2008 (9) TMI 411 - AT - Income Tax

Summary

Issues involved:
The issue involves the credit of tax paid in the USA on income also taxed in India, specifically regarding the inclusion of State income-tax for credit and the extent to which such credit is allowable as per the Double Taxation Avoidance Agreement (DTAA) between the USA and India.

Issue 1: Credit of tax paid in the USA

The appellant contested the tax credit granted by the Assessing Officer (AO) in respect of US Federal income-tax, arguing that State income-tax should also be included for credit as per the DTAA. The AO allowed credit based on the tax attributable to the income in the USA. The appellant claimed full credit of tax paid in the USA, including both Federal and State income-tax, against Indian taxes payable.

Issue 2: Interpretation of DTAA provisions

The contention before the CIT(A) was whether the appellant is entitled to credit for the entire tax paid in the USA on salary income, considering the deduction under section 80RRA in India. The CIT(A) agreed that credit should be given for both Federal and State income-tax but held that the appellant was only entitled to relief for the balance taxable income after deduction under section 80RRA, in accordance with the DTAA provisions.

Issue 3: Application of Double Taxation Relief

The debate centered on whether the appellant, being a resident of India with income taxed in the USA, is eligible for relief under the DTAA. The appellant argued for credit of taxes paid in the USA against Indian taxes, while the Departmental Representative contended that credit should only apply to income subject to double taxation in both countries.

Judgment:

The Tribunal analyzed the provisions of the DTAA and the Income Tax Act to determine the extent of tax credit allowable to the appellant. It was established that relief from double taxation can be achieved through either exemption or credit methods. The DTAA with the USA follows the credit method, allowing for relief based on the tax paid in the source country. The Tribunal emphasized that credit should only be granted for income subject to double taxation in both India and the USA.

The Tribunal referred to relevant case law and held that the appellant can only claim proportionate tax credit based on the income doubly taxed. The Tribunal upheld the AO's computation of the credit and disagreed with the CIT(A)'s decision to include State income-tax for credit, as it was not in line with the DTAA provisions. Therefore, the appeal was dismissed, affirming the AO's order regarding the credit of taxes paid in the USA.