Karnataka HC holds that denial of excess FTC without variation in total income cannot result in levy of penalty

 This Tax Alert summarizes a recent decision of the Karnataka High Court (HC) in the case of Mr. Srinivasa Gandhi Sampath (Taxpayer) v. ACIT, wherein the HC quashed a penalty order and held that penalty for under-reporting or misreporting of income cannot be imposed merely because the Taxpayer made an excess claim of foreign tax credit (FTC).

In this case, the Taxpayer’s returned income was accepted in the assessment without any variation. However, while computing tax liability, the tax authority disallowed part of FTC made in the return in respect of which tax authority initiated and imposed penalty of under-reported income.

The HC held that the penalty for under-reported income requires variation in total income as returned by the Taxpayer. Absent such variation, penalty cannot be invoked merely on account of reduction in grant of credit for FTC in computing tax liability of the Taxpayer