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Income Tax Appellate Tribunal, “B” BENCH KOLKATA
Before: Shri Rajesh Kumar & Shri Sonjoy Sarma
Assessment Year: 2021-22 Neetu Agarwal………………………………………………………….…..……Appellant Flat 6C, Block 2, Shree Ramnagar Residential Complex, VIP Road, Tegharia, W.B – 700052. [PAN: ACTPA2426P] vs. ITO, Kolkata……………..............…..….…..….........……........……...…..…..Respondent Appearances by: Shri Puja Agarwal, A.R, appeared on behalf of the appellant. Shri Pradip Biswas, Addl. CIT- Sr. DR, appeared on behalf of the Respondent. Date of concluding the hearing : October 30, 2024 Date of pronouncing the order : November 18, 2024 ORDER
Per Sonjoy Sarma, Judicial Member:
The present appeal is filed by the assessee against the order dated 11.07.2024 of the National Faceless Appeal Centre [hereinafter referred to as ‘CIT(A)’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).
2. The assessee is a resident individual, who filed her return of income on 29.12.2021 for the financial year 2020-21 relevant to assessment year 2021-22 reporting a total income of Rs.25,58,440/-. The assessee discharged her tax liability by way of tax deducted at source amounting to Rs.2,80,028/-, self-assessment tax of Rs.22,740/- and foreign tax credit (‘FTC’) of Rs.2,25,936/-. The assessee also filed Form.67 which was filed on 25.01.2022. An intimation u/s 143(1) of the Act was issued on 28.10.2022 in which the FTC was not provided to the assessee. This disallowance resulted in tax demand of Rs.2,79,130/-.
Assessment Year: 2021-22 Neetu Agarwal 3. Aggrieved by the above order, the assessee filed an application for rectification u/s 154 of the act on 18.04.2023, however, on 12.05.2023 a rectification order was passed without granting credit for the FTC.
4. Dissatisfied with the above order, the assessee appealed before the ld. CIT(A). Unfortunately, the ld. CIT(A) dismissed the appeal leading the assessee to file appeal before this Tribunal.
5. Before us, at the time of hearing, the primary contention raised by the ld. Counsel for the assessee before this Tribunal was that the denial of granting the FTC amounting to Rs.2,79,130/- as claimed by the assessee in relation to tax paid on foreign income in Sri Lanka. The ld. AR argued that credit should have been granted u/s 90 of the Act and Article 23 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and Sri Lanka. The ld. AR further contended that non-filing of Form 67 at the time of filing of original return is merely a procedural error and should not obstruct the grant of FTC specially since the Form 67 was filed before passing of intimation order u/s 143(1) and it was also available at the time of rectification proceedings. The ld. AR stated that DTAA between India and Sri Lanka allows FTC as provided under Article 23 aiming to eliminate double taxation on income. In the instant case, the filing of Form 67 should be considered as procedural mistake rather mandatory, particularly in the light of assessee’s submission of filing the Form 67 before passing of intimation order u/s 143(1) of the Act. The assessee in order to substantiate her claim cited a decision of the Coordinate Bench of the Tribunal in the assessee’s own case for the assessment year 2020-21 in dated 13.09.2024, wherein, the Tribunal under similar circumstances was allowed FTC claim of the assessee. The relevant part of the order of the Tribunal is reproduced as under:
11. As regards, Ground No. 7, in the case of the assessee Form No. 67 was not filed along with the return of income. It was submitted before the Ld. Addl/Jt. CIT(A) by the assessee that the return of income was filed on 2 Assessment Year: 2021-22 Neetu Agarwal 09.01.2021 and she had submitted the Form No. 67 after receiving the communication from the e-filing team, Income Tax Department that the return of income was not accompanied by Form No. 67 as mandated by law. Subsequently, since the credit was not allowed, she filed a rectification application and Form No. 67 on 14.01.2022. The credit was not allowed since Form No. 67 was filed beyond the date for filing the return of income under section 139(1) of the Act. Two orders u/s 154 of the Act were passed on 11.07.2022 and 05.08.2022 but the credit for the claim of foreign taxes was not allowed. Similar issue also came up for consideration before the coordinate Bench of the Tribunal in the case of Ramakrishna Rao Chintalapudi Vs Income Tax Officer, Ward-2(3), Alipurduar in Assessment Year: 2020-21, order dated 02.06.2024, “C Bench, ITAT, Kolkata wherein it has been held as under: “9. The only issue in this case is non-allowance of the credit for the foreign tax paid in Bhutan. Before proceeding further, we would like to reproduce rule 128 of the Income-tax Rules, 1962 (the Rules) which relates with foreign tax credit as under: “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”
We further note 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. Article 22 of DTAA between India and Bhutan provides for credit for foreign taxes. Article 22(2) is relevant in the present context same is extracted below: “ARTICLE 22 METHODS FOR ELIMINATION OF DOUBLE TAXATION 1…… 2. Double taxation shall be eliminated as follows: (i) In India: (a) Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Bhutan, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Bhutan. 3 Assessment Year: 2021-22 Neetu Agarwal 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 Bhutan. (b) (ii) (a) Where in accordance with any provision of the Agreement income derived by a resident of India is exempt from tax in India, India may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income. In Bhutan: Where a resident of Bhutan derives income which, in accordance with the provisions of this Agreement, may be taxed in India, Bhutan shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in India. 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 India. (b) Where in accordance with any provision of the Agreement, income derived by a resident of Bhutan is exempt from tax in Bhutan, Bhutan may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income.”
