Foreign tax relief on dividend income turns on whether U.K. tax deducted at source counts as tax paid abroad.

Relief under section 49D of the Indian Income-tax Act, 1922 required proof that income accrued outside the taxable territories and had suffered foreign tax by deduction or otherwise under foreign law. Dividend income from U.K. companies, shown by warrants to have borne U.K. standard-rate tax, was treated as income on which tax had been paid in the foreign country, even though the shareholder was not separately assessed there. The foreign tax rate was ascertainable, and the statutory expression was read as covering income subjected to tax abroad. On that basis, the assessee satisfied section 49D and was entitled to relief.

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Issues: Whether dividend income received from U.K. companies, from which U.K. income-tax was deducted at source, amounted to income on which tax had been paid in the foreign country so as to entitle the assessee to relief under section 49D of the Indian Income-tax Act, 1922.

Analysis: Relief under section 49D required proof that the assessee had income accruing outside the taxable territories and that, in respect of such income, income-tax had been paid in the foreign country by deduction or otherwise under the law there. The dividend warrants showed deduction of tax at the U.K. standard rate, and under the U.K. scheme dividend distributions out of taxed corporate profits were treated as franked income. The income was therefore regarded as having borne tax at source in U.K., even though the shareholder was not separately assessed there in the same manner as under the Indian Act. The rate of foreign tax was ascertainable as the standard rate, and the expression in the Explanation was read as referring to income subjected to tax in the foreign country.

Conclusion: The assessee satisfied the requirements of section 49D and was entitled to relief. The question was rightly answered in the affirmative, in favour of the assessee.

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