Case Law Details
Ajay Kumar Mishra Vs DCIT (ITAT Delhi)
In the case of Ajay Kumar Mishra vs. DCIT (ITAT Delhi), the central issue revolved around the denial of Foreign Tax Credit (FTC) due to a procedural lapse in filing Form 67, as required under Rule 128 of the Income Tax Rules, 1962. The Income Tax Appellate Tribunal (ITAT), Delhi, adjudicated on the matter for the assessment year 2018-19, where the assessee contested the disallowance of FTC amounting to INR 35,02,850/- related to taxes paid in the USA.
Factual Background and Proceedings:
- Assessment and Disallowance: The assessee, in their return filed electronically on 31st August 2018, claimed FTC under Section 90 of the Income Tax Act, 1961, for taxes paid in the USA. However, the Assessing Officer (AO) disallowed the claim citing non-compliance with Rule 128(9) due to the late filing of Form 67, which is required to be submitted along with the return of income.
- Appeals: Aggrieved by the AO’s decision, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC), Delhi, who upheld the AO’s order. The CIT(A) affirmed that the procedural requirements under Rule 128 were not fulfilled, thereby justifying the disallowance.
- ITAT Decision: The matter was subsequently brought before the ITAT Delhi. The key arguments presented by the assessee included:
- Procedural lapses should not result in denial of substantive rights such as FTC, especially when the taxes have been genuinely paid.
- Rule 128(9), which mandates filing Form 67 by the due date of filing the return under Section 139(1), should be considered directory rather than mandatory.
- Precedents and judicial interpretations have consistently favored the allowance of FTC even in cases of procedural delays.
Legal Analysis and ITAT’s Ruling:
- Nature of Rule 128: ITAT interpreted Rule 128 as a procedural requirement aimed at facilitating the process of claiming FTC. It emphasized that procedural lapses, such as delayed filing of Form 67, should not automatically lead to the denial of substantive rights conferred under Section 90 of the Income Tax Act and Article 25 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
- Precedents and Judicial Stance: The ITAT referred to several judicial decisions, including Rohan Hattangadi vs CIT(A), Ritesh Kumar Garg vs ITO, and Brinda Rama Krishna vs ITO, where similar issues were addressed. These cases underscored that the denial of FTC purely due to procedural irregularities is unjustified when the substantive conditions for claiming FTC are met.
- DTAA Supremacy: Considering Article 25 of the DTAA, which allows FTC for taxes paid in the USA, the ITAT highlighted that the DTAA provisions should prevail over procedural rules like Rule 128. This principle ensures that taxpayers are not unduly penalized for procedural delays that do not undermine the substance of their claims.
- Principle of Natural Justice: The ITAT also alluded to the principle of natural justice, asserting that denying FTC solely on the grounds of a procedural lapse without considering the merits of the claim violates fair treatment principles.
- Decision: In alignment with the aforementioned judicial precedents and legal principles, the ITAT ruled in favor of the assessee. It directed the AO to allow the claim for FTC amounting to INR 35,02,850/-, emphasizing that the procedural non-compliance should not overshadow the substantive right of the assessee to claim relief under the DTAA.
The ITAT’s decision in Ajay Kumar Mishra vs. DCIT (ITAT Delhi) reaffirms the principle that procedural requirements should not overshadow substantive rights granted under tax laws and international agreements.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal filed by the assessee for the assessment year 2018- 19 is directed against the order of Ld. CIT(A), National Faceless Appeal Centre (“NFAC”), Delhi dated 17.06.2022.
2. The assessee has raised following grounds of appeal:-
1. “On the facts and circumstances of the case, the final assessment order passed by the learned Assessing Officer under Section 143(3) read with Section 144B of the Act is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in passing the order without considering the foreign tax credit merely due to a procedural lapse of filing of Form 67 is clear violation of the principle of natural justice.
3. (i) On the facts and circumstances of the case, the learned AO has erred both on facts and in law in making the disallowance of Rs. 35,02,850/- on account of foreign tax credit claimed by the assessee in respect of taxes paid in the USA and availed the relief from the double taxation as per the treaty between India and USA.
(ii) That the above said disallowance has been made despite the submissions and explanation along with the evidences brought on record justifying the claims made by the assessee.
(iii) That the above disallowance has been made ignoring the settled position of law that the foreign taxes paid by the assessee, shall be allowed as a credit against the Indian Tax, payable by a resident Indian to give him relief from double taxation on the same income.
4. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in charging the interest under section 234A, 2348 and 234C of the Income Tax Act.
