November 04, 2025

Foreign Tax Credit for NRIs and RNORs: ITAT Delhi’s Landmark Ruling in Aditya Khanna vs ITO

Many NRIs and returning Indians face double taxation—paying taxes both in India and abroad on the same income. To address this, the Foreign Tax Credit (FTC) mechanism under Section 90 and Section 91 of the Indian Income Tax Act allows Indian residents to claim credit for taxes paid overseas.

The ITAT Delhi ruling in Aditya Khanna vs ITO (AY 2011–12) is a landmark judgment clarifying two crucial aspects for NRI taxation and cross-border income reporting:

Can a Resident but Not Ordinarily Resident (RNOR) claim foreign tax credit under Section 91?

Can U.S. State Taxes (like New York State tax) be claimed as part of the Foreign Tax Credit in India, or is relief restricted to Federal Taxes only?

Case Overview: Aditya Khanna vs ITO (International Taxation)

Assessee: Mr. Aditya Khanna

Assessment Year: 2011–12

Residential Status: Resident but Not Ordinarily Resident (RNOR)

Employment: Allen & Co., USA

Stay in India: 224 days

Income Declared: Proportionate U.S. salary for Indian stay period

Claim: Foreign Tax Credit under Section 91 for both Federal and New York State Taxes paid in the U.S.

Tax Department’s Stand

The Assessing Officer (AO) and CIT(A) denied credit for U.S. State Taxes, allowing FTC only for Federal Taxes.
Their reasons:

India–U.S. DTAA (Double Taxation Avoidance Agreement) covers only Federal Income Tax under Article 2.
Section 91 applies only when no DTAA exists.
An RNOR is not a “resident” for Section 91 relief purposes.
Assessee’s Argument
The assessee contended that:
Section 91 grants unilateral relief even if a DTAA exists, when it’s more beneficial, as per Section 90(2).
The term “income-tax in relation to any country” includes State or Local Taxes (per Explanation (iv) of Section 91).
RNORs are residents under Section 6 of the Income Tax Act and thus eligible for FTC under Section 91.

He relied on key judicial precedents:

Wipro Ltd vs DCIT (2016) 382 ITR 179 (Karnataka HC)
Tata Sons Ltd vs DCIT (2011) 135 TTJ 1 (Mumbai ITAT)
Dr. Rajeev Modi vs DCIT (ITA No.1285/Ahd/2014)

Legal Provisions Involved

Section 90 – Bilateral Relief (DTAA)

Applicable where India has signed a Double Taxation Avoidance Agreement. Relief is provided only for taxes covered under the treaty, usually Federal Income Tax.

Section 91 – Unilateral Relief

Applies where no DTAA exists or where it is more beneficial to the taxpayer.
Covers income-tax paid to any part of a foreign country, including State or Local taxes.

Section 6 – Residential Status

Defines Resident, Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NRI) classifications—key to determining the scope of taxable foreign income.

ITAT Delhi’s Findings in Aditya Khanna vs ITO

1. Section 91 Includes Both Federal and State Taxes

The Tribunal, citing Wipro Ltd and Tata Sons Ltd, held that:

“Income-tax in relation to any country includes income-tax paid to any part of that country or to a local authority.”

Thus, U.S. State Taxes, such as New York State Tax, also qualify for Foreign Tax Credit under Section 91.

2. RNORs Are Residents for Section 91 Relief

The ITAT confirmed that RNORs fall under the broader category of “residents” under Section 6.
Therefore, RNORs are entitled to claim Foreign Tax Credit under Section 91, just like other residents.

3. Section 91 Applies Even When a DTAA Exists

Under Section 90(2), if domestic law (Section 91) offers greater benefit than the DTAA, taxpayers may opt for it.
Since Section 91 allows credit for both Federal and State taxes, it can be used even if the DTAA provides narrower relief.

ITAT Delhi’s Final Ruling

The appeal was partly allowed.
Foreign Tax Credit under Section 91 was granted for U.S. Federal and New York State Taxes.
The alternative claim to exclude state taxes from taxable income became redundant.

Practical Implications for NRIs and RNORs

This judgment provides clarity and significant benefit for:

NRIs working in the U.S. and paying both Federal and State taxes.
Returning Indians (RNORs) with U.S. income taxable in India.
Individuals facing double taxation on foreign salary or investment income.

Key Takeaways

RNORs qualify as residents for claiming FTC under Section 91.
U.S. State and Local Taxes are eligible for Foreign Tax Credit in India.
Section 91 applies even when a DTAA exists, if it offers more beneficial relief.
Taxpayers must evaluate both Section 90 (DTAA) and Section 91 (Act) to determine the most advantageous route.

Why This Ruling Matters for NRIs

The ITAT Delhi judgment strengthens the interpretation of foreign tax credit for NRIs and RNORs by recognizing:

Broader coverage under Section 91, including State-level taxes.
Fair treatment for RNORs, equating them with residents for FTC purposes.
Relief flexibility between treaty and domestic law to maximize benefit.
It’s a critical precedent for cross-border tax planning, repatriation of U.S. income, and accurate NRI tax filing in India.

Conclusion: Strengthening NRI Tax Relief on Foreign Income

The Aditya Khanna vs ITO (ITAT Delhi) case reaffirms India’s approach toward avoiding double taxation and ensuring equitable treatment for global Indians.
It establishes that Section 91 of the Income Tax Act applies even to U.S. State Taxes and RNOR taxpayers, offering broader relief than the India–U.S. DTAA.

For NRIs, RNORs, and expatriates, this case emphasizes the importance of structured tax planning, correct residency classification, and claiming eligible FTCs to minimize tax outflows and stay compliant.

About Dinesh Aarjav & Associates

Dinesh Aarjav & Associates (DAA) is a leading Delhi-based Chartered Accountancy Firm specializing in NRI taxation and cross-border financial advisory. With over 25 years of global experience, we assist NRIs, OCIs, and returning Indians with: