Disallowance of Foreign Tax Credit for delay in filing of Form 67 is untenable

Ritesh Kumar Garg Vs ITO (ITAT Jaipur)

ITAT Jaipur held that filing of Form 67, for claiming Foreign Tax Credit, is a procedural requirement and violation of procedural norms doesn’t extinguish the substantive right of claiming the credit of Foreign Tax.

Facts-

Assessee is a salaried person and during the year under consideration he was employed with M/s. Infosys Limited. The assessee has been sent abroad and posted in Finland for service by his employer i.e. M/s. Infosys Limited where he received salary and paid the taxes of that country of which Form 67 has been filed by the assessee. The said Form 67 was filed on-line on 01.01.2020 and claimed relief under section 90 of the Act of Rs. 1,67,300/-. However, the said claim of the assessee was denied by the AO. Aggrieved by the order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld. CIT (A) after considering the case of the assessee, dismissed the appeal filed by the assessee by upholding the disallowance made by the AO under section 90 of the Act. Being aggrieved, the present appeal is filed.

Notably, the said relief was denied by the revenue authorities on the ground that the return for the year under consideration was filed by the assessee on 25.11.2020. However, the form 67 was filed on 27.04.2021 and not along with the return of income filed on 25.11.2020.

Conclusion-

Held that filing of Form 67, in my view, 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.

There are no conditions prescribed in DTAA that FTC can be disallowed for non compliance of any procedural provision, therefore, the provisions of DTAA override the provisions of the Act. As the assessee has vested right to claim the FTC under the tax treaty and the same cannot be disallowed for mere delay in compliance of a procedural provision.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

This appeal by the assessee is directed against the order dated 09.05.2022 of ld. CIT (A), National Faceless Appeal Centre (NFAC), Delhi passed under section 250 of the IT Act, 1961 for the assessment year 2020-21. The only issue involved in the present appeal relates to confirming the disallowance of relief of foreign tax credit of Rs. 1,67,300/- under section 90 of the IT Act, 1961.

2. The brief facts of the case are that assessee is a salaried person and during the year under consideration he was employed with M/s. Infosys Limited. The assessee has been sent abroad and posted in Finland for service by his employer i.e. M/s. Infosys Limited where he received salary and paid the taxes of that country of which Form 67 has been filed by the assessee. The said Form 67 was filed on-line on 01.01.2020 and claimed relief under section 90 of the Act of Rs. 1,67,300/-. However, the said claim of the assessee was denied by the AO. Aggrieved by the order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld. CIT (A) after considering the case of the assessee, dismissed the appeal filed by the assessee by upholding the disallowance made by the AO under section 90 of the Act. Being aggrieved by the order of the ld. CIT (A), now the assessee is in appeal before us on the ground mentioned as under :-

“ The ld. CIT (Appeals) erred in law and on facts in confirming the disallowance of relief of foreign tax credit of Rs. 1,67,300/- under section 90 of the Income Tax Act, 1961.”

3. The solitary ground raised by the assessee relates to challenging the order of CIT (A) in confirming the disallowance of relief of foreign tax claim of Rs. 1,67,300/- under section 90 of the IT Act, 1961. The ld. A/R appeared on behalf of the assessee has reiterated the same arguments as was raised by him before the lower authorities and also filed his written submissions. The same are reproduced below :-

“ It is submitted that the ld. AO disallowed the relief of Rs. 167,300/- without mentioning any reason for the disallowance and without giving any opportunity of being heard.

The ld. CIT (Appeals) has confirmed the disallowance. He has stated as under in his concluding para 3.3 at page-5 of his order-

“3.3 Since the appellant has failed to submit Form 67 within the stipulated time limit, the AO while passing the intimation order disallowed the claim of Foreign Tax Credit u/s. 90 of the Act. Hence, I agree with the action of the AO in disallowing the claim of Foreign Tax Credit to the appellant, since the appellant has failed to submit Form 67 within the due date, which was required by the appellant to file the same as per the the provisions of I.T. Act. Therefore, this ground of appeal is hereby dismissed.”

There is no dispute that the assessee is entitled to claim relief u/s 90 but the disallowance was confirmed on the sole ground that the relevant form 67 prescribed under rule 128(8) was not filed within the time stipulated under sub rule 9 of rule 128. (PB-24).

It is submitted that disallowance of FTC is bad in law. The 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 22 of India Finland DTAA provides for credit for foreign taxes. Article 22(2) is relevant in the present context. (PB 27-41) Same is extracted below:-

“2. In India double taxation shall be eliminated as follows:—

Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Finland, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Finland. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Finland.” (PB -37)

It is submitted that section 90 of the Act read with Article 22(2) provides that Finland income tax paid 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 22(2) of the DTAA read with section 90 and same cannot be disallowed for non-compliance of procedural requirement that is prescribed in the Rules.

