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2007 (6) TMI 277 - AT - Income TaxIndian resident deriving foreign income - taxability of particular income in both the contracting states - loss incurred by the PE abroad - DTAA with Japan - CIT(A) held that loss incurred by Japan office of the assessee company is not to be taken into account while computing its income taxable in India - HELD THAT - The law laid down by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT is binding on us under art. 141 of the Constitution of India. The prevailing legal position, therefore, is that once an income is held to be taxable in a tax jurisdiction under a DTAA and unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. To that extent, the worldwide basis of taxation in the scheme of the Indian IT Act is no longer applicable in a situation provisions of a DTAA entered into u/s 90 apply. Just because the assessee may, in AO's perception, claim treaty protection in a subsequent year, the treaty provisions cannot be thrust on the assessee this year as well. In this view of the matter, the assessee was indeed eligible to claim taxation on worldwide basis, disregard the scheme of taxability under the India Japan tax treaty, and, in effect, claim deduction of loss incurred by the PE in Japan. The CIT(A) was thus justified in his conclusion to the effect that losses of assessee's PE in Japan are to be taken into account while computing assessee's total income liable to tax in India. When the assessee makes profits in the subsequent years, and whether or not the assessee recaptures loss in the subsequent years, its entire PE income remains outside the scope of 'total income' u/s 5 of the Act. In effect, therefore, the loss of the PE abroad is deducted twice. This position may be unintended or even undesirable, as evident from the global concern to neutralise such dual benefits in the international taxation, but that is an inevitable corollary to the legal position existing now. Thus, we approve the conclusion arrived at by the learned CIT(A). His having arrived at right conclusion may have been somewhat fortuitous, in the sense it was without really analyzing the nuances of relevant legal position, but what is material is that he reached the right conclusion. We approve his conclusion and decline to interfere in the matter. In the result, the appeal filed by the AO is dismissed.
Issues Involved:
1. Allowance of losses incurred by the assessee's Japan branch office. 2. Consideration of the Double Taxation Avoidance Agreement (DTAA) with Japan. 3. Applicability of Section 90 of the Income Tax Act, 1961, in cases involving DTAA. Detailed Analysis: 1. Allowance of Losses Incurred by the Assessee's Japan Branch Office The primary issue in this appeal is whether the loss of Rs. 53,96,061 incurred by the assessee's Japan branch office should be considered while computing taxable income in India. The Assessing Officer (AO) disallowed this loss, asserting that since the profit of the Japan office is taxable only in Japan as per the DTAA, any loss incurred should not be deductible from the income taxable in India. The Commissioner of Income Tax (Appeals) [CIT(A)], however, allowed the deduction, stating that the company's global income/loss is taxable in India, hence the loss should be considered while computing the income of the appellant. 2. Consideration of the Double Taxation Avoidance Agreement (DTAA) with Japan The AO argued that under Article 7 of the India-Japan DTAA, the profits and losses of the Japanese Permanent Establishments (PEs) of Indian companies are subject to taxation in Japan only. Therefore, the losses incurred by the PE should be assessed in Japan and not be set off against the income taxable in India. The CIT(A) disagreed, holding that the global income/loss of the company, including that of the Japan office, should be taxable in India. 3. Applicability of Section 90 of the Income Tax Act, 1961 The AO contended that the CIT(A) failed to consider the specific provisions of Section 90 of the Income Tax Act, which deals with cases where the Government of India has entered into a DTAA with another country. The CIT(A) maintained that the company is a resident in India and its global income/loss is taxable in India, thus allowing the loss incurred by the Japan office as a deduction. Judicial Analysis: Precedent Cases and Legal Position The judgment references significant legal precedents including the cases of CIT vs. R.M. Muthaiah, CIT vs. SRM Firm & Ors., and Union of India vs. Azadi Bachao Andolan. These cases established that under the Indian Income Tax Act, resident assessees are taxable on their worldwide income. The Karnataka High Court and Madras High Court held that when a DTAA specifies that tax may be charged in a particular state, it implies that tax will not be charged by the other state, thus acting as a bar on the powers of the Government of India to tax the same income. Impact of Section 90(2) Section 90(2) of the Indian IT Act provides that the provisions of the Act shall apply to the extent they are more beneficial to the assessee. This means that the DTAA cannot impose additional liabilities on the taxpayer and cannot be thrust upon the assessee if it is not beneficial. The assessee can choose to be taxed on the basis of the IT Act if it is more advantageous. Double Dip of Losses The judgment acknowledges the possibility of a "double dip" of losses, where the same loss is deducted both in the source country and the residence country. However, it concludes that under the current legal framework, this is permissible. The court noted that while this might be unintended or undesirable, it is a consequence of the existing legal position. Conclusion The tribunal upheld the CIT(A)'s decision, allowing the deduction of the loss incurred by the Japan office while computing the taxable income in India. The tribunal dismissed the AO's appeal, affirming that the assessee is entitled to claim taxation on a worldwide basis and disregard the scheme of taxability under the India-Japan tax treaty for this particular year. The tribunal emphasized that each assessment year is independent, and the assessee can choose the more beneficial tax treatment for each year.
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