Section 80HHB deduction denied; 80HHC not read into 80HHB; Section 91 relief denied; Section 40(a)(ii) allows foreign tax deduction

HC held the claimant was not entitled to the Section 80HHB deduction because statutory conditions in subsection (3) were not satisfied and Section 80HHC could not be read into 80HHB; decision for Revenue. Relief under Section 91 for "doubly taxed" income was denied for amounts claimed under Sections 80HHB and 35B, as those amounts did not meet Section 91's requirements; decision for Revenue. However, HC held foreign tax paid on income that accrued or arose in India did not attract Section 91 but could be allowed as a deduction under Section 40(a)(ii); decision for the assessee.

---

---

Issues Involved:
1. Deduction under Section 80HHB of the Income Tax Act, 1961.
2. Double Taxation Relief under Section 91 of the Income Tax Act, 1961.
3. Deduction of tax paid in Saudi Arabia in computing income under the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Deduction under Section 80HHB

The applicant-assessee executed projects in Saudi Arabia and claimed a deduction under Section 80HHB of the Income Tax Act, 1961. The Assessing Officer allowed a deduction of Rs. 48 lakhs, but the applicant-assessee contended that the creation of a Foreign Projects Reserve Account was not necessary for availing the deduction. The CIT(A) and the Tribunal upheld that the deduction under Section 80HHB is available only if the amount is credited to the Foreign Projects Reserve Account.

The Tribunal dismissed the appeal, stating that the conditions specified in Section 80HHB(3)(ii) were not satisfied as the amount of Rs. 50 lakhs was transferred to the Foreign Projects Reserve Account only in 1991-92, beyond the five-year period. The court held that the conditions stipulated in Section 80HHB are mandatory and non-compliance disqualifies the applicant from claiming the deduction.

Issue 2: Double Taxation Relief under Section 91

The applicant-assessee sought relief under Section 91 for the sums of Rs. 47.30 lakhs and Rs. 5.59 lakhs, which were deducted under Sections 80HHB and 35B, respectively. The Assessing Officer and CIT(A) denied the relief, stating that the income must be taxed in both countries to qualify for relief under Section 91. The Tribunal upheld this view, relying on the Andhra Pradesh High Court's decision in Commissioner of Income Tax Vs. C.S. Murthy.

The court agreed with the Tribunal, stating that the deductions claimed under Sections 80HHB and 35B do not bear any tax in India and therefore do not qualify for relief under Section 91. The court emphasized that the relief is only available for income that is taxed in both countries.

Issue 3: Deduction of Tax Paid in Saudi Arabia

The applicant-assessee claimed a deduction for the tax paid in Saudi Arabia, arguing that it should be allowed as an expenditure if Section 91 relief is not available. The Tribunal denied this claim, citing the decision in Inder Singh Gill v/s. CIT, which held that foreign tax paid cannot be deducted in computing income under the Indian Income Tax Act, 1922.

The court noted that the definition of "tax" in Section 2(43) of the Income Tax Act, 1961, only includes income tax chargeable under the Act. Therefore, foreign taxes are not covered by Section 40(a)(ii). However, the Explanation to Section 40(a)(ii) clarifies that taxes eligible for relief under Sections 90 or 91 are included. Since the tax paid in Saudi Arabia on income accrued in India is not eligible for Section 91 relief, it is not hit by Section 40(a)(ii) and can be considered as an expenditure.

Judgments Delivered:
1. Question (i)(a) was answered in the affirmative, in favor of the respondent Revenue and against the applicant assessee.
2. Question (i)(b) was answered in the negative, in favor of the respondent Revenue and against the applicant assessee.
3. Question (ii) was answered in the affirmative, in favor of the respondent Revenue and against the applicant assessee.
4. Question (iii)(a) was answered in the negative, in favor of the applicant assessee and against the respondent Revenue.
5. Question (iii)(b) was answered in the negative, in favor of the applicant assessee and against the respondent Revenue.

The Reference was disposed of in these terms, with no order as to costs.

---