Introduction

In December 2025, the Mumbai bench of the Income Tax Appellate Tribunal (‘ITAT’) adjudicated on the matter of availment of Foreign Tax Credits (‘FTC’)sought to be utilized on total income (of the resident country) that is assessed in a year different from the year in which the tax on the foreign income (earned in the source country) is assessed, by allowing a carry-over of the credit amount to that year. The ITAT permitted a carry forward and set-off of FTC from the previous year, for avoiding double taxation due to FTC disentitlement, though related to a different Assessment Year (‘AY’). The decision mirrored the preamble of the Double Taxation Avoidance Agreement (‘DTAA’) (signed with the foreign country in context) as envisaged by the OECD, which is to eliminate double taxation in all facets, but the same essence was not applied in other similar cases that deemed its application necessary.

This piece will explain the need to dignify the ITAT’s stance with a clear provision for carry forward of FTCs in the new Income Tax legislation (effective April 2026) with the aid of relevant precedents, and foreign tax law as a benchmark.

Credence in credits- The purpose of FTCs

One of the most significant concerns in cross border transactions is double taxation, where the same income is taxed both in the jurisdiction where it is earned and in the taxpayer’s country of residence. To thwart this, countries enter into DTAAs, and for avoiding taxing the same amount twice, a credit on the tax paid on foreign income is granted to the resident country, which can be utilized to reduce the amount of tax to be paid on total income. Section 90 and 91 of the Income Tax Act, 1961 (‘Act’) read with Rule 128 of the Income Tax Rules, 1962 respectively provide for DTAAs, and the entitlement of FTCs in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India. The rule was applicable from AY 2017-18.

According to the Institute of Chartered Accountants of India’s guide on FTC mechanism, India follows the ordinary credit method of calculation. An example may enable better understanding. Say, Anand derives an income of GBP 1,000 (INR 1,08,000) from UK (X) and 10% tax has been withheld by the UK Payee. Further, Mr. A also has Indian taxable income of INR 10,00,000 (Y). In this case, Mr. A shall calculate tax on total income (X+Y) amounting to

INR 11,08,000. The gross tax liability (Z) would be INR 1,44,900, and average Indian tax rate comes out as 13% (Z/X+Y) in comparison to the 10% withheld by foreign payee. In this case, the entire foreign tax amount would be available as FTC as the Indian tax rate is higher than that of the UK. However, if vice versa, the FTC would be the amount calculated as a percentage (being the Indian tax rate) of the foreign income. The tax credit available comes down to INR 10,800. So, net tax payable would be INR 1,34,100 in the hands of Anand.

DTAA and the Law- BOI case and principles of interpretation

The functioning of FTC is not always streamlined. Timing mismatches between taxation in different jurisdictions can create what is often described as an “FTC trap”. The case of Bank of India (‘BOI case’) illustrates this vividly. In AY 2012-13, the bank earned profits from its foreign branches located in jurisdictions such as the US and paid substantial foreign taxes on these profits. However, when its global income was computed in India, the bank suffered an overall loss. As recorded by the tribunal in para 6 of the order, “the computation of the assessee’s global income… resulted in a net loss… and the assessee does not, therefore, have any tax liability in India in respect of its income.” Because there was no Indian tax liability, the bank could not utilize the FTC and attempted to claim a refund of the taxes paid abroad, from the Revenue. The ITAT rejected this claim, stating that relief for foreign taxes operates only against Indian tax payables, in the light of absence of a provision of refund in the law.

It bears note that if foreign tax is paid in a year in which the taxpayer has no tax liability in the residence country, the credit though availed, becomes unusable. The question of carry forward also remained unaddressed in this case. The situation was preceded by similar ones, being Wipro Ltd (related to AY 2004-05) and HCL comnet systems (related to AY 2010-11) in which though FTC was allowed in the AY, it was economically unusable due to nil tax liability. FTC was mainly allowed on paper, by the provisions of Section 90 of the Act, and based on the “chargeability of tax” and not the “liability of tax” payable, as held in the recent case of Canon India (AY 2005-06).

The bank pursued the FTC in the next year rather than enjoying a deduction of the foreign tax amount (as a business expense) based on the warning of the tribunal, that if the bank were to use the deduction, its future claim for the FTC might be inadmissible. The FTC directly addressed the increase in future tax liability, which is due to less ‘carry forward’ loss caused by the previous year’s foreign profits—a financial “hit” that only materialized once the bank becomes profitable again. This was held as premature by the ITAT, as a mere possibility of gain cannot drive tax reliefs. Evidently, when profits arose in FY 2013-14, the bank had less loss available for set-off which increased its Indian taxable income. As a result, the bank contended that the foreign taxes paid earlier should now be allowed as credit. Surprisingly, this was decided in the affirmative in 2025 by a ruling, in which the ITAT, allowed the carry forward of credit with the quantum to be assessed by the Assessing Officer.

In paras 11.2 and 11.3 of the decision in the BOI case, the ITAT clarifies that there is however no provision barring the carry-over of FTC, (as rule 128 didn’t exist then). The tribunal relied on the Supreme Court’s understanding that legislative silence cannot be misconstrued as a prohibition. It also held that the most beneficial of the provisions of the DTAA or the domestic Act shall be invoked to ensure that the statutory content is not uncharitable to the interests of the taxpayer, per the preamble of a DTAA and the narrow interpretation of Section 90(2) of the Act. The latter was encapsulated by the apex court in Tiger Global Int’l Holdings (2026).

The moral was that domestic laws can only apply to the extent that it is not adversely affecting the assessee, pushing for a treaty override. However, this was not surprisingly applied in Wipro and the other cases, when rule 128 was not in operation.

Way forward

The rationale of the ITAT in the BOI case creates an adjudicatory paradox. The argument that a carry forward is granted, in absence of rule 128 does not justify the act of not touching upon FTC carry forward on the frivolous ground that FTC was “statutorily” allowed while apparently failing the intent behind a DTAA. This increases ambiguity, raising a deep concern as claimants cannot be subjected to disproportionate two- faced interpretation, sometimes being by the law without beneficial usage or sometimes transcending the law, in the absence of an incidental law.

Moreover, this concern can aggravate as foreign laws entangle themselves with home statute. For instance, in the event of a rollover equity taxation when part of the consideration of sale (say, of a company by an Indian resident) constituting shares is taxed on a deferred basis, then the FTC on the deferred amount can be availed only in the year in which it is taxed in India. But this situation does not arise, as the entire consideration is taxed in India, and only the FTC on part consideration (cash) taxed in the US is available to be utilized on the entire amount taxed in India. This calls for a carry-back of the FTC of deferred tax to the year in which the entire amount is taxed in India.

In sum, while the position on carry forward has not been addressed adequately with analytical solutions, it is necessary for now that the judicial lapses are cured to prepare for complex scenarios similar to the aforesaid. The government must seriously contemplate on bringing the benefit of carry-over to the letter of the law similar to the tax laws of the US and Canada that allow for a carry forward (up to 10 years) and a carry back (former up to a year, latter being up to 3 years) as well in their jurisdictions, by introducing special provisions under Section 159 of the new Income Tax Act of 2026 along with guidelines in this regard. This way, there is ease of compliance and the object of a DTAA can go along the lines of the law with minimal friction.