The 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; ‘

Rule 128 is procedural provision–

It is submitted that 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.

The Rule 128(9) provides that Form 67 should be filed on or before the due date of filing the return of income as prescribed under section 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 under section 90 of the Act would be denied. In case the intention was 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. It is submitted that that there are many sections in the Act which specifically deny deduction or exemption or relief in case the return/audit report is not filed within prescribed time. Please refer to section 32AB(5), 80HHC(4), 80AC, 80-IA(7), 10A(5) and 10B(5). Such language is not used in Rule 128(9). Therefore, such condition cannot be read into Rule 128(9).

It is further submitted that Filing of Form 67 is 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 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 : 1991 TaxPub(EX) 624 (SC) wherein it observed that (Case PB-34) :-

‘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 & Ors. v. Gangabai & Ors., (2008) 17 SCC 117 : 2009 TaxPub(EX) 1999 (SC), (Case PB-39) 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 is 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.

It is further submitted that even in the context of 32AB, 80HHC(4), 80-IA(7), 10A(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. Reliance in this regard is placed on the following cases :–

1. CIT vs. LM Singhvi 289 ITR 425 (Raj)-Sec 32AB(5)(Case PB-13)

2. CIT vs Godha Chemicals 220 Taxman 31 (Raj)-Sec 80HHC(4) (Case PB-20 )

DTAA overrides the Act-

It is submitted 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.

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.

Form 67 was available at the time of passing order-

The Form No. 67 was available before the assessing officer when the intimation under section 143(1) of the Act dated 25/11/2021 was passed. There is no reason for making disallowance when the form 67 was available with the ld. AO at the time of framing the assessment order.

FTC Relief allowed even if the form 67 was filed late-

In case of Brinda Rama Krishna vs ITO 135 taxmann.com 358 the Hon’ble Banglore Bench (SMC) of ITAT ( Case PB 1 to 8) has directed the revenue to allow relief of FTC u/s 90 where the form 67 was filed after the prescribed due date after holding that- (Case PB-8) (para 16 of judgment)

> Rule 128(9) does not provide for disallowance of FTC in case of delay in filing form 67

> Filing of form 67 is not mandatory but a directory requirement, and

> DTAA overrides the provisions of Act and Rules can not be contrary to the Act.

The ratio of the above judgment has been followed in another case decided by Double Bench of Hon’ble Banglore Bench in case of 42 Hertz Software India (P) Ltd vs ACIT (IT Appeal no 29 of 2021) [2022 Taxpub(DT) 1975] (Case PB- 9 to 12)

The facts of our case are similar to the above two judgments.

Under the facts and circumstances of the case and more particularly the judgments of Hon’ble Banglore Bench I request your honour to kindly direct the ld. AO to allow the relief of Rs. 1,67,300/- u/s 90 towards foreign tax credit.”

The ld. A/R also relied upon the following decisions as under :-

Mangalore Chemicals & Fertilizers Ltd. vs. Deputy Commissioner (1992) Supp (1) Supreme Court Cases 21.

Sambhaji & Ors. vs. Gangabai & Ors. (2008) 17 SCC 117.

Brinda Rama Krishna vs. ITO 135 taxmann.com 358 (ITAT Bang.)

442 Hertz Software India Pvt Ltd vs. ACIT in ITA No. 29/Bang/2021, dated 7/3/2022.

4. On the contrary, the ld. D/R relied on the orders passed by the revenue authorities and also relied upon the decision of Coordinate Bench of ITAT Visakhapatnam in ITA No. 269/Viz/2021 in the case of Muralikrishna Vaddi vs. ACIT/DCIT.

5. We have heard the ld. Counsels of both the parties. We have also perused the material placed on record and also judgments cited by the respective parties. Under this ground of appeal, the assessee has filed Form 67 for claiming relief under section 90 of the IT Act. The said form was filed by the assessee on-line as on 27.04.2021 and the Income Tax Return was filed as on 25.11.2020 claiming relief under section 90 of Rs. 1,67,300/-. It is an undisputed fact that the assessee has got salary from his employer in Finland and due tax has been deducted by the employer. As per Article 15 of Double Taxation Avoidance Agreement (DTAA) with country Finland, the tax payable by assessee in that country is eligible for relief under section 90 of the Income Tax Act, 1961 to the assessee. The said relief was denied by the revenue authorities on the ground that the return for the year under consideration was filed by the assessee on 25.11.2020. However, the form 67 was filed on 27.04.2021 and not along with the return of income filed on 25.11.2020. Since according to revenue the said form 67 was filed after the due date of filing the return of income for the year under consideration which was extended to 31.01.2021, therefore, the assessee was rightly found not eligible for the credit of that amount.

