2019 (5) TMI 1160 - AT - Income Tax

Tribunal allows Foreign Tax Credit claim for federal and state taxes under Income Tax Act

The Tribunal allowed the assessee's claim for Foreign Tax Credit (FTC) for both federal and state taxes under Section 91 of the Income Tax Act. The appeal ... Foreign tax credit u/s 91 - assessee is an individual “Resident but not Ordinarily Resident” in India - income accrued in India - income tax paid in foreign jurisdictions pertaining to the federal tax and state income tax - proportionate tax on salary for 224 days of stay in India - assessee declared his income under the head salaries for the proportionate period for which he was employed with his employer in USA - article 2 of the Indo US DTAA - HELD THAT:- As relying on WIPRO LTD. VERSUS THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 1 (3) , BANGALORE [2015 (10) TMI 826 - KARNATAKA HIGH COURT] and DR. RAJIV I. MODI VERSUS THE DEPUTY COMMISSIONER OF INCOME-TAX (OSD) RANGE-1, AHMEDABAD [2017 (11) TMI 207 - ITAT AHMEDABAD] assessee is entitled for tax credit of federal as well as state taxes paid by him u/s 91. Section 91 are to be treated as general in application and these provisions can yield to the treaty provisions only to the extent the provisions of the treaty are beneficial to the assessee; that is not the case so far as question of tax credits in respect of state income taxes paid in USA are concerned. Accordingly, even though the assessee is covered by the scope of India US and India Canada tax treaties, so far as tax credits in respect of taxes paid in these countries are concerned, the provisions of Section 91, being beneficial to the assessee, hold the field. As Section 91 does not discriminate between state and federal taxes, and in effect provides for both these types of income taxes to be taken into account for the purpose of tax credits against Indian income tax liability, the assessee is, in principle, entitled to tax credits in respect of the same. Whether the assessee who is not a ‘resident’ but ‘resident and not ordinarily resident’ can also claim relief/ deduction u/s 91 of the act or not? - Provisions of section 91 (1) provides relief/deduction of taxes paid with respect to a person who is a ‘resident’ in India. The provisions of section 91 (2) also deals with the person who is a ‘resident’ in India. The provisions of section 91 (3) deals with the person who is a ‘non-resident’. The revenue contends that as the assessee is not a ‘resident’ therefore he is not entitled to benefit of section 91 . The provisions of section 6 of the income tax act provides for qualification of the persons who are residents in India. The provisions of section 6 (6) carves out another category of person in ‘ Residents’ , who is said to be ‘not ordinarily resident’ in India. However such persons are also ‘resident’. The category is also called a ‘resident but not ordinarily resident’ in India. Therefore persons who are ‘resident but not ordinarily resident’ in India are forming larger group of the persons who are ‘resident’ in India. In view of this, we reject the contentions of the revenue that benefit of section 91 (1) of the act does not apply to a person who is ‘not ordinarily resident’ in India. - ground of the assessee are allowed. Issues Involved:1. Validity of the order passed by the ITO and sustained by CIT (Appeals).2. Eligibility of the assessee, a 'Resident but not Ordinarily Resident' (RNOR), for benefits under Section 91 of the Income Tax Act.3. Denial of Foreign Tax Credit (FTC) for New York State Taxes and restriction to US Federal Taxes.4. Interpretation of Section 91 regarding discrimination between federal and state taxes.5. Applicability of judgments in 'DCIT vs Tata Sons Ltd' to the assessee.6. Alternative plea for exclusion of New York State Taxes from taxable income if FTC is not granted.Detailed Analysis:Validity of the Order:The assessee challenged the order passed by the ITO and sustained by CIT (Appeals) as 'bad in law, arbitrary and contrary to the facts of the case.' However, this ground was general in nature and was dismissed.Eligibility for Benefits under Section 91:The CIT (Appeals) denied the benefit under Section 91 on the grounds that the assessee, being 'Resident but not Ordinarily Resident' (RNOR), does not qualify as a 'Resident in India.' However, the Tribunal found that the provisions of Section 91 apply to any 'resident' in India, including those who are 'not ordinarily resident.' The Tribunal cited judicial precedents, including the Karnataka High Court's decision in Wipro Ltd vs DCIT, which held that Section 91 benefits extend to income tax paid in foreign jurisdictions, including state taxes. Therefore, the Tribunal allowed the assessee's claim under Section 91.Denial of FTC for New York State Taxes:The CIT (Appeals) restricted the FTC to US Federal Taxes, denying credit for New York State Taxes. The Tribunal found this interpretation incorrect, citing the Karnataka High Court's decision in Wipro Ltd vs DCIT and the ITAT's decision in Tata Sons Ltd vs DCIT. Both decisions held that Section 91 does not discriminate between federal and state taxes, and FTC should be allowed for both. The Tribunal allowed the credit for state taxes paid by the assessee.Interpretation of Section 91:The CIT (Appeals) interpreted that Section 91 does not apply where there is a Double Taxation Avoidance Agreement (DTAA). The Tribunal disagreed, stating that Section 91 is applicable even in the presence of a DTAA if it is more beneficial to the assessee. The Tribunal cited the ITAT's decision in Tata Sons Ltd, which held that Section 91 provides relief for both federal and state taxes, and should be applied if it is more beneficial than the treaty provisions.Applicability of Judgments in 'DCIT vs Tata Sons Ltd':The CIT (Appeals) held that the judgments in 'DCIT vs Tata Sons Ltd' do not apply to the assessee. The Tribunal found this reasoning flawed, as the principles laid down in Tata Sons Ltd regarding the applicability of Section 91 and the non-discrimination between federal and state taxes were relevant to the assessee's case. The Tribunal applied these judgments to allow the assessee's claim.Alternative Plea for Exclusion of State Taxes from Taxable Income:The assessee made an alternative plea that if FTC for state taxes is not granted, these taxes should be excluded from taxable income in India. As the Tribunal allowed the FTC for state taxes, this alternative plea became redundant and was dismissed.Conclusion:The Tribunal concluded that the assessee is entitled to FTC for both federal and state taxes under Section 91. The appeal was partly allowed, granting the relief sought by the assessee. The Tribunal's order emphasized the non-discriminatory nature of Section 91 and its applicability to RNOR individuals. The general ground challenging the validity of the ITO's order was dismissed, and the alternative plea was rendered redundant. The Tribunal's decision was pronounced in the open court on 17/05/2019.