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Section 91 of Income Tax Act with Example

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June 17, 2022

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22 mins read

Section 91 of Income Tax Act with Example

Countries With Which No Agreement Exists – Unilateral Agreements – Section 91 of Income Tax Act

i. Conditions for claiming relief u/s 91(1) of Income Tax Act : –

While India has double taxation avoidance agreement with many countries in the world, there may be certain countries,  with which, India does not have a tax treaty, whether Limited or Comprehensive .

Where any income arises, to an Indian tax resident, in a country with which India does not have any DTAA, the question which arises is, if such assessee has paid tax in the foreign country, would the same income be taxed again in India ? The answer to this question lies in section 91 of the Income Tax Act, which provides relief from double taxation in such cases.

In such cases, the relief would be granted under Section 91, where all the following conditions are fulfilled . Failure to satisfy even one of these conditions would result in denial of the benefit under section 91. : –

  1. Residential status – India :- Assessee is a tax resident in India , during the relevant PY , in which the income is taxable in India .
  2. Income accrues or arises outside India :- Income accrues or arises to him outside India , and is not deemed to accrue or arise in India during the previous year. If the income is , deemed to accrue or arise in India during the previous year, it would be taxable under the provisions of the Income Tax Act. No benefit of section 91 would be given in such a case.
  3. Payment of tax overseas :- Assessee has been subjected to income-tax on such income in foreign country and has paid tax thereon in foreign country. This would imply, that if no tax paid in the Overseas jurisdiction, these provisions will not be applicable.
  4. No Indian DTAA :- India does not have any agreement for relief from double taxation with the country where income has accrued or arisen.

ii) Computation of Relief under section 91(1) of Income tax Act

Assessee shall be entitled to a DEDUCTION from the Indian income-tax payable as under : –

Where the tax rates in India are different from the tax rate in the other country

  • A sum calculated on such doubly taxed income at the Indian rate of tax (i. e., average rate of income-tax) or the rate of tax in the said country, whichever is lower, or

Where the tax rates in India  and other country  are equal at the Indian rate     of tax if both the rates are equal .

Section 91 of Income Tax Act – Example 1 – No DTAA With Country

A received certain consultancy income which accrued and arose in Country X, wherein tax @ 10% has been withheld under local laws of Country X, as no Treaty exist between India and Country X. As A is tax resident of India, he is liable to tax in India , on his global income in India. Can he claim credit for tax withheld in Country X ?

Solution: –

Section 91 specifies that if a person resident in India, has paid tax in any country with which no DTAA (Treaty) under section 90 exists, then, for the purpose of relief or avoidance of double taxation, a deduction is allowed from income-tax payable by him, of a sum calculated on such doubly taxed income –

  1. At Indian rate of tax or the rate of tax of such foreign country, whichever is lower, or
  2. At the Indian rate of tax, if both the rates are equal .

In the present case, the assessee shall be allowed a deduction from the Indian income-tax payable by him as per Section 91 since : –

  • A is a resident of India;
  • He has paid tax in Country X
  • India does not have a DTAA (Treaty) with Country X
  • Such income accrued or arises to him outside India  during the previous year.

Section 91 of Income Tax Act – Example 2 – No DTAA With Country – Relief Average Rate of Tax

Mahesh, an Individual resident in India, is a famous anchor and host deriving income of Rs 2,00,000 from work performed outside India during the PY 2017-18 on which tax of Rs 20,000 has been deducted. India does not have any DTAA with that country where tax has been deducted. His income in India amounted to Rs 4,00,000. He has contributed Rs 1,00,000 in PPF and paid a life insurance premium of Rs 1,00,000.  Compute the tax liability of Mahesh for the Assessment Year 2018-19?

Solution: –

Where any income arises to an assessee in countries, with which India does not have any double taxation agreement, relief would be granted under Section 91 provided all the following conditions are fulfilled : –

  1. Assessee is a tax resident in India during the previous year in which the income is taxable .
  2. Income accrues or arises to him outside India .
  3. Income is not deemed to accrue or arise in India during the previous year .
  4. Such income has been subjected to income-tax in the foreign country in the hands of the assessee .
  5. Assessee has paid tax on the income in the foreign country.

International Taxation Services

Since all the above conditions are satisfied, Mahesh is eligible for deduction u/s 91 .

Computation of total income of Mahesh for the AY 2018-19

Particulars Amount
Indian income 4,00,000
Foreign income 2,00,000
Total 6,00,000
Less: Deduction under Section 80C
Contribution in PPF 1,00,000
LIC premium 1,00,000
Total payment 2,00,000
Aggregate Deduction should be restricted to Rs 1,50,000 1,50,000
Total Income 4,50,000

Tax on Total income

Particulars Amount Amount
Total Income 4,50,000
Income Tax 10,000
Add: Education Cess     200
Add: SHEC     100
Total Tax 10,300
Average rate of tax in India

(10,300/4,50,000) X 100

2 .289%
Average rate of tax in foreign Country

(20,000/2,00,000) X 100

10%
Rebate u/s 91

Rs 2,00,000 X 2 .289% (lower of 2 .289% and 10%)

4,578
Tax payable in India (10,300 -4,578) 5,722

Section 91 of Income Tax Act – Example 3 – No DTAA With Country – Relief – Average Rate of Tax – Two Countries Deduction

Ramesh, an Individual resident in India, earned following income in India, Country A and Country B:

Income from business carried out in India (Net income after deducting expenditure) 9,00,000
Gross royalty income from Country A 5,00,000
Expenses incurred to earn royalty 10,000
Rental income from house situated in Country B 4,00,000
Municipal taxes paid on aforesaid house 30,000

India does not have a DTAA with Country A and Country B . Tax rates in Country A and Country B are 5% and 20%, respectively . Compute the total income and tax payable by Ramesh for AY 2018-19 ?

