Delay in Filing Form 67 will not disallow Foreign Tax Credit

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Delay in Filing Form 67 will not disallow Foreign Tax Credit

Introduction:

In a significant development within the realm of income tax jurisprudence, the Income Tax Appellate Tribunal (ITAT), Delhi “A” Bench, comprising Shri Kul Bharat (Judicial Member) and Shri M Balaganesh (Accountant Member), rendered a noteworthy decision on April 17, 2023, in the case of Ajay Kumar Mishra vs DCIT. The appeal, originating from the assessment year 2018-19, challenged the order of the Ld. CIT(A), National Faceless Appeal Centre (“NFAC”).

Background of the Case:

The appellant, Ajay Kumar Mishra, a resident of B-12, The ICON, DLF City, Phase-5, Gurgaon, Haryana, filed an appeal against the final assessment order issued by the Assessing Officer (AO) under Section 143(3) read with Section 144B of the Income Tax Act. The crux of the appeal centered around the disallowance of Foreign Tax Credit (FTC) amounting to INR 35,02,850 and the imposition of interest under sections 234A, 234B, and 234C of the Income Tax Act.

Key Grounds of Appeal:

  1. Contesting the final assessment order on both legal and factual grounds.
  2. Alleging that the AO overlooked the foreign tax credit due to a procedural lapse in filing Form 67, resulting in a violation of the principle of natural justice.
  3. Objecting to the disallowance of INR 35,02,850 as foreign tax credit despite providing comprehensive submissions, explanations, and evidence, contrary to established legal principles.
  4. Challenging the imposition of interest under sections 234A, 234B, and 234C.

Procedural Lapse and Disallowance:

The appellant’s primary contention revolved around the disallowance of FTC, a consequence of the delay in filing Form 67, a procedural requirement stipulated by Rule 128 of the Income Tax Rules, 1962. The appellant’s return of income, initially processed by the Centralized Processing Center (CPC), underwent limited scrutiny concerning the issue of Double Taxation Relief under sections 90/91 of the Income Tax Act.

Legal Arguments:

The crux of the appellant’s argument rested on the premise that the disallowance of FTC was solely premised on the tardy submission of Form 67, a procedural prerequisite under Rule 128. The appellant vehemently asserted that Rule 128 is procedural in nature and not mandatory. Drawing attention to Section 90 of the Act, coupled with Article 25(2)(a) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA, the appellant contended that tax paid in the USA is eligible as a credit against Indian tax, subject to the proportion of Indian tax.

The appellant underscored that the provisions of DTAA take precedence over procedural rules and emphasized that filing Form 67 is directory, not mandatory. The appellant bolstered their argument by citing various legal precedents, asserting that procedural lapses should not compromise substantive rights.

Judgment and Relief:

In a watershed moment for the appellant, the ITAT categorically held that the disallowance of the FTC claim was unwarranted. Relying on precedents from analogous cases, the ITAT directed the Assessing Officer to accord due recognition to the appellant’s claim for Foreign Tax Credit.

Comprehensive Analysis:

  1. Factual Matrix: The factual backdrop of the case unveils Ajay Kumar Mishra’s appeal against the final assessment order, which primarily hinged on the disallowance of Foreign Tax Credit. The appellant contended that the disallowance stemmed from a procedural lapse, specifically the delayed submission of Form 67.
  2. Procedural Compliance and Foreign Tax Credit: Central to the dispute was the procedural requirement encapsulated in Rule 128 of the Income Tax Rules, 1962. Rule 128 outlines the conditions for claiming Foreign Tax Credit, including the filing of Form 67. The appellant argued that a delay in filing Form 67 should not impede the claim for FTC, emphasizing the procedural nature of Rule 128.
  3. Limited Scrutiny and Assessment Proceedings: The case originated from limited scrutiny initiated on the grounds of Double Taxation Relief under sections 90/91 of the Income Tax Act. The AO, while framing the assessment, disallowed the claim for FTC, leading to the subsequent appeal before the Ld. CIT(A).
  4. Grounds of Appeal: The appellant’s grounds of appeal extended beyond the mere disallowance of FTC. Challenges were mounted against the final assessment order on legal and factual fronts. The appellant specifically questioned the AO’s oversight of the foreign tax credit due to the procedural lapse, arguing it constituted a violation of the principle of natural justice.
  5. Legal Framework – Section 90 and DTAA: The appellant’s legal arguments drew heavily from Section 90 of the Income Tax Act, which empowers the Government of India to enter into agreements with other countries for granting relief in respect of income on which taxes are paid outside India. Article 25 of the DTAA between India and the USA was pivotal, providing for credit for foreign taxes.
  6. Overriding Effect of DTAA: A cornerstone of the appellant’s defense was the assertion that the provisions of DTAA override procedural rules. Article 25(2)(a) of the DTAA expressly allows a deduction from the tax on the income of a resident, equal to the income tax paid in the USA. The appellant contended that neither Section 90 nor the DTAA prescribed the disallowance of FTC for procedural non-compliance.
  7. Rule 128 – Procedural or Mandatory? The appellant firmly argued that Rule 128 is a procedural provision and not mandatory. The Rule outlines the procedure for claiming FTC, including the filing of Form 67. However, the appellant asserted that the Rule should be interpreted in the context of procedural requirements, without imposing conditions leading to disallowance.
  8. Precedents and Legal Support: To fortify their position, the appellant cited legal precedents that underscored the non-mandatory nature of procedural requirements. Decisions from the Hon’ble Supreme Court, including Mangalore Chemicals & Fertilizers Ltd. vs. Deputy Commissioner and Sambhaji and Others vs. Gangabai and Others, were invoked to establish that procedural laws should not be construed as mandatory, especially when substantive rights are at stake.
  9. Delegated Legislation and Constitutional Validity: An intriguing aspect of the appellant’s argument was the constitutional challenge to delegated legislation. The filing of Form 67, being a procedural requirement under Rule 128, was framed as a delegated legislation conferred by Section 295 of the Income Tax Act. The appellant contended that such delegated legislation cannot overreach the principal legislation as mandated under Article 253 of the Constitution of India.
  10. Decision of ITAT: The ITAT’s decision was a resounding victory for the appellant. Citing precedents from other cases, the ITAT rejected the disallowance of the claim for FTC. The tribunal underscored the procedural nature of Rule 128 and emphasized that procedural lapses should not undermine substantive rights. The AO was directed to grant the Foreign Tax Credit to the appellant.

