One of the incidental issues arising out of source-based taxation is regarding the allowability of taxes paid on business receipts in source jurisdiction as a business deduction under Section 37(1) of the IT Act, especially in view of the exclusion carved out under Explanation 1 to Section 40(a)(ii)1 of the IT Act.
Section 37(1) of the IT Act provides that any expenditure, other than a capital expenditure, which is laid out wholly & exclusively for the purpose of business may be allowed as a deduction whilst computing the business income of an assessee. However, Section 40(a)(ii) of the IT Act, excludes any taxes paid on profits or gains from business or profession, from the ambit of allowable business expenditures. In addition, thereto, under Explanation 1 to Section 40(a)(ii), taxes paid in foreign jurisdictions which are eligible for relief of tax under Section 90/91 of the IT Act, have also been excluded from the purview of allowable business expenses.
In such a scenario, the issue that arises for consideration is where the taxpayer is unable to claim benefit/relief of taxes paid in foreign jurisdiction owing to the restrictions envisaged in Sections 90/91, whether the said taxes can be claimed as a deduction under Section 37(1) of the IT Act.
This issue has been a matter of judicial debate and diverse positions have been adopted by different forums. Under the erstwhile Act2, the word “tax” was not defined and in the absence of any definition, the Hon'ble
However, with the enactment of the IT Act (i.e., the statute presently in force), which defines the term “tax” to mean and include “income tax chargeable under the provisions of this Act”4, the position with respect to the allowability of the foreign taxes as a business deduction, was also altered.
The
The ratio laid down in the case of
However, it would be relevant to highlight here that the Ahmedabad Bench of the Tribunal in a subsequent decision rendered in the case of DCIT v.
Though the judicial opinion is divided, in the absence of any contrary ruling from a
- Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—
(a) in the case of any assessee—
(ii) any sum paid on account of 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.
Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under Section 90 or, as the case may be, deduction from the Indian income-tax payable under Section 91.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under Section 90A.
[Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax;]”
Footnotes
1 Amounts not deductible.
2 The Income Tax Act, 1922.
3 [1963] 47 ITR 284 (Bom. HC).
4 Refer Section 2(43) of the IT Act.
5 [2017] 390 ITR 271 (
6 [2022] 145 taxmann.com 134 (Ahmedabad - Trib.).
7 [2017] 58 ITR(T) 131 (Ahd. Trib.).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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