1. Introduction

The case of Vinodkumar Lakshmipathi vs. Assistant Director Of Income Tax before the Income Tax Appellate Tribunal (ITA), Bangalore, adjudicated on September 6, 2022, represents a significant precedent in the interpretation of procedural requirements for claiming Foreign Tax Credit (FTC) under the Indian Income Tax Act, 1961. This appellant, Mr. Lakshmipathi, contested the disallowance of his claimed FTC for the Assessment Year (AY) 2018-19, which was denied by the Commissioner of Income Tax (International), New Delhi, on the grounds of late filing of his income tax return and Form 67.

2. Summary of the Judgment

In ITA No.680/Bang/2022, the Tribunal examined the appellant’s contention that the disallowance of FTC was unjustified based on procedural non-compliance. The Assistant Commissioner of Income Tax (AO, CPC Bengaluru) had disallowed an FTC claim of ₹28,431 under sections 90/90A, raising a demand of ₹38,540 for AY 2018-19 due to the appellant’s alleged failure to file the income tax return and Form 67 by the due dates.

The appellant argued that the requirements under Rule 128(9) for filing Form 67 were directory, not mandatory, and that the Double Taxation Avoidance Agreement (DTAA) between India and Australia took precedence over such procedural provisions when more beneficial to the taxpayer.

The Tribunal, led by Accountant Member Shri Chandra Poojari and Judicial Member Shri George George K., analyzed the arguments and the relevant legal provisions, ultimately allowing the appellant’s appeal. The Tribunal concluded that the disallowance of the FTC was not warranted as Rule 128(9) did not mandate disallowing FTC for late filing of Form 67 and that DTAA provisions supersede conflicting procedural rules.

3. Analysis

a. Precedents Cited

The Tribunal referenced the landmark case of Ms. Brinda Ramakrishna, ITA No.454/Bang/2021, where it was held that Rule 128(9) does not mandate disallowance of FTC solely based on delays in filing Form 67. Additionally, the Tribunal drew upon Supreme Court decisions such as Mangalore Chemicals & Fertilizers Ltd. vs. Deputy Commissioner and Sambhaji and Others vs. Gangabai and Others, which emphasized that procedural requirements should not override substantive rights, especially when procedures are designed to aid justice rather than obstruct it.

b. Legal Reasoning

The crux of the Tribunal's reasoning centered on distinguishing between procedural and substantive requirements. It was posited that:

• Rule 128(9) as Directory: The filing of Form 67, although a procedural requirement under Rule 128, was interpreted as directory rather than mandatory. The Tribunal opined that procedural delays should not amount to the forfeiture of a taxpayer’s substantive right to claim FTC.
• Supremacy of DTAA: Under Section 90(2) of the Income Tax Act, the provisions of a DTAA prevail over domestic tax laws to the extent that they are more beneficial to the taxpayer. The Tribunal emphasized that since DTAA provisions aim to prevent double taxation and ensure tax neutrality, they should not be undermined by procedural technicalities unless explicitly stated.
• Precedent Alignment: Aligning with previous judgments, the Tribunal underscored that procedural rules serve as aids to justice rather than barriers, reinforcing that substantive rights protected under DTAA should take precedence when procedural lapses are non-fatal.

c. Impact

This judgment has profound implications for taxpayers claiming FTC under DTAA provisions. It establishes that procedural oversights, such as delays in filing Form 67, should not necessarily result in the denial of FTC if the substantive rights are protected under international agreements. This interpretation promotes fairness and aligns domestic tax practices with international norms of avoiding double taxation.

Moreover, it obliges tax authorities to exercise discretion and interpret procedural rules in harmony with substantive rights, thereby enhancing taxpayer confidence in the equitable application of tax laws.

4. Complex Concepts Simplified

a. Foreign Tax Credit (FTC)

FTC allows taxpayers to reduce their Indian tax liability by the amount of tax paid to a foreign country on income that is also taxable in India. This prevents double taxation of the same income.

b. Double Taxation Avoidance Agreement (DTAA)

DTAA are treaties between two countries to prevent the same income from being taxed twice. They provide mechanisms for tax relief, including FTC, and determine taxing rights between the contracting states.

c. Rule 128 of the Income Tax Rules, 1962

Rule 128 outlines the provisions for claiming FTC, including the necessity to furnish Form 67, which details the foreign income and tax paid. Rule 128(9) specifies the due date for filing this form in alignment with the return of income.

d. Substantive vs. Procedural Law

Substantive Law: Defines legal rights and obligations (e.g., entitlement to FTC under DTAA).
Procedural Law: Provides the methods and processes to enforce legal rights (e.g., filing deadlines).

5. Conclusion

The ITA Bangalore's judgment in Vinodkumar Lakshmipathi vs. Assistant Director Of Income Tax serves as a pivotal reference in balancing procedural compliance with substantive taxpayer rights. By affirming that the disallowance of FTC based on delayed procedural filings contradicts the protective intent of DTAA, the Tribunal reinforces the principle that laws facilitating tax relief should not be rendered ineffective by procedural technicalities unless explicitly mandated.

This decision not only upholds the appellant's right to FTC but also sets a precedent encouraging a more equitable and reasonable interpretation of tax laws, thereby fostering a taxpayer-friendly environment and ensuring alignment with international tax practices.

As tax complexities continue to evolve, such jurisprudence underscores the necessity for legal interpretations that prioritize substantive justice over rigid procedural adherence, ultimately contributing to a fairer and more predictable tax system.