Conclusion:

The ITAT’s decision in the case of Ajay Kumar Mishra vs DCIT serves as a beacon in the realm of income tax jurisprudence, shedding light on the delicate balance between procedural requirements and substantive rights. The appellant’s success in challenging the disallowance of Foreign Tax Credit reinforces the principle that procedural lapses should not eclipse the fundamental rights of taxpayers.

The judgment places significant importance on the provisions of Double Taxation Avoidance Agreements, emphasizing their overarching influence on procedural rules. By directing the Assessing Officer to grant the Foreign Tax Credit, the ITAT reaffirms its commitment to upholding the principles of natural justice and ensuring a fair and just tax assessment process.

Taxpayers, legal practitioners, and scholars alike can glean valuable insights from this decision, recognizing the pivotal role of legal arguments grounded in statutory provisions, DTAA provisions, and precedents. As the landscape of tax law continues to evolve, this case stands as a testament to the judiciary’s role in safeguarding the rights of taxpayers and maintaining the delicate equilibrium between procedural compliance and substantive justice.

Judicial Precedents:

  1. CIT vs Axis Computers (India) (p.) Ltd [2009] 178 Taxman 143 (Delhi)
  2. PCIT, Kanpur vs Surya Merchants Ltd [2016] 72 taxmann.com 16 (Allahabad)
  3. CIT, Central Circle vs American Data Solutions India (P) Ltd [2014] 45 taxmann.com 379 (Karnataka)
  4. CIT-II vs Mantee Consultants (P.) Ltd [2009] 178 Taxman 429 (Delhi)
  5. CIT vs ACE Multitaxes Systems (p.) Ltd [2009] 317 ITR 207 (Karnataka).
  6. Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC)
  7. CIT v Eli Lily & Co (India) P Ltd (2009) 178 Taxman 505 (SC)
  8. GE India Technology Centre P Ltd v CIT (2010) 193 Taxman 234 (SC)
  9. Engineering Analysis Centre of Excellence P Ltd v CIT (2021) 125 taxmann.com 42 (SC) (Pg 106-109 of PB 2-Para 25 & 26)
  10. CBDT Circular No 333 dated 2/4/82 137 ITR (St.)
  11. Rohan Hattangadi Vs CIT (A) (Hon’ble ITAT Mumbai):- “It was held that that delay in filing Form No. 67 should not by, in anyway, deny the claim of FTC enumerated in the DTAA and the intention of the legislation in the said case has to be construed in a manner which benefits the assessee. The A.O. is hereby directed to allow the FTC claim of the assessee and to grant refund in accordance with the law”.
  12. Ritesh Kumar Garg Vs ITO (Hon’ble ITAT Jaipur):- “It was held that filing of 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”.
  13. Brinda Rama Krishna Vs ITO (2022) (Hon’ble ITAT Bangalore):- “It was held that (i) Rule 128(9) of the Rules does not provide for disallowance of FTC in case of delay in filing Form No.67; (ii) filing of Form No. 67 is not mandatory but a directory requirement and (iii) DTAA overrides the provisions of the Act and the Rules cannot be contrary to the Act. In the result, the appeal is allowed and benefit of FTC is allowed”
  14. Mangalore Chemicals & Fertilizers Ltd. vs. Deputy Commissioner (1992 Supp (1) Supreme Court 21) & Sambhaji and Others vs. Gangabai and others f2008] 17 SCC 117 (SC):- “The Hon’ble Apex Court had laid down the proposition that procedural law should not be construed as mandatory and should only aid the claim of substantive right”.

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