M/S. BARKHA DUTT,NEW DELHI V. ACIT, NEW DELHI

ITA 966/DEL/2017

AI Insights

Ms. Barkha Dutt appealed against the order of the Commissioner of Income Tax (Appeals)-32, which denied her relief for state taxes paid in the USA on her salary income from M/s. Brown University. The primary legal contention was whether the foreign tax credit for state taxes paid in the USA should be allowed under Section 91 of the Income Tax Act, 1961, despite the existence of a DTAA with the USA. The Tribunal examined the applicability of Section 91 in the context of the DTAA and previous judicial decisions, ultimately deciding in favor of the assessee based on the more beneficial provisions of the Act.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 26116 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2013-2014
• Other Referred Cases: Tata Sons Ltd. vs. Deputy Commissioner of Income Tax, M/s. Wipro Ltd. Vs. ACIT, Manpreet Singh Gambhir vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RINI HANDA
• Assessee Lawyers: MEENAL GOYAL
• Keywords: Business income; Salary income; Double taxation relief
• Section: 143(3); 119; 195; 43; 90

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No.966/Del/2017 Assessment Year: 2013-14 Ms. Barkha Dutt, J-27/A, Jangpura Extension, New Delhi Vs. ACIT, Circle-71(1), New Delhi PAN: AGZPD7605D (Appellant) (Respondent) ORDER PER SATBEER SINGH GODARA, JM This assessee’s appeal for assessment year 2013-14, arises against the Commissioner of Income Tax (Appeals)-32 [in short, the “CIT(A)”], Delhi’s order dated 22.11.2016 passed in case no. 104/2016-17, involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. This assessee’s appeal raises the following substantive grounds: 1. The order of the Ld. Assessing Officer is bad in law and on the facts. Assessee by Ms. Meenal Goyal, Adv. Department by Ms. Rini Handa, Sr. DR Date of hearing 13.03.2025 Date of pronouncement 26.03.2025 ITA No.966/Del/2017 2 | P a g e 2. The learned ACIT has erred: - a) In not allowing relief of state tax of 70,870/- paid in USA on Salary Income when the said relief of state tax is allowable to the appellant under the provisions of Section 91 of the Income Tax Act, 1961. b) In ignoring the provisions of Section 90(2) of the Income Tax Act, 1961 and department circular no. 621 dated 19.12.1991 which provides for the applicability of the provisions of Income Tax Act to the extent they are more. beneficial to the appellant. c) In ignoring the fact that even though the appellant is covered by the scope of Double Taxation Treaty of India with USA which provides for relief of federal withholding tax only, however, the provisions of section 91 being more beneficial to the appellant are applicable which permits credit for all income taxes paid abroad whether State or Federal irrespective of the fact whether there is double taxation treaty or not. d) In not following the ITAT Mumbai D Bench decision in the case of Tata Sons Ltd. vs. Deputy Commissioner of Income Tax, ITA No. 4978/Mum/04. e) In charging interest u/s 2343 and 234C of the Income Tax Act, 1961. 3. The appellant craves leave to add, modify, alter, substitute and delete any of the grounds of appeal on or before the date of hearing. 3. Suffice to say, the assessee’s sole substantive issue herein which arises for our apt adjudication is her entitlement of foreign tax credit claim pertaining to state taxes paid in the United States of America (USA). There is hardly any dispute between the parties that the assessee had admittedly derived salary income amounting to USD 28,356/- from M/s. Brown University for three months in the relevant previous year. It is an admitted fact that she raised ITA No.966/Del/2017 3 | P a g e claim of foreign tax credit paid in USA for both the federal as well as state taxes. Both the parties are ad idem during the course of hearing that her foreign tax credit claim pertaining to the latter had only arisen herein for our apt adjudication. 4. The Revenue vehemently contends in this factual backdrop that the benefit of foreign tax credit comes into play only under section 91 of the Act dealing with a situation wherein no Double Taxation Avoidance Agreement (DTAA) has been between India and the other contracting state concerned. The Revenue, therefore, seeks to buttress the point that once India and the USA already have a DTAA between them duly notified, the assessee’s case would not fall under section 91, and, therefore, her instant sole substantive grievance deserves to be declined only. 5. We have given our thoughtful consideration to the assessee’s pleadings and Revenue’s foregoing vehement contentions. We find no merit in the Revenue’s either of the twin vehement contentions raised herein. This is for the precise reason that this tribunal’s in Tata Sons Ltd. Vs. Dy. CIT [2011] 10 taxmann.com 87 (Mum) has already rejected the Revenue’s case seeking to invoke section 91 of the Act in identical circumstances as under: ITA No.966/Del/2017 4 | P a g e “2. While hearing in this appeal was concluded on 11th November 2010, alongwith Assessing Officer’s cross appeal against the same CIT(A)’s order – which has since been disposed of vide our order dated 24th November 2010 (now reported as DCIT Vs Tata Sons Limited, 43 SOT 27), the matter was listed for certain clarifications, in respect of assessee’s claim of tax credit in respect of State Income Taxes paid in the USA and Canada, on 4th February 2011. As this issue regarding tax credit for State Income Taxes is intricately linked to the issue regarding deduction of taxes paid abroad, which has been elaborately dealt with in our order dated 24th November 2010 on the cross appeal, and for the sake of continuity, we will take up this issue first. The relevant ground of appeal, i.e. ground no. 4 in assessee’s appeal, is that the “ CIT(A) erred in not granting DIT relief in respect of taxes paid in various states in USA and Canada”. 