Foreign tax credit is limited to treaty-covered taxes and only to income actually doubly taxed in India.

Treaty-based foreign tax credit under section 90 is available only for taxes within the treaty's scope and only to the extent the same income is actually taxed in India. Credit for US tax was confined to federal income-tax and did not extend to US state income-tax. Where part of the foreign salary had already been relieved in India under section 80RRA, only the balance that remained doubly taxed qualified for credit, and the credit could not exceed the Indian tax attributable to that doubly taxed portion. The computation restricting relief to the balance of income taxed in both countries was upheld.

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Issues: (i) Whether credit for tax paid in the USA under Article 25(2)(a) of the India-USA tax treaty was confined to federal income-tax or extended to state income-tax as well. (ii) Whether the assessee was entitled to full credit for US tax paid on the entire foreign salary income, or only proportionate credit to the extent the income remained doubly taxed in India after deduction under section 80RRA.

Issue (i): Whether credit for tax paid in the USA under Article 25(2)(a) of the India-USA tax treaty was confined to federal income-tax or extended to state income-tax as well.

Analysis: The treaty relief was examined with reference to the taxes covered by the agreement. The credit mechanism under the treaty applied to the income-tax paid in the USA within the scope of the convention, and the State income-tax did not fall within that covered category. The respondent was entitled to support the order on this ground even though the Revenue had not appealed.

Conclusion: Credit was not available for US State income-tax and was confined to the treaty-covered US federal income-tax only.

Issue (ii): Whether the assessee was entitled to full credit for US tax paid on the entire foreign salary income, or only proportionate credit to the extent the income remained doubly taxed in India after deduction under section 80RRA.

Analysis: Relief from double taxation under section 90 and the treaty was held to operate only to the extent income was actually taxed in both countries. Since a substantial part of the US salary income had already been allowed as deduction under section 80RRA in India, only the balance remained doubly taxed. Credit could therefore be granted only against the Indian tax attributable to that doubly taxed portion, and not against income that was no longer subject to Indian tax because of the deduction.

Conclusion: Only proportionate tax credit was admissible, as computed by the Assessing Officer.

Final Conclusion: The assessee was not entitled to full credit of the foreign taxes paid, and the computation restricting relief to the doubly taxed portion of income was upheld.

Ratio Decidendi: Treaty-based foreign tax credit under section 90 is available only to the extent the same income is actually taxed in India, and the credit cannot exceed the Indian tax attributable to the doubly taxed portion of income.

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