Foreign tax credit allowed where section 10A income remains taxable and treaty relief applies despite domestic deduction treatment.

Rectification applications under section 154 were treated as timely because the four-year period ran from the assessment order sought to be rectified, and the omission to deal with the claimed foreign tax credit could be examined as a mistake apparent from the record. On the substantive issue, income covered by section 10A remained part of chargeable total income after the provision was amended to operate as a deduction from total income, so foreign tax credit was not denied merely because the same income had domestic deduction relief. Applying the India-Japan treaty, the assessee was held entitled to credit for tax deducted in Japan against Indian tax on the corresponding income.

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Issues: (i) Whether the rectification applications under section 154 were within limitation and whether the omission to grant foreign tax credit was a mistake apparent from the record; (ii) Whether the assessee was entitled to credit for tax deducted in Japan against Indian tax liability on income eligible for deduction under section 10A.

Issue (i): Whether the rectification applications under section 154 were within limitation and whether the omission to grant foreign tax credit was a mistake apparent from the record.

Analysis: The period of four years had to be reckoned from the assessment order sought to be rectified. The omission to consider the foreign tax credit was not supported by the view that the applications were time-barred from the date of the intimation under section 143(1). The record showed that the assessee had claimed the credit and the Assessing Officer had not dealt with it in the original processing and assessment orders.

Conclusion: The rectification applications were within time and the omission could be examined under section 154.

Issue (ii): Whether the assessee was entitled to credit for tax deducted in Japan against Indian tax liability on income eligible for deduction under section 10A.

Analysis: After the amendment to section 10A, the provision operates as a deduction from total income and not as an exemption. The income remained part of the chargeable total income in India, so the fact that foreign tax was paid on the same income did not cease to attract treaty relief. The Court applied the principle that liability to tax, and not actual payment alone, is relevant for double taxation relief, and held that the India-Japan treaty supported credit for the foreign tax deducted.

Conclusion: The assessee was entitled to foreign tax credit against the Indian tax on the corresponding income.

Final Conclusion: The orders below were set aside to the extent they denied foreign tax credit, and the Assessing Officer was directed to grant the credit for all three assessment years.

Ratio Decidendi: A provision granting deduction from total income does not convert the income into exempt income, and foreign tax credit cannot be denied merely because the same income is relieved under a domestic deduction provision if the treaty otherwise permits relief.

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