Income Tax, Issue Update

Claim of Foreign Tax Credit by Resident but not ordinarily resident

Case: Aditya Khanna vs Dy. DIT, Delhi ITAT

This case deals with the claim of Foreign Tax Credit by Resident but not ordinarily resident.

A resident tax payer is eligible to claim Foreign Tax Credit if any tax has been paid by him in a foreign jurisdiction. Section 6 of the income tax act provides for qualification of the persons who are residents in India. The provisions of section 6(6) carves out another category of person in Residents who is said to be not ordinarily resident in India. However such persons are also resident. 

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Facts

  • The Assessee was an individual, not ordinarily resident in India, who declared his income under the head salaries for the proportionate period for which he was employed with his employer in USA M/s Allen & Co USA. Assessee filed his return of income on 21.07.2011 declaring total income of Rs. 86.26 lakhs and claimed refund of Rs. 4 lakhs. The Assessee stayed in India for 224 days. Therefore, the Assessee’s total salary income of Rs. 1.42 crores for 365 days was offered for taxation in India for 224 days proportionately at Rs. 87.29 lakhs. Originally the Assessee claimed total tax liability of the Assessee in proportion to salary income offered for taxes in India at Rs 28.55 lakhs and thereafter tax credit for taxes paid in USA was claimed. The total tax liability in India was computed at Rs 25.15 lakhs and Assessee claimed foreign taxes paid in United States against the salary of Rs. 28.55 lakhs restricted up to the amount of tax payable of Rs. 25.15 lakhs. Advance tax paid by the Assessee of Rs 4 lakhs was claimed as refund due.
  • The amount of the foreign taxes paid by the Assessee was federal income tax deducted of US dollars 69.80 thousand amounting to Rs. 32.07 lakhs, credit of alternate minimum tax of USD 10.122 thousand amounting to Rs. 4.61 lakhs and local taxes of New York State tax and local city tax net of refund of USD 21.54 thousand amounting to Rs. 9.82 lakhs resulted into the total foreign tax credit claimed by the Assessee of Rs. 46.52 lakhs. As Assessee has offered proportionate tax on salary for 224 days Assessee also claimed the proportionate tax credit for 224 days out of 365 days computed at Rs. 28.55 lakhs which was restricted to the amount of Indian tax liability. The Assessing Officer noted that total tax paid by the Assessee was of Rs. 36.69 lakhs and proportionately for 224 days the Assessee would be entitled to the tax credit of only Rs. 22.51 lakhs. Accordingly, the Assessing Officer accepted the returned income of the Assessee at Rs. 86.26 lakhs. However, he granted the credit of the foreign taxes paid to the extent of only Rs. 22.51 lakhs. Accordingly the assessment order under section 143 (3) of the act was passed on 26.03.2014.

Key points

  • The provisions of section 91(1) provides relief/ deduction of taxes paid with respect to a person who is a ‘resident’ in India. The provisions of section 91(2) also deals with the person who is a ‘resident’ in India. The provisions of section 91(3) deals with the person who is a ‘non-resident’. The provisions of section 6 of the income tax act provides for qualification of the persons who are residents in India.
  • The provisions of section 6 (6) carves out another category of person in ‘Residents’ , who are said to be ‘not ordinarily resident’ in India. However, such persons are also ‘Resident’. This category is called ‘resident but not ordinarily resident’ in India. Therefore, persons who are ‘resident but not ordinarily resident’ in India form larger group of the persons who are ‘resident’ in India. Hence, it was inferred that even the resident, but not ordinarily resident in India can also claim foreign tax credit in respect of taxes paid outside India.

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