIA, WHICH HAS SUFFERED TAX IN SUCH SOURCE JURISDICTION. SECTION 90 AND 90 A PROVIDE THAT WHEN INDIA HAS ENTERED INTO A DOUBLE T AXATION AVOIDANCE AGREEMENT WITH A FOREIGN COUNTRY, OR A SPECIFIED AS SOCIATION OUTSIDE INDIA, THE PROVISIONS OF SUCH AGREEMENTS WILL OVERR IDE THE PROVISIONS OF THE INDIAN INCOME TAX ACT EXCEPT TO THE EXTENT TH E PROVISIONS OF THE INDIAN INCOME TAX ACT ARE BENEFICIAL TO THE ASSESSE E. UNDER THE TAX CREDIT SCHEME ENVISAGED IN THE SCHEMES OF TAX TREATIES, ON CE AGAIN EACH INCOME SOURCED IN THE TREATY PARTNER COUNTRY IS PRACTICALL Y TREATED AS A SEPARATE BASKET OF INCOME AND THE DOUBLE TAXATION RELIEF, IN RESPECT OF TAXES PAID IN THAT TREATY PARTNER COUNTRY, IS RESTRICTED TO TH E TAXES ACTUALLY LEVIED IN THE HOME COUNTRY IN RESPECT OF THE SAID INCOME. IT THUS FOLLOWS THAT THE LEAST RELIEF AVAILABLE IN RESPECT OF INCOME TAX PAI D ABROAD IS IF AT ALL AN ASSESSEE IS ALSO TAXED IN INDIA IN RESPECT OF THE I NCOME TAXED ABROAD, IT IS ONLY TO THE EXTENT THE TAX RATE ABROAD FALLS SHORT OF INDIAN TAX RATE. THERE IS NO DISPUTE THAT THE ASSESSEE HAS CLAIMED DOUBLE TAXATION RELIEF UNDER THE SCHEME OF THE ACT AS SET OUT IN SECTIONS 90 A ND 91 OF THE ACT. 11. THE ASSESSEE, HOWEVER, WAS NOT SATISFIED WITH T HE RELIEF SO GRANTED BY THE ASSESSING OFFICER. HE ALSO CLAIMED DEDUCTIO N, IN COMPUTATION OF INCOME FROM PROFITS AND GAINS FROM BUSINESS AND PR OFESSION, IN RESPECT ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 16 OF 31 OF TAXES PAID ABROAD. IT IS THE CASE OF THE ASSESS EE THAT THE TAXES SO PAID ABROAD CONSTITUTED EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, AND , THEREFORE, DEDUCTIBLE UNDER SECTION 37 (1) OF THE ACT. IT IS T HIS DEDUCTION WHICH IS NOW SUBJECT MATTER OF CORE DISPUTE BEFORE US. INTER ESTINGLY, WHILE THE ASSESSEE HAS CLAIMED DEDUCTION OF OVERSEAS INCOME T AXES UNDER SECTION 37(1), THE ASSESSEE HAS ALSO CLAIMED TAX CREDITS, I N RESPECT OF TAXES SO PAID ABROAD, UNDER SECTION 90 OR UNDER SECTION 91 AS A PPLICABLE. THE SAME AMOUNT HAS BEEN TREATED AS A CHARGE ON INCOME, BY C LAIMING THE SAME AS DEDUCTION AS EXPENDITURE INCURRED TO EARN AN INCOME , AS ALSO AN APPLICATION OF INCOME, BY CLAIMING THE SAME AS APPR OPRIATION OF INCOME BEING TAX LEVIED ON PROFITS AND CLAIMING INCOME TAX CREDIT IN RESPECT THEREOF. THERE IS NO MEETING GROUND BETWEEN THESE TWO DIAMETRICALLY OPPOSED APPROACHES, AND, IN OUR HUMBLE UNDERSTANDIN G, THERE CANNOT BE ANY JUSTIFICATION FOR MAKING THESE CONTRADICTORY CL AIMS. THIS WOULD ALSO RESULT IN A DOUBLE UNINTENDED BENEFIT TO THE ASSESS EE. TO ILLUSTRATE, THE ASSESSEE HAS PAID US FEDERAL INCOME TAX @ 35% AMOUN TING TO RS 35,01,71,283. ON THE ONE HAND, THE ASSESSEE HAS CLA IMED DEDUCTION IN RESPECT OF THESE TAXES WHICH GIVES ASSESSEE A TAX A DVANTAGE OF RS 13,48,15,940, BEING 38.5% OF THIS AMOUNT, AND THE A SSESSEE HAS ALSO CLAIMED TAX CREDIT OF RS 35,01,71,283 IN RESPECT O F US FEDERAL INCOME TAX, IN COMPUTATION OF INDIAN INCOME TAX LIABILITY. THUS , FOR A PAYMENT OF US FEDERAL INCOME TAX AMOUNTING TO RS 35.01 CRORES, TH E ASSESSEE HAS CLAIMED TAX RELIEF OF RS 48.49 CRORES IN INDIA. TO CAP IT ALL, THE INCOME WHICH IS SO SUBJECTED TO US FEDERAL TAX HAS NOT BEEN TAXED IN I NDIA AT ALL, DUE TO DEDUCTION UNDER SECTION 80 HHE BEING AVAILABLE IN R ESPECT OF THE SAME, AND EFFECTIVELY THUS THE US FEDERAL TAXES PAID BY T HE ASSESSEE ARE SOUGHT TO BE OFFSET, ON 1.38 TIMES WEIGHTED BASIS, AGAINS T TAXES ON ASSESSEES DOMESTIC INCOMES TAXABLE IN INDIA. WHILE HOLDING TH AT THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 80 HHE, THE CIT (A) HAS DECLINED THE CLAIM OF TAX CREDIT IN RESPECT OF TAXES PAID IN USA AS THERE IS NO INDIAN TAX LIABILITY IN RESPECT OF THE SAID INCOME TAXED IN US A. THAT HAS AT LEAST ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 17 OF 31 RESTRICTED SOME INTENDED DOUBLE BENEFIT TO THE ASSE SSEE, BUT EVEN IN A SITUATION IN WHICH TAX RELIEF IS CONFINED TO A SITU ATION IN WHICH THE SAME HAS BEEN ACTUALLY TAXED IN INDIA, THE RELIEF WILL B E AVAILABLE AGAINST TAX LIABILITY IN RESPECT OF OTHER INCOMES TO THE EXTENT OF APPLICABLE TAX RATE ON TAXES ACTUALLY PAID ABROAD. THE NET EFFECT IS THAT EVEN WHEN THERE IS ADMITTEDLY NO DOUBLE TAXATION OF AN INCOME, THE ASS ESSEE IS ABLE TO REDUCE HIS INDIAN INCOME TAX LIABILITY, IN RESPECT OF OTHE R INCOMES, BY BEING ALLOWED DEDUCTION IN RESPECT OF TAXES PAID ABROAD. SUCH A CLAIM BEING ACCEPTED WILL LEAD TO QUITE AN INCONGRUOUS RESULT B Y ANY STANDARD. 