2023 (9) TMI 1560 - AT - Income Tax

Disallowance of Foreign Tax Credit (FTC) - requisite Form No.67 was not filed within the prescribed time - HELD THAT - As decided in VIKASH DAGA VERSUS ACIT CIRCLE-3 (1) GURGAON 2023 (6) TMI 1387 - ITAT DELHI form 67 is a procedural / directory requirement and is not a mandatory requirement. Therefore, violation of procedural norms does not extinguish the substantive right of claiming the credit of FTC. We accordingly direct the AO to allow the credit of FTC and hold that rule 128(9) of the Rules does not provide for disallowance FTC in case of delay filing of form 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. Thus, AO ought to have granted foreign tax credit. Therefore, set aside the impugned order and restore the matter to the file of the assessing authority with a direction to verify the correctness of the claim of the assessee and, after verification, the assessee may be granted foreign tax credit - Appeal of the assessee is allowed for statistical purposes only.

Summary

Issues Involved:
1. Confirmation of disallowance of Foreign Tax Credit (FTC) by CIT(A).
2. Procedural requirement of filing Form 67 along with the Income Tax Return (ITR).
3. Applicability of Double Tax Avoidance Agreement (DTAA) provisions over Income Tax Act.
4. Legality of disallowance under Section 143(1) for procedural non-compliance.
5. Precedents supporting the allowance of FTC despite procedural delays.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance of Foreign Tax Credit (FTC):
The core issue in this appeal is the confirmation by the CIT(A) of the disallowance of FTC claimed by the assessee against salary income earned in Japan. The disallowance was initially made by the Centralized Processing Centre (CPC) due to the non-filing of Form 67 within the prescribed time frame. The assessee contended that the filing of Form 67, albeit belatedly, should not extinguish the substantive right to claim FTC, especially when the form was submitted during the pendency of the appeal.

2. Procedural Requirement of Filing Form 67:
The assessee argued that the requirement to file Form 67 before the due date is procedural or directory, not mandatory. The violation of this procedural norm should not result in the denial of FTC. The argument hinges on the premise that procedural lapses should not override substantive rights, especially when the DTAA between India and Japan, which governs the tax treatment, does not specify such a requirement.

3. Applicability of Double Tax Avoidance Agreement (DTAA) Provisions:
The assessee relied on the provisions of the DTAA, asserting that the specific provisions of the DTAA should prevail over the general provisions of the Income Tax Act. The DTAA between India and Japan allows for the avoidance of double taxation, and the assessee claimed FTC under this agreement. The principle that DTAA provisions override conflicting provisions of domestic law was supported by CBDT Circular No. 333, which emphasizes that specific provisions in a DTAA should prevail over general provisions in the Income Tax Act.

4. Legality of Disallowance under Section 143(1):
The assessee contended that the disallowance of FTC by CPC under Section 143(1) was unjustified, as it involved a debatable issue that required a more detailed examination. The procedural irregularity of filing Form 67 late should not be grounds for a prima facie adjustment under Section 143(1), which is intended for clear, undisputed adjustments. The assessee cited a similar case from the ITAT Kolkata Bench, which held that procedural irregularities are not sufficient grounds for disallowance under Section 143(1).

5. Precedents Supporting the Allowance of FTC:
The assessee cited several decisions from various ITAT benches, including ITAT Bangalore, ITAT Jaipur, and ITAT Delhi, which supported the view that the late filing of Form 67 should not bar the allowance of FTC. These precedents emphasized that procedural requirements should not negate the substantive right to claim FTC, especially when the DTAA provisions are more beneficial to the taxpayer.

Conclusion:
In light of the arguments and precedents, the Tribunal concluded that the filing of Form 67 is a procedural requirement and not mandatory. The substantive right to claim FTC should not be denied due to procedural lapses. The Tribunal set aside the impugned order and remanded the matter to the assessing authority for verification of the claim, directing that FTC be granted in accordance with the law. The appeal was allowed for statistical purposes, emphasizing the precedence of DTAA provisions and the non-mandatory nature of procedural compliance.