Delayed filing of Form 67 cannot deny Foreign Tax Credit under Rule 128(9) - filing is directory not mandatory

ITAT Kolkata allowed the assessee's appeal regarding denial of Foreign Tax Credit for taxes paid in USA. The tribunal held that filing Form No. 67 is directory, not mandatory, and FTC cannot be denied solely due to delayed filing beyond the prescribed time limit under rule 128(9) of Income-tax Rules, 1962. Following precedents from Madras HC and other ITAT decisions, the tribunal directed the AO to grant FTC benefits for foreign taxes paid in accordance with law and India-USA DTAA.

---

---

The core legal questions considered in this appeal are as follows:

1. Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in disallowing the Foreign Tax Credit (FTC) of Rs. 2,07,098/- claimed by the assessee for taxes withheld/paid in the United States of America, particularly on the ground that Form No. 67 was filed beyond the due date prescribed under Rule 128(9) of the Income Tax Rules, 1962.

2. Whether the AO erred in adopting a higher total income figure (Rs. 2,49,43,470/-) in the computation sheet instead of the assessed total income of Rs. 2,23,86,630/-, thereby resulting in an inflated income and additional tax liability, and whether this issue was properly adjudicated by the CIT(A).

3. Whether procedural non-compliance, specifically the late filing of Form No. 67, can result in denial of substantive right to claim Foreign Tax Credit under Section 90 of the Income Tax Act, 1961 (the Act) read with the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

4. Ancillary and general grounds relating to the correctness of the assessment order and the appeal process.

Issue-wise Detailed Analysis:

Issue 1: Disallowance of Foreign Tax Credit due to late filing of Form No. 67

Relevant legal framework and precedents: Section 90 of the Income Tax Act empowers the Government of India to enter into agreements with foreign countries to grant relief from double taxation. Article 25(2)(a) of the India-USA DTAA provides that India shall allow as a deduction from the tax on income of a resident an amount equal to the income tax paid in the USA, limited to the Indian tax attributable to that income.

Rule 128 of the Income Tax Rules, 1962, governs Foreign Tax Credit. Rule 128(9) mandates that Form No. 67, which contains particulars of foreign taxes paid, must be filed on or before the due date for filing the return of income under Section 139(1) of the Act.

Key precedents include the Supreme Court's ruling in CIT vs. G.M. Knitting Industries (P) Ltd., which distinguishes between substantive and procedural conditions, holding that not all statutory conditions are mandatory and some may be directory. Additionally, the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax held that DTAA provisions override the Income Tax Act unless the latter is more beneficial to the assessee.

Coordinate Bench decisions such as Jaspal Singh Bindra vs. DCIT and Rahul Anand vs. ADIT have held that filing of Form No. 67 is a procedural requirement and delay in filing should not result in denial of the substantive right to claim FTC.

The Madras High Court decision in Duraiswamy Kumaraswamy vs. PCIT is particularly instructive. The Court held that the filing of Form No. 67 is directory and not mandatory, and failure to file it along with the return does not extinguish the right to claim FTC. The Court remanded the matter for reassessment allowing FTC to be given effect.

Court's interpretation and reasoning: The Tribunal noted that neither Section 90 nor the DTAA explicitly provide for denial of FTC on account of procedural non-compliance such as late filing of Form No. 67. The Tribunal emphasized that FTC is a vested substantive right under the DTAA and the Act, which cannot be denied merely due to procedural lapses.

The Tribunal relied on the principle that procedural rules like Rule 128(9) are directory and not mandatory, consistent with the Supreme Court's approach in the G.M. Knitting Industries case.

The Tribunal observed that the assessee had filed Form No. 67 on 30.03.2019, which, although late, was available before the completion of assessment. The Tribunal held that disallowance of FTC on this ground was not justified.

Key evidence and findings: The assessee filed the original return on 30.07.2017 and a revised return on 30.03.2019 declaring higher income. Form No. 67 was filed on 30.03.2019, beyond the due date prescribed under Section 139(1). The AO disallowed FTC on this ground, upheld by CIT(A).

The Tribunal examined the statutory provisions, the DTAA, and judicial precedents, and found that the substantive right to FTC cannot be denied on procedural grounds.

Application of law to facts: The Tribunal applied the principle that procedural non-compliance should not defeat substantive rights, especially where the assessee had furnished the requisite information before the assessment order. The Tribunal held that the assessee was entitled to FTC despite late filing of Form No. 67.

Treatment of competing arguments: The Department argued that the statutory mandate of timely filing Form No. 67 was not complied with, justifying denial of FTC. The assessee contended that the delay was procedural and did not extinguish the substantive right to claim FTC under the DTAA and the Act.

