DR.RAJIV I.MODI,AHMEDABAD vs. THE DY.CIT.,(OSD) RANGE-1,, AHMEDABAD

ITA No. 1285/Ahd/2014 Dr Rajiv I Modi vs. DCIT Assessment year: 2010-11 Page 3 of 6 treaty], to show that the tax credits under the India US tax treaty are restricted to credits in respect of federal income tax paid in the United States. It was also submitted that under the India Canada Double Taxation Avoidance Agreement, tax credits are admissible only in respect of tax paid under the ‘Income Tax Act of Canada’ whereas state income taxes are levied under separate provincial legislations. It could not, according to the learned counsel, result in a situation in which an income tax payment cannot have any tax implication – neither as a charge on income, nor as an allocation of income. While rejecting these arguments, and allowing the appeal of the Assessing Officer on this issue, we had, inter alia, observed as follows: “20. Learned counsel has also contended that in any event, we must allow deduction in respect of state income-taxes paid in USA and Canada as relief is not admissible in respect of the same in respective tax treaties. We have been taken through India USA tax treaty to point out that tax credits are admissible only in respect of Income-tax levied by the federal Government and not by the State Governments. It is contended that since no relief is admissible in respect of state taxes under section 90 or section 91, these taxes will continue to be tax deductible, and to that extent, decisions of the coordinate benches will hold good. We are unable to see legally sustainable merits in this submission either. Apart from the fact that such a claim of deduction is clearly contrary to the law laid down by Hon’ble jurisdictional High Court in Lubrizol India Ltd.’s case (supra), there is another independent reason to reject this claim as well. The reason is this. It is only elementary that tax treaties override the provisions of the Income-tax Act, 1961, only to the extent the provisions of the tax treaties are beneficial to the assessee. In other words, a person cannot be worse off visa-vis the provisions of the Income-tax Act, even when a tax treaty applies in his case. Section 90(2) states that even in relation to the assessee to whom a tax treaty applies “the provisions of this Act shall apply to the extent they are more beneficial to that assessee”. Undoubtedly, title of section 91 as also reference to the countries with which India has entered into agreement, suggests that it is applicable only in the cases where India has not entered into a double taxation avoidance agreement with respective jurisdiction, but the scheme of the section 91, read alongwith section 90, does not reflect any such limitation, and section 91 is thus required to be treated as general in application. The scheme of the Income-tax Act is to be considered in entirety in a holistic manner, and each of the section cannot be considered on standalone basis. It is important to bear in mind the fact that so far as section 91 is concerned, it does not discriminate between taxes levied by the Federal Governments and taxes levied by the State Government. The Income-tax levied by different States in USA usually ranges from 3 per cent to 11 per cent, and the aggregate Income-tax paid by the assessee in USA will range from 38 per cent to 46 per cent. Therefore, on the facts of the present case and bearing in mind the fact that the Federal Incometax in USA at the relevant point of time was lesser in rate at 35 per cent vis-avis 38.5 per cent Income-tax rate applicable in India, the admissible double taxation relief under section

ITA No. 1285/Ahd/2014 Dr Rajiv I Modi vs. DCIT Assessment year: 2010-11 Page 4 of 6 91 will be higher than relief under the tax treaty. It will be so for the reason that State Income-tax will also be added to Income-tax abroad, and the aggregate of taxes so paid will be eligible for tax relief - of course subject to tax rate on which such income is actually taxed in India. The tax relief under section 91 thus works out to at least 38 per cent, as against tax credit of only 35 per cent admissible under the tax treaty. In such a situation, the assessee will be entitled to relief under section 91 in respect of federal as well as state taxes, and that relief being more beneficial to the assessee vis-a-vis tax credit under the applicable tax treaty, the provisions of section 91 will apply to state Income-taxes as well. The state Income-tax is also, therefore, covered by Explanation 1 to section 40(a)(ii), and deduction cannot be allowed in respect of the same. Finally, in view of Hon’ble Bombay High Court’s judgment in S. Inder Singh Gill’s case (supra), Income-tax abroad cannot be allowed as a deduction in computation of income and this judgment does not discriminate between federal and state taxes either. Interestingly, state Income-taxes paid in USA, subject to certain limitations, are deductible in computation of income for the purposes of computing federal tax liability in USA, but that factor cannot influence deductibility of these taxes, particularly in the light of the provisions of Explanation 1 to section 40(a)(ii) and in the light of Hon’ble Bombay High Court’s judgment in S. Inder Singh Gill’s case (supra), in computation of business income under Indian Income-tax Act. For all these reasons, we are unable to uphold the plea of the assessee seeking deduction of at least state Income-tax paid in USA.” 4. Having so held that deduction in respect of state income tax paid is not admissible, when we took up the appeal of the assessee and noticed that the assessee has not pressed grievance against tax credit in respect of state income tax paid in USA and Canada, for the stated reason that the same is not admissible in terms of the Indo US and Indo Canada tax treaty provisions, we deemed it appropriate to once again hear the parties on this issue. In our considered view, it is indeed an incongruous position that payment of state income taxes in US and Canada are not allowed deduction as these are treated as in the nature of taxes on income, in terms of the provisions of domestic tax law in India, and these payments are also not being taken into account for granting credit for taxes paid abroad by the assessee, as only federal income tax is eligible for tax credit in terms of the Indo US and Indo Canada tax treaty. If this approach is adopted, the assessee does not get a deduction for state taxes so paid abroad, nor does he get the tax credit for the same, and if these two propositions are correct, there is clearly an inherent contradiction in these propositions on tax treatment for state income taxes paid abroad. There cannot obviously be a tax payment which is neither treated as admissible expenditure, because it is treated as an income tax, nor is it taken into account for tax credits, because it is not to be treated as income tax. However, as we have observed in our order on the cross appeal, extracts from which are reproduced in the preceding paragraph, it is incorrect to proceed on the assumption that state income tax paid in USA, or for that purpose paid in Canada, cannot be taken into account for the purposes of computing admissible tax credits. It is so for the elementary reason that the

