Appeal which was admitted by Karnataka High Court (‘HC’) over allowability of taxes paid in foreign countries as expenditure under Section 37(1) where credit against such taxes is not allowed under Sections 90 and 91 of the Income Tax Act, 1961.

The appeal was admitted in the HC based on the following Question of Law:

“Whether, on the facts and circumstances of the case and on the grounds raised, the taxes paid by the Appellant to foreign Governments and authorities, in respect of which credit has not been given under Sections 90 and 91 of the Act read with the applicable DTAAs, should be allowed as a deduction from the business income of the Appellant given that it is unquestionably expenditure which has been incurred by the Appellant wholly and exclusively for the purposes of its business and is, therefore, eligible for deduction under Section 37 of the Act? “

Assessee relied on Bombay HC ruling in Reliance Infrastructure where the denial of foreign tax credit was upheld but the taxes were allowed as expenditure under Section 37(1) by applying the ‘real income theory’.