2019 (4) TMI 95 - AT - Income Tax

Tax credit of the tax paid in USA - Foreign Tax Credit - assessee has paid federal tax, state tax and medicare-cum-disability tax in USA - HELD THAT - Assessee is eligible to claim tax credit both federal as well as state taxes paid on the income earned during the year. Respectfully following the TATA SONS LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 2 (3) , MUMBAI 2011 (2) TMI 1528 - ITAT MUMBAI we direct the AO to allow the credit to the extent of state taxes paid by the assessee along with the federal taxes paid. The Medicare and Disability taxes are not in the nature of income-tax, hence, this may be disallowed. Accordingly, ground raised by the assessee is allowed.

Summary

Issues:
- Disallowance of state tax credit claimed by the assessee under section 90 of the Income-tax Act, 1961.
- Interpretation of tax credit provisions for taxes paid in the USA.
- Applicability of tax treaties in granting relief for double taxation.

Analysis:
The appeal addressed the disallowance of state tax credit claimed by the assessee under section 90 of the Income-tax Act, 1961, for the assessment year 2013-14. The assessee, employed for a part of the year in the USA, paid federal and state withholding taxes in the USA. The Assessing Officer (AO) allowed tax credit for federal taxes but disallowed the credit for state tax paid. The Commissioner of Income Tax (Appeals) upheld this restriction, leading to the assessee's appeal before the ITAT Hyderabad.

The ITAT considered the arguments presented by both parties and reviewed the relevant facts and legal provisions. The assessee relied on precedents such as Tata Sons Ltd. Vs. DCIT and Wipro Ltd. Vs. DCIT to support their claim for tax credit on both federal and state taxes paid in the USA. The ITAT observed that the coordinate bench in a previous case had acknowledged the eligibility of state income taxes paid in the USA for computing tax credit under section 91. It emphasized that the tax treaty provisions should not deny benefits available under domestic law to the assessee.

The ITAT highlighted the importance of harmonizing interpretations between tax treaties and domestic laws to avoid absurd outcomes. It referenced Circular No. 621, emphasizing that beneficial provisions in the law should not be denied to residents of contracting countries due to less advantageous treaty provisions. The ITAT concluded that the assessee was entitled to claim tax credit for both federal and state taxes paid in the USA, as section 91 does not differentiate between state and federal taxes for tax credit purposes.

In light of the above analysis and precedents, the ITAT directed the AO to allow the credit for state taxes paid by the assessee along with federal taxes, while disallowing Medicare and Disability taxes as they were not considered income-tax. Consequently, the ITAT allowed the appeal of the assessee, emphasizing the entitlement to tax credits for both federal and state taxes paid in the USA.

In conclusion, the ITAT's judgment clarified the eligibility of the assessee to claim tax credit for state taxes paid in the USA under section 91, emphasizing the importance of aligning treaty provisions with domestic laws to prevent disadvantages to taxpayers. The decision underscored the need for a harmonious interpretation to ensure the taxpayer's entitlement to available benefits under the Income-tax Act.