Chennai Tribunal rules payment of foreign taxes is not an allowable deduction u/s. 37(1)

The Taxpayer (Zoho Corporation Private Limited^[1]), a private limited company, claimed deduction of taxes paid in foreign country against business income as entire amount of foreign taxes was not eligible for credit against the income tax payable in India. The claim was disallowed by the tax authority which was upheld by the first appellate authority as well.

On further appeal by Taxpayer, the issue before the Chennai Income Tax Appellate Tribunal (Tribunal or ITAT) was whether the taxes paid in foreign country, credit for which is not allowed under Section (s.) 90/ 91, is allowable as a deduction under Section (u/s.) 37 of the Income Tax Act (ITA).

The Chennai Tribunal ruled that taxes paid in foreign jurisdictions (whether or not eligible for relief u/s. 90/91) are not allowable as a deduction u/s. 37 of the ITA for the following reasons: 

• The sole objective of sections 90 and 91 is to avoid double taxation of the same income by granting credit for taxes paid in overseas jurisdiction. There are no provisions under the ITA that provides for deduction of excess amount of taxes paid in foreign jurisdiction which could not be claimed as credit. 
• S.40(a)(ii) clearly and unambiguously disallows the amount of taxes paid, while computing income under the head Profits and Gains from Business and Profession (PGBP). Further, Explanation 1 to s.40(a)(ii) clarifies disallowance for the amount eligible for relief u/s. 90 and 91. What cannot be claimed u/s. 90 and 91 does not become automatically allowable u/s 40(a)(ii).
• Allowing claim for the ineligible part of foreign taxes paid which could not be claimed under s. 90 or 91 as a deduction under s. 37, defeats the purpose of graded allowance prescribed under s. 90 and 91 of the ITA. Double Taxation Avoidance Agreements (DTAAs) which are deliberated at length before signing by the Contracting States for deciding their taxing rights, forms the basis for scheme of allowance prescribed u/s. 90/91.
• Relying on various judicial precedents^[2] , the Tribunal observed that income taxes paid is application of income and cannot be treated as having expended for earning profit or a charge against the profit. Further, the Taxpayer’s argument that “tax” as defined under s. 2(43) includes only domestic income taxes paid under the ITA 1961, is also not tenable on account of initial wordings of s. 2 which begins with a clause “in this Act, unless the context otherwise requires”. The expression ‘tax' in s. 40(a)(ii) must be taken in its contextual meaning which extends to any tax ascertainable with reference to the profits of the assessee. Further, reference to the word ‘any’ in the phrase 'any rate or tax levied' used in s.40(a)(ii) refers to any kind of tax levied or leviable on the profits or gains or assessed at its proportion. It necessarily takes into account taxes other than the tax under the ITA. Thus, the taxes paid in foreign jurisdiction is squarely hit by the mischief of section 40(a)(ii).

[1]TS-105-ITAT-2025(CHNY), ITA No.2957 /Chny/2018; Judgement dated 7 February 2025
[2]Madras High Court (HC) in CIT v. Kerala Lines Ltd. (1994) 74 Taxman 3 (Madras); Ahmedabad ITAT in DCIT v. Elite Core Technologies Pvt. Ltd. [2017] 165 ITD 153 (Ahmedabad - Trib.); Madras HC in Sundaram Industries Ltd. v. CIT [1986] 159 ITR 646 (Madras); Bombay HC in Lubrizol India Ltd. v. CIT (1991) 54 Taxman 363 (Bombay)