2025 (7) TMI 741 - AT - Income Tax

Assessee wins Foreign Tax Credit relief despite non-filing of Form 67 under Rule 128 sections 90/91

The Income-tax officer Versus Fashion Factory [International], Delhi

The Income-tax officer Versus Fashion Factory [International], Delhi - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:- Whether the Foreign Tax Credit (FTC) under section 90/91 of the Income-tax Act, 1961 can be disallowed solely on the ground that Form 67 was not filed within the prescribed time as mandated under Rule 128 of the Income-tax Rules, 1962.- Whether the filing of Form 67 is a mandatory condition for claiming FTC or merely a procedural/directory requirement.- The interplay between the domestic provisions under section 90/91 of the Act, the prescribed Rules (specifically Rule 128), and the provisions of the Double Taxation Avoidance Agreement (DTAA) with respect to the entitlement and procedural compliance for claiming FTC.- Whether procedural non-compliance (delay or non-filing of Form 67) can extinguish the substantive right of the assessee to claim FTC under the DTAA and section 90/91 of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether FTC can be disallowed due to non-filing or delayed filing of Form 67 under Rule 128Legal framework and precedents: Section 90 of the Income-tax Act empowers the Government of India to enter into agreements with foreign countries to provide relief against double taxation. Section 90 read with Article 22(2) of the DTAA provides that India shall allow as a deduction from the tax on income, an amount equal to the tax paid in the foreign country, limited to the Indian tax attributable to that income.Rule 128 of the Income-tax Rules prescribes the procedure for claiming FTC, including the filing of Form 67 on or before the due date of the income tax return under section 139(1). Rule 128(8) states that FTC shall be allowed only after furnishing Form 67.However, multiple judicial pronouncements have held that the filing of Form 67 is procedural and directory rather than mandatory. Notably, the Hon'ble Bangalore Bench of ITAT in Brinda Rama Krishna vs ITO held that Rule 128(9) does not provide for disallowance of FTC in case of delay in filing Form 67 and that DTAA provisions override the Act and Rules. Similarly, the ITAT Jaipur in Ritesh Kumar Garg vs ITO emphasized that neither section 90 nor the DTAA provides that FTC shall be disallowed for non-compliance with procedural requirements. The Supreme Court decision in Mangalore Chemicals & Fertilizers Ltd. vs Deputy Commissioner also supports the distinction between mandatory and procedural conditions, holding that non-observance of procedural conditions does not extinguish substantive rights.Other consistent decisions include Anuj Bhagwati vs DCIT (Mumbai ITAT) and Nirmala Murli Relwani vs ADIT (Mumbai ITAT), which reaffirm that mere delay or non-filing of Form 67 does not preclude the claim of FTC.Court's interpretation and reasoning: The Tribunal examined the legislative scheme, the DTAA provisions, and the Rules. It observed that while Rule 128 prescribes the procedure for claiming FTC, it does not mandate disallowance of FTC for non-compliance. The substantive right to claim FTC arises under section 90 and the DTAA, which cannot be overridden by procedural rules. The Tribunal relied on the consistent judicial view that procedural requirements like filing Form 67 are directory and not mandatory conditions precedent to claiming FTC.Key evidence and findings: The Assessing Officer had disallowed FTC solely because Form 67 was not filed within the prescribed time. The Tribunal found no dispute regarding the actual foreign tax paid by the assessee, affirming the entitlement to FTC on merits.Application of law to facts: The Tribunal applied the legal principle that procedural lapses cannot extinguish substantive rights. Since the assessee had paid foreign tax and was entitled to FTC under the DTAA and section 90, the non-filing of Form 67 within the stipulated time could not justify denial of the credit.Treatment of competing arguments: The Revenue argued that Rule 128(8) clearly mandates filing of Form 67 before allowing FTC and that the procedural requirement is mandatory. The Tribunal rejected this argument, emphasizing the primacy of substantive law under the Act and DTAA over procedural rules. It also noted that if the legislature intended to make Form 67 filing mandatory for FTC, it would have explicitly provided for disallowance consequences in the Act or Rules.Conclusion: The Tribunal held that filing of Form 67 is a procedural/directory requirement and that non-compliance does not extinguish the right to claim FTC. Therefore, FTC cannot be denied solely on the ground of non-filing or delayed filing of Form 67.3. SIGNIFICANT HOLDINGS- 'Rule 128(9) does not provide for disallowance of FTC in case of delay in filing form 67; Filing of form 67 is not mandatory but a directory requirement, and DTAA overrides the provisions of Act and Rules cannot be contrary to the Act.'- 'Section 90 of the Act read with Article 22(2) provides that foreign income tax paid shall be allowed as a credit against the Indian tax but limited to proportion of Indian tax. Neither section 90 nor DTAA provides that FTC shall be disallowed for non-compliance with any procedural requirements.'- 'Violation of procedural norms does not extinguish the substantive right of claiming the credit of FTC.'- 'The Rules cannot override the Act and therefore filing of Form No. 67 is not mandatory but it is directory.'- 'Mere delay in filing Form No. 67 as per the provisions of Rule 128(9) will not preclude the assessee from claiming the benefit of foreign tax credit in respect of tax paid outside India.'- The final determination was that the assessee is entitled to the relief of FTC under section 90 of the Income-tax Act, and the Assessing Officer is directed to allow the credit after due verification of tax paid outside India.