2025 (10) TMI 531 - AT - Income Tax

Delayed filing of Form No. 67 is directory, DTAA overrides Income-tax Act; foreign tax credit must be allowed

ITAT (Kol) allowed the appeal, holding that delayed filing of Form No. 67 is directory, not mandatory, and DTAA provisions prevail over the Income-tax ... Disallowing Foreign Tax Credit (FTC) - delayed filing of Form No. 67 - HELD THAT:- Relying upon the decision of Swapan Bhttacharya [2025 (5) TMI 438 - ITAT KOLKATA] which has referred to the decision of Duraiswamy Kumaraswamy [2023 (11) TMI 1000 - MADRAS HIGH COURT] and Rahul Anand [2024 (12) TMI 638 - ITAT KOLKATA] it is held that the filing of Form No. 67 is directory and not mandatory, and the provisions of DTAA override the provision of the Income tax Act, the credit for foreign tax is allowable to the assessee. Hence, Ground allowed and the AO is directed to allow the credit for foreign taxes in accordance with law. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether failure to file Form No. 67 before the due date prescribed under section 139(1) / Rule 128(9) of the Income-tax Rules precludes allowance of Foreign Tax Credit (FTC) under section 90/DTAA. 2. Whether Rule 128(9) is mandatory or directory in nature for claiming FTC and whether non-compliance extinguishes the substantive right to FTC. 3. Whether denial of FTC resulting from non-filing or late filing of Form 67 justifies consequential levies of interest under sections 234A, 234B and 234C. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowance of Foreign Tax Credit despite late filing of Form 67 Legal framework: Section 90 (and applicable DTAA article) allows relief by way of credit for foreign taxes paid; Rule 128 (sub-rules (8) and (9)) prescribes procedural requirements, including furnishing Form 67 and supporting certificates on or before the due date of filing the return under section 139(1). Precedent treatment: The Tribunal considered decisions of coordinate benches and a High Court which held that procedural non-compliance with Rule 128 does not automatically extinguish the substantive right to FTC; higher court jurisprudence distinguishing substantive versus procedural conditions was also invoked. Interpretation and reasoning: The Court examined the text of Rule 128(9) and the DTAA/section 90 framework. It found that neither section 90 nor the DTAA conditions expressly render FTC conditional upon strict compliance with the timing requirement in the Rules. The Court emphasized that Rule 128 implements the substantive entitlement under section 90/DTAA and that the Rules do not expressly prescribe denial of FTC upon mere delay in filing Form 67. The Court applied principle that procedural requirements designed for implementation should not defeat substantive vested rights unless the statutory scheme clearly intends such forfeiture. Ratio vs. Obiter: Ratio - The DTAA/section 90 creates a substantive right to FTC which cannot be defeated merely by delay in filing a procedural form unless the statute or the rules unambiguously make the timing condition a substantive pre-requisite. Obiter - discussion of specific processing timelines of CPC or administrative practice is ancillary. Conclusion: FTC is allowable despite late filing of Form 67 where the substantive entitlement under section 90/DTAA is established; the Assessing Officer is directed to grant credit in accordance with law and the DTAA. Issue 2 - Mandatory or directory character of Rule 128(9) Legal framework: Rule 128(9) uses the word 'shall' requiring Form 67 and prescribed certificates to be furnished on or before the due date for filing the return under section 139(1). Precedent treatment: The Court weighed conflicting Tribunal decisions and an authoritative High Court ruling. It also referred to Supreme Court principles distinguishing mandatory/substantive conditions from procedural/directory ones, stressing that not every statutory condition termed in imperative language is necessarily intended to extinguish substantive rights. Interpretation and reasoning: Although Rule 128(9) employs 'shall', the Court examined legislative intent and the relationship between the rule and the substantive DTAA/section 90 right. The reasoning emphasized that procedural mandates designed to aid administration (such as filing a statement in a particular time) are directory where the underlying statute or treaty does not prescribe forfeiture for non-compliance. The Court found persuasive precedent holding the rule directory in analogous contexts and treated the filing requirement as procedural rather than a condition precedent to entitlement to FTC. Ratio vs. Obiter: Ratio - Rule 128(9) is directory in nature insofar as it prescribes a procedural timeline and does not, by itself, extinguish the substantive right to FTC under section 90/DTAA; therefore non-compliance does not automatically lead to disallowance. Obiter - remarks on particular fact patterns where delay was unexplained or excessive and could be treated differently are ancillary. Conclusion: Requirement of filing Form 67 within the return due date is directory; delay in filing Form 67 does not, standing alone, mandate disallowance of FTC. Issue 3 - Consequential interest levies under sections 234A, 234B and 234C resulting from denial of FTC Legal framework: Interest under sections 234A, 234B and 234C is generally consequential to the assessed tax liability and depends on correct tax computation and timely compliance with advance tax obligations. Precedent treatment: The Court noted that interest consequences flow from the primary question whether FTC is allowable; it referred to coordinate bench treatment that relief on FTC entails recalculation of tax and interest consequences. Interpretation and reasoning: Because denial of FTC by the assessing/processing authority directly affected the assessed tax and thereby triggered interest demands, the Court reasoned that, if FTC is to be allowed (see Issues 1 and 2), interest should be recomputed consistently with the corrected tax liability and documented computations. The Court also directed verification of the return and computation where discrepancies (e.g., incorrect capital gains figures) impacted the tax base, indicating that interest cannot be sustained if based on erroneous higher tax caused by wrongful denial of FTC or incorrect income figures. Ratio vs. Obiter: Ratio - Interest consequences are dependent on the corrected tax computation; where FTC is allowed, corresponding interest demands under sections 234A/234B/234C must be recalculated and adjusted. Obiter - specific methodological directions to the assessing officer for recomputation are procedural guidance rather than binding ratio. Conclusion: Consequential interest levies arising from denial of FTC cannot stand where FTC is permitted; the Assessing Officer is directed to verify computations, allow FTC as per law/DTAA, and recompute interest accordingly. Where computation errors (e.g., capital gains figures) are present, those should be rectified and considered in recomputation. Cross-references and final disposition Related issues are cross-linked: the determination that Rule 128(9) is directory (Issue 2) directly informs the decision to allow FTC despite late filing (Issue 1), which in turn requires recalculation of interest consequences (Issue 3). The Tribunal allowed the grounds relating to denial of FTC and directed the Assessing Officer to grant credit and verify/recompute tax and interest in accordance with the DTAA and applicable law.