Foreign tax deducted on dividend and interest income was not taxable absent an express deeming provision under the Income-tax Act.

For a resident assessee, only income actually accruing or arising outside India is taxable under section 5(1)(c) of the Income-tax Act, 1961, unless the Act contains an express deeming provision to gross up the foreign receipt. The deeming rules applied to dividend income received in India under sections 194 and 198 do not extend to tax deducted by a foreign payer under foreign law. In the absence of any comparable statutory provision for foreign dividends and interest on securities, the amount withheld in the United Kingdom could not be treated as part of the assessee's chargeable income, and the foreign tax deducted at source was excluded.

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Issues: Whether tax deducted in the United Kingdom from dividends and interest on securities paid to a resident assessee is includible in the chargeable income of the assessee.

Analysis: Section 5(1)(c) of the Income-tax Act, 1961 brings to tax, in the case of a resident, income accruing or arising outside India only to the extent that it actually accrues or arises outside India. The deeming provisions applicable to dividend income received in India under sections 194 and 198 of the Income-tax Act, 1961 do not extend to tax deducted by a foreign company under foreign law. In the absence of any comparable deeming provision in the Act for foreign dividend income, and having regard to the foreign legal regime that denies a tax credit to a non-resident recipient, the gross amount declared by the foreign company cannot be treated as income accruing to the assessee.

Conclusion: The foreign tax deducted at source was not includible in the assessee's chargeable income and the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: In respect of income accruing outside India, only the amount actually accruing or arising to the assessee is includible under section 5(1)(c) of the Income-tax Act, 1961 unless the Act contains an express deeming provision to gross up the foreign receipt.

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