In the case of IFFCO Ltd.[1] (Taxpayer), the Taxpayer received the dividend income of INR113.86 crores from an Oman-based company. The foreign dividend was taxable under the head “income from other sources”. However, the Taxpayer claimed tax treaty benefit by way of tax sparing credit under Article 25 of the India-Oman Double Taxation Avoidance Agreement (DTAA), pursuant to which, effectively, no tax was paid on such income, either in India or in Oman. The tax authority sought to disallow expenditure incurred in relation to such foreign dividend under Section (S.) 14A, read with Rule 8D, which provides for disallowance of expenditure incurred in relation to income, which does not form a part of “total income”.
The Delhi High Court (HC) held that the words, “income which do not form part of the total income” are significant. The HC referred to its earlier ruling[2] where the HC had held that S.14A does not apply to the incomes which form part of the total income but are allowed as deduction and accordingly reduced while computing the total income.
The HC held that, in the instant case, dividend income earned from an Oman company is taxable under the head “income from other sources” and included in the “total income”. However, having included in the total income, a rebate of tax on such income is allowed in terms of the tax treaty and, resultantly, no tax is payable on such income. Merely because a rebate of tax is allowed, it does not result in such income not forming part of “total income”. Therefore, the HC held that S.14A will not apply in this scenario and no disallowance of expenditure can be made on such dividend income.
