Deduction u/s 37(1) cannot be Allowed in respect of Income Tax withheld Abroad: ITAT Ahmedabad [Read Order]

DRP- ITAT

In DCIT v. Elitecore Technologies Private Limited, the Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that Deduction under section 37(1) of the Income Tax Act cannot be allowed in respect of any income tax withheld abroad as the same are covered by section 40(a)(ii) of the Income Tax Act.

Assessee-Company, in the present case, paid commission to its non-resident agents without paying TDS. While completing assessment, the AO found the payment suspicious in the absence of supporting documents. He also found that since right to receive commission income accrued in India, the income is deemed to accrue or arise in India.He also found that since CBDT circular no. 23, holding that commission income in the hands of the non residents is not taxable in India, stands withdrawn, the assessee was under an obligation to either deduct tax at source from foreign remittance or obtain the permission of the AO for making the remittances without TDS under section 195 of the Act. Accordingly, the AO disallowed the commission payments made by the assessee by invoking s. 40(a)(i). The CIT(A) reversed the order, and therefore, the Revenue preferred an appeal before the Tribunal.

Before the Tribunal, the assessee contended that the Explanations to Section 40(a)(ii) refer only such taxes paid outside India in respect of which relief under section 90 and 91 are available, and it cannot be open to extend the scope of what is covered by Explanations to Section 40(a)(ii). It was contended that for the purpose of section 40(a)(ii), the definition of ‘tax’ must be the same as is assigned to ‘tax’ under section 2(43) of the Act. It is for this reason that tax paid outside India, not being tax levied under the Indian Income Tax Act, is said to be intact from the bar placed under section 40(a)(ii) of the Act. as per section 40(a)(ii), “any sum paid on account of any rate of tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains” shall not be allowed as a deduction, inter alia, under section 37(1) of the Income Tax Act.

The Revenue, on the other hand, argued that the connotations of expression ‘tax’ in section 40(a)(ii) must be taken in its contextual meaning which extends to any tax ascertainable with reference to the profits of the assessee as evident from the wordings of section which refer to “any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”, and that its connotations cannot be treated as restricted to tax under the Income Tax Act.”

Based on the case laws, the bench rejected the contentions of the assessee. Verifying the scope of Explanations to Section 40(a)(ii), the bench said that “if the main provision, as is the claim of the learned counsel, does not cover the taxes paid abroad, there cannot be any occasion to include, under Explanations to Section 40(a)(ii), taxes in respect of which relief under section 90 and 91 is not admissible. These Explanations do not extend the scope of the Section 40(a)(ii) but rather explain the scope of the said section. If something is covered by the Explanation, it cannot be said that it is not covered by the main provision. If taxes in respect of which tax credit under section 90 or 91 are covered by the proviso, these are covered by the scope of Section 40(a)(ii) as well. And if these taxes are covered by Section 40(a)(ii), the theory that meaning of ‘tax’ under section 40(a)(ii) must remain confined to the taxes levied under Income Tax Act, 1961 comes to a naught since the taxes in respect of which credits are available under section 90 or 91 cannot be, under any circumstances, imposed under the Indian Income Tax Act.”

In view of the above findings, the bench held that no deduction under section 37(1) can be allowed in respect of any income tax withheld abroad as the same will be, for the detailed reasons set out above, hit by the disabling provisions under section 40(a)(ii) of the Act.

While quashing the order of the CIT(A), the bench further directed that “as a result of our directions earlier in this order, in the event of assessee being allowed only partial tax credit in respect of taxes withheld abroad, the assessee cannot be allowed any deduction, in respect of the balance of the taxes so withheld abroad, under section 37(1) of the Income Tax Act.”

Read the full text of the order below.

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