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2025 (2) TMI 599 - AT - Income TaxDeduction in respect of foreign taxes paid u/s 37(1) - allowance of foreign tax credit to the assessee over and above the one eligible u/s 90/91 of act - Section 40(a)(ii) applicability - HELD THAT - The law postulates that when a taxpayer earns overseas income and is exposed to taxes in foreign tax jurisdiction then it is liable to get credit for such taxes paid in overseas jurisdiction while submitting his final tax liabilities in the domestic tax jurisdictions. The idea is to avoid double taxation of the same income. Section 90 and 91 of the act prescribe in exquisite details as to how and how much of the taxes paid in foreign tax jurisdiction would be available to the taxpayers. It is noteworthy that the quantum of deduction available is defined in the impugned sections. There is nothing in the act that provides that the excess amounts of taxes paid in foreign tax jurisdiction and which could not be claimed under Section 90 and 91 would be available for deduction under any other statute of the Income tax act 1961. Prohibition u/s 40(a)(ii) applies to these foreign taxes or not? - The argument propounded by assessee are not found to be satisfactory for the very reason that section 2 of the act begins with a clause in this act unless the context otherwise requires and which goes on to indicate that the definition is to be understood in the context of the situation. The clear unambiguous legislative intent appearing from insertion of provisions of 40(a)(ii) is that any sum paid by a tax payer on account of any amount of money be it be any rate or tax levied on the profits or gains of any business or profession would not be allowed as a deduction. As undisputed fact of the case that the amounts of foreign taxes claimed as the deduction by the assessee are in respect of taxed levied on its component of income earned in foreign tax jurisdiction and hence the same cannot be allowed under the provisions of section 40(a)(ii). It is pertinent to note that explanation 1 to section 40(a)(ii) excludes amounts of monies eligible for relief u/s 90 and 91 of the act. Now what cannot be claimed u/s 90 and 91 does not becomes automatically allowable u/s 40(a)(ii). The scheme of allowance mentioned u/s 90 and 91 of the act is a part of a sovereign agreement between the Government of India and other governments arrived at after detailed and prolonged discussions/deliberations. The taxing rights of each contracting nations are deliberated at length before a DTAA is signed which forms the basis of procedure of deduction prescribed u/s 90/91 of the act. Argument propounded by assessee regarding eligibility of its claim u/s 37(1) thus gets squarely hit by the mischief of section 40(a)(ii) and does not come to its rescue given a clear prohibition. It is therefore seen that the position of the statute on the subject of allowance of claim of taxes paid in foreign tax jurisdiction u/s 40(a)(ii) is clear in as much as it is categorically provided that no allowance can be made. As observed earlier in the order Hon ble Apex Court has ruled and also reiterated in several of its decisions that when the provisions of a statute are unambiguously clear no different interpretation is to be adopted. Hon ble ITAT Ahmedabad in DCIT Vs. Elite Core Technologies Pvt. Ltd. 2017 (4) TMI 394 - ITAT AHMEDABAD has exhaustively discussed the above issue of allowability of foreign tax credit u/s 37(1) in great detail in its impugned order before reaching at its conclusion that the same is not permissible. No case is made out in favour of the assessee to allow its claim of foreign taxes u/s 37(1) of the act. Thus we are of the view that the order of the Ld. AO and its confirmation by the Ld. First Appellate Authority is based upon the correct understanding and appreciation of facts of the case inter-alia including statutory provisions and judicial pronouncements. The Order of the Ld. CIT(A) is confirmed and all the grounds of appeal raised by the assessee are dismissed.
ISSUES PRESENTED and CONSIDERED
The primary issue in this case is whether the assessee is entitled to a deduction under Section 37(1) of the Income Tax Act for foreign taxes paid, which were not eligible for relief under Sections 90 and 91 of the Act. The case also examines whether the prohibition under Section 40(a)(ii) applies to these foreign taxes, thereby disallowing the deduction. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework involves several sections of the Income Tax Act, 1961:
Precedents considered include decisions from the ITAT Ahmedabad Bench, the Bombay High Court, and the Supreme Court, among others, which have interpreted these sections in various contexts. Court's Interpretation and Reasoning The Tribunal examined the statutory provisions and relevant judicial precedents to determine whether the foreign taxes paid by the assessee could be deducted under Section 37(1). The Court noted that Sections 90 and 91 explicitly provide for relief from double taxation, and any excess foreign tax not covered by these sections cannot be claimed under Section 37(1) due to the prohibition in Section 40(a)(ii). Key Evidence and Findings The assessee initially claimed a foreign tax credit under Sections 90/91 but later sought to claim the excess amount as a deduction under Section 37(1). The Tribunal found that the statutory provisions and judicial precedents do not support this claim, as Section 40(a)(ii) explicitly disallows deductions for taxes levied on profits or gains. Application of Law to Facts The Tribunal applied the statutory provisions to the facts, concluding that the foreign taxes paid by the assessee, which were not eligible for relief under Sections 90/91, could not be deducted under Section 37(1) due to the prohibition in Section 40(a)(ii). The Tribunal emphasized that the legislative intent is clear in disallowing such deductions to prevent double claims. Treatment of Competing Arguments The assessee argued that the prohibition in Section 40(a)(ii) does not apply to foreign taxes not eligible for relief under Sections 90/91. However, the Tribunal rejected this argument, citing the clear language of Section 40(a)(ii) and judicial precedents that support a broad interpretation of the prohibition on deductions for taxes levied on profits or gains. Conclusions The Tribunal concluded that the assessee's claim for deduction under Section 37(1) is not tenable due to the explicit prohibition in Section 40(a)(ii). The Tribunal upheld the decisions of the lower authorities, confirming that the assessee is not entitled to the claimed deduction. SIGNIFICANT HOLDINGS Core Principles Established
Final Determinations on Each Issue The Tribunal dismissed the assessee's appeal, confirming the lower authorities' decisions. The Tribunal held that the foreign taxes paid by the assessee, which were not eligible for relief under Sections 90/91, could not be deducted under Section 37(1) due to the prohibition in Section 40(a)(ii).
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