2024 (11) TMI 916 - AT - Income Tax

Denial of foreign tax credit ( FTC ) on tax paid on foreign income in Sri Lanka - non-filing of Form 67 at the time of filing of original return - procedural v/s mandatory provision - HELD THAT - Article 23 of the India-Sri Lanka DTAA mandates that reliefs should be provided to avoid double taxation and FTCs should be granted when tax is paid in both the countries. Denying of FTC due to procedural delay in filing Form 67 goes against the DTAA s objectives. Section 90 allows relief in cases of double taxation. Although Rule 128(9) requires Form 67, the assessee s compliance within this rule during the rectification stage demonstrated a good faith or effort to fulfil procedural requirement. Hon ble Courts and Tribunal has often held that procedural delay should not be hindered substantive relief when the claimant has made all other substantive requirement. As the assessee fulfils the substantive requirement of paying taxes in Sri Lanka and subsequently claimed FTC as per DTAA u/s 90 of the Act and filing of the Form 67 during rectification process suffices as a procedural compliance to the claim of FTC. Moreover, the objective of the Article 23 of the DTAA and section 90 to mitigate double taxation which should not be compromised by procedural technicalities when substantive compliance is evident. We find that the assessee is entitled to FTC on foreign tax paid. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Denial of Foreign Tax Credit (FTC) due to procedural non-compliance.
2. Interpretation of Double Taxation Avoidance Agreement (DTAA) provisions.
3. Applicability of Section 90 of the Income Tax Act and Rule 128 of the Income-tax Rules regarding FTC.

Detailed Analysis:

1. Denial of Foreign Tax Credit (FTC) Due to Procedural Non-compliance:

The primary issue in this case was the denial of FTC to the assessee, which was claimed for taxes paid on foreign income in Sri Lanka. The disallowance was based on the procedural non-compliance of not filing Form 67 at the time of the original return submission. The assessee argued that this was merely a procedural error and should not obstruct the FTC, especially since Form 67 was filed before the intimation order under Section 143(1) and was available during rectification proceedings. The Tribunal acknowledged that the filing of Form 67 is procedural and not mandatory, and its non-filing should not extinguish the substantive right to claim FTC. The Tribunal referred to multiple precedents where procedural delays did not hinder substantive relief, emphasizing that procedural requirements should not override substantive rights.

2. Interpretation of Double Taxation Avoidance Agreement (DTAA) Provisions:

The DTAA between India and Sri Lanka, specifically Article 23, aims to eliminate double taxation and allows for FTC. The assessee contended that the DTAA provisions override the procedural requirements of the Income Tax Act if they are more beneficial. The Tribunal agreed, noting that the DTAA's objective is to mitigate double taxation, and procedural technicalities should not compromise this objective. The Tribunal cited past judicial decisions supporting the view that DTAA provisions take precedence over domestic law when they are more favorable to the taxpayer.

3. Applicability of Section 90 of the Income Tax Act and Rule 128 of the Income-tax Rules Regarding FTC:

Section 90 of the Income Tax Act allows for relief in cases of double taxation, aligning with the DTAA's provisions. Rule 128(9) requires the filing of Form 67 for FTC claims, but the Tribunal found that this requirement is directory, not mandatory. The Tribunal highlighted that neither Section 90 nor the DTAA stipulates that FTC should be disallowed for procedural non-compliance. The Tribunal concluded that since the assessee fulfilled the substantive requirement of paying taxes in Sri Lanka and claimed FTC under the DTAA and Section 90, the procedural compliance of filing Form 67 during rectification sufficed.

Conclusion:

The Tribunal concluded that the denial of FTC due to the procedural delay in filing Form 67 was unjustified. The assessee's substantive compliance with the DTAA and Section 90 was evident, and procedural technicalities should not impede the relief from double taxation. The Tribunal allowed the appeal, directing the Assessing Officer to grant the FTC claim in accordance with the DTAA and Section 90, and to rectify the tax demand resulting from the disallowance of FTC.