12. IT IS IN THE BACKDROP OF THE ABOVE CLAIM FOR DE DUCTION THAT ONE HAS TO TAKE A LOOK AT SECTION 40(A)(II) AND SECTION 2 (43) WHICH ARE REPRODUCED BELOW FOR READY REFERENCE : SECTION 40 (A) (II) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION S 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCO ME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON, (II) ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LE VIED ON THE PROFITS OR GAINS OF ANY BUSINESS OR PROFESSION OR ASSESSED AT A PROPORTION OF, OR OTHERWISE ON THE BASIS OF, ANY SUCH PROFITS OR GAIN S. EXPLANATION 1**.FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SUB-CLAUSE, ANY SUM PAID O N ACCOUNT OF ANY RATE OR TAX LEVIED INCLUDES AND SHALL BE DEEMED ALWAYS T O HAVE INCLUDED ANY SUM ELIGIBLE FOR RELIEF OF TAX UNDER SECTION 90 OR, AS THE CASE MAY BE, DEDUCTION FROM THE INDIAN INCOME-TAX PAYABLE UNDER SECTION 91. EXPLANATION 2**.FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SUB-CLAUSE, ANY SUM PAID O N ACCOUNT OF ANY RATE OR TAX LEVIED INCLUDES ANY SUM ELIGIBLE FOR RELIEF OF TAX UNDER SECTION 90A. ** INSERTED WITH EFFECT FROM 1 ST APRIL 2006, VIDE FINANCE ACT, 2006 SECTION 2 (43) IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQUIRES ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 18 OF 31 TAX IN RELATION TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1965, AND ANY SUBSEQUENT ASSESSMENT YEAR MEANS INCO ME-TAX CHARGEABLE UNDER THE PROVISIONS OF THIS ACT, AND IN RELATION T O ANY OTHER ASSESSMENT YEAR INCOME-TAX AND SUPER-TAX CHARGEABLE UNDER THE PROVI SIONS OF THIS ACT PRIOR TO THE AFORESAID DATE 13. LET US NOW ADDRESS OURSELVES TO THE WEB OF LEGA L ARGUMENTS IN SUPPORT OF THIS CLAIM OF DEDUCTION, IN RESPECT OF T AXES PAID ABROAD, MADE BY THE ASSESSEE. THE CASE OF THE ASSESSEE IS THAT TAXE S PAID ABROAD ARE PAID FOR THE PURPOSES OF BUSINESS, AND AS SUCH DEDUCTIBL E UNDER SECTION 37 (1) WHICH PROVIDES THAT, ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO SECTION 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON. IT IS CONTENDED THAT THE TAXES PAID ARE INHERENTLY IN THE NATURE OF EXPENSES INCURRED FOR THE PURPOSES OF BUSINESS BUT THESE ARE NOT ALLOWABL E AS DEDUCTION BECAUSE OF THE SPECIFIC BAR PLACED UNDER SECTION 40 (A)(II). HOWEVER, ACCORDING TO THE ASSESSEE, THE RESTRICTION PLACED U NDER SECTION 40(A)(II), IN COMPUTATION OF INCOME FROM BUSINESS AND PROFESSION, REFERS TO ONLY TAX BUT THE SAID EXPRESSION, IN VIEW OF DEFINITION OF T HE EXPRESSION TAX UNDER SECTION 2(43), COVERS ONLY INCOME TAX CHARGEABLE U NDER THE PROVISIONS OF THIS ACT (I.E. INCOME TAX ACT, 1961), AND, AS A CO ROLLARY THERETO, THIS LIMITATION ON DEDUCTION OF TAX DOES NOT EXTEND ITS SCOPE TO TAXES PAID OTHER THAN UNDER INCOME TAX ACT, 1961. 14. THE ABOVE CLAIM OF DEDUCTION HAS BEEN APPROVED BY THE COORDINATE BENCHES, FOR THE FIRST TIME IN THE ASSESSMENT YEAR 1976-77, AND WHICH HAS ALSO BEEN FOLLOWED BY ANOTHER COORDINATE BENCH, VID E ORDER DATED 23TH OCTOBER 1984 A COPY OF WHICH WAS ALSO FILED BEFOR E US. THIS DECISION HAS BEEN FOLLOWED BY THE COORDINATE BENCHES SINCE THEN. IT HAS BEEN NOTED IN THIS ORDER THAT THERE IS NO FINDING THAT LOCAL TAX ES (ABROAD) WERE ASSESSED ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 19 OF 31 ON A PROPORTION OF THE PROFITS I.E. CONSULTANCY FEE S RECEIVED. WHEN COMMISSIONER SOUGHT A REFERENCE, UNDER SECTION 256( 1), FOR ESTEEMED VIEWS OF HONBLE BOMBAY HIGH COURT AND AGAINST THIS ORDER ON THE QUESTION OF DEDUCTIBILITY OF LOCAL TAXES PAID ABROA D, THE TRIBUNAL DECLINED THE REFERENCE AND, INTER ALIA , OBSERVED THAT THE QUESTION IS ONE OF THE FACTS, THAT THE TAX DEDUCTED IS A LOCAL TAX AND NOT A TAX ON PROFITS AND THAT FOREIGN TAX IS NOT COVERED BY THE PROVISIONS OF SECTION 40(A)(II). HONBLE HIGH COURT ALSO DECLINED COMMISSIONERS PRA YER FOR REFERENCE UNDER SECTION 256(2) AND THE ORDER OF THE TRIBUNAL THUS RECEIVED FINALITY. THIS DECISION HAS BEEN CONSISTENTLY FOLLOWED OVER T HE DECADES. HOWEVER, IN THE LEAD DECISION CITED BEFORE US, THERE IS A CATEG ORICAL 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 POS ITION THAT THE TAX LEVIED ABROAD, BEING INCOME TAX, IS A TAX ON PROFITS OF TH E ASSESSEE WHETHER ON PRESUMPTIVE BASIS OR ON THE BASIS OF ACTUAL PROFITS EARNED BY THE ASSESSEE. OBVIOUSLY, THEREFORE, A DECISION IN THE CONTEXT OF LOCAL TAX NOT IN THE NATURE OF TAX ON PROFITS WILL HAVE NO APPLICATION O N THESE FACTS. IT IS ALSO IMPORTANT TO TAKE NOTE OF AMENDMENT IN LAW BY INSER TING EXPLANATION 1 TO SECTION 40(A)(II) WHICH PROVIDES THAT, FOR THE REM OVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SUB-C LAUSE, ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LEVIED INCLUDES AND SHAL L BE DEEMED ALWAYS TO HAVE INCLUDED ANY SUM ELIGIBLE FOR RELIEF OF TAX UN DER SECTION 90 OR, AS THE CASE MAY BE, DEDUCTION FROM THE INDIAN INCOME-TAX P AYABLE UNDER SECTION 91. IT CANNOT, THEREFORE, BE SAID THAT A FOREIGN TAX, IN RESPECT OF WHICH RELIEF IS ELIGIBLE UNDER SECTION 90 OR SECTION 91, IS NOT COVERED BY THE SCOPE OF EXPRESSION TAX IN SECTION 40(A)(II). 