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 was partly allowed, emphasizing the non-discriminatory nature of Section 91 and its applicability to "Resident but not Ordinarily Resident" individuals. The general challenge to the validity of the Income Tax Officer's order was dismissed, and the alternative plea for excluding state taxes from taxable income was rendered redundant. The Tribunal's decision was pronounced on 17/05/2019.

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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.

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