2015 (12) TMI 285 - AT - Income Tax

Income recognition - CIT(A) considering foreign income at average exchange rate of conversion during the year when credit for tax deducted at source is given based on the actual exchange rate prevailing on the date of transaction - Held that - CIT(A) had given directions to adopt the exchange rate prevailing on the date of payment of taxes for the purpose of granting foreign tax credit and whereas for the purpose of assessing the foreign income, he had adopted a different view of adopting the average exchange rate of conversion during the year. We hold that the provisions of Rule 26 and Rule 115 of Income Tax Rules provide computation mechanism for conversion of foreign currency into Indian currency in respect of each source of income. Hence we deem it fit and appropriate in the interest of justice and fair play to set aside this issue to the file of the Learned AO to determine the foreign income in accordance with Rule 26 and Rule 115 of Income Tax Rules depending upon the nature of income. We also direct that in case the assessee is able to produce any other fresh evidence to determine the foreign income based on exchange rate prevailing on the date of income, the same need to be considered by the Learned AO while framing the set aside assessment. - Decided in favour of revenue for statistical purposes. Determination of presumptive profit u/s 44AD - Held that - The action of the lower authorities in adopting the presumptive rate of taxation u/s 44AD in the facts and circumstances of the case is not appreciated and accordingly the cross objection of the assessee is allowed. Non consideration of effect of Double Taxation Avoidance Agreement (DTAA) between India and Oman for the purpose of assessment of foreign income of the assessee - Held that - We find lot of force in the cross objection raised by the assessee in this regard. Accordingly, we direct the Learned AO to consider the relevant article of DTAA with regard to the foreign income depending upon the nature of income and assess the foreign income in accordance with the provisions of section 90 of the Act. Cross objection of the assessee is allowed for statistical purposes.

Summary

Issues:
1. Treatment of foreign income and foreign tax credit in assessment.
2. Applicability of presumptive profit under section 44AD when turnover exceeds a certain limit.
3. Consideration of Double Taxation Avoidance Agreement (DTAA) for assessment of foreign income.

Issue 1: Treatment of Foreign Income and Foreign Tax Credit:
The appeal involved a dispute regarding the treatment of foreign income and foreign tax credit in assessment. The Assessing Officer (AO) converted the foreign income to Indian Rupees (INR) using the exchange rate at the end of the previous year. The Commissioner of Income Tax Appeals (CITA) directed the adoption of the average exchange rate for taxing foreign income and using the exchange rate on the date of tax payment for foreign tax credit. The Income Tax Appellate Tribunal (ITAT) held that the provisions of Rule 26 and Rule 115 of Income Tax Rules provide the mechanism for converting foreign currency into Indian currency. The ITAT set aside the issue to the AO to determine foreign income in accordance with the rules, allowing consideration of fresh evidence for exchange rates at the time of income receipt. The appeal of the revenue was allowed for statistical purposes.

Issue 2: Applicability of Presumptive Profit under Section 44AD:
The cross objection by the assessee challenged the confirmation of the AO's order for determining presumptive profit under section 44AD despite the turnover exceeding Rs. 40 lakhs. Section 44AD specifies that the provision does not apply if the gross receipts exceed Rs. 40 lakhs. The ITAT held that the application of the presumptive rate of taxation under section 44AD when the turnover exceeds the threshold was not justified. Therefore, the cross objection of the assessee on this issue was allowed.

Issue 3: Consideration of Double Taxation Avoidance Agreement (DTAA):
The cross objection raised by the assessee highlighted the failure of the CITA to consider the impact of the DTAA between India and Oman on the assessment of foreign income. The ITAT directed the AO to assess foreign income in accordance with the relevant article of the DTAA and the provisions of section 90 of the Income Tax Act. Consequently, the cross objection of the assessee on this issue was allowed for statistical purposes.

In conclusion, the ITAT allowed the appeal of the revenue for statistical purposes, partly allowed the cross objection of the assessee, and directed the AO to reevaluate the treatment of foreign income, applicability of presumptive profit under section 44AD, and consideration of the DTAA for assessment purposes.