15. IN ANY EVENT, THE SCOPE OF EXPRESSION TAX HAS TO BE CONSIDERED IN THE CONTEXT OF SECTION 40(A)(II), AND IN HARMONY WI TH THE SCHEME OF THINGS AS ENVISAGED IN THE INCOME TAX ACT. A LOT OF EMPHA SIS HAS BEEN PLACED ON DEFINITION OF TAX IN SECTION 2(43), BUT, LIKE ANY OTHER DEFINITION CLAUSE IN ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 20 OF 31 THE ACT, ALL DEFINITIONS ARE SUBJECT TO THE RIDER T HAT ONLY UNLESS THE CONTEXT OTHERWISE REQUIRES THESE DEFINITIONS HOLD THE FIEL D. IT THUS FOLLOWS THAT THESE DEFINITIONS CANNOT BE VIEWED ON STANDALONE BA SIS IN ISOLATION WITH THE CONTEXT IN WHICH THE EXPRESSIONS SO DEFINED ARE SET OUT. THE UNDERLYING PRINCIPLE OF THIS APPROACH IS THAT THE S TATUTORY DEFINITIONS CANNOT BE APPLIED EVERYWHERE, DE HORS THE CONTEXT IN WHICH THESE EXPRESSIONS ARE EMPLOYED, ON ONE SIZE FITS ALL BA SIS, EXALTING THESE DEFINITIONS INTO A PRISON HOUSE OF OBDURACY, REGARD LESS OF THE VARYING CIRCUMSTANCES IN WHICH, AND MYRIAD DEVELOPMENTS ARO UND WHICH, THESE DEFINITIONS ARE USED. HONBLE SUPREME COURT, IN TH E CASE OF K.P. VARGHESE V. ITO (131 ITR 597), HAS HELD THAT THE TASK OF INT ERPRETATION IS NOT A MECHANICAL TASK AND, QUOTED WITH APPROVAL, JUSTICE HANDS OBSERVATION THAT IT IS ONE OF THE SUREST INDEXES OF A MATURE A ND DEVELOPED JURISPRUDENCE NOT TO MAKE A FORTRESS OUT OF THE DIC TIONARY BUT TO REMEMBER THAT STATUTES ALWAYS HAVE SOME PURPOSE OR OBJECT TO ACCOMPLISH, WHOSE SYMPATHETIC AND IMAGINATIVE DISCO VERY IS THE SUREST GUIDE TO THEIR MEANING. THEIR LORDSHIPS FURTHER OB SERVED THAT, WE MUST NOT ADOPT A STRICTLY LITERAL INTERPRETATION OF . BUT WE MUST CONSTRUE ITS LANGUAGE HAVING REGARD TO THE OBJECT AND PURPOSE WH ICH THE LEGISLATURE HAD IN VIEW IN ENACTING THAT PROVISION AND IN THE C ONTEXT OF THE SETTING IN WHICH IT OCCURS AND THAT WE CANNOT IGNORE THE CO NTEXT AND THE COLLECTION OF THE PROVISIONS IN WHICH ......, APPEA RS, BECAUSE, AS POINTED OUT BY JUDGE LEARNED HAND IN THE MOST FELICITOUS LANGUA GE : INTERPRET . . .THE MEANING OF A SENTENCE MAY BE MORE THAN THAT OF THE SEPARATE WORDS, AS A MELODY IS MORE THAN THE NOTES, AND NO DEGREE OF PAR TICULARITY CAN EVER OBVIATE RECOURSE TO THE SETTING IN WHICH ALL APPEAR , AND WHICH ALL COLLECTIVELY CREATE . .. ONE OF THE THINGS WHICH IS CLEARLY DISCERNIBLE FROM THE ABOVE OBSERVATIONS OF THEIR LORDSHIPS IS THAT W HILE INTERPRETING THE STATUTES, ONE HAS TO ESSENTIALLY BEAR IN MIND THE C ONTEXT AND UNDERLYING SCHEME OF THE LEGISLATION IN WHICH THE WORDS ARE SE T OUT. KEEPING THESE DISCUSSIONS IN MIND, LET US SEE THE CONTEXT IN WHIC H EXPRESSION TAX IS USED IN SECTION 40 (A)(II) WHICH PROVIDES THAT ANY SUM PAID ON ACCOUNT ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 21 OF 31 OF ANY RATE OR TAX LEVIED ON THE PROFITS OR GAINS OF ANY BUSINESS OR PROFESSION OR ASSESSED AT A PROPORTION OF, OR OTHERWISE ON THE BASIS OF, ANY SUCH PROFITS OR GAINS CANNOT BE ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME FROM BUSINESS OR PROFESSION. THE UNDERLYING PRINCIPLE IN THIS PROVISION IS THAT A TAX WHICH IS LEVIED ON THE INCOME OF THE ASSESSEE IS AN APPROPRIATION OF INCOME, REPRESE NTING STATES SHARE INCOME OF THE ASSESSEE, AND NOT A CHARGE ON INCOME. IN THE CASE OF LUBRIZOL INDIA LTD VS CIT (187 ITR 25), HONBLE BOM BAY HIGH COURT HAS OBSERVED THAT, AS HELD IN A NUMBER OF DECISIONS IN COME-TAX IS A CROWN'S OR CENTRAL GOVERNMENT'S SHARE IN THE PROFITS OF A C OMPANY. IN OTHER WORDS THUS, INCOME TAX REPRESENTS STATES SHARE IN INCOME OF A SUBJECT. THE PRINCIPLE OF INCOME TAX BEING AN APPROPRIATION OF INCOME RATHER THAN A CHARGE ON INCOME IS ALSO IN HARMONY WITH THE VI EWS EXPRESSED BY HONBLE BOMBAY HIGH COURT, IN THE CASE OF S INDER S INGH GILL VS CIT (47 ITR 284) WHEREIN THEIR LORDSHIPS TOOK NOTE OF THIS TRIBUNALS FINDINGS TO THE EFFECT THAT 'WE (THE TRIBUNAL) ARE NOT AWARE OF ANY COMMERCIAL PRACTICE OR