5. That the appellant craves leave to add, amend or alter any of the grounds of appeal.”
3. Facts giving rise to the present appeal are that in this case, the assessee filed its return of income electronically in ITR-3 on 31.08.2018, disclosing total income of INR 1,08,66,510/-. The case was taken up for limited scrutiny on the issue of Double Taxation Relief u/s 90/91 of the Income Tax Act, 1961 (“the Act”). While framing assessment, the Assessing Officer (“AO”) had disallowed claim of Foreign Tax Credit (“FTC”) of INR 35,02,850/- in terms of Rule 128 of the Income Tax Rules, 1962 (“the Rules”).
4. Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who after considering the submissions, dismissed the appeal of the assessee and sustained the action of AO.
5. Aggrieved against the order of Ld.CIT(A), the assessee has preferred the appeal before the Tribunal.
6. At the outset, Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. For the sake of clarity, the written submissions of the assessee are reproduced as under:-
Ground No.1, 4 &5:-
These grounds are of routine nature and may be dealt with accordingly.
Ground No.2 and 3:-
Ground No.2:-
That on the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeal) (hereafter called CIT(A)), has erred both on facts and in law in passing the order without considering the foreign tax credit merely due to procedural lapse of filing of Form 67 is clear violation of the principle of natural justice.
Ground No.3:-
i) On the facts and circumstance of the case, the Ld. A.O. has erred both on facts and in law in making the disallowance of Rs. 35,02,850/- on account of Foreign Tax Credit (FTC) claimed by the assessee in respect of taxes paid in the USA and availed the relief from the double taxation as per the treaty between India & USA.
ii) That the above said disallowance has been made despite the submission and explanation along with the evidences brought on record justifying the claims made by the assessee.
iii) That the above disallowance has been made ignoring the settled position of law that the FTC paid by the assessee, shall be allowed as a credit against the Indian Tax, payable by a resident Indian to give him relief from double taxation on the same income.
In respect to the above grounds of appeal, we would like to draw your kind attention that the Ld. A.O./NFAC has accepted the total income of the assessee at Rs.1,08,66,510/- as declared by him in his tax return and disallowed only the relief claimed under section 90 of the Income Tax Act, 1961 for FTC, on the ground of delay in filing of Form 67 by the assessee as required under Rule 128 of the Income Tax Rules, 1962.
We would like to reproduce the Rule 128 of the Income Tax Rules, 1962 (Rules) which provides the provisions related with FTC and reads thus:
“Foreign Tax Credit.
128. (1) An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule:
Provided that in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.”
One of the requirements of Rule 128 for claiming FTC is provided by
Rule 128 (8) & (9) of the Rules and the same reads thus:
“(8) Credit of any foreign tax shall be allowed on furnishing the following documents by the assessee, namely:–
(i) a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein;
(ii) certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee,–
(a) from the tax authority of the country or the specified territory outside India; or
(b) from the person responsible for deduction of such tax; or
(c) signed by the assessee:
Provided that the statement furnished by the assessee in clause (c) shall be valid if it is accompanied by,–
(A) an acknowledgement of online payment or bank counter foil or challan for payment of tax where the payment has been made by the assessee;
(B) proof of deduction where the tax has been deducted
(9) The statement in Form No.67 referred to in clause (i) of sub-rule (8) and the certificate or the statement referred to in clause (ii) of sub-rule (8) shall be furnished on or before the due date specified for furnishing the return of income under subsection (1) of section 139, in the manner specified for furnishing such return of income.”
The return of income was processed for the impugned year by the CPC and intimation order under section 143(l)(a) of the Act passed on dated 23.03.2020 DIN CPC/1819/A3/1978194980. Thereafter, the return of income of the assessee was selected for limited scrutiny on the issue: Double Taxation relief u/s 90/91 of the Income Tax Act, 1961.
The assessment in the case was completed u/s 143(3) of the Income Tax Act, 1961 and order passed on 10.09.2021. The learned National Faceless Appeal Centre (“NFAC”) has accepted the Total Income of Rs. 108,66,510/-as declared by the assessee in his tax return filed.
However, ld. NFAC had denied the FTC relief available to assessee merely because there was a delay in filling Form 67 and made observation in the impugned order at Page No.8 in last para that:-
“The due date for furnishing return of income in the case of the assessee was 31/07/2018 which was further extended upto 31/08/2018. On perusal of E-filing portal, it has been found that the assessee has furnished Form 67 on 03/09/2018. Thus, it is evident that the assessee has not furnished Form 67 on or before the due date specified for furnishing the return of income under subsection (1) of section 139. The assessee has also failed to furnish the certificates of statements referred to in rules 128(8)(ii). Thus, the assessee failed to fulfill both the conditions as stated above for allowance of his foreign tax credit.”.