Solution: –

Where any income arises to an assessee in countries, with which India does not have any double taxation agreement, relief would be granted under Section 91 provided all the following conditions are fulfilled : –

  1. Assessee is a tax resident in India during the previous year in which the income is taxable .
  2. Income accrues or arises to him outside India .
  3. Income is not deemed to accrue or arise in India during the previous year .
  4. Such income has been subjected to income-tax in the foreign country in the hands of the assessee .
  5. Assessee has paid tax on the income in the foreign country .

Since all the above conditions are satisfied, Mahesh is eligible for deduction u/s 91 .

Computation of Total Income of Ramesh for the AY 2018-19

Particulars Amount Amount
INCOME FROM HOUSE PROPERTY
Gross Annual Value* 4,00,000
Less: Municipal tax 30,000
Net Annual Value 3,70,000
Less: Standard deduction u/s 24 [30% X 3,70,000] 1,11,000
2,59,000
PROFIT AND GAINS FROM BUSINESS OR PROFESSION IN INDIA 9,00,000
     
INCOME FROM OTHER SOURCES
Royalty income from Country A (after deduction Rs 10,000 expenditure) 4,90,000
Gross Total Income 16,49,000
Less: Deduction under Chapter VIA  u/s 80QQB 3,00,000
Total Income 13,49,000

* Rental income has been assumed as Gross Annual Value

Computation of tax liability of Ramesh for the AY 2018-19

Particulars Amount Amount
Tax on total income 2,17,200
Add: Education Cess 4,344
Add: SHEC 2,172
2,23,716
Less: Rebate u/s 91 (See Working note) 52,442
Tax payable 1,71,274
Tax payable (Round off) 1,71,270

International Taxation Services 

Working Note

Particulars Amount Amount
Average rate of tax in India

(2,23,716/13,49,000) X 100

16 .58%
Average rate of tax in Country A 5%
Doubly taxed income pertaining to Country A
Royalty income  [ Rs 5,00,000 – Rs 10,000 – Rs 3,00,000] 1,90,000
Rebate u/s 91 on Rs 1,90,000 @ 5% [lower of 5% and 16 .58%] 9,500
Average rate of Tax in Country B 20%
Doubly taxed income pertaining to Country B 2,59,000
Rebate u/s 91 on Rs 2,59,000 @ 16 .58% (lower of 16 .58% and 20%) 42,942
Total rebate u/s 91 52,442

Deduction of tax paid on agricultural income in Pakistan – Section 91 of Income Tax Act

Any person, who is resident in India, who proves that he has agricultural income in Pakistan, and such person paid tax in Pakistan (by deduction or otherwise), such person shall be entitled to a deduction from the Indian income-tax payable by him.

Deduction shall be lower of following amounts : –

  1. The amount of the tax paid in Pakistan under any law on such income which is also taxable under IT Act ; or
  2. Sum calculated on that income at the Indian rate of tax (i.e., average rate of income-tax).

Deduction in Respect of a Non resident share in the income of a registered firm resident in India – Section 91(3) of Income Tax Act

In order to understand this case, let us take an example : –

  • An Indian Firm , tax resident in India, derives certain income from Country X, with which India does not have a DTAA, and pays tax on such income in country X ;
  • A non-resident, has a share in the income of the Indian firm ;
  • The non-resident has paid tax in Country X, on such income of the Indian firm. ;

Section 91(3) of Income Tax Act

In light of the above, lets evaluate the provision of Section 91(3).

Section 91(3) provides that where a non-resident assesse (NR), has a share in the income of a registered firm (Indian Firm),  which is assessed as resident in India  in any previous year, and such NR has paid  income-tax in respect of such income derived by registered firm in country where the income had arisen (Country X) , he shall be entitled to a deduction of tax provided all the following conditions are fulfilled –

  1. The share income from the firm should include income accruing or arising outside India during that previous year;
  2. Such income should not be deemed to accrue or arise in India;
  3. The income should accrue or arise in a country with which India has no agreement under section 90 for the relief or avoidance of double taxation;
  4. The assessee should have paid income-tax in respect of such income according to the law in force in that country.

Where the above conditions are satisfied, the assessee will be entitled to a deduction as under : –

  • Sum calculated on such doubly taxed income so included, at the Indian rate of tax or the rate of tax of the said country, whichever is lower, or
  • at the Indian rate of tax, if both the rates are equal .

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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