2025 (4) TMI 580 - AT - Income Tax

Denial of the Foreign Tax Credit (FTC) u/s 90 - Form 67 was belatedly filed - HELD THAT - As decided in Anindya Sarkar 2024 (7) TMI 1564 - ITAT KOLKATA 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 the claiming credit for FTC in case of delay in filing the return of income as the credit for FTC is a vested right of the assessee and since form 67 was filed in response to the query received from CPC as contended by the assessee therefore there was no justification for not allowing the credit for FTC. Appellant deserves the credit for taxes paid in Nepal since the provisions of DTAA (in this case DTAA with Nepal) have an overriding effect over other provisions of the Act. Accordingly the claim of the appellant is directed to be allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the denial of the Foreign Tax Credit (FTC) under Section 90 of the Income Tax Act, 1961, due to the late filing of Form No. 67, was justified.

2. Whether the adjustment made by the Centralized Processing Center (CPC), Bengaluru, without prior intimation to the assessee, violated the principles of natural justice as per the first proviso to Section 143(1) of the Income Tax Act, 1961.

3. Whether the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Nepal override the procedural requirements under the Income Tax Act and Rules, specifically concerning the timing of filing Form No. 67.

4. Whether the enhancement of interest under Sections 234B and 234C of the Act was justified in light of the foreign tax credit claim.

5. Whether the appellant was denied a fair opportunity of being heard, thus breaching the principles of natural justice.

ISSUE-WISE DETAILED ANALYSIS

1. Denial of FTC Due to Late Filing of Form No. 67

Relevant legal framework and precedents: Section 90 of the Income Tax Act, 1961, provides for relief from double taxation in accordance with DTAAs. Rule 128 of the Income Tax Rules requires Form No. 67 to be filed for claiming FTC. The Tribunal referenced a prior decision in Anindya Sarkar Vs. Assistant Director of Income Tax, which addressed similar issues regarding late filing and the applicability of DTAAs.

Court's interpretation and reasoning: The Tribunal emphasized that DTAAs are intended to prevent double taxation and generally have an overriding effect over domestic tax provisions. It was noted that the appellant had paid taxes in Nepal on income earned there and that the DTAA with Nepal should facilitate the credit of such taxes against Indian tax liability.

Key evidence and findings: The appellant filed Form No. 67 belatedly, which was the basis for the denial of FTC by the CPC. However, the Tribunal found that the DTAA provisions should take precedence, allowing the FTC despite the procedural lapse.

Application of law to facts: The Tribunal applied the DTAA provisions, which allowed for the credit of taxes paid in Nepal against the appellant's Indian tax liability, overriding the procedural requirement of timely filing Form No. 67.

Treatment of competing arguments: The appellant argued for the allowance of FTC based on the substantive right under the DTAA, while the respondent relied on procedural compliance. The Tribunal favored the substantive right over procedural compliance.

Conclusions: The Tribunal concluded that the appellant was entitled to the FTC, as the DTAA provisions override the procedural requirements under domestic law.

2. Adjustment Without Prior Intimation

Relevant legal framework and precedents: The first proviso to Section 143(1) mandates prior intimation to the assessee before making adjustments. This is rooted in the principles of natural justice.

Court's interpretation and reasoning: The Tribunal found that the CPC's failure to provide prior intimation before denying the FTC was a breach of the principles of natural justice.

Key evidence and findings: The appellant did not receive any intimation regarding the adjustment, which was a procedural lapse on the part of the CPC.

Application of law to facts: The Tribunal applied the principles of natural justice, emphasizing the requirement for prior intimation, and found the CPC's actions to be procedurally flawed.

Treatment of competing arguments: The appellant argued that the lack of intimation constituted a breach of natural justice, while the respondent did not provide a sufficient counter-argument.

Conclusions: The Tribunal concluded that the adjustment was procedurally invalid due to the lack of prior intimation.

3. DTAA Provisions vs. Procedural Requirements

Relevant legal framework and precedents: DTAAs are designed to prevent double taxation and generally override domestic tax provisions when beneficial to the taxpayer.

Court's interpretation and reasoning: The Tribunal reiterated that the DTAA provisions should take precedence, particularly when they provide relief from double taxation.

Key evidence and findings: The Tribunal referred to the DTAA between India and Nepal, which allows for the credit of taxes paid in Nepal against Indian tax liability.

Application of law to facts: The Tribunal applied the DTAA provisions, granting the FTC despite the procedural lapse in filing Form No. 67.

Treatment of competing arguments: The appellant emphasized the substantive right under the DTAA, while the respondent focused on procedural compliance. The Tribunal sided with the appellant.

Conclusions: The Tribunal concluded that the DTAA provisions override procedural requirements, allowing the FTC claim.

4. Enhancement of Interest Under Sections 234B and 234C

Relevant legal framework and precedents: Sections 234B and 234C pertain to interest on delayed payment of advance tax and deferment of advance tax, respectively.

Court's interpretation and reasoning: The Tribunal found that once the FTC is allowed, the basis for the interest enhancement under these sections is nullified.

Key evidence and findings: The Tribunal noted that the FTC, once granted, would eliminate any outstanding tax liability that could attract interest under Sections 234B and 234C.

Application of law to facts: The Tribunal applied the allowance of FTC to negate the interest enhancement.

Treatment of competing arguments: The appellant argued that the FTC would nullify any interest liability, which the Tribunal accepted.

Conclusions: The Tribunal concluded that the enhancement of interest was unjustified once the FTC was allowed.

5. Opportunity of Being Heard

Relevant legal framework and precedents: The principles of natural justice require that parties be given a fair opportunity to present their case.

Court's interpretation and reasoning: The Tribunal found that the appellant was not afforded a sufficient opportunity to be heard, which constituted a breach of natural justice.

Key evidence and findings: The appellant contended that they were not given adequate opportunity to present their case before the appellate order was passed.

Application of law to facts: The Tribunal applied the principles of natural justice, finding procedural shortcomings in the appellate process.

Treatment of competing arguments: The appellant argued for a fair hearing, which the Tribunal found to be lacking in the proceedings.

Conclusions: The Tribunal concluded that the appellant was denied a fair hearing, breaching natural justice principles.

SIGNIFICANT HOLDINGS

The Tribunal held that the provisions of the DTAA between India and Nepal override procedural requirements under the Income Tax Act, allowing the appellant's claim for FTC. The Tribunal emphasized the principle that DTAAs, being more beneficial to the taxpayer, should prevail over domestic law when there is a conflict. The Tribunal also highlighted the importance of adhering to the principles of natural justice, particularly in providing prior intimation and a fair opportunity to be heard. Consequently, the Tribunal directed that the appellant's claim for FTC be allowed and found the enhancement of interest under Sections 234B and 234C to be unjustified. The appeal was allowed in favor of the appellant.