PRINCIPLE WHICH LAYS DOWN THAT TAX PAID BY ONE ON ONE'S INCOME IS A PROPER DEDUCTION IN DETERMINING ONE'S I NCOME FOR THE PURPOSE OF TAXATION', AND APPROVED THE SAME BY OBSE RVING THAT NO GOOD REASON HAS BEEN SHOWN TO US TO DIFFER FROM THE CONC LUSION TO WHICH THE TRIBUNAL HAS REACHED. IT IS THUS CLEAR THAT IN THE ESTEEMED VIEWS OF HONBLE JURISDICTIONAL HIGH COURT, TAXES PAID ABROA D DO NOT CONSTITUTE ADMISSIBLE DEDUCTION UNDER SECTION 37(1). INCIDENT ALLY, THESE OBSERVATIONS WERE IN THE CONTEXT OF OVERSEAS INCOME TAX PAID BY THE ASSESSEE, I.E. IN UGANDA IN THAT CASE. LEARNED COUN SELS RELIANCE ON DEFINITION OF TAX UNDER SECTION 2(43), IN THE CONTE XT OF DISALLOWANCE UNDER SECTION 40(A)(II), IS THUS OF NO HELP TO THE ASSESSEE. IN LUBRIZOLS CASE (SUPRA), HONBLE BOMBAY HIGH COURT TOOK NOTE O F THE WORDING OF SECTION 40(A)(II) AND DISAGREED WITH THE ASSESSEES CONTENTION THAT THE EXPRESSION TAX IS RESTRICTED TO INCOME TAX AS D EFINED UNDER SECTION 2(43). WHILE DOING SO, THEIR LORDSHIPS, INTER ALIA, OBSERVED AS FOLLOWS: ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 22 OF 31 IT IS SIGNIFICANT TO NOTE THAT THE WORD 'TAX' IS US ED IN CONJUNCTION WITH THE WORDS 'ANY RATE OR TAX'. THE WORD 'ANY' GOES BO TH WITH THE RATE AND TAX. THE EXPRESSION IS FURTHER QUALIFIED AS A R ATE OR TAX LEVIED ON THE PROFITS OR GAINS OF ANY BUSINESS OR PROFESS ON OR ASSESSED AT A PROPORTION OF, OR OTHERWISE ON THE BASIS OF, ANY SU CH PROFITS OR GAINS. IF THE WORD 'TAX' IS TO BE GIVEN THE MEANING ASSIGN ED TO IT BY SECTION 2(43), THE WORD 'ANY' USED BEFORE IT WILL BE OTIOSE AND THE FURTHER QUALIFICATION AS TO THE NATURE OF LEVY WILL ALSO BE COME MEANINGLESS. FURTHERMORE, THE WORD 'TAX' AS DEFINED IN SECTION 2 (43) OF THE ACT IS SUBJECT TO 'UNLESS THE CONTEXT OTHERWISE REQUIRES'. IN VIEW OF THE DISCUSSION ABOVE WE HOLD THAT THE WORD 'ANY' TAX HE REIN REFERS TO ANY KIND OF TAX LEVIED OR LEVIABLE ON THE PROFITS OR GA INS OF ANY BUSINESS OR PROFESSION OR ASSESSED AT A PROPORTION OF, OR OTHER WISE ON THE BASIS OF, ANY SUCH PROFITS OR GAINS . 16. HONBLE BOMBAY HIGH COURTS JUDGMENT LUBRIZOL I NDIA LTD (SUPRA) WHICH HOLDS THAT THE MEANING OF EXPRESSION TAX CA NNOT BE RESTRICTED TO THE DEFINITION OF TAX WAS DELIVERED ON 11 TH JULY 1990, AND, TO THAT EXTENT, TRIBUNALS DECISION DATED 23 RD OCTOBER 1984, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1976-77 AND WHICH HAS BEEN FOLL OWED IN ALL OTHER ASSESSMENT YEARS, IS NO LONGER GOOD LAW. NONE OF TH E SUBSEQUENT DECISIONS OF THE TRIBUNAL, WHICH MERELY FOLLOWED TH E SAID ORDER, HAD AN OCCASION TO DEAL WITH THE LAW SO LAID DOWN BY THEIR LORDSHIPS. IT NEEDS HARDLY BE STATED THAT MERE REJECTION OF REFERENCE B Y THE HONBLE HIGH COURT DOES NOT AMOUNT TO APPROVAL OF THE VIEWS OF THE TRIBUNAL. AS AGAINST THIS REJECTION OF REFERENCE, WHICH IS SOUGH T TO BE CONSTRUED AS IMPLIED APPROVAL OF TRIBUNALS ANALYSIS, THERE IS A DIRECT DECISION BY THE HONBLE HIGH COURT HOLDING THAT DEFINITION OF TAX U NDER SECTION 2(43) IS NOT RELEVANT FOR THE PURPOSE OF SECTION 40(A)(II). WITH RESPECT, INSTEAD OF FOLLOWING THE COORDINATE BENCH IN SUCH CIRCUMSTANCE S, WE HAVE TO YIELD TO THE HIGHER WISDOM OF THE HONBLE COURTS ABOVE 17. THE SITUATION BEFORE US IS ALSO QUITE UNIQUE IN THE SENSE THAT IN NONE OF THE DECISIONS CITED BEFORE US, THE ASSESSEE HAS CLAIMED DOUBLE TAXATION RELIEF UNDER SECTION 90 OR SECTION 91, AND , IN ADDITION TO SUCH A ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 23 OF 31 RELIEF HAVING BEEN CLAIMED, THE ASSESSEE HAS ALSO C LAIMED DEDUCTION, IN COMPUTATION OF BUSINESS INCOME , IN RESPECT OF THE TAXES SO PAID. THIS IS CLEARLY DOUBLE DOUBLE TAXATION RELIEF TO THE ASSE SSEE WHEREAS IN FACT THERE IS NO DOUBLE TAXATION AT ALL TO THE EXTENT A SSESSEES INCOME FROM EXPORTS OF SOFTWARE WAS HELD TO BE ELIGIBLE FOR DED UCTION UNDER SECTION 80 HHE IN INDIA. WHAT DOES IT LEAD TO? IT LEADS TO, F OR EXAMPLE, A SITUATION THAT THE TAXES PAID IN US ARE BEING SOUGHT TO BE OF FSET AGAINST ASSESSEES TAX LIABILITY IN RESPECT OF DOMESTIC INCOMES, AND I N ADDITION TO THE SAME, THE TAXES PAID IN USA ARE ALSO BEING SOUGHT TO BE D EDUCTED FROM ASSESSEES TAXABLE INCOME IN INDIA. THE NET RESULT OF THIS CLAIM IS THAT, AS WE HAVE SEEN IN PARAGRAPH 11 ABOVE, THAT THE ASSESS EE IS CLAIMING A WEIGHTED DEDUCTION OF 1.38 TIMES THE TAX PAID IN US A FROM INCOME TAX LIABILITY IN RESPECT OF OTHER INCOMES. EVEN IN A SI TUATION IN WHICH TAX RELIEF IS CONFINED TO A SITUATION IN WHICH THE SAME HAS