The Tribunal sided with the assessee, relying on judicial precedents and the principle of substantive rights prevailing over procedural lapses.

Conclusion: The Tribunal allowed the claim of FTC and directed the AO to grant credit for foreign taxes paid in the USA in accordance with law and the DTAA.

Issue 2: Discrepancy in Total Income Computation and Capital Gains

Relevant legal framework and precedents: Section 143(3) of the Act empowers the AO to complete assessment based on scrutiny. The return of income and computation sheet are relevant documents for determining the correct income.

Court's interpretation and reasoning: The Tribunal noted that the AO's computation sheet showed total income of Rs. 2,49,43,470/- whereas the assessment order recorded Rs. 2,23,86,630/-, the figure declared in the revised return. The Tribunal observed that the capital gains figure adopted in the computation sheet (Rs. 68,28,041/-) was incorrect, as per the revised return which showed nil short-term capital gains after set-off of brought forward losses.

Key evidence and findings: The Tribunal examined the revised return and computation sheet, noting the inconsistency and the incorrect adoption of capital gains in the AO's computation sheet.

Application of law to facts: The Tribunal directed the AO to verify the return and computation and allow relief as per law, correcting the inflated income figure.

Treatment of competing arguments: The Department maintained the correctness of the AO's computation, while the assessee pointed out the discrepancy and incorrect capital gains figure.

Conclusion: The Tribunal allowed this ground of appeal for statistical purposes and directed the AO to rectify the computation and income assessment accordingly.

Issue 3: Procedural vs. Substantive Nature of Form No. 67 Filing Requirement

Relevant legal framework and precedents: As discussed under Issue 1, Rule 128(9) requires filing Form No. 67 by the due date of return filing. The Supreme Court in CIT vs. G.M. Knitting Industries clarified the distinction between mandatory and directory conditions. The Madras High Court in Duraiswamy Kumaraswamy held that Form No. 67 filing is directory.

Court's interpretation and reasoning: The Tribunal reiterated that the legislative intent does not suggest denial of FTC for procedural delay. The filing of Form No. 67 is a procedural requirement to facilitate implementation but does not extinguish the substantive right to claim FTC.

Key evidence and findings: The Tribunal noted the absence of any explicit provision in the Act or Rules denying FTC for late filing of Form No. 67.

Application of law to facts: The Tribunal applied the principle that procedural lapses should not defeat substantive rights and held that the assessee's right to FTC remains intact despite late filing.

Treatment of competing arguments: The Department's reliance on the procedural mandate was rejected in light of judicial precedents and the overriding effect of DTAA provisions.

Conclusion: The Tribunal held that the filing of Form No. 67 is directory and does not preclude the assessee from claiming FTC.

Issue 4: General Grounds of Appeal

The Tribunal found that Grounds 1 and 4 were general in nature and did not require separate adjudication.

Significant Holdings:

"Foreign Tax Credit is an assessee's vested right as per Article 25[2](a) of the DTAA read with Section 90 and same cannot be disallowed for non-compliance with procedural requirement as prescribed in the rules."

"The rule nowhere provides that if the said Form No. 67 is not filed within the required time frame, the relief as sought by the assessee u/s 90 of the Act would be denied."

"The filing of Form No. 67 is a procedural/directory requirement and is not a mandatory requirement and violation of procedural norm does not extinguish the substantive right of claiming the credit of FTC."

"The mere fact that it is statutory does not matter one way or the other. There are conditions and conditions. Some may be substantive, mandatory and based on considerations of policy and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance of all conditions irrespective of the purposes they were intended to serve." (Supreme Court in Mangalore Chemicals & Fertilizers Ltd.)

"The provisions of DTAA shall override the provisions of the Income-tax Act unless they are more beneficial to the assessee." (Supreme Court in Engineering Analysis Centre of Excellence)

"Merely because the assessee could not file Form No. 67 within the prescribed time limit as per the provisions of rule 128(9) of the Income-tax rules, 1962, as it stood during the year under consideration, will not preclude the assessee from claiming the benefit of the Foreign Tax Credit in respect of taxes paid outside India."

Regarding the discrepancy in income computation: "The AO is directed to verify the return of income with the computation made and allow the requisite relief as per law as the tax computation apparently has been made on a higher income and the figure of capital gains has been incorrectly adopted."

The Tribunal's final determinations are:

- The disallowance of Foreign Tax Credit on the ground of late filing of Form No. 67 is not justified; FTC must be allowed in accordance with Section 90 and the DTAA.

- The AO must rectify the income computation to reflect the correct total income as per the revised return and allow relief accordingly.

- General grounds of appeal not requiring separate adjudication are dismissed.

- The appeal is partly allowed, primarily to grant FTC and to correct income computation for statistical purposes.

---