2025 (3) TMI 1046 - AT - Income Tax

Denial of Foreign Tax credit claimed u/s 90/90A - directory v/s mandatory obligation - HELD THAT - The claim of FTC is allowable to the assessee on the facts of the case as Form No. 67 was filed along with the return of income and the filing of the Form is held to be directory and not mandatory in nature and the provisions of DTAA override the provisions of the Income Tax Act 1961. Since the provision of DTAA override the provision of Section 90 of the Act as they are more beneficial to the assessee in view of judicial pronouncements in this regard and since Rule 128(a) does not preclude the assessee from claiming credit for FTC in case of delay in filing the required Form No. 67 as the credit for FTC is a vested right of the assessee and since Form No. 67 was filed along with the return of income and was available at the time of processing the return of income u/s 143(1)(a) of the Act as contended by the assessee therefore there was no justification for not allowing the credit for FTC. Assessee appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment revolve around the allowance of Foreign Tax Credit (FTC) claimed under sections 90/90A of the Income Tax Act, 1961. The primary issues include:

• Whether the filing of Form No. 67 is a mandatory requirement for claiming FTC under Rule 128 of the Income Tax Rules, 1962.
• Whether the provisions of the Double Taxation Avoidance Agreement (DTAA) override the procedural requirements of the Income Tax Act and Rules.
• Whether the delay in filing Form No. 67 can lead to the denial of FTC.

ISSUE-WISE DETAILED ANALYSIS

1. Mandatory Nature of Form No. 67 Filing

• Relevant Legal Framework and Precedents: Rule 128(9) of the Income Tax Rules requires Form No. 67 to be filed on or before the due date of filing the return of income under section 139(1) of the Act. However, the rule does not explicitly state that failure to meet this requirement results in the disallowance of FTC.
• Court's Interpretation and Reasoning: The Tribunal referred to several precedents, including decisions from the Bangalore and Kolkata Benches, which held that the requirement to file Form No. 67 is directory rather than mandatory. The Tribunal emphasized that procedural requirements should not extinguish substantive rights.
• Key Evidence and Findings: The appellant filed Form No. 67 along with the return of income, albeit after the due date under section 139(1), but within the extended period under section 139(4).
• Application of Law to Facts: The Tribunal found that the appellant complied with the substantive requirement of filing Form No. 67, and the procedural delay should not impede the FTC claim.
• Treatment of Competing Arguments: The Department argued for the mandatory nature of the rule, but the Tribunal favored a directory interpretation, aligning with higher judicial precedents.
• Conclusions: The Tribunal concluded that the filing of Form No. 67 is a procedural requirement and not filing it within the prescribed time should not preclude the allowance of FTC.

2. Override of DTAA Provisions

• Relevant Legal Framework and Precedents: Section 90 of the Act allows for agreements with foreign countries to avoid double taxation. Article 25 of the India-USA DTAA provides for FTC, overriding domestic law where more beneficial.
• Court's Interpretation and Reasoning: The Tribunal reiterated that DTAA provisions prevail over domestic law when beneficial to the taxpayer, as supported by Supreme Court rulings.
• Key Evidence and Findings: The appellant's claim was supported by the DTAA, which allowed for FTC irrespective of procedural delays in filing Form No. 67.
• Application of Law to Facts: The Tribunal applied the DTAA provisions, determining that the appellant was entitled to FTC as per the agreement between India and the USA.
• Treatment of Competing Arguments: The Tribunal dismissed the Department's reliance on procedural non-compliance, emphasizing the supremacy of DTAA provisions.
• Conclusions: The Tribunal held that the DTAA overrides procedural requirements, allowing the appellant's FTC claim.

SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The filing of FTC in terms of the Rule 128 is only directory in nature. The rule is only for the implementation of the provisions of the Act and it will always be directory in nature."
• Core Principles Established: The Tribunal established that procedural requirements should not negate substantive rights, and DTAA provisions take precedence over domestic rules when more beneficial.
• Final Determinations on Each Issue: The Tribunal allowed the appellant's claim for FTC, directing the Assessing Officer to grant the credit in accordance with the DTAA between India and the USA.

The Tribunal's decision underscores the importance of interpreting procedural rules in a manner that does not undermine substantive rights, particularly when international agreements provide more favorable terms. The judgment aligns with the principle that DTAA provisions, being part of international commitments, should be given effect over domestic procedural stipulations when they confer benefits to taxpayers.