Unutilized Foreign Tax Credit isn’t a tax deductible expenditure: Ahmedabad ITAT

Facts:

a) Assessee pointed out that in terms of the Explanation 1 to Section 40(a)(ii), bar on deduction under section 40(a)(ii) is confined to only such income tax paid abroad in respect of which tax credit is granted under section 90 or 91. There is no bar on deduction under section 40(a)(ii) in respect of foreign tax for which no tax credit is available.

b) The issue before the Tribunal was as under:

‘Whether deduction under section 37(1) could be allowed in respect of foreign tax credit for which only partial credit was allowed in the current year?’ 

Tribunal held in favour of revenue as under:-

1) As per Explanation 1 to section 40(a)(ii), 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 and as per Explanation 1 to section 40(a)(ii) any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;

2) The scope of Explanations to Section 40(a)(ii), on which assessee had relied upon so much, it may be noticed that if the main provision 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. 

3) 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.

4) Therefore, in the event of assessee being allowed only partial tax credit in respect of taxes withheld abroad, he could not be allowed any deduction in respect of the balance of the taxes so withheld abroad under section 37(1). - [2017] 80 taxmann.com 6 (Ahmedabad - Trib.)