On the basis of above observation, the Ld A.O/NF AC has made decision in the impugned order at page No.10 in last para that:-
“Thus, the provisions of Rule-128 of the Rule can not be ignored or relaxed in the case of the assessee relating to his claim of foreign tax credit. Since the assessee failed to fulfill the conditions as laid down in Rule-128 of I.T. Rules, 1962 for allowance of foreign tax credit, the credit of foreign tax claimed by the assessee u/s 90 of the Act of Rs. 35,02,850/- is hereby disallowed”.
Aggrieved by the order of Ld. A.O/NFAC, the assessee filed an appeal before Honorable NFAC/CIT(A), who upheld the order of Ld. NFAC/A.O vide their order dated 17.06.2022 and passed the impugned order and made decision at page no. 15 in para 3 which is reproduced as under:-
“After considering the facts and evidence on record, it is seen that the appellant did not dispute the facts that he failed to satisfy the conditions laid down in Rule- 128 of IT. Rules, 1962 for foreign tax credit. The appellant did not bring on record any provisions of the Act, Rule etc. or any document from which the conditions laid down in Rule-128 of the Rule can be ignored or relaxed. Thus, the provisions of Rule-128 of the Rule can not be ignored or relaxed in the case of the appellant relating to his claim of foreign tax credit. Since the appellant failed to fulfill the conditions as laid down in Rule 128 of I T. Rules, 1962 for allowance of foreign tax credit, the credit of foreign tax claimed by the appellant u/s 90 of the Act of Rs. 35,02,850/- is hereby disallowed.”
Aggrieved by the order of the CIT(A), the Assessee is in appeal before your honorable Bench that disallowance of FTC is against the provision of DTAA and bad in law.
Section 90 of the Act provides that, Government of India can enter into Agreement with other countries for granting relief in respect of income on which taxes are paid in country outside India and such income is also taxable in India. Article 25 of DTAA between India and USA provides for credit for foreign taxes. Article 25(2)(a) is relevant in the present context. Same is extracted below:
“Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States”.
We submit here that, Section 90 of the Act read with Article 25(2)(a) provides that tax paid in USA shall be allowed as a credit against the Indian tax but limited to proportion of Indian tax. Neither section 90 nor DTAA provides that FTC shall be disallowed for non-compliance with any procedural requirements. FTC is Assessee”s vested right as per Article 25(2)(a) of the DTAA read with Section 90 and same cannot be disallowed for non-compliance of procedural requirement that is prescribed in the Rules.
It is further submitted that Section 295(1) of the Act gives power to the CBDT to prescribe Rules for various purposes. Section 295(2)(ha) gives power to the Board to issue Rules for FTC. The relevant extract is as follow:
“(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters :-
(ha) the procedure for granting of relief or deduction, as the case may be, of any income-tax paid in any country or specified territory outside India, under section 90 or section 90A or section 91, against the income-tax payable under this Act; “
The Board has power to prescribe procedure to granting FTC. However, the Board does not have power to prescribe a condition or provide for disallowance of FTC. The procedure prescribed in Rule 128 should therefore be interpreted in this context. Rule 128 is therefore a procedural provision and not a mandatory provision.
Further, we would like to submit that, Rule 128(9) provides that Form 67 should be filed on or before the due date of filing the return of income as prescribed u/s 139(1) of the Act. However, the Rule nowhere provides that if the said Form 67 is not filed within the above stated time frame, the relief as sought by the assessee u/s 90 of the Act would be denied. It is therefore clear that in case the intention is to deny the FTC, either the Act or the Rules would have specifically provided that the FTC would be disallowed if the assessee does not file Form 67 within the due date prescribed under section 139(1) of the Act.
We further submit that Filing of Form 67 is a procedural/directory requirement and is not a mandatory requirement and violation of procedural norm does not extinguish the substantive right of claiming the credit of FTC. Reliance is placed on the decision of the Hon’ble Supreme Court, in the case of Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner, (1992 Supp (1) Supreme Court Cases 21) wherein it observed that:
“The mere fact that it is statutory does not matter one way or the other. There are conditions and conditions. Some may be substantive, mandatory and based on considerations of policy and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance of all conditions irrespective of the purposes they were intended to serve.”
Further reliance is placed on the decision of the Hon’ble Supreme Court, in the case of Sambhaji and Others v. Gangabai and Others, reported in (2008) 17 SCC 117, wherein it has been held that procedure cannot be a tyrant but only a servant. It is not an obstruction in the implementation of the provisions of the Act, but an aid. The procedures are handmaid and not the mistress. It is a lubricant and not a resistance. A procedural law should not ordinarily be construed as mandatory; the procedural law is always subservient to and is in aid to justice. It was submitted that filing of Form 67 as per the provisions of section 90 read with Rule 128(9) is a procedural law and should not control the claim of FTC.
