TaxTMI 
TaxTMI 
2022 (6) TMI 143
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....iz., Ghana. As per the details furnished during the assessment proceedings the assessee had a total receipt of Rs. 21,59,99,223 for the year under consideration. Out of this total receipts the assessee had initially submitted to the AO that Rs.12,95,91,404 was from Ghana. During the proceedings before the CIT(A) this was corrected to Rs.15,99,37,226 based on the revised submission by the assessee which the AO gave effect to by way of a remand report. In respect of the receipt from Ghana, the payer had deducted at source on the receipts of Rs.15,99,37,226 amounting to Rs.1,05,36,759. In the computation of income the assessee has claimed the tax paid/deducted at Ghana of Rs.1,05,36,759 as deduction under Section 91 of the Income Tax Act, 1961 (Act). 3. An assessee being a resident, it shall be allowed a credit for the amount of foreign tax paid by him by way of deduction as per the provisions of section 91 of the Act r.w.r 128 of the Income Tax Rules 1962. It will be worthwhile to reproduce the relevant provisions of section 91 here in order to understand how the deduction u/s.91 is computed which is the subject matter of appeal "91. (1) If any person who is resident in I....
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....ent case), whichever is the lower. 5. The assessee has in the computation reproduced below has calculated - (i) Indian rate of tax of income considered by dividing Indian income tax by the total income. (No dispute except that surcharge and education cess should also be included as part of the rate of tax) (ii) The rate of tax of Ghana was taken as the same rate at which the payer has deducted at source. (iii) The rate of tax in Ghana being lower than the Indian rate of tax, claimed tax credit for the entire tax deducted at source. Thus, in the computation an amount of Rs.1,05,36,759 was claimed as a deduction u/s.91 of the Act as per the computation below 6. The AO questioned the way assessee computed effective tax rate in Ghana which is arrived at by dividing the tax deducted on gross receipts i.e. the rate at which tax is deducted at source by the payer. According to the AO when the Indian rate of tax is arrived at after considering the expenses, the same logic should be applied for arriving at the tax rate of Ghana. The AO therefore proceeded to re-compute the deduction u/s.91 whereby he restricted the deduction to Rs.73,30,582. The AO exclud....
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.... H = G 30.58% Profit on foreign turnover (I) = (H) * (D) 4,89,03,514 Tax: TDS deducted by Ghana - (J) 1,05,36,759 Effective rate of tax on Ghana income - (K) = (J)/(I) 21.55% Effective Indian tax rate - (L) 18.50% Effective rate of tax on which foreign tax credit is allowable - (M) = (lesser of) (K) or (L) 18.50% Tax credit allowed / allowable - (N) = (M) * (I) 90,47,150 Tax credit disallowed - (O) = (J) - (N) 14,89,609 8. Aggrieved the assessee filed an appeal before the CIT(A) contending the computation of tax credit by the AO on net income from Ghana and also the exclusion of 'other income' from total revenue. For the purpose of computing the effective rate outside India, the CIT(A) held that it should be on the net income i.e. after considering the expenses incurred for making such sales outside India. The CIT(A) relied on various judicial pronouncements in this regard. On the issue of including 'other income' for computing effective rate of tax outside India, the CIT(A) held that the none of the expenses debited to the P&L could be said to be incurred in relation to 'other income' credited to the P&L and....
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....d the assessing officer's action of arbitrarily applying the net profit ratio for computation of foreign tax credit u/s. 91 of the Act is unjustified and unsustainable under the law. (v) The effective rate of tax paid in Ghana should be computed by dividing the tax paid in Ghana by income assessed Ghana. (vi) The expression 'income assessed in foreign country' would clearly in the context in which it is used mean subject to tax in the foreign country and the amount on which tax is deducted at source in the absence of any assessment should be considered as the income assessed in Ghana (vii) The other income shown in the P&L account is mainly in connection with the business. For the purpose of computing the book profits u/s.115JB the other income is included as part of net profit. Since the Indian effective rate of tax is arrived at including the other income, for the purpose of computing the effective tax rate of Ghana assessing officer is not justified in not including the same (viii) Considering the effective rate of tax at 18.5% excluding surcharge and cess is not correct in the light of the decision of the Supreme Court in the case of CIT vs K....
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....he disallowance of deduction (para 7 above). The effective tax rate of India (MAT) with which the comparison is done includes the 'other income'. The AO/CIT(A) have justified the exclusion of 'other income' on the basis that no expenditure is incurred towards earning the 'other income'. From the perusal of the break-up of 'other income' (page 28 of paper book) it is clear that these incomes are earned in the course of the business and the assessee has incurred various expenses in connection with earning income in the course of business. The assessee has included the 'other income' as part of the business income while computing the book profits u/s.115JB and the computation is accepted by the AO thereby confirming that the 'other income' as part of the business income of the assessee. Considering the facts and on merits, we are of the view that exclusion of 'other income' in only one leg of the computing net income and effective rate of tax in Ghana is not the right approach. The comparison of the rate thus computed with the Indian rate of tax will not be correct in the interest of justice. 15. The expression 'Indian rate of tax' has been defined as the rate determined by dividin....
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....- (D) 15,99,37,226 Expenses incurred on foreign turnover - (E) -- Net profit % on total turnover - (G) (C/(A+B)) 31.97% NP% on foreign income - (H) H = G 31.97% Profit on foreign turnover (I) = (H) * (D) 5,11,28,979 Tax: TDS deducted by Ghana - (J) 1,05,36,759 Effective rate of tax on Ghana income - (K) = (J)/(I) 20.61% Effective Indian tax rate - (L) 20.01% Effective rate of tax on which foreign tax credit is 20.01% allowable - (M) = (lesser of) (K) or (L) Tax credit allowed / allowable - (N) = (M) * (I) 1,02,30,909 18. We have in para 14 above held that for the purpose of computing the net profit ratio of total income of the assessee in India which is used as the basis for arriving at the net income of Ghana should include 'other income'. We have also held that the 'effective Indian rate of tax' should include surcharge and education cess i.e. 20.01%. The calculation of deduction u/s.91 as done in the above table is in accordance with our views expressed in the foregoing paragraphs and is a ....