3. In the original hearing, the assessee had not pressed the ground of appeal seeking credit in respect of state income tax paid in United States, but had claimed deduction in respect of the same under section 37(1). The reason, for not pressing this ground of appeal, was stated to be that the assessee was content with CIT(A)’s having granted the deduction in respect of these taxes, as the claim for tax credit was anyway not admissible in terms of the Indo US tax treaty. The Assessing Officer was also in appeal before us in respect of the deduction having been granted by the CIT(A). For the detailed reasons set out in our order dated 24th November, 2010, we upheld the grievance of the Assessing Officer and held that deductions in respect of any income tax paid abroad, whether state or federal, were not admissible. One of the arguments before us was that at least deduction in respect of US and Canada state income taxes should be allowed, since the US and Canada state income tax payments did not entitle the assessee to any tax credit, and either an income tax payment is to be allowed as deduction or it is to be taken into account for giving tax credit. We were also taken through the provisions of India-USA Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion [187 ITR (Statute) 102 - hereinafter referred to as ‘Indo US tax treaty], to show that the tax credits under the India US tax treaty are restricted to credits in respect of federal income tax paid in the United States. It was also submitted that under the India Canada Double Taxation Avoidance Agreement, tax credits are admissible only in respect of tax paid under the ‘Income Tax Act of Canada’ whereas state income taxes are levied under separate provincial legislations. It could not, according to the learned counsel, result in a situation in which an income tax payment cannot have any tax implication – neither as a charge on income, nor as an allocation of income. While rejecting these arguments, and allowing the appeal of the Assessing Officer on this issue, we had, inter alia, observed as follows: ITA No.966/Del/2017 5 | P a g e 20. Learned counsel has also contended that in any event, we must allow deduction in respect of state income-taxes paid 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 point 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 under 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 either. Apart from the fact that such a claim of deduction is clearly contrary to the law laid down by Hon’ble jurisdictional High Court in Lubrizol India Ltd.’s case (supra), there is another independent reason to reject this claim as well. The reason is this. It is only elementary that tax treaties override the provisions of the Income-tax Act, 1961, only to the extent the provisions of the tax treaties are beneficial to the assessee. In other words, a person cannot be worse off visa-vis the provisions of the Income-tax Act, even when a tax treaty applies in his case. Section 90(2) states that even in relation to the assessee to whom a tax treaty applies “the provisions of this Act shall apply to the extent they are more beneficial to that assessee”. Undoubtedly, title of section 91 as also reference to the countries with which India has entered into agreement, suggests that it is applicable only in the cases where India has not entered into a double taxation avoidance agreement with respective jurisdiction, but the scheme of the section 91, read alongwith section 90, does not reflect any such limitation, and section 91 is thus required to be treated as general in application. The scheme of the Income-tax Act is to be considered in entirety in a holistic manner, and each of the section 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 levied by the State Government. The Income-tax levied by different States in USA usually ranges from 3 per cent to 11 per cent, and the aggregate Income-tax paid by the assessee in USA will range from 38 per cent to 46 per cent. Therefore, on the facts of the present case and bearing in mind the fact that the Federal Incometax in USA at the relevant point of time was lesser in rate at 35 per cent vis-avis 38.5 per cent Income-tax rate applicable in India, the admissible double taxation relief under section 91 will be higher than relief under the tax treaty. It will ITA No.966/Del/2017 6 | P a g e be so for the reason that State Income-tax will also be added to Income-tax abroad, and the aggregate of taxes 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 section 91 thus works out to at least 38 per cent, as against tax credit of only 35 per cent admissible under the tax treaty. In such a situation, the assessee will be entitled to relief under section 91 in respect of federal as well as state taxes, and that relief being more beneficial to the assessee vis-a-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 also, therefore, covered by Explanation 1 to section 40(a)(ii), and deduction cannot be allowed in respect of the same. Finally, in view of Hon’ble Bombay High Court’s judgment in S. Inder Singh Gill’s case (supra), Income-tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between federal and state taxes either. Interestingly, state Income-taxes paid in USA, subject to certain limitations, are deductible in computation of income for the purposes of computing federal tax liability in USA, but that factor cannot influence deductibility of these taxes, particularly in the light of the provisions of Explanation 1 to section 40(a)(ii) and in the light of Hon’ble Bombay High Court’s judgment in S. Inder Singh Gill’s case (supra), in computation of business income under Indian Income-tax Act. For all these reasons, we are unable to uphold the plea of the assessee