Tata Sons Limited vs. DCIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: March 9, 2011 (Date of publication)

Click here to download the judgement (tata_sons_state_tax_credit.pdf)

Despite DTAA restricting credit to ‘Federal’ taxes, Foreign ‘State’ taxes also eligible for credit u/s 91

In DCIT vs. Tata Sons Limited 43 SOT 27 it was held that the assessee was not entitled to a deduction of foreign taxes such as Federal & State taxes paid in the USA & Canada in view of s. 40(a)(ii) which prevented the deduction of “any taxes”. While Federal taxes are eligible for credit under the India-USA & India-Canada DTAA, State taxes are not eligible. On the question whether the State taxes can be allowed as a credit u/s 91 despite the DTAA, HELD:

(i) The view that State taxes cannot be allowed as a deduction and also cannot be taken into account for giving credit is incongruous and results in a contradiction. A tax payment which is not treated as admissible expenditure on the ground that it is payment of income tax has to be treated as eligible for tax credit;

(ii) While s. 91 allows credit for Federal & State taxes, the DTAA allows credit only for Federal taxes. The result is that the s. 91 is more beneficial to the assessee & by virtue of s. 90(2) it must prevail over the DTAA. Though s. 91 applies only to a case where there is no DTAA, a literal interpretation will result in a situation where an assessee will be worse off as a result of the provisions of the DTAA which is not permissible under the Act. S. 91 must consequently be treated as general in application and must prevail where the DTAA is not more beneficial to the assessee. Accordingly, even an assessee covered by the scope of the DTAA will be eligible for credit of State taxes u/s 91 despite the DTAA not providing for the same.

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