Treaty tax credit and no notional interest disallowance upheld where foreign tax clarification and sufficient own funds existed.

ITAT Delhi held that a conclusive clarification from the Omani tax authority on dividend-related tax had to be accepted for treaty tax credit purposes under section 90, so the revenue could not substitute its own interpretation of the foreign tax position; the assessee was therefore entitled to the credit. It also held that no notional interest disallowance under section 36(1)(iii) could be sustained because the assessee's own interest-free funds exceeded the relevant investments and capital work-in-progress, making the revenue's mixed-funds objection unsustainable. Both issues were decided in favour of the assessee, and the appellate order was upheld.

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Issues: (i) Whether the assessee was entitled to tax credit in India in respect of the dividend-related tax deemed to have been paid in Oman; (ii) Whether any notional disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was warranted when the assessee had sufficient interest-free own funds.

Issue (i): Whether the assessee was entitled to tax credit in India in respect of the dividend-related tax deemed to have been paid in Oman.

Analysis: The clarification issued by the Omani tax authority was treated as conclusive, and the revenue authorities could not substitute their own interpretation of the foreign tax position. The issue was also covered by the assessee's own case for an earlier assessment year, where the coordinate bench had accepted the entitlement to tax credit under the treaty framework and section 90 of the Income-tax Act, 1961.

Conclusion: The issue was decided in favour of the assessee and against the revenue.

Issue (ii): Whether any notional disallowance of interest under section 36(1)(iii) of the Income-tax Act, 1961 was warranted when the assessee had sufficient interest-free own funds.

Analysis: The factual finding was that the assessee's own funds exceeded the level of closing capital work-in-progress and investments. On that basis, and following the consistent view taken in the assessee's earlier year, no notional disallowance of interest could be sustained where mixed funds were available and the interest-free funds were sufficient to cover the investments.

Conclusion: The issue was decided in favour of the assessee and against the revenue.

Final Conclusion: The revenue's challenge to both the tax credit relief and the deletion of the notional interest disallowance failed, and the appellate order in favour of the assessee was left undisturbed.

Ratio Decidendi: A conclusive clarification of the foreign tax authority on the treaty position must be accepted for granting tax credit, and no notional interest disallowance can be made under section 36(1)(iii) where the assessee's own interest-free funds are sufficient to cover the relevant investments.

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