Thus, Section 90 of the Act read with Article 22(2) of the DTAA provides that tax paid in Bhutan shall be allowed as a credit against the tax payable in India but limited to the proportion of Indian tax. Neither section 90 nor the DTAA provides that FTC shall be disallowed for non- compliance with any procedural requirement. Foreign Tax Credit is an assessee’s vested right as per Article 22(2) of the DTAA read with Section 90 and the same cannot be disallowed for non-compliance with procedural requirement that is prescribed in the rules.
12. Further, we would like to mention that rule 128(9) provides that Form No. 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 No. 67 is not filed within the required time frame, the relief as sought by the assessee u/s 90 of the Act would be denied. It is therefore evident that if the intention of the legislature were to deny the foreign tax credit, either the Act or the rules would have specifically provided that the foreign tax credit would be disallowed if the assessee does not file Form No. 67 within the due date prescribed under section 139(1) of the Act. We further note that Filing of Form No. 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. The following decisions support the claim of the assessee: i. CIT vs. G.M. Knitting Industries (P) Ltd. 71 Taxmann.com 35(SC) 4 Assessment Year: 2021-22 Neetu Agarwal ii. Brinda Ramakrishna vs. ITO 193 ITD 840 (Bang.) iii. 42 Hertz Software India Pvt. Ltd. vs. Asst. CIT, iv. Duraiswamy Kumaraswamy vs. PCIT, W.P No.5834 of 2022
13. Hon’ble Supreme Court, in the case of Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner, (1992 Supp (1) Supreme Court Cases 21) in respect of compliance with the procedural requirements have 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, in the case of Engineering Analysis Centre of Excellence Private Limited vs the Commissioner of Income-tax & Anr. Civil Appeal Nos. 8733-8734 of 2018 & Ors., Hon’ble Supreme Court have held as under that the provisions of DTAA shall override the provisions of the Income-tax Act unless they are more beneficial to the assessee: 165.The conclusions in the aforestated paragraph have no direct relevance to the facts at hand as the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the Income Tax Act to the contrary, unless more beneficial to the assessee.
We have gone through the decisions of the coordinate Benches and concur with their findings in this regard that filing of Form No. 67 is directory and not mandatory and the credit for foreign taxes paid cannot be denied merely on the delay in filing the Form No. 67. In the case of M/s. 42 Hertz Software India Pvt. Ltd. Vs the Assistant Commissioner of Income Tax, Circle – 3 (1)(1), Bangalore, ITAT, BANGALORE it is held that: 6. There is no dispute that the Assessee is entitled to claim FTC. On perusal of provisions of Rule 128 (8) & (9), it is clear that, one of the requirements of Rule 128 for claiming FTC is that Form 67 is to be submitted by assessee before filing of the returns. In our view, this requirement cannot be treated as mandatory, rather it is directory in nature. This is because, Rule 128(9) does not provide for disallowance of FTC in case of delay in filing Form No.67. This view is fortified by the decision of coordinate bench of this Tribunal in case of Ms. Brinda Kumar Krishna vs.ITO in by order dated 17/11/2021.
7. It’s a trite law that DTAA overrides the provisions of the Act and the Rules, as held by various High Courts, which has also been approved by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence (P.) Ltd. reported in (2021) 432 ITR 471.
