ITAT Hyderabad: Foreign allowances for services abroad not taxable in India under Income Tax Act

The Appellate Tribunal ITAT Hyderabad ruled in favor of the assessee, an employee of M/s IBM India Pvt. Ltd., in a case concerning the assessment of foreign allowances received for services performed abroad under section 5(2) of the Income Tax Act, 1961. Despite the Revenue's argument that the allowances were taxable in India, the Tribunal relied on judicial precedents to determine that income earned by a non-resident for services outside India, with income accrual abroad, cannot be taxed in India under section 5(2). As a result, the Tribunal deleted the addition, allowing the assessee's appeal.

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Issues: Assessment of foreign allowances received for services performed abroad under section 5(2) of the Income Tax Act, 1961.

Analysis:

Issue 1: Assessment of foreign allowances under section 5(2) of the Income Tax Act, 1961

The assessee challenged the assessment as a non-resident for taxing foreign allowances received for services performed in the Netherlands under section 5(2) of the Act. The assessee, an employee of M/s IBM India Pvt. Ltd., was deputed for service outside India, resulting in receiving foreign allowances. The Revenue contended that the sum becomes taxable in India upon being credited or received in India, arguing the application of section 5(2). However, the Tribunal disagreed with the Revenue's stance, citing various judicial precedents such as CIT vs. Avtar Singh Wadhwan, DIT vs. Prahlad V Rao, and Utanka Roy vs. DIT. These precedents established that income derived by a non-resident for services outside India, with income accrual outside India, cannot be taxed in India under section 5(2). Consequently, the Tribunal deleted the addition based on this reasoning alone, allowing the assessee's appeal.

This judgment by the Appellate Tribunal ITAT Hyderabad addressed the issue of assessing foreign allowances received for services performed abroad under section 5(2) of the Income Tax Act, 1961. The Tribunal analyzed the facts, the Revenue's argument, and relevant judicial precedents to conclude that the income derived by a non-resident for services performed outside India, with income accrual outside India, cannot be brought to tax in India under section 5(2). The Tribunal's decision to delete the impugned addition was based on the established legal principles from previous court decisions, providing relief to the assessee in this case.

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