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Issues Involved:
1. Validity of the invocation of jurisdiction under section 263 of the Income-tax Act, 1961. 2. Deductibility of foreign taxes under section 37(1) of the Income-tax Act, 1961. 3. Applicability of section 40(a)(ii) of the Income-tax Act, 1961. Detailed Analysis: 1. Validity of the Invocation of Jurisdiction under Section 263 of the Income-tax Act, 1961: The Commissioner of Income-tax (CIT) invoked jurisdiction under section 263 of the Income-tax Act, 1961, holding that the assessment orders for the assessment years 1982-83 and 1983-84 were erroneous and prejudicial to the interests of the revenue due to the wrongful allowance of foreign tax liability. The assessee argued that the Assessing Officer (AO) had correctly allowed the foreign tax liability based on the decision of the CIT(A) for assessment year 1978-79 and that the assessment order could not be called "erroneous" within the meaning of section 263. The Tribunal noted that the AO's orders for the years under consideration did not contain any reference to the CIT(A)'s decision for assessment year 1978-79. The Tribunal held that the AO's failure to follow the departmental view on pending assessments, despite the pending departmental appeals, justified the invocation of section 263 by the CIT to protect the interests of revenue administration. Therefore, the preliminary objection of the assessee was rejected. 2. Deductibility of Foreign Taxes under Section 37(1) of the Income-tax Act, 1961: The CIT examined whether the foreign taxes could be considered as expenses "laid out or expended wholly and exclusively for the purposes of business" under section 37 of the Act. The CIT concluded that foreign taxes were a charge on income and not an expense incurred to earn profits, thus not deductible under section 37. The Tribunal concurred with this view, citing various High Court decisions, including: - S. Inder Singh Gill v. CIT [1963] 47 ITR 284 (Bom.): Held that tax paid on foreign income in the foreign country should not be deducted in computing the foreign income for the purpose of ascertaining the total world income. - CIT v. Indian Overseas Bank Ltd. [1963] 50 ITR 725 (Mad.): Held that even on general principles, a tax deduction was not expenditure laid out wholly and exclusively for the purposes of earning profits. - A.V. Thomas & Co. Ltd. v. CIT [1986] 159 ITR 431 (Ker.)(FB): Held that sur-tax was a charge on income and not an allowable deduction under section 37. - CIT v. Kerala Lines Ltd. [1993] 201 ITR 106 (Mad.): Held that taxes paid in foreign ports were an application of income and not deductible under section 37. Based on these precedents, the Tribunal held that foreign taxes on income were not deductible under section 37(1) of the Act. 3. Applicability of Section 40(a)(ii) of the Income-tax Act, 1961: The CIT also examined whether the foreign taxes fell within the purview of section 40(a)(ii) of the Act, which disallows any sum paid on account of any rate or tax levied on the profits or gains of any business or profession. The Tribunal noted that the question of disallowance under section 40(a)(ii) would arise only if the amount was otherwise deductible under sections 30 to 39 of the Act. Since the Tribunal had already concluded that foreign taxes were not deductible under section 37(1), it was unnecessary to further consider their disallowance under section 40(a)(ii). The Tribunal followed the observations of the Madras High Court in the case of Kerala Lines Ltd., which stated that if an amount is not deductible under section 37, there is no need to consider its disallowance under section 40(a)(ii). Conclusion: The Tribunal upheld the CIT's order under section 263, concluding that the assessment orders were erroneous and prejudicial to the interests of the revenue. The foreign taxes were not deductible under section 37(1) of the Act as they were a charge on income and not incurred wholly and exclusively for the purposes of business. Consequently, the assessee's appeals for both the years were dismissed.
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