BEEN ACTUALLY TAXED IN INDIA, THE RELIEF WILL BE AVAILABLE AGAINST TAX LIABILITY IN RESPECT OF OTHER INCOMES TO THE EXTENT OF 38.5% OF TAXES PAID ABROAD . THE SCHEME OF THE ACT DOES NOT VISUALIZE THIS KIND OF AN UNDUE RELIEF TO THE ASSESSEE WHICH PROVIDES MUCH GREATER RELIEF THAN THE HARDSHIP CAUS ED TO THE ASSESSEE. THE HARDSHIP IS OF DOUBLE TAXATION OF AN INCOME IN MORE THAN ONE TAX JURISDICTION, AND THE RELIEF MUST NOT GO BEYOND MIT IGATING THIS HARDSHIP; IT CANNOT BE TURNED INTO AN UNDUE ADVANTAGE, OR SOURCE OF INCOME, TO THE ASSESSEE. SECTION 91 RESTRICTS THE DOUBLE TAXATION RELIEF ONLY TO SUCH AMOUNT AS MAY HAVE BEEN PAID BY THE ASSESSEE IN EXC ESS OF HIS INCOME TAX OBLIGATIONS IN INDIA. SIMILARLY, IN TERMS OF THE PR OVISIONS OF TAX TREATIES WHICH ARE ENTERED INTO UNDER SECTION 90, TAX CREDIT S, IN RESPECT OF TAXES PAID ABROAD, ARE RESTRICTED TO ASSESSEES DOMESTIC TAX LIABILITY IN RESPECT OF THE SUBJECT INCOME AS WAS HELD BY THIS TRIBUNAL IN THE CASE OF JCIT VS. DIGITAL EQUIPMENTS INDIA LTD (94 ITD 340). IF WE A RE TO HOLD THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF TAX PAID ABROA D, IN ADDITION OF ADMISSIBILITY OF TAX RELIEF UNDER SECTION 90 OR SE CTION 91, IT WILL RESULT IN A SITUATION THAT ON ONE HAND DOUBLE TAXATION OF AN INCOME WILL BE ELIMINATED BY ENSURING THAT THE ASSESSEES TOTAL IN COME TAX LIABILITY DOES ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 24 OF 31 NOT EXCEED INCOME TAX LIABILITY IN INDIA OR INCOME TAX LIABILITY ABROAD WHICHEVER IS GREATER, AND, ON THE OTHER HAND, THE A SSESSEES DOMESTIC TAX LIABILITY WILL ALSO BE REDUCED BY TAX LIABILITY IN RESPECT OF INCOME DECREASED DUE TO DEDUCTION OF TAXES. SUCH A BENEFI T TO THE ASSESSEE IS NOT ONLY CONTRARY TO THE SCHEME OF THE ACT AND CONTRARY TO THE FUNDAMENTAL PRINCIPLES OF INTERNATIONAL TAXATION, IT ALSO ENDS UP MAKING DOUBLE TAXATION RELIEF A MECHANISM TO REDUCE DOMESTIC TAX LIABILITY IN INDIA SOMETHING WHICH IS MOST INCONGRUOUS. IN OUR CONSIDE RED VIEW, AN INTERPRETATION WHICH LEADS TO SUCH GLARING ABSURDIT IES CANNOT BE ADOPTED. 18. LEARNED COUNSEL HAS ALSO SUBMITTED THAT IN THE EVENT OF OUR DECLINING THE DEDUCTION, WE SHOULD AT LEAST DIRECT THAT TAX CREDIT IN TERMS OF THE PROVISIONS OF SECTION 90 BE GRANTED IN RESPE CT OF THE ENTIRE AMOUNT. LEARNED COUNSEL SUBMITS THAT THIS APPROACH IS JUSTI FIED INASMUCH AS WE MUST TAKE INTO ACCOUNT RIGHT TO TAX, RATHER THAN TH E ACTUAL LEVY OF TAX. IN OUR CONSIDERED VIEW, HOWEVER, THE RIGHT TO TAX IS R ELEVANT ONLY FOR THE PURPOSE OF ALLOCATION OF TAXING RIGHTS, AS WAS HELD BY THIS TRIBUNAL IN THE CASE OF ADIT VS GREEN EMIRATE SHIPPING & TRAVELS ( 100 ITD 203 ), AND NOT FOR THE PURPOSES OF GRANTING TAX CREDITS. BEING GRANTED TAX CREDITS IN EXCESS OF THE ACTUAL DOMESTIC TAX LIABILITY WOULD R ESULT IN A SITUATION THAT EVEN WHEN ASSESSEE HAS NO TAX LIABILITY IN INDIA, H E IS TO BE ALLOWED CREDIT IN RESPECT OF ENTIRE TAXES PAID IN US, AND THUS PER HAPS EVEN ENTITLING HIMSELF TO REFUND IN INDIA IN RESPECT OF TAXES PAID IN USA. THAT IS CLEARLY CONTRARY TO THE SCHEME OF TAX CREDIT UNDER THE APPL ICABLE TAX TREATY. IN ANY EVENT, THIS ISSUE IS, HOWEVER, COVERED AGAINST THE ASSESSEE BY TRIBUNALS DECISION IN THE CASE OF DIGITAL EQUIPMEN TS (SUPRA), WHEREIN THE COORDINATE BENCH, SPEAKING THROUGH ONE OF US, HAS O BSERVED AS FOLLOWS: 4. WE CONSIDER IT USEFUL TO REPRODUCE THE TEXT OF A RTICLE 25(2)(A) OF THE INDO US DTAA WHICH IS AS FOLLOWS : WHERE A RESIDENT OF INDIA DERIVES INCOME WHICH, IN ACCORDANCE WITH THE PROVISIONS OF THIS CONVENTION, MAY BE TAXED IN THE U NITED STATES, INDIA SHALL ALLOW A DEDUCTION FROM THE INCOME OF THAT RESIDENT AN AMOUNT EQUAL TO INCOME ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 25 OF 31 TAX PAID IN THE UNITES STATES, WHETHER DIRECTLY OR BY WAY OF DEDUCTION. SUCH DEDUCTION SHALL HOWEVER NOT EXCEED THAT PART OF INC OME TAX (AS COMPUTE BEFORE THE DEDUCTION IS GIVEN) WHICH IS ATTRIBUTABLE TO THE INCOME WHICH IS TAXED IN THE UNITED STATES. [EMPHASIS SUPPLIED] A PLAIN READING OF THE ABOVE PROVISION MAKES IT CLEA R THAT THE DEDUCTION ON ACCOUNT OF INCOME TAX PAID IN THE US, FROM INCOME TAX PAYABL E IN INDIA, CANNOT EXCEED INDIAN INCOME TAX LIABILITY IN RESPECT OF SUCH AN IN COME. THIS RESTRICTION ON THE DEDUCTION IS UNAMBIGUOUS AND BEYOND ANY CONTROVERSY, AS EVIDENT PARTICULARLY FROM THE LAST SENTENCE IN ARTICLE 25(2)(A) WHICH IS UNDERLINED AS ABOVE THE SUPPLY THE EMPHASIS ON THE SAME. AS A MATTER OF FACT, WE A RE UNABLE TO