Assessment Year: 2021-22 Neetu Agarwal 8. We accordingly, hold that FTC cannot be denied to the assessee. Assessee is directed to file the relevant details/evidences in support of its claim. We thus remand this issue back to the Ld.AO to consider the claim of assessee in accordance with law, based on the verification carried out in respect of the supporting documents filed by assessee.
In Vikash Daga Vs ACIT Circle – 3 (1) Gurgaon the ITAT DELHI BENCH ‘H’, NEW DELHI vide order dated 14/06/2023 have held that: 8. We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the assessee holds a foreign tax credit certificate for Rs.1887114/-. In our considered opinion 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. We accordingly direct the AO to allow the credit of FTC and hold that rule 128(9) of the Rules 3 does not provide for disallowance FTC in case of delay filing of form 67 is not mandatory but a directory requirement and DTAA overrides the provisions of the Act and the Rules cannot be contrary to the Act.
In the result, the appeal filed by the assessee is allowed.
Similarly, in the case of Ashish Agrawal Vs. Income Tax Officer, Ward- 12(1), Hyderabad ITAT HYDERABAD BENCHES “B”, have held vide order dated 26/09/2023 that: 11. As far as the issue of FTC is concerned, learned AR placed reliance on the decision in the case of Ms. Brinda Rama Krishna (supra). In the case of Ms. Brinda Rama Krishna (supra), the Bench considered the issue in the light of the provisions of DTAA, section 295(1) of the Act, the decisions of the Hon'ble Apex Court in the case of Mangalore Chemicals & Fertilizers Ltd. Vs. Deputy Commissioner (1992 Supp (1) SCC 21), Sambhaji Vs. Gangabai (2008) 17 SCC 117 and a lot many decisions of the Hon'ble Apex Court including the case in Union of India Vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) etc. and reached a conclusion that since Rule 128(9) of the Rules does not provide for disallowance of FTC in the case of delay in filing Form 67 and such filing within the time allowed for filing the return of income under section 139(1) of the Act is only directory, since DTAA over rides the Act, and the Rules cannot be contrary to the Act.
We find from Article 25(2)(a) of the DTAA that where a resident of India derives income which, in accordance with the provisions of the convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of the resident an amount equal to the income tax paid, paid in the United States, whether directly or by deduction. In view of this provision over riding the provisions of the Act, according to us, Rule 128(9) of the Rules has to be read down in conformity thereof. Rule 128(9) of the Rules cannot be read in isolation. Rules must be read in the context of the Act and the DTAA impacting the rights, liabilities and disabilities of the parties.
Assessment Year: 2021-22 Neetu Agarwal 13. In the case of Purushothama Reddy Vankireddy (supra) also the Co-ordinate Bench of the Tribunal, in the similar circumstances, allowed the appeal of assessee for FTC claim. Respectfully following the same, we are of the considered Page 6 of 8 opinion that the decisions relied upon by the assessee are applicable to the facts of the case and the grounds raised by the assessee are accordingly allowed.
14. In the result, appeal of the assessee is allowed.
18. We have also gone through the decision of the Hon’ble Madras High Court in the case of Duraiswamy Kumaraswamy vs. PCIT (supra) and find that the facts are identical to the facts of the case of the assessee and the decision is squarely applicable to the facts of the case of the assessee. In that case, the petitioner was resident of India and had filed Indian ITR and claimed benefit of FTC u/s 90/91 of the Act r.w. Article 24 of the India-Kenya DTAA. During the year, he had income of both Kenya and India but while filing the Indian ITR for the impugned assessment year 2019-20, the Form No. 67 prescribed in rule 128 of the rules for claiming FTC was inadvertently not uploaded along with the ITR which was uploaded on 02.02.2021. The return was processed on 26.03.2021, however, the credit of FTC was not given effect to and the request made to the CPC to give effect to the FTC was not accepted and intimation along with notices of demand was received. The assessee also could not succeed with the rectification application filed and approached the CIT u/s 264 of the Act and at the same time filed a writ petition before the Hon’ble Madras High Court. It was stated by the respondent-department that rule 128 is mandatory and cannot be considered as directory in nature. The petitioner referred to the judgment of the Hon’ble Supreme Court in the case of CIT vs. G.M. Knitting Industries (P) Ltd. Civil Appeal Nos.10782 of 2013 and 4048 of 2014 dated 24.06.2015. The Hon’ble High Court allowed the Writ Petition in favour of the assessee by holding as under: “11.The law laid down by the Hon'ble Apex Court in Commissioner of Income-Tax, Maharashtra v. G.M.Knitting Industries (P) Limited in Civil Appeal Nos.10782 of 2013 and 4048 of 2014 dated 24.06.2015, which was referred above, would be squarely applicable to the present case. In the present case, the returns were filed without FTC, however the same was filed before passing of the final assessment order. The filing of FTC in terms of the Rule 128 is only directory in nature. The rule is only for the implementation of the provisions of the Act and it will always be directory in nature. This is what the Hon'ble Supreme Court had held in the above cases when the returns were filed without furnishing Form 3AA and the same can be filed the subsequent to the passing of assessment order. W.P.No.5834 of 2022
12. Further, in the present case, the intimation under Section 143(1) was issued on 26.03.2021, but the FTC was filed on 02.02.2021. Thus, the respondent is supposed to have provided the due credit to the FTC of the petitioner. However, the FTC was rejected by the respondent, which is not proper and the same is not in accordance with law. Therefore, the impugned order is liable to be set aside.