We further submit that, there are many sections in the Act which specifically deny deduction or exemption or relief in case the return/form is not filed within prescribed time limits. Reference was made to section 80AC, 80-IA(7), l0A(5) and l0A(5) etc, wherein there is specific provision for disallowance of deduction/exemption if audit report is not filed along with the return, various High Courts have taken a view that filing of audit report is directory and not mandatory. Such language is not used in Rule 128(9). Therefore, such condition cannot be read into Rule 128(9).
Reliance in this regard was placed on the following cases:
– CIT vs Axis Computers (India) (p.) Ltd (2009] 178 Taxman 143 (Delhi)
– PCIT, Kanpur vs Surya Merchants Ltd (2016] 72 taxmann.com 16 (Allahabad)
– CIT, Central Circle vs American Data Solutions India (P) Ltd (2014] 45 taxmann.com 379 (Karnataka)
– CIT-II vs Mantee Consultants (P.) Ltd (2009] 178 Taxman 429 (Delhi)
– CIT vs ACE Multitaxes Systems (p.) Ltd (2009] 317 ITR 207 (Karnataka).
We submit that as per the provisions of section 90(2) of the Act, where the Central Government of India has entered into a DTAA, the provisions of the Act would apply to the extent they are more beneficial to a taxpayer. Therefore, the provisions of DTAA override the provisions of the Act, to the extent they are beneficial to the assessee. Reliance in this regard is placed on the following cases and circulars:
– Union of India v. Azadi Bachao Andolan (2003] 263 ITR 706 (SC)
– CIT v Eli Lily & Co (India) P Ltd (2009) 178 Taxman 505 (SC)
– GE India Technology Centre P Ltd v CIT (2010) 193 Taxman 234 (SC)
– Engineering Analysis Centre of Excellence P Ltd v CIT (2021) 125 taxmann.com 42 (SC) (Pg 106-109 of PB 2-Para 25 & 26)
– CBDT Circular No 333 dated 2/4/82 137 ITR (St.)
We submit that when there is no condition prescribed in DTAA that the FTC can be disallowed for non-compliance of any procedural provision. As the provisions of DTAA override the provisions of the Act, the Assessee has vested right to claim the FTC under the tax treaty, the same cannot be disallowed for mere delay in compliance of a procedural provision.
Further, it is well settled law that delegated legislation can’t overreach principal legislation. The delegation made could be exercised within the four comers of the principal legislation and not to overreach it. Filing of Form 67 is merely a procedural requirement provided in Rule 128 of the Income Tax Rules, 1962. Here, important to note that Rule 128 itself is a delegated legislation conferred by section 295 of the Act. Such delegated legislation cannot overreach the principal legislation as mandated under Article 253 of the Constitution of India, read with the applicable DTAA. Any exercise of the delegate under rule 128, to defeat the plain enforcement of that law would wholly unconstitutional.
The said issue under consideration is no longer res integra. There are various judgments of Hon’ble ITAT, and Apex courts on the identical issue. These are as under;
i) 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”.
ii) 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”.
iii) 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”
iv) 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”.
Prayer:-
Therefore, when once the authenticity, veracity and genuineness of the claim of the assessee, in respect of his foreign tax credit, has been established by him, by production of the corresponding documentary evidences in the form of tax payment certificates, and Articles 25 in the applicable DTAA between India and USA, read with section 90 of the Act, compulsorily mandates for the providing of benefit of such foreign tax credit, while filing return of Income in India, then merely due to a procedural lapse of filing of belated form 67, the assessee must not be denied and deprived of his lawful and substantive claim of his foreign tax credit.
It is prayed before your honorable bench to allow the Foreign Tax Credit relief u/s 90 of the Act available to the assessee or as may feel fit in the natural justice.”
7. On the other hand, Ld. CIT DR opposed the submissions of the assessee and supported the orders of the authorities below.
8. We have heard Ld. Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. The short question before us is that whether the authorities below is justified in disallowing the claim of FTC. It is stated that under the identical facts, the Co-ordinate Benches of the Tribunal in the cases of Rohan Hattangadi vs CIT(A) in ITA No.1896/Mum/2022 vide order dated 02.12.2022; Ritesh Kumar Garg vs ITO in ITA No.261/JP/2022 vide order dated 15.09.2022 and Brinda Rama Krishna vs ITO (2022) in ITA No.454/Bang/2021 vide order dated 17.11.2021, allowed the claim of the assessee regarding FTC. The Revenue has not rebutted the claim of the assessee regarding allowance of FTC. We therefore, respectfully following the decisions of the Co-ordinate Benches of the Tribunal in the above-mentioned cases (supra), we hereby direct the Assessing Officer to grant FTC to the assessee. Grounds of appeal raised by the assessee are hence, allowed.
9. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 17th April, 2023.
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