Foreign Tax Credit under s.90/91 and DTAA allowed despite Form 67 lapse, subject to verification of payment records

ITAT (Bangalore) allowed the assessee's appeal and directed the AO to verify the federal tax payment voucher and foreign tax return and grant the Foreign Tax Credit (FTC). The Tribunal held that substantive FTC under s.90/91 and DTAA cannot be denied for mere procedural lapses where relevant evidence is later furnished, noting HC and tribunal precedents that filing Form 67 was directory. The allowance is subject to verification of the documentary proof of foreign tax payment and return.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the denial of foreign tax credit (FTC) in the intimation under section 143(1) for failure to furnish requisite documents under Rule 128(8)(ii) is valid when the assessee subsequently furnishes evidence of foreign tax payment and files Form-67 prior to submission of a revised return?

2. Whether procedural non-compliance (timing of filing Form-67 and initial absence of documentary proof) can justify withholding the substantive benefit of FTC under sections 90/91 and applicable DTAA.

3. Whether an intimation under section 143(1) that disallows FTC without specifying reasons and without prior notice violates principles of natural justice and the proviso to section 143(1).

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of denial of FTC for alleged non-compliance with Rule 128(8)(ii) when documentary evidence was later produced

Legal framework: Sections 90/91 of the Income-tax Act govern relief for taxes paid in foreign territory/read with relevant DTAA; Rule 128(8) prescribes documentary requirements for claiming FTC, including Form-67 (Rule 128(8)(i)) and certificate/statement or proof of tax payment or deduction (Rule 128(8)(ii)). Section 143(1) provides for intimation of tax computation; the first proviso contemplates communication before adjustments.

Precedent treatment: The Tribunal referred to decisions of several High Courts and the Tribunal which have held filing of Form-67 (within the previously prescribed timeline under section 139(1)) to be directory and that FTC should not be denied on mere procedural lapses where substantive compliance is established.

Interpretation and reasoning: The Court examined the paper book and found that the assessee had produced a Federal Tax Payment Voucher and a copy of the US Tax Return evidencing tax actually paid in the USA (pp.79-160). On that factual matrix, the Tribunal held that the requirement of Rule 128(8)(ii) was satisfied. The Tribunal emphasized the settled principle that substantive benefits like FTC cannot be refused solely on technical grounds when documentary evidence establishing foreign tax payment is available.

Ratio vs. Obiter: Ratio - Where the assessee furnishes documentary proof that foreign tax was paid (e.g., tax vouchers and foreign tax returns), Rule 128(8)(ii) requirement is satisfied and FTC cannot be denied on the ground of earlier non-production of such documents. Obiter - General references to various High Court/Tribunal rulings on the directory nature of Form-67 are instructive but ancillary to the present factual finding.

Conclusion: The Tribunal directed the assessing officer to verify the Federal Tax Payment Voucher and US Tax Return and to allow the FTC of Rs.1,85,150/- in accordance with law. The ground of appeal on this issue was allowed.

Issue 2: Effect of timing of Form-67 and revised return on entitlement to FTC - procedural non-compliance vs. substantive entitlement

Legal framework: Rule 128(8)(i) requires filing of Form-67; section 139(1) prescribes the due date for filing returns and, prior to the amendment applicable from AY 2022-23, the timeline for Form-67 was treated in relevant judicial pronouncements. The proviso to section 143(1) and principles of natural justice constrain summary adjustments.

Precedent treatment: The Tribunal cited the established line of authority that filing of Form-67 within the earlier prescribed deadline was considered directory and not an absolute condition to deny FTC where there is reasonable cause and substantive proof of tax paid.

Interpretation and reasoning: The assessee filed Form-67 on 24th January 2019 and revised the return on 30th January 2019; the Tribunal accepted that the Form-67 was filed prior to the revised return and that the delay (relative to the original return due date) arose because FTC was claimed only in the revised return. The Tribunal treated such timing as not deliberate or intentional and emphasized that denial of FTC for a procedural delay would be inappropriate where the assessee ultimately furnished required particulars and proof.

Ratio vs. Obiter: Ratio - When Form-67 is filed prior to filing the revised return claiming FTC and documentary proof of foreign tax is furnished, timing irregularity does not justify denial of FTC. Obiter - Comments on what constitutes reasonable cause for late filing are advisory and dependent on facts.

Conclusion: The Tribunal held the timing of Form-67 and the fact of its filing prior to the revised return did not disentitle the assessee to FTC; the claim was to be allowed following verification.

Issue 3: Legality of section 143(1) intimation adjusting FTC without prior notice or reasoned communication - natural justice considerations

Legal framework: The first proviso to section 143(1) requires certain communications/notice before making adjustments and principles of natural justice mandate that denial of substantive tax benefits be accompanied by reasons enabling effective defence.

Precedent treatment: The Tribunal referenced the requirement that summary intimation should not mechanically disallow substantive claims without affording the taxpayer an opportunity and without stating reasons; prior rulings have condemned administrative rejections that are not reasoned.

Interpretation and reasoning: The assessee argued the adjustment was made without intimation in violation of the proviso and natural justice. While the Tribunal noted the contention, its decisive finding rested on the availability of documentary evidence proving foreign tax payment and on the principle that substantive benefit should not be refused on technical grounds. The Tribunal did not expressly set aside the intimation on purely procedural grounds but effectively required the assessing officer to reconsider and allow FTC after verification.

Ratio vs. Obiter: Ratio - An intimation under section 143(1) that disallows FTC without giving the assessee an opportunity and without reasons is vulnerable; where substantive compliance is demonstrated, the assessing officer must verify documents and allow FTC. Obiter - The judgment's remarks on natural justice are contextual and support the principal holding on entitlement to FTC.

Conclusion: The Tribunal directed verification and allowance of FTC, implicitly recognizing that a mechanical, unexplained disallowance in a section 143(1) intimation cannot stand when the assessee produces the required evidence and had filed Form-67 prior to the revised return.

Cross-references and operative direction

Cross-reference: Issues 1 and 2 are interrelated - documental proof under Rule 128(8)(ii) and the timing/directory nature of Form-67 together determine entitlement; Issue 3 (natural justice/proviso to s.143(1)) underpins the requirement that denials be reasoned and not purely procedural.

Operative direction: The Tribunal directed the assessing officer to verify the Federal Tax Payment Voucher and US Tax Return produced in the paper book and thereafter to allow the FTC of Rs.1,85,150/- in accordance with law. The appeal was allowed subject to this direction.

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