13. Accordingly, the impugned order dated 25.01.2022 is set aside. While setting aside the impugned order, this Court remits the matter back to the respondent to make reassessment by taking into 7 Assessment Year: 2021-22 Neetu Agarwal consideration of the FTC filed by the petitioner on 02.02.2021. The respondent is directed to give due credit to the Kenya income of the petitioner and pass the final assessment order. Further, it is made clear that the impugned order is set aside only to the extent of disallowing of FTC claim made by the petitioner and hence, the first respondent is directed to consider only on the aspect of rejection of FTC claim within a period of 8 weeks from the date of receipt of copy of this order.”
Respectfully following the order of the Hon’ble Madras High Court in the case of Duraiswamy Kumaraswamy vs. PCIT (supra) and concurring with the views held by the coordinate Benches of the Tribunal (supra), we hold that merely because the assessee could not file Form No. 67 within the prescribed time limit as per the provisions of rule 128(9) of the Income- tax rules, 1962, as it stood during the year under consideration, will not preclude the assessee from claiming the benefit of foreign tax credit in respect of taxes paid outside India. Therefore, the claim of the assessee is allowed and the Assessing Officer is directed to give benefit of foreign tax credit in respect of tax paid outside India by the assessee in accordance with law and the DTAA between India and the Bhutan. Since in the instant case the assessee had filed Form No. 67 along with the return of income filed u/s. 139(4) of the Act, the foreign tax credit was allowable. The AO is directed to allow the credit in accordance with the provisions of section 90 read with DTAA. Accordingly, grounds no. 1, 2 and 3 of the appeal are allowed.”
12. The relevant extract of Article 24 of India-Sri Lanka Double Taxation Avoidance Agreement (DTAA) is as under:
“ARTICLE 24 - Elimination of double taxation - 1. The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except when express provision to the contrary is made in this Convention. When income or capital is subject to tax in both Contracting States, relief from double taxation shall be given in accordance with the following paragraphs of this article.
Subject to the provisions of the law of India regarding the allowance as a credit against Indian tax of tax payable in a territory outside India (which shall not affect the general principle hereof) Sri Lanka tax payable under the law of Sri Lanka and in accordance with this Convention whether directly or by deduction on profits, income or chargeable gains from sources within Sri Lanka (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) or capital in Sri Lanka shall be allowed as a credit against any Indian tax computed by reference to the same items of income or capital by reference to which the Sri Lanka tax is computed :
Provided that such credit shall not exceed Indian tax (as computed before allowing any such credit), which is appropriate to the income derived from sources within Sri Lanka or to capital in Sri Lanka, so however, that where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first 8
For the purposes of paragraph (2) of this article, the term “Sri Lanka tax payable” shall be deemed to include any amount which would have been payable as Sri Lanka tax for any year but for an exemption or reduction of tax granted for that year or any part thereof under : (a) any of the following provisions, that is to say sections 11, 16, 17, 18, 19, 20, 21, 22 and 85 of the Sri Lanka Inland Revenue Act No. 28 of 1979 so far as they were in force on, and have not been modified since, the date of the signature of this Convention, or have been modified only in minor respects so as not to affect their general character; or (b) any agreement entered into under section 17 of the Greater Colombo Economic Commission Law No. 4 of 1978; or (c) any other provisions which may subsequently be made granting an exemption or reduction of tax which is agreed by the competent authorities to be of a substantially similar character, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.
