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2017 (10) TMI 308 - ITAT BANGALOREIncome deemed to accrue or arise in India - Addition holding that Federal Taxes withheld in the USA is part of Salary Income of the assessee - scope of total income for a resident in India is provided in Section 5(1) - P.E. in India - Held that:- Section 198 of the Act provides that the taxes which are deducted at source in accordance with the provisions of the Act is deemed to be income which is received. Accordingly, taxes deducted at source is deemed income as the same is not actually received by the assessee. There is no inclusion under Section 198 of the Act of the sums deducted at source abroad. Accordingly, there is no specific provision under the Act to include sums deducted abroad. • Additionally, Section 5(1)(c) of the Act defines the concept of total income which covers only income accrues or arises to him outside India during such year. Scope of income under Section 5(1)(c) does not include income which is deemed to accrue or arise outside India. • Therefore, tax deducted abroad is neither income which is accruing or arising outside India nor there is any provision similar to Section 198 to cover taxes deducted at source abroad. Accordingly, taxes deducted at source abroad is not taxable in India in the absence of any specific provision under the Act. For clause (c) of section 5(1), grossing up of income is not required and only net income after TDS is to be taxed in India but for granting the benefit of Federal tax withheld in USA, the same has to be quantified as per Article 25 of Indo US DTAA. Section 9(1)(ii) of the Act states that when services are rendered in India, salary for such services are earned in India. On a converse interpretation of this section, if services are rendered outside India, then salary for such services is earned outside India and it cannot be construed as accruing in India. Based on the above, during the Appellant's tenure of employment with FIS, he was rendering services outside India and salary was earned outside India. Since, the A.O. has determined the amount of credit of tax paid in USA after including the US tax amount as an income taxable in India; this issue has to go back to his file for a fresh decision. Hence, set aside the order of CIT (A) and restore the matter back to the file of the AO for a fresh decision with the direction that the tax withheld in USA (Federal and State Tax) should not be added back to quantify the income taxable in India as held by Hon’ble M. P. High Court in the case of CIT vs. Yawar Rashid [1995 (12) TMI 68 - MADHYA PRADESH High Court] of the assessee and relevant Para reproduced above. The amount of foreign tax credit to be allowed to the assessee should be quantified afresh as per Article 25 of Indo US DTAA after providing adequate opportunity of being heard to the assessee because foreign tax credit cannot exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States. Taxable salary income in India we follow the judgment of Hon’ble Delhi High Court rendered in the case of CIT vs. Lala Sridhar [1971 (3) TMI 21 - DELHI High Court] and hold that this is not taxable because it cannot be said that it has accrued or arisen in the absence vested right.
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