APPRECIATE ANY BASIS WHATSOEVER FOR THE CIT(A)S CONCLUSION THAT TH E TAXES PAID IN THE US, IN THE INSTANT CASE, ARE TO BE CREDITED TO THE ASSESSEES A CCOUNT AND ARE TO BE REFUNDED TO THE APPELLANT, IN CASE HE HAS NO INCOME TAX LIABILIT Y IN RESPECT OF THAT INCOME IN INDIA. AS FOR THE COMMISSIONER (APPEALS)S OBSERVAT ION, REFERRING TO PAYMENT OF INCOME-TAX IN THE UNITED STATES ON AN INCOME AND RE TURNING A LOSS IN RESPECT OF THAT INCOME IN INDIA, TO THE EFFECT THAT THIS IS AN ABS URD SITUATION AND WAS NOT VISUALIZED BY THE TREATY, IT CANNOT BUT STEM FROM H IS INABILITY TO TAKE NOTE OF THE FACT THAT CERTAIN INCOMES (E.G., ROYALTIES, FEES FO R TECHNICAL OR INCLUDED SERVICES, INTEREST, DIVIDENDS ETC.), ARE TAXED ON GROSS BASIS IN THE SOURCE COUNTRY BUT ARE ONLY BE TAXED ON NET BASIS, AS IS THE INHERENT SCHEME OF INCOME-TAX LEGISLATION NORMALLY, IN THE COUNTRY OF WHICH THE ASSESSEE IS RESIDENT. I N SUCH SITUATIONS, IT IS QUITE POSSIBLE THAT WHILE AN ASSESSEE PAYS TAX IN THE SOUR CE COUNTRY WHICH IS ON GROSS BASIS, HE ACTUALLY ENDS UP INCURRING LOSS WHEN ALL T HE ADMISSIBLE DEDUCTIONS, IN RESPECT OF THAT EARNING, ARE TAKEN INTO ACCOUNT. TH ERE IS NOTHING ABSURD ABOUT IT. THE UNDERLYING PHILOSOPHY OF THE SOURCE RULE ON GRO SS BASIS, WHICH PRESCRIBES TAXATION OF CERTAIN INCOMES ON GROSS BASIS IN THE SO URCE COUNTRY, IS THAT IRRESPECTIVE OF ACTUAL OVERALL PROFITS AND LOSSES IN EARNING THO SE INCOMES, THE ASSESSEE MUST PAY A CERTAIN AMOUNT OF TAX, AT A NEGOTIATED LOWER RATE THOUGH, IN THE COUNTRY IN WHICH THE INCOME IN QUESTION IS EARNED. IT IS ALSO NOTEWO RTHY THAT THE HEADING OF ARTICLE 25 IS ELIMINATION OF DOUBLE TAXATION BUT THEN THERE HAS TO BE DOUBLE TAXATION OF AN INCOME IN THE FIRST PLACE BEFORE THE QUESTION OF ELIMINATION OF THAT DOUBLE TAXATION CAN ARISE. IN THE CASE BEFORE US THE ASSESS EE COMPANY HAS PAID TAXES, IN RESPECT OF THAT EARNING, ONLY IN ONE COUNTRY, I.E., THE UNITED STATES, AND CLAIMED LOSSES, ON TAKING INTO ACCOUNT THE ADMISSIBLE DEDUCT IONS THEREFROM, IN THE OTHER COUNTRY I.E., INDIA. THIS IS SURELY NOT, BY ANY STR ETCH OF LOGIC, A CASE OF DOUBLE TAXATION OF AN INCOME. ARTICLE 25 DOES NOT, THEREFO RE, COME INTO PLAY AT ALL. TURNING TO THE COMMISSIONER (APPEALS)S OBSERVATION THAT T HE TREATY NOWHERE STIPULATES THAT THE CREDIT FOR THE TAXES PAID IN THE USA HAS T O BE GIVEN ON PROPORTIONATE BASIS, ALL WE NEED TO SAY IS THAT THE INDO US DTAA, AS IND EED OTHER DTAAS AS WELL, DOES STIPULATE THAT THE FOREIGN TAX CREDIT CANNOT EXCEED THE INCOME TAX LEVIABLE IN RESPECT OF THAT INCOME IN THE COUNTRY OF WHICH THE ASSESSEE IS RESIDENT. IT IS BECAUSE OF THIS LIMITATION THAT THE ASSESSING OFFICER DECLI NED THE REFUND IN RESPECT OF TAXES PAID BY THE ASSESSEE IN THE UNITED STATES. IN VIEW OF THIS LIMITATION ON THE FOREIGN TAX CREDIT, THE INNOVATIVE THEORY OF CREDITING THE ENTIRE TAX PAID IN THE US TO THE ASSESSEE AND GRANT OF REFUND TO HIM IN CASE THERE I S NO TAX LIABILITY IN INDIA IN RESPECT OF THAT INCOME, AS ENUNCIATED AND ADOPTED B Y THE COMMISSIONER (APPEALS), ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 26 OF 31 IS WHOLLY UNSUSTAINABLE IN LAW. WHERE IS THE QUESTIO N OF REFUND OF TAXES PAID ABROAD WHEN FTD (I.E., FOREIGN TAX CREDIT), IN VIEW OF SPE CIFIC PROVISIONS TO THAT EFFECT IN THE DTAAS, CANNOT EVEN EXCEED THE INDIAN INCOME TAX LIA BILITY? IT IS NOT THE TAX PAYMENT ABROAD WHICH IS THE MATERIAL FIGURE FOR THE PURPOSE OF COMPUTING INDIAN INCOME TAX LIABILITY, BUT IT IS THE ADMISSIBLE FOREIGN TAX CREDIT IN RESPECT OF THE SAME WHICH AFFECTS SUCH AN INDIAN INCOME TAX LIABILITY. T HE FTD IN RESPECT OF INCOME TAX PAID IN THE US CANNOT EXCEED THE INDIAN INCOME TAX LIABILITY IN RESPECT OF THE INCOME ON WHICH INCOME TAX IS PAID IN US. 19. IN VIEW OF THE AFORESAID JUDICIAL PRECEDENT, AN D BEING IN CONSIDERED AGREEMENT WITH THE SAME, WE REJECT THIS ALTERNATE C LAIM OF THE ASSESSEE. 