ITA No. 1285/Ahd/2014 Dr Rajiv I Modi vs. DCIT Assessment year: 2010-11 Page 5 of 6 provisions of a tax treaty, based on which tax credits are said to be inadmissible, cannot be pressed into service to decline a benefit to the assessee which is otherwise available to him, even in the absence of such a tax treaty, under the provisions of the Income Tax Act. 5. Even as we have held that, in principle, state income taxes paid in USA are eligible for being taken into account for the purpose of computing admissible tax credit under Section 91, we are alive to the fact that Section 91 refers to a situation in which the assessee has paid tax “in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation” and that there is indeed an agreement under section 90 with United States of America, as also with Canada. If we adopt a literal interpretation of this provision, and bearing in mind the undisputed position that tax credit provisions under section 91 are more beneficial to the assessee vis-à-vis the tax credit provisions in related tax treaties inasmuch as while section 91 permits credit for all income taxes paid abroad – whether state or federal, relevant tax treaties permit credits in respect of only federal taxes, it will result in a situation that an assessee will be worse off as a result of the provisions of tax treaties. That certainly is not permissible under the scheme of the Income Tax Act. Circular 621 dated 19-12-1991 [(1992) 195 ITR (Statutes) 154] issued by the Central Board of Direct Taxes, which is binding on the Assessing Officer under section 119(2) of the Act, inter alia , observes that “Since the tax treaties are intended to grant relief and not put residents of a Contracting State at a disadvantage vis-a-vis other taxpayers, section 90 of the Income-tax Act has been amended to clarify any beneficial provision in the law will not be denied to a resident of a contracting country merely because corresponding provision in a tax treaty is less beneficial”. In the case before us, however, tax credit provisions in Indo US tax treaty are admittedly less advantageous to the assessee, but just because there is a tax treaty between India and USA, the benefits of the domestic law provisions are being declined to the assessee. That is an interpretation which leads to absurdity and calls for an interpretation harmonious with the scheme of the Income Tax Act. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is also clear from the provisions of section 90(2) of the Act. Section 90(2) makes it clear that “where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee” meaning thereby that the Act gets modified in regard to the assessee in so far as the agreement is concerned if it falls within the category stated therein. It would thus appear that the treaty override is only restricted to the extent it is beneficial to a taxpayer. In other words, the fact that a taxpayer is entitled to make a particular claim, in accordance with a tax treaty provisions, does not disentitle him to make the claim in accordance with the provisions of the Act. In this view of the matter, and further to the observations made by us in our order on the cross appeal, in our considered view, the provisions of Section 91 are to be treated as general in application and these provisions can yield to the treaty provisions only to the extent the provisions of the treaty are beneficial to the assessee;

ITA No. 1285/Ahd/2014 Dr Rajiv I Modi vs. DCIT Assessment year: 2010-11 Page 6 of 6 that is not the case so far as question of tax credits in respect of state income taxes paid in USA are concerned. Accordingly, even though the assessee is covered by the scope of India US and India Canada tax treaties, so far as tax credits in respect of taxes paid in these countries are concerned, the provisions of Section 91, being beneficial to the assessee, hold the field. As Section 91 does not discriminate between state and federal taxes, and in effect provides for both these types of income taxes to be taken into account for the purpose of tax credits against Indian income tax liability, the assessee is, in principle, entitled to tax credits in respect of the same. Of course, as is the scheme of tax credit envisaged in Section 91, tax credit in respect of foreign income tax is restricted to actual income tax liability in India, in respect of income on which taxes have been so paid abroad.” 6. We have noted that the concerned CIT(A) has declined to follow the decision of the Tribunal even though he was fully aware of the same. Merely because a judicial precedent is challenged in further appeal, the precedence value of such a judicial precedent does not get diluted. The stand of the CIT(A), in conscious disregard of a binding judicial precedent, cannot but be condemned. Be that as it may, in any event, we see no reason to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we uphold the plea of the assessee in respect of the credit for the state tax paid in the USA. This is, however, subject to the rider that the credit for all taxes paid abroad in any case cannot exceed the Indian income-tax liability in respect of the same income. While giving effect to this order, the Assessing Officer will verify this aspect of the matter. With these observations, the matter stands restored to the file of the Assessing Officer for granting admissible relief, if any.

Sd/- Sd/-

Rajpal Yadav Pramod Kumar (Judicial Member) (Accountant Member) Ahmedabad, the 21st day of September, 2017 **bt Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order