Foreign tax credit cannot be denied for delayed filing of Form 67 as it's directory requirement not mandatory

ITAT Chandigarh allowed assessee's appeal regarding denial of foreign tax credit under Section 90 for delayed filing of Form No. 67. The tribunal held that filing Form No. 67 is a directory requirement, not mandatory, and procedural lapse does not extinguish substantive right to claim FTC under India-Canada DTAA. Since neither the Act nor Rules explicitly mandate disallowance for delayed filing, and the form was filed before return processing, the assessee's substantive right to FTC was upheld following consistent judicial precedents.

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The primary legal questions considered in this appeal pertain to the entitlement of the assessee to claim foreign tax credit (FTC) under Section 90 of the Income Tax Act, 1961, where Form No. 67, required under Rule 128(9) of the Income Tax Rules, 1962, was filed after the due date prescribed under Section 139(1). Specifically, the issues are:

1. Whether the delay in filing Form No. 67 beyond the due date for filing the income tax return under Section 139(1) justifies denial of the FTC claim under Section 90.

2. Whether Rule 128(9) imposes a mandatory condition that Form No. 67 must be filed on or before the due date of return filing, and if non-compliance results in automatic disallowance of FTC.

3. The legal effect and interplay of the Double Taxation Avoidance Agreement (DTAA) between India and Canada with domestic procedural requirements under the Income Tax Act and Rules.

4. The applicability and relevance of judicial precedents, including decisions from various tribunals and High Courts, regarding the mandatory or directory nature of filing Form No. 67 and related procedural compliance.

Issue-wise detailed analysis:

Issue 1 and 2: Whether delay in filing Form No. 67 warrants denial of FTC and whether Rule 128(9) is mandatory or directory

The relevant legal framework includes Section 90 of the Income Tax Act, which permits a resident taxpayer to claim relief in respect of taxes paid in a foreign country under a DTAA, and Rule 128(9) of the Income Tax Rules, which prescribes the procedural requirement of filing Form No. 67 on or before the due date of filing the return under Section 139(1).

The AO and CIT(A) took the view that Rule 128(9) is mandatory and non-compliance by filing Form No. 67 late (filed on 27.08.2022 instead of by 31.07.2022) disentitles the assessee from claiming FTC. The CIT(A) relied on the explicit language of Rule 128(9) and dismissed the assessee's reliance on judicial precedents from non-jurisdictional tribunals, emphasizing that no Supreme Court ruling had conclusively settled the issue.

The assessee contended that Rule 128(9) is procedural and directory, not mandatory, and that the substantive right to claim FTC under Section 90 and the India-Canada DTAA cannot be curtailed by procedural lapses. The assessee relied on several tribunal decisions, including Brinda RamKrishna v. ITO and Sonakshi Sinha v. CIT(A), which held that delayed filing of Form No. 67 does not extinguish the right to FTC if the form is filed before assessment completion. The assessee also pointed to the amendment to Rule 128(9) effective 01.04.2022, which allows filing Form No. 67 until the end of the assessment year, indicating a legislative intent to relax procedural strictness.

The DR argued that Rule 128(9) is a mandatory condition for FTC claim, and non-compliance invalidates the claim, emphasizing that the DTAA does not override domestic procedural requirements. The DR also submitted that the amendment to Rule 128(9) post-dated the relevant assessment year and was thus inapplicable.

The Tribunal, after hearing both sides and reviewing the record, found merit in the assessee's arguments. It observed that neither the Act nor the Rules explicitly prescribe disallowance of FTC for delayed filing of Form No. 67. The Tribunal relied on consistent judicial interpretations from various benches, including decisions from ITAT Bangalore, Mumbai, and others, which held that filing Form No. 67 is directory and procedural, not mandatory. The Tribunal noted that the form was filed on 27.08.2022, well before the return was processed on 26.10.2022, thereby preserving the substantive right to FTC.

The Tribunal further observed that the amendment to Rule 128(9) effective 01.04.2022, although not directly applicable, reflects a legislative intent to liberalize procedural compliance. It rejected the CIT(A)'s dismissal of non-jurisdictional precedents as untenable, given the uniform judicial trend favoring the assessee's position.