5.1. After having meticulously gone through the facts of the present case, we are of the view that there is no dispute that assessee is entitled to claim relief under section 90 of the IT Act but the disallowance was confirmed on the sole ground that the relevant form 67 prescribed under section 128(8) was not filed within the time stipulated under sub rule 9 of Rule 128. It is important to mention here that 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. In this regard Article 22 of India Finland DTAA provides for credit for foreign taxes. The relevant portion of sub clause (2) of Article 22 is reproduced below :-

“ 2. In India double taxation shall be eliminated as follows :-

Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Finland, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Finland. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Finland.”

And since as per section 90 of the Act read with Article 22 sub clause (2) provides that Finland Income Tax paid shall be allowed as a credit against the Indian Tax but limited to proportion of Indian tax. In my view, neither section 90 nor DTAA provides that FTC shall be disallowed for non compliance with any procedural requirements. Since FTC is assessee’s vested right as per Article 22(2) of the DTAA read with section 90 and thus same cannot be disallowed for non compliance of procedural requirement that is prescribed in the Rules.

5.2. In my view, section 295 sub section (1) of the Act provides powers to the CBDT to prescribe Rules for various purposes. Section 295 sub section (2) sub clause (ha) gives power to the Board to issue Rules for FTC. The relevant extract is as follows :-

“ (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; ”

Thus, in this way the Board has power to prescribe procedure for granting FTC. Therefore, in my view the procedure prescribed in Rule 128 should be interpreted in this context. Therefore, Rule 128 is a procedural provision and not a mandatory provision. The said rule 128(9) provides that Form 67 should be filed on or before the due date of filing the return of income as prescribed under section 139(1) of the Act. However, the said 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 under section 90 of the Act would be denied. In case the intention of the Act or Rule was to deny the FTC, then in that eventuality 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. Thus filing of Form 67, in my view, 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. While reaching to this conclusion, we draw strength from the decision of Hon’ble Supreme Court of India in the case of Mangalore Chemicals & Fertilizers Ltd. vs. Deputy Commissioner, (1992) Supp (1) Supreme Court Cases 21 wherein the Hon’ble Supreme Court has held as under :-

“ 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. ”

Apart from the above decision, I further rely upon the decision of Hon’ble Supreme Court in the case of Sambhaji & Ors. vs. Gangabai & Ors., (2008) 17 SCC 117 (SC) wherein it was 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. According to Hon’ble Supreme Court, the procedures are handmaid and not the mistress. It is a lubricant and not a resistance. Thus, a procedural law should not ordinarily be construed as mandatory. The procedural law is always subservient to and is in aid to justice. Even otherwise, since there are no conditions prescribed in DTAA that FTC can be disallowed for non compliance of any procedural provision, therefore, the provisions of DTAA override the provisions of the Act. As the assessee has vested right to claim the FTC under the tax treaty and the same cannot be disallowed for mere delay in compliance of a procedural provision.

5.3. Even otherwise, the said Form 67 filed by the assessee before the tax authorities was available before the AO when the intimation under section 143(1) of the Act dated 25.11.2021 was passed. Therefore, in such circumstances, in my view, there were no reasons with the tax authorities for making disallowance when the said Form 67 was very much available with the AO at the time of framing the assessment order. While reaching to this conclusion, I further strengthen my view by relying upon the decision in the case of Brinda Rama Krishna vs. ITO 135 taxmann.com 358 wherein the Coordinate Bench of the Bangalore Tribunal had directed the Revenue to allow relief of FTC under section 90 of the Act, wherein Form 67 was filed after the prescribed due date. The ratio of the said decision in the case of Brinda Rama Krishna vs. ITO (supra) was further followed in another case decided by the Coordinate Bench of the Bangalore Tribunal in the case of 42 Hertz Software India Pvt. Ltd. vs. ACIT in IT Appeal No. 29 of 2021. On the contrary, I respectfully with all humility disagree with the view taken by the Visakhapatnam Bench of the Tribunal in the case of Muralikrishna Vaddi (supra) while relying upon the decision of Hon’ble Supreme Court and also of the decisions of Coordinate Benches of the Tribunal in the cases of Brinda Rama Krishna vs. ITO (supra) and 42 Hertz Software India Pvt. Ltd. vs. ACIT (supra). Therefore, considering the totality of facts and legal position as discussed above, I am of the view that assessee is entitled for the credit of FTC under section 90 of the Act. Thus, I, accordingly direct the AO to allow the relief of FTC under section 90 of the Act in the case of assessee.

6. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 15/09/2022.