Foreign tax credit allowed despite late Form 67 filing under Rule 128 as requirement deemed directory not mandatory

ITAT Bangalore allowed assessee's appeal regarding foreign tax credit disallowance. Revenue authorities rejected FTC claim due to late filing of Form 67 beyond due date. ITAT held that Form 67 filing is directory, not mandatory, when assessee reported foreign income in timely return and paid tax abroad. Rule 128 doesn't bar FTC claims for delayed Form 67 filing. ITAT relied on precedents establishing Form 67 as directory requirement. Tribunal directed AO to grant FTC after verification, ruling filing requirement non-mandatory when facts undisputed and income properly reported.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the disallowance of Foreign Tax Credit (FTC) due to the late filing of Form 67 is justified.
• Whether the requirement to file Form 67 before the due date of filing the return is mandatory or directory.
• Whether the disallowance of FTC affects the consequential interest under sections 234B and 234C.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Foreign Tax Credit due to Late Filing of Form 67

• Relevant legal framework and precedents: Rule 128 of the Income Tax Rules, 2016, prescribes the filing of Form 67 for claiming FTC. The rule was introduced effective from Assessment Year 2018-19. The precedents include the cases of Ms. Brinda Ramakrishna and 42 Hertz Software India Pvt. Ltd., where it was held that the filing of Form 67 is not mandatory but directory.
• Court's interpretation and reasoning: The Tribunal found that the requirement to file Form 67 is directory and not mandatory. The Tribunal emphasized that the Double Taxation Avoidance Agreement (DTAA) overrides the provisions of the Act and the Rules, and Rule 128 does not explicitly bar the claim of FTC if Form 67 is not filed timely.
• Key evidence and findings: The assessee had paid tax in a foreign country, reported the income in India, and remitted taxes to the Indian department. The only lapse was the late filing of Form 67.
• Application of law to facts: The Tribunal applied the principle that procedural requirements should not obstruct substantive rights, especially when the facts are undisputed. The assessee had complied with the substantive requirement of reporting foreign income and paying taxes in India.
• Treatment of competing arguments: The Revenue argued for disallowance based on procedural non-compliance, while the assessee argued for substantive compliance. The Tribunal sided with the assessee, emphasizing the directory nature of the requirement.
• Conclusions: The Tribunal concluded that the disallowance of FTC was incorrect and directed the Assessing Officer (AO) to grant the necessary relief after verification.

Issue 2: Consequential Interest under Sections 234B and 234C

• Relevant legal framework and precedents: Sections 234B and 234C pertain to interest for defaults in payment of advance tax and deferment of advance tax, respectively.
• Court's interpretation and reasoning: The Tribunal did not directly address the issue of consequential interest but implied that if the FTC is allowed, the basis for interest under these sections would change.
• Key evidence and findings: The Tribunal focused on the allowance of FTC, which would inherently affect the calculation of interest under these sections.
• Application of law to facts: By allowing the FTC, the Tribunal indirectly addressed the issue of interest, as the tax liability would be recalculated.
• Treatment of competing arguments: The Tribunal did not explicitly discuss arguments regarding interest but focused on the primary issue of FTC.
• Conclusions: The Tribunal's decision to allow FTC implies a recalculation of interest under sections 234B and 234C.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No.67; filing of Form No.67 is not mandatory but a directory requirement and DTAA overrides the provisions of the Act and the Rules cannot be contrary to the Act."
• Core principles established: The Tribunal established that procedural requirements should not impede substantive rights, particularly when the DTAA provides for FTC. The filing of Form 67 is a directory requirement, not a mandatory one.
• Final determinations on each issue: The Tribunal allowed the appeal, granting the FTC to the assessee, and directed the AO to verify and provide relief in accordance with the law.

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