20. LEARNED COUNSEL HAS ALSO CONTENDED THAT IN AN Y EVENT, WE MUST ALLOW DEDUCTION IN RESPECT OF STATE INCOME TAXES PA ID IN USA AND CANADA AS RELIEF IS NOT ADMISSIBLE IN RESPECT OF THE SAME IN RESPECTIVE TAX TREATIES. WE HAVE BEEN TAKEN THROUGH INDIA USA TAX TREATY TO POI NT OUT THAT TAX CREDITS ARE ADMISSIBLE ONLY IN RESPECT OF INCOME TAX LEVIED BY THE FEDERAL GOVERNMENT AND NOT BY THE STATE GOVERNMENTS. IT IS CONTENDED THAT SINCE NO RELIEF IS ADMISSIBLE IN RESPECT OF STATE TAXES U NDER SECTION 90 OR SECTION 91, THESE TAXES WILL CONTINUE TO BE TAX DEDUCTIBLE, AND TO THAT EXTENT, DECISIONS OF THE COORDINATE BENCHES WILL HOLD GOOD. WE ARE UNABLE TO SEE LEGALLY SUSTAINABLE MERITS IN THIS SUBMISSION EITHE R. APART FROM THE FACT THAT SUCH A CLAIM OF DEDUCTION IS CLEARLY CONTRARY TO THE LAW LAID DOWN BY HONBLE JURISDICTIONAL HIGH COURT IN LUBRIZOLS CAS E (SUPRA), THERE IS ANOTHER INDEPENDENT REASON TO REJECT THIS CLAIM AS WELL. THE REASON IS THIS. IT IS ONLY ELEMENTARY THAT TAX TREATIES OVERRIDE TH E PROVISIONS OF THE INCOME TAX ACT, 1961, ONLY TO THE EXTENT THE PROVIS IONS OF THE TAX TREATIES ARE BENEFICIAL TO THE ASSESSEE. IN OTHER WORDS, A P ERSON CANNOT BE WORSE OFF VIS--VIS THE PROVISIONS OF THE INCOME TAX ACT, EVEN WHEN A TAX TREATY APPLIES IN HIS CASE. SECTION 90 (2) STATES THAT EVE N IN RELATION TO THE ASSESSEE TO WHOM A TAX TREATY APPLIES THE PROVISIO NS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THA T ASSESSEE. UNDOUBTEDLY, TITLE OF SECTION 91 AS ALSO REFERENCE TO THE COUNTRIES WITH WHICH INDIA HAS ENTERED INTO AGREEMENT, SUGGESTS TH AT IT IS APPLICABLE ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 27 OF 31 ONLY IN THE CASES WHERE INDIA HAS NOT ENTERED INTO A DOUBLE TAXATION AVOIDANCE AGREEMENT WITH RESPECTIVE JURISDICTION, B UT THE SCHEME OF THE SECTION 91, READ ALONGWITH SECTION 90, DOES NOT RE FLECT ANY SUCH LIMITATION, AND SECTION 91 IS THUS REQUIRED TO BE T REATED AS GENERAL IN APPLICATION. THE SCHEME OF THE INCOME TAX ACT IS T O BE CONSIDERED IN ENTIRETY IN A HOLISTIC MANNER , AND EACH OF THE SEC TION CANNOT BE CONSIDERED ON STANDALONE BASIS. IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT SO FAR AS SECTION 91 IS CONCERNED, IT DOES NOT DISCRIMINATE BETWEEN TAXES LEVIED BY THE FEDERAL GOVERNMENTS AND TAXES L EVIED BY THE STATE GOVERNMENT. THE INCOME TAX LEVIED BY DIFFERENT STA TES IN USA USUALLY RANGES FROM 3% TO 11%, AND THE AGGREGATE INCOME TAX PAID BY THE ASSESSEE IN USA WILL RANGE FROM 38% TO 46%.THEREFOR E, ON THE FACTS OF THE PRESENT CASE AND BEARING IN MIND THE FACT THAT THE FEDERAL INCOME TAX IN USA AT THE RELEVANT POINT OF TIME WAS LESSER IN RATE AT 35% VIS--VIS 38.5% INCOME TAX RATE APPLICABLE IN INDIA, THE AD MISSIBLE DOUBLE TAXATION RELIEF UNDER SECTION 91 WILL BE HIGHER TH AN RELIEF UNDER THE TAX TREATY. IT WILL BE SO FOR THE REASON THAT STATE IN COME TAX WILL ALSO BE ADDED TO INCOME TAX ABROAD, AND THE AGGREGATE OF TA XES SO PAID WILL BE ELIGIBLE FOR TAX RELIEF OF COURSE SUBJECT TO TAX RATE ON WHICH SUCH INCOME IS ACTUALLY TAXED IN INDIA. THE TAX RELIEF UNDER SE CTION 91 THUS WORKS OUT TO AT LEAST 38%, AS AGAINST TAX CREDIT OF ONLY 35% ADMISSIBLE UNDER THE TAX TREATY. IN SUCH A SITUATION, THE ASSESSEE WIL L BE ENTITLED TO RELIEF UNDER SECTION 91 IN RESPECT OF FEDERAL AS WELL AS S TATE TAXES, AND THAT RELIEF BEING MORE BENEFICIAL TO THE ASSESSEE VIS-- VIS TAX CREDIT UNDER THE APPLICABLE TAX TREATY, THE PROVISIONS OF SECTION 91 WILL APPLY TO STATE INCOME TAXES AS WELL. THE STATE INCOME TAX IS ALS O, THEREFORE, COVERED BY EXPLANATION 1 TO SECTION 40(A)(II), AND DEDUCTION C AN NOT BE ALLOWED IN RESPECT OF THE SAME. FINALLY, IN VIEW OF HONBLE B OMBAY HIGH COURTS JUDGMENT IN GILLS CASE (SUPRA) , INCOME TAX ABROAD CANNOT BE ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME AND THIS JUDGMEN T DOES NOT DISCRIMINATE BETWEEN FEDERAL AND STATE TAXES EITHER . INTERESTINGLY, STATE INCOME TAXES PAID IN USA, SUBJECT TO CERTAIN LIMITA TIONS, ARE DEDUCTIBLE IN ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 28 OF 31 COMPUTATION OF INCOME FOR THE PURPOSES OF COMPUTING FEDERAL TAX LIABILITY IN USA, BUT THAT FACTOR CANNOT INFLUENCE DEDUCTIBIL ITY OF THESE TAXES, PARTICULARLY IN THE LIGHT OF THE PROVISIONS OF EXPL ANATION 1 TO SECTION 40(A)(II) AND IN THE LIGHT OF HONBLE BOMBAY HIGH C OURTS JUDGMENT IN GILLS CASE (SUPRA) , IN COMPUTATION OF BUSINESS INCOME UNDER INDIAN INCOME TAX ACT. FOR ALL THESE REASONS, WE ARE UNABL E TO UPHOLD THE PLEA OF THE ASSESSEE SEEKING DEDUCTION OF AT LEAST STATE IN COME TAX PAID IN USA. 21. IN VIEW OF THE ABOVE DISCUSSIONS, AND FOR THE DETAILED REASONS SET OUT ABOVE, WE UPHOLD THE GRIEVANCE OF THE ASSESSING OFFICER. THE CIT(A) WAS INDEED NOT JUSTIFIED IN DELETING THE DISALLOWAN CE OF RS 67,89,30,514 IN RESPECT OF INCOME TAX PAID ABROAD. WE VACATE THE RELIEF GRANTED BY THE CIT(A) AND RESTORE THIS DISALLOWANCE. 22. GROUND OF APPEAL NO. 2, WHICH IS AGAINST DELE TION OF DISALLOWANCE OF INCOME TAX PAID ABROAD AMOUNTING TO RS 67.89 CRORE S, IS THUS ALLOWED. 