2025 (5) TMI 214 - HC - Income Tax

Denial of Foreign tax credit - delay in filing Form 67 is only the procedural lapse on the part of the petitioner - HELD THAT - There is no dispute with regard to filing of income tax return in time i.e. 30.06.2018. While filing the income tax return the petitioner disclosed Foreign Income at 65, 61, 171/- and claimed a sum of Rs. 18, 85, 919/- towards foreign tax credit which was withheld by employer. The 2nd respondent vide order dated 14.05.2020 rejected the foreign tax credit on the ground that Form 67 was not submitted along with Income Tax Return. The Form 67 was introduced for the 1st time from the Assessment Year 2018-19 vide Rule 128(9) Income Tax Act and the same was filed by the petitioner on 20.05.2020. Thereafter the petitioner filed the rectification petition on 20.05.2020 and the same was rejected by the 3rd respondent on the ground that Form 67 was not filed in time. As rightly contended by the learned counsel for the petitioner the delay in filing the Form 67 is only the procedural lapse. That apart this Court in the decision cited by petitioner has observed that Rule 128 is not mandatory but to be considered as directory in nature. This Court is inclined to condone the delay in filing the Form 67 subject to payment of a cost of Rs. 10, 000/- to the Principal Government Naturopathy Medical College and Hospital.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the requirement of filing Form No. 67 along with the income tax return for claiming Foreign Tax Credit (FTC) under Rule 128(9) of the Income Tax Rules is mandatory or directory in nature;

(b) Whether the delay in filing Form No. 67 can be condoned, particularly when the Form is filed after the due date but before the completion of the assessment proceedings;

(c) Whether the foreign tax credit claimed by the petitioner should be allowed despite the procedural lapse of late filing of Form No. 67;

(d) The proper interpretation and application of relevant judicial precedents concerning the procedural requirements for claiming FTC and the consequences of non-compliance;

(e) The scope and extent of the Assessing Officer's discretion in rejecting FTC claims on procedural grounds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Mandatory or Directory Nature of Form 67 Filing for Claiming Foreign Tax Credit

The Court examined Rule 128(9) of the Income Tax Rules, which introduced Form 67 from the Assessment Year 2018-19 as a procedural requirement for claiming FTC under Section 90 of the Income Tax Act. The petitioner contended that the requirement to file Form 67 along with the return of income is only directory and not mandatory, and hence the delay in filing should not result in denial of FTC.

The Court relied heavily on a recent decision of the same High Court in a similar case, where it was held that Rule 128 is directory and not mandatory. The Court referred to the reasoning that procedural rules cannot convert a substantive right into a forfeitable claim merely by imposing a strict timeline for filing Form 67.

Further, the Court cited the Supreme Court judgment in Commissioner of Income-Tax, Maharashtra v. G.M. Knitting Industries (P) Limited, which held that even if the prescribed form (Form 3AA in that case) is not filed along with the return but is filed during the assessment proceedings before the final order, it amounts to sufficient compliance. This principle was applied analogously to Form 67, emphasizing that procedural non-compliance can be rectified before completion of assessment.

The Court noted that the petitioner had disclosed the foreign income and claimed FTC in the original return, albeit without Form 67, and subsequently filed Form 67 before the completion of assessment proceedings.

Issue (b): Condonation of Delay in Filing Form 67

The petitioner filed Form 67 belatedly on 20.05.2020, nearly two years after filing the original return on 30.06.2018. The Assessing Officer rejected the claim on the ground that Form 67 was not filed along with the return and was submitted only after processing of the return.

The Court, relying on the aforementioned precedent, held that the delay was a procedural lapse and that the delay in filing Form 67 could be condoned. The Court emphasized that the procedural rule was introduced only recently and the petitioner was under a bona fide impression that FTC would be allowed automatically.

In the interest of justice, the Court condoned the delay subject to the petitioner paying a cost of Rs. 10,000/- to a government institution. This condition was imposed to balance procedural discipline with substantive justice.

Issue (c): Allowance of Foreign Tax Credit Despite Procedural Lapse

The Court found that the foreign income of Rs. 65,61,171/- was undisputed and admitted by the Department. The petitioner had claimed FTC of Rs. 18,85,919/-, withheld by the foreign employer. The only ground for rejection was the procedural failure to file Form 67 on time.

Given the procedural nature of the lapse and the petitioner's compliance before final assessment, the Court held that the rejection of FTC was not in accordance with law. The Court directed the Assessing Officer to allow the FTC after the petitioner complied with the payment of the cost and filed proof thereof.

The Court remitted the matter back to the Assessing Officer for reassessment, emphasizing that the final order must consider the FTC claim filed by the petitioner.

Issue (d): Interpretation and Application of Judicial Precedents

The Court extensively relied on the principle laid down in the Supreme Court decision in Commissioner of Income-Tax, Maharashtra v. G.M. Knitting Industries (P) Limited, which clarified that procedural requirements for filing forms related to claims under the Income Tax Act are generally directory and not mandatory, provided compliance is made before the conclusion of assessment proceedings.

The Court also referred to its own earlier decision in Duraiswamy Kumaraswamy Vs. Principal Commissioner of Income Tax, which held that Rule 128 is directory and that delay in filing Form 67 can be condoned.

The Court rejected the respondents' contention that the procedural requirement is mandatory, recognizing that strict adherence to procedural rules should not defeat substantive rights.

Issue (e): Scope of Assessing Officer's Discretion in Rejecting FTC Claims

The Court observed that the Assessing Officer's rejection of the FTC claim solely on the ground of delay in filing Form 67 was not proper. The procedural lapse was rectified before final assessment, and the Assessing Officer was directed to reconsider the claim in light of the petitioner's compliance and the binding judicial precedents.

The Court's order effectively limited the discretion of the Assessing Officer to reject FTC claims on procedural grounds when the substantive claim is genuine and compliance is made before the final assessment.

3. SIGNIFICANT HOLDINGS

The Court held:

"The filing of Form 67 in terms of 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."

"Even if the prescribed form is not filed along with the return of income but is filed during the assessment proceedings before the final order of assessment is made, that would amount to sufficient compliance."

"The rejection of foreign tax credit solely on the ground that Form 67 was not filed along with the return is not in accordance with law, when the Form is filed before completion of assessment."

"Delay in filing Form 67 is a procedural lapse which can be condoned in the interest of justice, subject to payment of cost."

Accordingly, the impugned order rejecting the foreign tax credit claim was set aside, and the matter was remitted to the Assessing Officer to grant credit for the foreign tax paid, after the petitioner pays the cost and furnishes proof thereof.

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