Foreign Tax Credit cannot be denied for delay in filing Form 67: ITAT Delhi

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:

1. 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.
2. 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.
3. 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.