23. WE NOW COME TO FIRST GROUND OF APPEAL WHICH IS SUBDIVIDED INTO SUB GROUND OF APPEAL AS FOLLOWS: (A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN REDUCING THE DISALLOWANCE TOWARDS INTEREST EXPENSES FROM RS 30.6 2 CRORES TO RS 30.35 CRORES FOR EARNING THE DIVIDEND. (B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE A DDITION OF RS 1.58 CRORES TOWARDS ADMINISTRATIVE EXPENSES FOR EARNING THE DIVIDEND. 24. AS REGARDS FIRST LIMB OF THIS GROUND OF APPEAL, LEARNED COUNSEL FOR THE ASSESSEE FAIRLY CONCEDES THE ASSESSING OFFICER S GRIEVANCE TO THE EFFECT THAT THE CIT(A) INDEED ERRED IN REDUCING THE INTERE ST DISALLOWANCE FROM RS ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 29 OF 31 30.62 CRORES TO RS 30.35 CRORES. TO THAT EXTENT, R ELIEF GRANTED BY THE CIT(A) MUST BE VACATED. WE DO SO. 25. GROUND NO. 1 (A) IS THUS ALLOWED. 26. HOWEVER, AS FAR AS SECOND LIMB OF THIS GROUND O F APPEAL IS CONCERNED, WE HAVE NOTED THAT THE CIT(A) HAS DELETE D THE DISALLOWANCE OF RS 1.58 CRORES, OUT OF ADMINISTRATIVE EXPENSES, ON THE GROUND THAT THE EXPENSES ON ACCOUNT OF SALARY PAID TO STAFF CANNOT BE TREATED AS IT WAS NOT DIRECTLY RELATABLE TO EARNING OF DIVIDEND IN VIEW OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF CIT VS GENERAL INSURANCE CORPORATION (254 ITR 203). THE SAID OBSERVATIONS WERE MADE BY THE HONBLE HIGH COURT IN THE CONTEXT OF DEDUCTION UNDER SECTION 80 M. HOWEVER, IN VIEW OF SPECIFIC OBSERVATIONS MADE BY HONBLE BOMBAY HIGH COURT, IN THE CONTEXT OF SECTION 14 A THAT WE ARE AT PRESENT DEALING WITH , IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81), EVEN PRIOR T O ASSESSMENT YEAR 200809, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSES SING OFFICER HAS TO ENFORCE THE PROVISIONS OF SUB SECTION (1) OF SECTIO N 14A, (AND) FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DET ERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT . THEIR LORDSHIPS HAVE, HOWEVER, ADDED THAT THE ASSESSING OFFICER MUST ADO PT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AN D CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECORD. LEARNED DEPARTMENTAL REPRE SENTATIVE SUBMITS THAT IN VIEW OF THIS BINDING JUDICIAL PRECEDENT, WE MAY REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJU DICATION IN ACCORDANCE WITH THE LAW AND, INTER ALIA, ABOVE OBSERVATIONS OF HONBLE JURISDICTIONAL HIGH COURT. LEARNED COUNSEL DOES NOT DISPUTE THE SA ID LEGAL POSITION, BUT ADDS THAT SINCE THE ASSESSEE HAS NOT INCURRED ANY E XPENSES IN EARNING THIS DIVIDEND INCOME, NO DISALLOWANCE CAN BE MADE U NDER SECTION 14 A. LEARNED DEPARTMENTAL REPRESENTATIVE DOES NOT SEE AN Y NEED OF JOINING ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 30 OF 31 THE ISSUE ON THIS ASPECT OF THE MATTER, AND SUBMITS THAT THE MATTER IS EXAMINED AFRESH BY THE ASSESSING OFFICER, IT IS OPE N TO THE ASSESSEE TO TAKE ALL THESE CONTENTIONS BEFORE HIM. 27. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 28. HAVING PERUSED THE MATERIAL ON RECORD AND HAVIN G CONSIDERED THE RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED VIEW TH AT THE PLEA OF THE LEARNED DEPARTMENTAL REPRESENTATIVE INDEED DESERVES TO BE UPHELD TO THE EXTENT THAT THE MATTER IS TO BE REMITTED TO THE FIL E OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN THE LIGHT OF HONBLE BOMB AY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD (SUPRA), AFTER GI VING A FAIR AND REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. WE, HOWEVER, DEEM IT NECESSARY TO CLARIFY THAT IT IS, HOWEVER, OPEN TO T HE ASSESSEE TO TAKE ALL SUCH LEGAL AND FACTUAL ARGUMENTS AS THE ASSESSEE DE EMS FIT, AND THE ASSESSING OFFICER HAS TO DISPOSE OF THE SAME IN ACC ORDANCE WITH THE LAW AND BY WAY OF A SPEAKING ORDER. 29. GROUND NO. 1 (B) IS THUS ALLOWED FOR STATISTICA L PURPOSES. 30. TO SUM UP, WHILE GROUND NO. 2 IS ALLOWED, GROUN D NO. 1 IS ALLOWED IN THE LIMITED TERMS INDICATED ABOVE. 31. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TER MS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 24 TH DAY OF NOVEMBER, 2010. SD/XX SD/XX (N V VASUDEVAN) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTAN T MEMBER ITA NO . 4776 /MUM/04 ASSESSMENT YEAR: 2000-01 PAGE 31 OF 31 MUMBAI 24 TH DAY OF NOVEMBER , 2010 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER - , MUMBAI 4. COMMISSIONER (APPEALS) - , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, D BENCH, MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC . ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI