Foreign tax credit for dividend income paid in Sri Lanka was allowed under the India-Sri Lanka tax treaty.

Where an Indian resident received dividend income that had also suffered withholding tax in Sri Lanka, the treaty relief under section 90(2) applied because the India-Sri Lanka DTAA was more beneficial than domestic law. Article 10 permitted taxation of the dividend in the source State, and Article 24 provided foreign tax credit for tax paid there. The foreign tax paid in Sri Lanka was therefore creditable in India, and the revenue's challenge failed. The ITAT upheld the allowance of foreign tax credit under the treaty and dismissed the revenue appeal.

---

---

Issues: Whether tax deducted in Sri Lanka on dividend income was allowable as credit in India under the Double Taxation Avoidance Agreement between India and Sri Lanka.

Analysis: The assessee, being a resident of India, was taxed on global income, but the same dividend income had also suffered withholding tax in Sri Lanka. Section 90(2) of the Income-tax Act, 1961 permits application of the treaty to the extent it is more beneficial to the assessee. Article 10 of the treaty enabled taxation of the dividend in Sri Lanka, and Article 24 provided for relief by way of credit for tax paid in the source State. On that basis, the foreign tax paid was treated as creditable in India.

Conclusion: The credit for tax paid in Sri Lanka was allowable to the assessee, and the revenue's challenge failed.

Final Conclusion: The order allowing foreign tax credit under the treaty was upheld and the revenue appeal was dismissed.

Ratio Decidendi: Where a treaty permits taxation in the source State and provides relief by foreign tax credit, the assessee is entitled to the credit to the extent the treaty is more beneficial than the domestic law.

---