2022 (6) TMI 143 - AT - Income Tax

Deduction u/s 91 r.w.r 128 - credit for the amount of foreign tax paid by him by way of deduction - computing the effective rate of tax in Ghana - agreement for double taxation relief for avoidance of double taxation - deductions as calculate by applying the lower of effective Indian rate of tax or effective rate of tax of other country (Ghana) on such doubly taxed income - HELD THAT - 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 relief due in the said country in respect of double taxation divided by the whole amount of income as assessed in the said country. Tax actually paid is Ghana is Rs.1,05,36,759. The assessee has not brought anything on record to show what is the income assessed in Ghana. AR during the course of the hearing submitted that the said details are not available with the assessee. Thus for the purpose of computing the net profit ratio of total income of the assessee in India which is used as the basis for arriving at the net income of Ghana should include other income . We have also held that the effective Indian rate of tax should include surcharge and education cess i.e. 20.01%. The calculation of deduction u/s.91 as done in the above table is in accordance with our views expressed in the foregoing paragraphs and is a reasonable basis of arriving at the effective rate of tax for Ghana. Hence we are of the considered view that it is reasonable to allow the deduction u/s.91 to the assessee. AO is therefore directed to re-compute the income of the assessee. Appeal of the assessee is partially allowed.

Summary

Issues Involved:
1. Effective Indian rate of tax.
2. Effective rate of tax in Ghana.
3. Doubly taxed income.

Detailed Analysis:

Issue 1: Effective Indian Rate of Tax
The assessee contended that the AO and CIT(A) incorrectly excluded surcharge and education cess from the effective Indian rate of tax. The Supreme Court in CIT vs K Srinivasan (1972 AIR 491) clarified that "income tax" includes surcharge and additional surcharge. Thus, the effective Indian rate of tax should be 20.01% instead of 18.50%.

Issue 2: Effective Rate of Tax in Ghana
The AO excluded 'other income' while determining the net profit ratio to compute the net profit on Ghana receipts. The CIT(A) upheld this exclusion, reasoning that no expenses were incurred to earn 'other income.' However, the Tribunal found that 'other income' was earned in the course of business and should be included in the net profit ratio. This inclusion affects the effective rate of tax in Ghana, which the AO initially computed at 21.55%. The Tribunal recalculated it to be 20.61% by including 'other income'.

Issue 3: Doubly Taxed Income
The assessee argued that the entire gross receipt from Ghana should be considered doubly taxed income. However, the Tribunal held that only the net income, after deducting expenses, should be considered. The AO's method of applying the net profit ratio of total income in India to Ghana receipts was accepted, provided 'other income' is included in the net profit ratio.

Conclusion:
The Tribunal directed the AO to recompute the deduction under Section 91 by including surcharge and education cess in the effective Indian rate of tax (20.01%) and including 'other income' in the net profit ratio for Ghana receipts. This adjustment resulted in a revised allowable deduction of Rs.1,02,30,909. The appeal was partially allowed, and the AO was instructed to recompute the income accordingly.