Reinterpreting Rule 128(9) on Foreign Tax Credit: The Sonakshi Sinha v. CIT (A) NFAC Judgment

Introduction

The case of Sonakshi Sinha, Mumbai v. Commissioner of Income Tax (Appeals), NFAC, Delhi adjudicated by the Income Tax Appellate Tribunal (ITAT) on September 20, 2022, addresses the contentious issue of claiming foreign tax credit (FTC) under Section 90 of the Income Tax Act, 1961. The primary dispute centered around the disallowance of an FTC claim amounting to ₹2,921,327 by the National Faceless Appeal Centre (NFAC) for the assessment year 2018-19. The appellant, an individual actor, contended that the procedural lapse of filing Form 67 post the due date should not impede the entitlement to FTC, arguing that the requirement is directory rather than mandatory.

Summary of the Judgment

The ITAT bench, consisting of Shri Prashant Maharishi and Shri Sandeep Singh Karhail, analyzed the appellant's contention that the NFAC erred in disallowing the FTC solely based on the late filing of Form 67. While the Assessing Officer (AO) had denied the credit citing non-compliance with Rule 128(9) of the Income Tax Rules, 1962, the appellant argued that recent precedents interpret this requirement as directory. The Tribunal, referencing decisions like Brinda Ramakrishna v. ITO and 42-Hertz Software India Pvt. Ltd. v. ACIT, concluded that the late filing of Form 67 during the assessment proceedings does not warrant the denial of FTC. Consequently, the Tribunal allowed the appellant's appeal, reinstating the disallowed foreign tax credit.

Analysis

Precedents Cited

The Tribunal extensively relied on pivotal judgments that redefined the interpretation of Rule 128(9). Notably:

Brinda Ramakrishna v. ITO (ITA No. 454/Bang/2021): This case established that while Form 67 is required for claiming FTC, the non-compliance with its timely filing should not automatically lead to disallowance of the credit, classifying the requirement as directory.
42-Hertz Software India Pvt. Ltd. v. ACIT (ITA No. 680/Bang/2022): Reinforcing the stance from Brinda Ramakrishna, this judgment emphasized that procedural lapses under Rule 128(9) do not override the substantive entitlement to FTC, especially when such lapses do not impact the rights under the Act.
Vinodkumar Lakshmipathi v. CIT (A) NFAC (ITA No. 680/Bang/2022): This case further solidified the view that procedural provisions without penal consequences are to be treated as directory.
PCIT v. Wipro Ltd. (Civil Appeal No. 1449 of 2022): Although discussed by the lower authorities, the Tribunal noted its distinction, indicating that the mandatory nature in that context differed from the present case.

Legal Reasoning

The cornerstone of the Tribunal's reasoning was the distinction between mandatory and directory provisions. Rule 128(9) of the Income Tax Rules mandates the filing of Form 67 by the due date; however, it does not prescribe adverse consequences for non-compliance except for the denial of FTC. The Tribunal observed that:

The Act itself (Sections 90/91) does not stipulate procedural conditions for the entitlement to FTC, suggesting that procedural lapses should not negate substantive rights.
Rule 128(9) does not explicitly state that FTC will be denied solely based on the delayed filing of Form 67. Instead, it outlines the necessary procedure without attaching punitive implications.
Subsequent amendments extending the deadline for Form 67 filing indicate legislative intent to mitigate strict procedural timelines, aligning with the view that such requirements are directory.

Therefore, the Tribunal concluded that the appellant’s genuine attempt to rectify the procedural lapse during the assessment phase should not result in the denial of FTC, upholding the essence of taxpayer rights.

Impact

This judgment holds significant implications for the realm of income tax, particularly in the interpretation of procedural versus substantive provisions:

Judicial Precedent: Reinforces the trend of treating procedural requirements under the Income Tax Rules as directory unless explicitly stated otherwise.
Taxpayers' Rights: Empowers taxpayers by safeguarding substantive entitlements against punitive procedural deficiencies, promoting fairness in tax assessments.
Administrative Practices: Encourages Assessing Officers to focus on substantive misstatements rather than procedural lapses when determining the allowability of credits and deductions.
Legislative Considerations: May prompt legislators to clarify the nature of procedural requirements to eliminate ambiguities in future tax statutes and rules.

Complex Concepts Simplified

Foreign Tax Credit (FTC)

FTC is a provision that allows taxpayers to offset the taxes paid in a foreign country against their Indian tax liability on the same income, preventing double taxation.

Rule vs. Act

The Income Tax Act, 1961, lays down substantive laws, whereas the Income Tax Rules provide procedural guidelines for implementing the Act.

Mandatory vs. Directory Provisions

Mandatory: Requirements that must be strictly followed, with clear penalties or adverse consequences for non-compliance.
Directory: Recommendations or guidelines that are advisable to follow but do not attract penalties if not adhered to.

Conclusion

The ITAT's decision in Sonakshi Sinha v. CIT (A) NFAC marks a pivotal shift in interpreting procedural provisions related to FTC claims. By classifying the late filing of Form 67 as a directory rather than mandatory requirement, the Tribunal upholds the taxpayer's substantive rights against procedural oversights. This judgment not only aligns with recent judicial trends favoring taxpayer-friendly interpretations but also underscores the necessity for clear legislative directives distinguishing between mandatory and directory provisions. Taxpayers and practitioners must take note of this nuanced interpretation to ensure compliance without jeopardizing substantive tax benefits.