Issue 3: Interplay of DTAA and domestic procedural requirements

The Tribunal emphasized that Section 90 read with the India-Canada DTAA confers a substantive right to claim FTC. Procedural rules like Rule 128 cannot override or curtail substantive rights granted under the Act and the DTAA. The Tribunal held that procedural lapses should not result in denial of substantive relief, especially when the procedural requirement is directory and the form was filed before completion of assessment.

Issue 4: Treatment of judicial precedents and relevant case law

The Tribunal extensively reviewed judicial precedents, including:

• The Madras High Court judgment in Duraiswamy Kumaraswamy, which held that filing of Form No. 67 is directory and FTC cannot be denied if filed before assessment completion.
• Coordinate Bench decisions from ITAT Hyderabad and Bangalore, including Natco Pharma Ltd., 42 Hertz Software India Pvt. Ltd., and Brinda RamKrishna, which consistently held that delayed filing of Form No. 67 does not warrant disallowance of FTC.
• Decisions from the Amritsar Bench and Ahmedabad Bench, which held that procedural forms like Form 10-IE or Form 10/10B are directory and failure to file strictly on time cannot be fatal if the forms are available before assessment.
• Reference to the Supreme Court decision in Commissioner of Income-Tax, Maharashtra v. G.M.Knitting Industries (P) Ltd., which supported the principle that procedural requirements are often directory and do not extinguish substantive rights if complied with before final assessment.
• Judgments addressing technical glitches in filing, such as Pr. CIT v. KGY Glass Industries, which held that taxpayers should not be deprived of benefits due to technical issues beyond their control.

The Tribunal found these precedents persuasive and consistent with the principle that procedural requirements under the Act and Rules are intended to facilitate administration and verification, not to extinguish substantive rights.

Application of law to facts and conclusions

The Tribunal applied the above legal framework and precedents to the facts, noting that the assessee had filed Form No. 67 on 27.08.2022, before the return was processed on 26.10.2022. The delay was thus procedural and did not prejudice the revenue. The substantive right to FTC under Section 90 and the DTAA was intact. The Tribunal held that the CIT(A) and AO erred in disallowing the FTC claim solely on the ground of delayed filing of Form No. 67.

The Tribunal accordingly set aside the orders of the AO and CIT(A) and directed the AO to allow the FTC claim of Rs. 10,32,088 after verifying supporting documents.

Competing arguments regarding the mandatory nature of Rule 128(9) and the binding effect of judicial precedents were addressed by the Tribunal through detailed analysis of statutory provisions, legislative intent, and judicial interpretations. The Tribunal rejected the Revenue's contention that DTAA does not override procedural requirements, affirming that substantive rights under DTAA and Section 90 prevail over procedural lapses in filing Form No. 67.

Significant holdings include the following verbatim excerpts and core principles:

"Section 90, in conjunction with the India-Canada DTAA, confers a substantive right to claim FTC for taxes paid abroad, subject to conditions prescribed under the Income Tax Rules. Rule 128(9), as applicable for A.Y. 2022-23, required Form No. 67 to be filed by the due date of the return under Section 139(1). However, neither the Act nor the Rules explicitly mandate disallowance of FTC for delayed filing of Form No. 67."

"Filing Form No. 67 is a directory requirement, not mandatory, and a procedural lapse does not extinguish the substantive right to FTC, especially when the form was filed before processing of the return."

"The amendment to Rule 128(9) effective from 01.04.2022, allowing filing until the end of the assessment year, indicates legislative intent to liberalize procedural compliance."

"The CIT(A)'s dismissal of non-jurisdictional precedents is not tenable, as these rulings reflect a consistent judicial interpretation favouring the assessee."

"Procedural rules like Rule 128 cannot override or curtail substantive rights granted under the Act and the DTAA."

"The Tribunal accordingly sets aside the orders of the AO and CIT(A) and directs the AO to allow the FTC claim after verifying supporting documents."

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