1990 (12) TMI 125 - AT - Income Tax

Summary

Issues:
Applicability of section 40A(5) of the Income-tax Act, 1961 in violation of the Double Taxation Avoidance Agreement between India and France.

Analysis:
The dispute in the assessee's appeal revolves around the interpretation of the provisions of section 40A(5) of the Income-tax Act, 1961, in light of the Double Taxation Avoidance Agreement (DTAA) between India and France. The assessee argued that the restrictions under section 40A(5) conflict with Art. III(3) of the DTAA, which allows for the deduction of all expenses reasonably allocable to a permanent establishment. The CIT(A) rejected the assessee's argument, emphasizing that the limits imposed by sections 40A(5) and 44C are intended to prevent extravagant expenditure and do not conflict with the DTAA. The tribunal noted that while the DTAA prevails over domestic laws in case of conflict, in this instance, there is no direct conflict between the provisions of the DTAA and the Income-tax Act.

The counsel for the assessee contended that the DTAA should take precedence over domestic laws, citing the Board's Circular and a judgment of the Andhra Pradesh High Court. However, the tribunal observed that the DTAA allows for the deduction of expenses allocable to a permanent establishment without restriction, while section 40A(5) imposes limitations on certain expenditures. It was noted that the non obstante clause in section 40A(1) makes all provisions of section 40A applicable despite any contrary provisions in other parts of the Act, including the DTAA under section 90. The tribunal rejected the assessee's argument that the provisions of the DTAA should override section 40A(5) based on the specific language and scope of the relevant sections.

The tribunal further clarified that the non obstante clause in section 40A(5) extends to all provisions relating to the computation of income from business or profession, not limited to sections 28 to 43A. It emphasized that Art. III(3) of the DTAA falls under the computation of income for business or profession and is subject to the restrictions imposed by section 40A(5). The tribunal concluded that there is no conflict between the DTAA and the Income-tax Act in this context, and the provisions of section 40A(5) are valid and applicable. Therefore, the tribunal upheld the decision of the CIT(A) against the assessee on this ground.

The tribunal's detailed analysis provides a comprehensive understanding of the interaction between domestic tax laws and international agreements, emphasizing the importance of specific statutory provisions and the hierarchy of legal norms in resolving disputes related to tax assessments involving cross-border transactions.