seeking deduction of at least state Income-tax paid in USA. 4. Having so held that deduction in respect of state income tax paid is not admissible, when we took up the appeal of the assessee and noticed that the assessee has not pressed grievance against tax credit in respect of state income tax paid in USA and Canada, for the stated reason that the same is not admissible in terms of the Indo US and Indo Canada tax treaty provisions, we deemed it appropriate to once again hear the parties on this issue. In our considered view, it is indeed an incongruous position that payment of state income taxes in US and Canada are not allowed deduction as these are treated as in the nature of taxes on income, in terms of the provisions of domestic tax law in India, and these payments are also not being taken into account for granting credit for taxes paid abroad by the assessee, as only federal income tax is eligible for tax credit in terms of the Indo US and Indo Canada tax treaty. If this approach is adopted, the assessee does not get a deduction for state taxes so paid abroad, nor does he get the tax credit for the same, and if these two propositions are correct, there is clearly an inherent contradiction in these propositions on tax treatment for state income taxes paid abroad. There cannot obviously be a tax payment which is neither treated as admissible ITA No.966/Del/2017 7 | P a g e 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. However, as we have observed in our order on the cross appeal, extracts from which are reproduced in the preceding paragraph, it is incorrect to proceed on the assumption that state income tax paid in USA, or for that purpose paid in Canada, cannot be taken into account for the purposes of computing admissible tax credits. It is 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. 5. Even as we have 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, we are alive to 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 there is indeed an agreement under section 90 with United States of America, as also with Canada. If we adopt a literal interpretation of this provision, and bearing in mind the undisputed position that tax credit provisions under section 91 are more beneficial to the assessee vis-à-vis the tax credit provisions in related tax treaties inasmuch as while section 91 permits credit for all income taxes 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 certainly is not permissible under the scheme of the Income Tax Act. Circular 621 dated 19-12-1991 [(1992) 195 ITR (Statutes) 154] issued by the Central Board of Direct Taxes, which is binding on the Assessing Officer under section 119(2) of the Act, 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 has been amended to clarify any beneficial provision in the law will not be denied to a resident of a contracting country merely because corresponding provision in a tax treaty is less beneficial”. In the case before us, however, tax credit provisions in Indo US tax treaty are admittedly less advantageous to the assessee, but just because there is a tax treaty between India and USA, the benefits of the domestic law provisions are being declined to the assessee. That is an interpretation which leads to absurdity and calls 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 provisions of the agreement would prevail over the provisions of the Act, as is also clear from the provisions of section 90(2) of the Act. Section 90(2) makes it clear that “where the Central Government has entered into an agreement with the Government of ITA No.966/Del/2017 8 | P a g e 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 in so far 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 this view of the matter, and further to the observations made by us in our order on the cross appeal, in our considered view, 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 is not the case so far as question of tax credits in respect of state income taxes paid in USA are concerned. Accordingly, even though the assessee is covered by the scope of India US and India Canada tax treaties, so far as tax credits in respect of taxes paid in these countries are concerned, the provisions of Section 91, being beneficial to the assessee, hold the field. As Section 91 does not discriminate between state and federal taxes, and in effect provides for both these 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.” 6. We next advert to the Revenue’s latter argument that the impugned foreign tax credit relief could not be extended to the assessee’s federal taxes payment made in USA. We find that the same is no more res-integra in light of M/s. Wipro Ltd. Vs. ACIT, 382 ITR 179 (Kar) deciding the very issue in assessee’s favour and against the department that for the purpose of such foreign tax credit claim, both federal as well as state taxes stand on an identical footing. ITA No.966/Del/2017 9 | P a g e 7. Faced with this situation, the Revenue quotes Manpreet Singh Gambhir vs. DCIT - (2008) 119 TTJ 615 (Delhi) that a learned coordinate bench has already settled the issue in the department’s favour as well. We are of the considered view that the given fact that hon’ble Karnataka high court has already adjudicated the issue in assessee’s favour, the tribunal’s foregoing order must make way for the hon’ble higher judicial forum’s wisdom by following judicial discipline. We accordingly accept the assessee’s instant sole substantive grievance in principle and direct the learned Assessing Officer to frame his consequential computation as per law. 8. This assessee’s appeal is allowed in above terms. Order pronounced in the open court on 26th March, 2025 Sd/- Sd/- (S. RIFAUR RAHMAN) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26th March, 2025. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi "