2025 (6) TMI 1398 - AT - Income Tax

Foreign Tax Credit - denial of claim due to delay in filing Form-67 - HELD THAT - Filing of Form No. 67 is directory and not mandatory and therefore the relief of foreign tax credit is allowable as Form No. 67 was available at the time of processing of the return. See Swapan Bhttacharya 2025 (5) TMI 438 - ITAT KOLKATA which has referred to the decision of Duraiswamy Kumaraswamy 2023 (11) TMI 1000 - MADRAS HIGH COURT and Rahul Anand 2024 (12) TMI 638 - ITAT KOLKATA AO is directed to allow the credit for foreign taxes in accordance with law.

Summary

The core legal questions considered in this appeal revolve around the entitlement to Foreign Tax Credit (FTC) under the Income Tax Act, 1961 (the Act) and the Double Taxation Avoidance Agreement (DTAA) between India and the USA, specifically:

1. Whether the Foreign Tax Credit can be denied solely on the ground of delay in filing Form No. 67, which is prescribed under Rule 128 of the Income Tax Rules, 1962 (the Rules).

2. Whether the filing of Form No. 67 is mandatory or merely directory in nature for claiming FTC.

3. Whether non-compliance with the procedural requirement of timely filing of Form No. 67 can override the substantive right of the assessee to claim FTC under section 90 of the Act and the DTAA between India and USA.

4. Whether the decisions of various High Courts and the coordinate Benches of the Tribunal, which have held that filing of Form No. 67 is directory and that FTC cannot be denied for delay in filing the form, are binding and applicable.

5. Ancillary issue regarding correctness of income computation and allowance of relief on that basis.

Issue-wise Detailed Analysis:

Issue 1 & 2: Denial of Foreign Tax Credit due to delay in filing Form No. 67 and nature of filing requirement

Relevant Legal Framework and Precedents: Rule 128(1) of the Income Tax Rules, 1962, provides that a resident assessee shall be allowed credit for foreign tax paid in the year in which the corresponding income is offered to tax in India. Rule 128(9) requires filing of Form No. 67 on or before the due date of filing the return under section 139(1) of the Act. Section 90(1) of the Act empowers the Central Government to enter into agreements with other countries for relief in respect of income taxed in both countries. Article 25(2)(a) of the DTAA between India and USA mandates that India shall allow as a deduction from tax an amount equal to the income tax paid in the USA, subject to certain limits.

Judicial precedents relied upon include decisions of the Hon'ble Madras High Court and coordinate Benches of the Tribunal (e.g., Duraiswamy Kumaraswamy vs. PCIT, Rahul Anand vs. ADIT, Jaspal Singh Bindra vs. DCIT), which have held that filing of Form No. 67 is directory and not mandatory, and delay in filing cannot lead to denial of FTC.

Court's Interpretation and Reasoning: The Tribunal noted that neither section 90 of the Act nor the DTAA contains any provision that FTC shall be disallowed for non-compliance with procedural requirements such as timely filing of Form No. 67. The Tribunal emphasized that the substantive right to claim FTC under the DTAA and section 90 cannot be extinguished by procedural lapses. The Tribunal relied on the Supreme Court's observation in Mangalore Chemicals & Fertilizers Ltd. that not all statutory conditions are mandatory; some are procedural and directory.

The Tribunal further observed that Rule 128(9) nowhere explicitly states that failure to file Form No. 67 on time would result in denial of FTC. The amended Rule 128(9) effective from 01/04/2022, which permits filing Form No. 67 within the due date under section 139(1) or 139(4), was noted to be beneficial and thus applicable retrospectively. In the present case, the form was filed with a delay of only eight days, and hence the delay was minor and non-prejudicial.

Key Evidence and Findings: The assessee filed the return of income by 28/12/2020 and filed Form No. 67 on 18/01/2021, eight days after the due date of 10/01/2021. Documentary evidence supporting the payment of foreign tax and claim of FTC was submitted. The Assessing Officer (AO) and the Central Processing Centre (CPC) denied FTC due to delay in filing Form No. 67.

Application of Law to Facts: Applying the legal framework and judicial precedents, the Tribunal held that the delay in filing Form No. 67 did not justify denial of FTC. The substantive right under the DTAA and section 90 to claim FTC prevailed over procedural non-compliance. The Tribunal directed the AO to grant FTC accordingly.

Treatment of Competing Arguments: The Department relied on the mandatory nature of Rule 128(9) and the failure to meet the filing deadline as grounds to deny FTC. The Tribunal rejected this, relying on judicial pronouncements that procedural requirements are directory and the DTAA provisions override the domestic law in case of conflict. The Tribunal also relied on the CBDT Notification and Supreme Court rulings emphasizing the distinction between mandatory and directory conditions.

Conclusion: The Tribunal concluded that the filing of Form No. 67 is directory and that FTC cannot be denied merely on the ground of delay in filing the form. The assessee was entitled to FTC of Rs. 16,49,094/- as claimed.

Issue 3: Non-grant of FTC contrary to section 90 of the Act and DTAA between India and USA

Relevant Legal Framework and Precedents: Section 90(1) of the Act and Article 25(2)(a) of the DTAA between India and USA provide for relief from double taxation by allowing credit for foreign taxes paid. The Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income-tax held that DTAA provisions override the Income Tax Act unless more beneficial to the assessee.

Court's Interpretation and Reasoning: The Tribunal reiterated that FTC is a vested right under the DTAA and section 90 and that procedural non-compliance cannot defeat this right. The Tribunal held that the DTAA provisions have overriding effect over the Income Tax Act and Rules where applicable.

Key Evidence and Findings: The assessee was a resident of India and earned salary income in the USA, which was taxable in both countries. The foreign tax paid in the USA was duly documented and claimed as FTC.

Application of Law to Facts: The Tribunal applied the overriding effect of the DTAA and section 90 to hold that the FTC claim must be allowed irrespective of procedural delays.

Treatment of Competing Arguments: The Department's argument that procedural lapses justified denial was rejected on the ground that the DTAA and section 90 do not condition FTC on procedural compliance.

Conclusion: The Tribunal directed the AO to grant FTC in accordance with section 90 and the DTAA.

Issue 4: Binding effect of decisions of Madras High Court and coordinate Benches of the Tribunal

Relevant Legal Framework and Precedents: The Tribunal referred to several decisions, notably Duraiswamy Kumaraswamy vs. PCIT by the Madras High Court, and multiple Kolkata ITAT decisions (Rahul Anand, Jaspal Singh Bindra, etc.), which have consistently held that filing Form No. 67 is directory and that FTC cannot be denied for delay.

Court's Interpretation and Reasoning: The Tribunal found these decisions squarely applicable and binding in the present case, noting the identical facts and legal issues. The Madras High Court had set aside orders denying FTC on procedural grounds and remitted for reassessment allowing FTC.

Key Evidence and Findings: The Tribunal reviewed these precedents and found them persuasive and consistent with Supreme Court rulings distinguishing mandatory and directory conditions.

Application of Law to Facts: Applying these precedents, the Tribunal held that the assessee's claim for FTC must be allowed despite delay in filing Form No. 67.

Treatment of Competing Arguments: The Department's reliance on procedural compliance was rejected in light of binding judicial precedents.

Conclusion: The Tribunal followed the binding precedents and allowed the appeal.

Issue 5: Verification of income computation and allowance of relief

The Tribunal noted discrepancies in the income computation sheets and directed the AO to verify the return and allow relief as per law, particularly regarding capital gains figures. This ground was allowed for statistical purposes.

Significant Holdings:

"Foreign Tax Credit is an assessee's vested right as per Article 25(2)(a) of the DTAA between India and USA read with Section 90 of the Income Tax Act, 1961 and same cannot be disallowed for non-compliance with procedural requirement as prescribed in the rules."

"The filing of Form No. 67 is only a procedural/directory requirement and is not a mandatory requirement. Violation of procedural norm does not extinguish the substantive right of claiming the credit of Foreign Tax."

"Neither section 90 of the Act nor the DTAA provides that Foreign Tax Credit shall be disallowed for non-compliance with any procedural requirement."

"The provisions of DTAA shall override the provisions of the Income-tax Act unless they are more beneficial to the assessee."

"The mere fact that a condition is statutory does not mean all conditions are mandatory; some are procedural and directory in nature."

"The Assessing Officer is directed to give benefit of Foreign Tax Credit in respect of taxes paid outside India by the assessee in accordance with law and the DTAA between India and the USA."

The Tribunal allowed the appeal on grounds 1, 2, 3, and 4, directing the Assessing Officer to grant the Foreign Tax Credit despite the delay in filing Form No. 67, in accordance with the law and DTAA provisions. The ancillary ground relating to income computation was allowed for statistical purposes. Ground 5, being general, was not separately adjudicated.