Tax Credit Disallowance: Rules must be read in the context of the Act, Says ITAT

Brief facts, relevant for the disposal of the case are that the assessee is an individual, employed with Micro Soft Global Resources GMBH. During the year 2018-19, he was a resident and ordinarily resident and, therefore, he offered his global income for taxation in India. Such income includes foreign income on which the assessee paid the tax as per rules and claims credit thereof. Assessee, however, uploaded the Form 67 along with the revised return of income. Authorities below, therefore, denied to give credit of the foreign tax paid by the assessee holding that the assessee violated the mandatory requirement of furnishing Form 67 before the due date specified for furnishing the return of income under section 139(1) of the Act.

Contention of the assessee

According to Shri H. Srinivasulu (the learned AR), Rule 128(9) of the Rules does not provide for disallowance of Foreign Tax Credit (FTC) in case of delay in filing Form 67 and, therefore, it has consistently been held by various Benches of the Tribunal that filing of Form 67 is a directory requirement, but not a mandatory one inasmuch as Article 25(2)(a) of India-USA Double Taxation Avoidance Agreement (DTAA) vests a right in the assessee to claim the credit thereof. He placed reliance on the decisions reported in Babu Rao Atluri Vs. DCIT in ITA No. 108/Hyd/2022, ITAT, Hyderabad ‘B’ Bench, Ms. Brinda Rama Krishna Vs. LTO, ITAT, SMC-B Bench, Bangalore, M/s. 42 Hertz Software India (P) Ltd Vs. ACIT, Sri Govindarajan Roopkumar Vs. ADIT, ITAT ‘B’ Bench, Chennai and Sanjay Patil Vs. A.O. Circle-3(2), ITAT, Surat in ITA No. 189/Srt/2021, dt. 18/05/2022.

Contention of Department

Per contra, Ms. Swapna, Learned DR submitted that when the language employed in Rule 128(9) is clear in its purport in saying ‘certificate or the statement …. shall be furnished on or before the date specified for furnishing the return of income under sub-section (1) of section 139’, it is not open for the assessee to contend that it is not mandatory requirement. She placed reliance on the view taken by the Visakhapatnam Bench of the Tribunal in the case of Murali Krishna Vaddi Vs. ACIT (2022) 142 taxmann.com 32.

ITAT Observation

ITAT said that “It could be seen from the view taken in Murali Krishna Vaddi (supra), the decision of the Bangalore Tribunal in the case of M/s. 42 Hertz Software India (P) Ltd (supra), was brought to the notice of the Bench, but looking at the abnormal delay of more than two years without any valid and reasonable cause, the Bench held that such delayed filing of Form 67 was in compliance with Rule 128(9) of the Rules.”

Further ITAT Added “Coming to the decisions relied upon by the assessee it could be seen that in the case of M/s. 42 Hertz Software India (P) Ltd (supra), reliance was placed on the decision in Ms. Brinda Rama Krishna (supra) and all the other decisions were following of the same. In 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.”

Rules must be read in the context of the Act and the DTAA

ITAT found 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 overriding 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.

ITAT opined that the decisions relied upon by the assessee are applicable to the facts of the case on hand and respectfully following the same, the tribunal allowed the appeal, and directed the Learned Assessing Officer to verify the details of the foreign tax paid by the assessee on the earnings at foreign source and take a view inconformity with the established law discussed above.

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