Wrongly reported foreign salary in ITR? ITAT grants relief with one catch

A taxpayer who mistakenly reported his Australian salary in his Indian income tax return (ITR) has secured relief from the Delhi bench of the Income Tax Appellate Tribunal (ITAT), which ruled that the income was not taxable in India under the India-Australia Double Taxation Avoidance Agreement (DTAA). However, the tribunal also held that he could not claim a foreign tax credit (FTC) of ₹3.4 lakh for taxes paid in Australia because the income itself was not taxable in India.

According to an ET Wealth report, the taxpayer had earned a salary of ₹14.16 lakh while working in Australia during the relevant financial year. Although the salary was taxed in Australia, he inadvertently declared it as taxable income in his Indian ITR for Assessment Year (AY) 2020-21, leading to a tax dispute.

What happened in the case

As per the report, after realising the mistake, the taxpayer filed Form 67 to claim foreign tax credit for the taxes deducted in Australia and sought rectification under Section 154 of the Income-tax Act to exclude the Australian salary from his Indian taxable income. The Centralised Processing Centre (CPC), Bengaluru, rejected the rectification request.

The taxpayer then challenged the decision before the appellate authorities. Before the ITAT, his representatives argued that under Article 15 of the India-Australia DTAA, salary is generally taxable in the country where the employment is exercised. Since the services were rendered entirely in Australia, the salary should not have been taxed in India.

The Delhi ITAT accepted this argument and directed the assessing officer to exclude the Australian salary from the taxpayer’s total income.

Why foreign tax credit was denied

While granting relief on the taxability of the salary, the tribunal refused to allow the taxpayer’s claim for a foreign tax credit of ₹3,40,428.

The report said the tribunal reasoned that foreign tax credit is available only against income that is taxable in India. Since the salary was held to be exempt from Indian tax under the DTAA, there was no Indian tax liability against which the Australian taxes could be credited. As a result, the FTC claim also failed.

The report also noted comments from Mihir Tanna, Associate Director at S.K. Patodia LLP, who pointed out that the Income Tax Department relaxed the timeline for filing Form 67 through Notification No. 100/2022. From FY23 onwards, taxpayers can file Form 67 up to the end of the relevant assessment year to claim FTC, whereas earlier it had to be filed by the due date of the original ITR.

The ruling serves as a reminder that taxpayers with overseas income should carefully determine whether the income is taxable in India under the applicable DTAA before reporting it in their ITR. While genuine reporting errors may be corrected, claiming foreign tax credit is possible only where the corresponding income is liable to tax in India.