2025 (6) TMI 877 - AT - Income Tax

Foreign Tax Credit cannot be denied solely for late Form 67 submission, DTAA provisions override domestic filing rules

Kumar Ranganathan Versus DCIT Circle-1 (1) (1), Bangalore

ITAT Bangalore held that denial of Foreign Tax Credit (FTC) based solely on late submission of Form 67 violates DTAA provisions. The Tribunal ruled that ... Denial of FTC Based Solely on Late Submission of Form 67 Violates the DTAA's Intent - HELD THAT:- We are of the opinion that similar issue came for consideration before this Tribunal in the case of Ms. Brinda Ramakrishna [2022 (2) TMI 752 - ITAT BANGALORE] wherein held Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No.67; (ii) filing of Form No.67 is not mandatory but a directory requirement and (iii) DTAA overrides the provisions of the Act and the Rules cannot be contrary to the Act. Thus, we hold that the assessee is entitled to FTC and the ld. AO is directed to grant the same after due verification. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:- Whether the denial of Foreign Tax Credit (FTC) solely on the ground of late submission of Form 67 violates the substantive objectives of the Double Taxation Avoidance Agreement (DTAA) and Section 90 of the Income Tax Act, 1961.- Whether Rule 128(9) of the Income Tax Rules, which mandates filing of Form 67 by the due date under Section 139(1), is mandatory or directory in nature.- Whether principles of substantial compliance and good faith apply to procedural delays in filing Form 67, especially when foreign taxes have been duly paid and disclosed.- Whether the beneficial provisions of the DTAA override procedural rules and timelines prescribed under domestic law for claiming FTC.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Denial of FTC Based Solely on Late Submission of Form 67 vs. DTAA IntentRelevant legal framework and precedents: Section 90 of the Income Tax Act empowers the government to enter into DTAA treaties to avoid double taxation. The India-US DTAA aims to prevent the same income from being taxed twice, thereby promoting cross-border trade and investment. Procedural rules such as Rule 128 are intended to streamline claims but must not defeat substantive treaty rights. Judicial precedents emphasize the primacy of substantive relief over procedural technicalities.Court's interpretation and reasoning: The Tribunal noted that denying FTC solely due to late filing of Form 67 results in double taxation, contrary to the DTAA's fundamental objective. Procedural timelines should not be used to frustrate the treaty's purpose. The Tribunal underscored that the procedural requirement is intended to facilitate claims and not to bar bona fide entitlements.Key evidence and findings: The appellant had paid foreign taxes and disclosed foreign income correctly. The only lapse was delayed submission of Form 67, which was a procedural oversight without mala fide intent.Application of law to facts: The Tribunal applied the principle that substantive rights under the DTAA should not be defeated by procedural non-compliance, especially when the foreign tax was paid and income disclosed.Treatment of competing arguments: The Revenue relied on strict adherence to procedural timelines to deny FTC. The Tribunal rejected this rigid approach, favoring a purposive interpretation aligned with treaty objectives.Conclusions: Denial of FTC based solely on late filing of Form 67 violates the DTAA's intent and results in unjust double taxation.Issue 2: Nature of Rule 128(9) - Mandatory or DirectoryRelevant legal framework and precedents: Rule 128(9) requires Form 67 to be filed by the due date under Section 139(1). However, recent Tribunal rulings in Muralikrishna Vaddi v. ACIT and 42 Hertz Software India Pvt. Ltd. v. ACIT have held that despite the use of 'shall,' this provision is directory and not mandatory. The filing is procedural and should not defeat substantive claims if there is no intent to evade tax.Court's interpretation and reasoning: The Tribunal concurred with these precedents, holding that the rule is intended to facilitate FTC claims and not to act as a bar for delayed filing. The Tribunal emphasized that the DTAA provisions override domestic procedural rules.Key evidence and findings: The appellant's delayed filing was an oversight without any attempt to conceal income or evade tax.Application of law to facts: The Tribunal applied the principle that procedural requirements must be interpreted purposively and not in a manner that defeats substantive rights.Treatment of competing arguments: The Revenue's insistence on strict compliance was rejected in favor of a balanced approach that recognizes substantial compliance.Conclusions: Filing of Form 67 is a directory requirement; delay does not warrant disallowance of FTC.Issue 3: Principles of Substantial Compliance and Good FaithRelevant legal framework and precedents: The Supreme Court decisions in Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner and Sambhaji & Others v. Gangabai & Others establish that procedural laws are meant to aid justice and should not become hurdles to substantive rights. The principle of substantial compliance holds that minor procedural lapses should not deprive a party of their rights if there is no mala fide intent.Court's interpretation and reasoning: The Tribunal found that the appellant's delay was a bona fide oversight and did not affect the legitimacy of the foreign tax payment or income disclosure. Thus, the principle of substantial compliance applies, and procedural lapses should not be fatal.Key evidence and findings: The appellant had already paid foreign taxes and disclosed income correctly in the return.Application of law to facts: The Tribunal applied the principle that procedural technicalities must yield to substantive justice where the taxpayer acts in good faith.Treatment of competing arguments: The Revenue's strict procedural stance was balanced against the taxpayer's bona fide compliance and the overarching principle of justice.Conclusions: The delay in filing Form 67 was a procedural lapse that should be condoned in light of substantial compliance and good faith.Issue 4: Primacy of DTAA Provisions over Procedural RulesRelevant legal framework and precedents: Section 90(2) of the Income Tax Act states that where a DTAA applies, its provisions prevail over domestic law. Tribunal decisions such as Rohini Hattangadi v. CIT[A] and Gurcharan Singh v. ITO have upheld the primacy of DTAA provisions and held that procedural delays should not defeat treaty benefits.Court's interpretation and reasoning: The Tribunal reaffirmed that the DTAA's objective of eliminating double taxation must override procedural non-compliance. Procedural rules cannot be applied rigidly to deny treaty benefits.Key evidence and findings: The appellant's claim was based on a documented double taxation scenario recognized under the treaty.Application of law to facts: The Tribunal directed that the substantive treaty entitlement to FTC must be upheld notwithstanding procedural lapses.Treatment of competing arguments: The Revenue's reliance on procedural rules was subordinated to the DTAA's overriding purpose.Conclusions: DTAA provisions prevail over procedural rules; FTC cannot be denied due to delayed filing of Form 67.3. SIGNIFICANT HOLDINGSThe Tribunal held:'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 include:- The substantive relief from double taxation under the DTAA and Section 90 must not be defeated by procedural technicalities such as delayed filing of Form 67.- Rule 128(9) is a directory provision intended to facilitate FTC claims, not a mandatory bar.- The principle of substantial compliance and good faith applies, whereby bona fide procedural lapses do not warrant denial of substantive rights.- DTAA provisions hold primacy over domestic procedural rules and timelines.Final determinations on each issue:- The appellant's claim for FTC amounting to Rs. 1,58,200/- for AY 2021-22 was allowed despite the delayed filing of Form 67.- The Assessing Officer was directed to grant the FTC after due verification, treating the delayed filing as a condonable procedural oversight.