The Central Board of Direct Taxes (CBDT) vide notification No.91 dated 28/08/2008 has directed that where an agreement entered into by the central government with any foreign government for granting relief of tax or avoidance of double taxation provides that any income of resident of India may be taxed in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.

As a result of the aforesaid notification, wherever any income of a resident of India is also eligible for being taxed in the other country also with which India has signed a tax treaty for avoidance of double taxation, such a person will have to include such income as chargeable to tax in India and claim the relief in accordance with the tax treaty.

In other words, in the first step the income has to be shown as chargeable to tax and in the second step relief is to be granted as per the tax treaty. Even if the income is taxable outside India, the assessee must include it in the total income chargeable to tax in India. Relief as per tax treaty will be granted thereafter.

One fails to understand the intent and purpose of the above notification. It is reported that with a large number of foreign companies operating in India, the department has found that there are many cases where either they are not reporting their exempt income or under reporting it.

While the assessee can avail the same foreign tax credit even now, the tax department will get a much better understanding of his earnings, a finance ministry official explained.

It, however, sounds strange that an assessee should be required to add to his total income even that income which is not taxable in India by virtue of the fact that the same is taxable in a foreign country.

It is an internationally accepted principle of law that tax treaties supersede the domestic tax laws of both the treaty countries. Such treaties are a complete code in themselves. It is an agreement between two sovereign states and therefore above the individual domestic tax laws.

As observed by the Honble Supreme Court in case of Azadi Bachao Andolan (263 ITR of 706). The tax treaties are essentially a bargain between two countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions.

Thus if the Tax Treaties are supreme, how can the CBDT direct that such income which may be taxed in the other country must be included in the total income in accordance with the provisions of Income-tax Act.

It is also not clear as to how an assessee will take relief from double taxation. The format for electronic filing of return of income, which is mandatory now, does not have suitable columns or space for availing relief from double taxation.

It appears that CBDT in an overzealous efforts is trying to force the foreign enterprises to disclose in their Indian tax returns that income also which is taxable outside India. Therefore, a notification has been issued under Section 90(3) of the income-tax act without bothering to see that section 90(3) is meant to clarify by way of notification the terms not defined in the act. The said section cannot by any stretch of imagination be used to make disclosure of exempt income as mandatory.

The aforesaid notification is likely to create unnecessary confusion without any meaningful benefit to the Revenue. Therefore, it is felt that the CBDT should reconsider their decision and withdraw the notification which appears to be not only irrational but also illegal being without authority of law.