Subject to the provisions of the law of Sri Lanka regarding the allowance as a credit against Sri Lanka tax of tax payable in a territory outside Sri Lanka (which shall not affect the general principle hereof) Indian tax payable under the law of India and in accordance with the Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within India (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) or capital in India shall be allowed as a credit against any Sri Lanka tax computed by reference to the same items of income or capital by reference to which the Sri Lanka tax is computed:
Provided that such credit shall not exceed Sri Lanka tax (as computed before allowing any such credit), which is appropriate to the income derived from sources within India or to capital in India.
For the purpose of paragraph (4) of this article, the term “Indian tax payable” shall be deemed to include any amount which would have been payable as Indian tax for any year but for an exemption or reduction of tax granted for that year or any part thereof under: (a) any of the following provisions, that is to say, sections 10(4), 10(4A), 10(15)(iv), 32A, 33A, 35C, 54E, 80CC, 80HH, 80J, 80K of the Income-tax Act, 1961; or (b) any other provisions which may subsequently be made granting an exemption or reduction of tax which is agreed by the competent authorities to be of a substantially similar character if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.”
Since the provisions of DTAA override the provision of Section 90 of the Act as they are more beneficial to the assessee, in view of judicial 9 Assessment Year: 2021-22 Neetu Agarwal pronouncements in this regard (supra) and since Rule 128(9) does not preclude the assessee from the claiming credit for FTC in case of delay in filing the return of income as the credit for FTC is a vested right of the assessee and since Form No. 67 was filed along with the rectification application, as contended by the assessee, therefore, there was no justification for not allowing the credit for FTC. Hence, in view of the discussion made in the preceding paragraph, the claim of foreign tax credit has to be allowed since it is a vested right of the assessee and provision of DTAA will override the normal provision of the Income-tax Act if the same are more beneficial to the assessee and there is no justification for not allowing the credit. Respectfully following the judicial pronouncements (supra), the AO is directed to allow the FTC in accordance with Article 24 of the DTAA between India & Sri Lanka and as per law. Hence, Ground No. 7 is allowed.”
On the other hand, the ld. DR argued that the assessee did not initially submit Form 67 with her return of income which is an essential condition for FTC claim. Therefore, the department acted correctly in disallowing the FTC to the assessee.
We, after reviewing the submissions made from both the parties and examining the facts on record, find that Article 23 of the India-Sri Lanka DTAA mandates that reliefs should be provided to avoid double taxation and FTCs should be granted when tax is paid in both the countries. Denying of FTC due to procedural delay in filing Form 67 goes against the DTAA’s objectives. Section 90 allows relief in cases of double taxation. Although Rule 128(9) requires Form 67, the assessee’s compliance within this rule during the rectification stage demonstrated a good faith or effort to fulfil procedural requirement. Hon’ble Courts and Tribunal has often held that procedural delay should not be hindered substantive relief when the claimant has made all other substantive requirement. As in the similar case of the assessee, the Tribunal have favoured a liberal interpretation of procedural requirement when do not make the substantive aspect of the claim as in assessee’s own case for the assessment year 2020-21 in (supra). Based on the above analysis, we conclude that the assessee fulfils the substantive requirement of paying taxes in Sri Lanka and subsequently claimed FTC Assessment Year: 2021-22 Neetu Agarwal as per DTAA u/s 90 of the Act and filing of the Form 67 during rectification process suffices as a procedural compliance to the claim of FTC. Moreover, the objective of the Article 23 of the DTAA and section 90 to mitigate double taxation which should not be compromised by procedural technicalities when substantive compliance is evident. Considering of these aspects and judicial precedents and in the interest of fair application of tax provision, we find that the assessee is entitled to FTC on foreign tax paid. Thus, the denial of FTC by the authority below is not sustainable. Accordingly, the appeal of the assessee is allowed. The Assessing Officer is directed to grant the FTC claim of the assessee in accordance with DTAA provision and section 90 of the Act. The demand of Rs.2,79,130/- resulting from the disallowance on FTC is to be rectified accordingly.
In terms of the above, the appeal of the assessee is allowed. Kolkata, the 18th November, 2024.