2025 (5) TMI 969 - AT - Income Tax

Denial of Foreign Tax Credit (FTC) - delay in filing of Form No.67 beyond the due date of filing the return - HELD THAT - We observe that in the case of Duraiswamy Kumaraswamy 2023 (11) TMI 1000 - MADRAS HIGH COURT has held that filing of Form No.67 read with Rule 128 of the Income-tax Rules 1962 is only directory in nature and not mandatory. Similar view has also been followed by this Tribunal in the case of Preeti Das 2025 (1) TMI 1065 - ITAT PUNE placing reliance of the judgment of Hon ble Madras High Court in the case of Duraiswamy Kumaraswamy Supra . Thus we allow the claim of FTC claimed by the assessee in Form No.67 and allow the Grounds of appeal Nos. 1 2 and 3 raised by the assessee. Taxation of dividend income from USA based company - In the income-tax return assessee has offered this income to tax @25% as per Article 10 of Indo-USA Double Taxation Avoidance Agreement - CPC while processing the return u/s. 143(1)(a) has taxed the said dividend income @30% - HELD THAT - Article 10 we find that 2(a) is not applicable on the facts of the case and what remains is clause 2(b) which provides that except for the cases covered in 2(a) in all other cases the dividend is taxable @25% of the gross amount. Since the rate of tax is already prescribed under the Treaty the same shall prevail over and above the normal tax rate provided under the Act. Therefore assessee has rightly offered to tax the dividend income @25% and the CPC grossly erred in taxing the dividend income @30% in the given case. Finding of CIT(A) is set aside. The additional ground of appeal raised by the assessee is allowed.

The core legal questions considered by the Tribunal are:

1. Whether the denial of Foreign Tax Credit (FTC) of Rs. 2,15,252/- on the ground of delayed filing of Form No. 67 beyond the due date for filing the income tax return under section 139(1) of the Income-tax Act, 1961 (the Act) is justified.

2. Whether dividend income of Rs. 8,61,084/- received from a USA-based company was rightly taxed at 30% by the CPC instead of the reduced treaty rate of 25% as per Article 10 of the India-USA Double Taxation Avoidance Agreement (DTAA).

3. Grounds of appeal numbered 4 and 5 were noted to be alternate in nature and did not require adjudication.

Issue 1: Denial of Foreign Tax Credit due to delayed filing of Form No. 67

Relevant legal framework and precedents: Section 90 and 91 of the Act provide for relief from double taxation, including allowance of FTC. Rule 128 of the Income-tax Rules, 1962 mandates filing of Form No. 67 to claim FTC. The due date for filing the return under section 139(1) was 15.03.2022 for the relevant assessment year. The assessee filed Form No. 67 belatedly on 24.07.2022. The denial of FTC was solely on this ground.

The Tribunal relied heavily on the judgment of the Hon'ble Madras High Court in Duraiswamy Kumaraswamy v. PCIT (2024) 336 CTR 108 (Madras), which held that filing of Form No. 67 under Rule 128 is directory and not mandatory. The Tribunal also referred to its own precedents including Preeti Das v. ITO (ITA No. 2491/PUN/2024) and Samiran Arunkumar Dutta v. DCIT (ITA No. 1195/PUN/2024), which followed the Madras High Court's view and allowed FTC despite delayed filing of Form No. 67, provided the form was filed before the return was processed.

Court's interpretation and reasoning: The Tribunal noted that the Form No. 67 was filed before the processing of the return by the CPC, Bangalore, and thus was available on record. The Tribunal emphasized that Rule 128 is procedural and directory, intended to implement the provisions of the Act, and non-compliance with the due date for filing Form No. 67 should not result in denial of substantive relief of FTC.

Key evidence and findings: The assessee filed the return on 14.11.2022 and Form No. 67 on 24.07.2022, both dates post the due date of 15.03.2022. The CPC processed the return after the filing of Form No. 67, making the form available for consideration.

Application of law to facts: Applying the principle that procedural requirements are directory, the Tribunal held that FTC cannot be denied solely on the ground of delayed filing of Form No. 67. The Tribunal directed the Assessing Officer to allow the FTC after due verification.

Treatment of competing arguments: The Revenue argued in favor of strict compliance with the due date, but the Tribunal rejected this, relying on binding judicial precedents that favored a liberal and purposive interpretation to allow FTC and avoid double taxation.

Conclusion: The Tribunal allowed the claim of FTC of Rs. 2,15,252/-, setting aside the denial by the lower authorities.

Issue 2: Taxation of Dividend Income from USA-based Company at 30% instead of 25%

Relevant legal framework and precedents: Article 10 of the India-USA DTAA governs taxation of dividends paid by a resident company of one Contracting State to a resident of the other. Article 10(2)(b) provides that dividends, except those covered under clause (a) (15% rate for qualifying companies), shall be taxed at a maximum of 25% of the gross amount.

Court's interpretation and reasoning: The Tribunal examined Article 10 in detail, noting that clause 2(a) was not applicable as the assessee did not own at least 10% of the voting stock of the company paying dividends. Therefore, clause 2(b) applied, fixing the maximum tax rate at 25%. The Tribunal held that the treaty rate prevails over the domestic tax rate under the Act, which is 30% for dividend income.

Key evidence and findings: The assessee had offered the dividend income to tax at 25% as per the treaty. The CPC, however, taxed it at 30% during processing under section 143(1)(a). The Tribunal found this to be an error.

Application of law to facts: Applying the treaty provisions, the Tribunal concluded that the dividend income should be taxed at 25%, not 30%, as per the India-USA DTAA.

Treatment of competing arguments: The Revenue supported the higher domestic tax rate, but the Tribunal emphasized the supremacy of the DTAA provisions in cases of conflict with domestic law, as per section 90(2) of the Act.

Conclusion: The Tribunal set aside the CIT(A)'s order and allowed the additional ground of appeal, directing the CPC to compute tax on dividend income at 25%.

Issue 3: Grounds of appeal Nos. 4 and 5

The Tribunal noted these grounds were alternate in nature and did not require adjudication.

Significant holdings include:

"Filing of Form No.67 read with Rule 128 of the Income-tax Rules, 1962 is only directory in nature and not mandatory."

"The CPC, Bangalore cannot deny the claim for credit for foreign tax paid merely because Form No.67 was not filed within the due date specified for filing the return of income under the provisions of section 139(1) of the Act, as it is merely directory in nature."

"The rate of tax prescribed under the Treaty shall prevail over and above the normal tax rate provided under the Act."

"Since clause 2(a) of Article 10 is not applicable, clause 2(b) applies, which provides that dividend income shall be taxed at 25% of the gross amount."

The Tribunal's final determinations were that the FTC claim be allowed despite the delayed filing of Form No. 67, and that dividend income from the USA-based company be taxed at 25% as per the DTAA, not 30% as charged by the CPC. The appeal was allowed accordingly.

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