Tribunal Establishes Eligibility for Foreign Tax Credit Despite Delayed Filing of Form 67

Introduction

In the case of Nirmala Murli Relwani, Mumbai v. The Commissioner of Income Tax (Appeal), Mumbai, the Income Tax Appellate Tribunal (ITAT) addressed a significant issue concerning the eligibility for claiming foreign tax credit (FTC) under Section 91 of the Income Tax Act, 1961 (“the Act”). The appellant, an elderly individual, contested the denial of FTC amounting to Rs. 11,79,796 due to the delayed submission of Form 67, which was filed after the prescribed due date under Rule 128 of the Income Tax Rules, 1962 (“the Rules”). This commentary delves into the background, the Tribunal's analysis, the legal reasoning employed, and the broader implications of this judgment.

Summary of the Judgment

Nirmala Murli Relwani filed her original income tax return for the assessment year 2019-20 on 20/08/2019 and subsequently filed a revised return on 26/08/2020, including Form 67 to claim a foreign tax credit of Rs. 11,79,796. The Commissioner of Income Tax (Appeals) denied the FTC, asserting that Form 67 was filed after the due date stipulated under Rule 128(9) of the Income Tax Rules. The appellant appealed this decision to the ITAT, contending that the delay was justified and that the Rules should not override the substantive provisions of the Act.

The ITAT, after reviewing the submissions and relevant precedents, held that the delay in filing Form 67 did not preclude the appellant from claiming FTC. The Tribunal emphasized that Rules cannot override the Act and that Form 67 filing is procedural and directory, not mandatory. Consequently, the appeal was allowed for statistical purposes, directing the Assessing Officer to adjudicate the FTC claim on its merits.

Analysis

Precedents Cited

The Tribunal extensively referenced decisions from the coordinate bench of the ITAT to support its stance:

Sonakshi Sinha vs. CIT, ITA No. 1704/Mum./2022: The bench held that Rule 128(9) is directory and does not mandate the denial of FTC if Form 67 is filed late, provided it is submitted before the completion of assessment proceedings.
Anuj Bhagwati vs. DCIT, ITAs No.1844 and 1845/Mum./2022: It was reiterated that Section 90/91 of the Act governs FTC claims and that Rules cannot override substantive provisions of the Act. Filing of Form 67 was deemed directory.
Brinda Rama Krishna v. ITO [2022] 135 taxmann.com 358 (Bang Trib): The court observed that Rule 128(9) does not explicitly prescribe the denial of FTC for delays, reinforcing that the requirement is directory.
Vinodkumar Lakshmipathi vs. CIT(A), ITA No.680/Bang./2022: Confirmed the view that directory rules do not carry punitive consequences if not strictly adhered to.

Legal Reasoning

The Tribunal's legal reasoning revolved around the hierarchical supremacy of the Act over the Rules. It emphasized that:

Substance over Procedure: The substantive provisions of Section 91 of the Act, which governs FTC, take precedence over procedural requirements stipulated in Rule 128 of the Rules.
Directory Nature of Rule 128(9): The Tribunal found that Rule 128(9) is directory, meaning it outlines a preferred procedure but does not impose a mandatory obligation that carries punitive consequences if not followed.
Extended Due Dates: The appellant filed her revised return and Form 67 within the extended deadlines provided under the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020, acknowledging the context of delays due to unforeseen circumstances.
Legislative Intent: The recent amendment to Rule 128(9) extended the deadline for filing Form 67 to the end of the assessment year, aligning procedural compliance with the broader legislative framework.

Consequently, the Tribunal concluded that the denial of FTC based solely on the delay in filing Form 67 was unfounded, as it contravened the principle that Rules cannot override the substantive provisions of the Act.

Impact

This judgment has significant implications for taxpayers and the administration of foreign tax credits:

Enhancing FTC Accessibility: Taxpayers can claim FTC without the stringent adherence to procedural deadlines for Form 67, provided they submit it before the completion of assessment proceedings.
Regulatory Clarity: Clarifies the non-mandatory nature of certain procedural rules when they conflict with substantive tax provisions, reinforcing the primacy of the Act.
Judicial Precedence: Establishes a precedent that can be cited in future cases where procedural compliance is challenged in the context of substantive tax benefits.
Administrative Efficiency: Reduces the rigid enforcement of procedural timelines, allowing for greater flexibility and fairness in tax assessments.

Overall, the decision fosters a more equitable tax environment, ensuring that substantive rights under the Act are not undermined by procedural technicalities.

Complex Concepts Simplified

Form 67: A declaration form required for claiming foreign tax credit, wherein the taxpayer provides details of taxes paid abroad.
Foreign Tax Credit (FTC) under Section 91: A mechanism that allows taxpayers to reduce their Indian tax liability by the amount of tax paid in a foreign country on the same income.
Rule 128(9) of the Income Tax Rules: Specifies the deadline for submitting Form 67, traditionally aligned with the return filing deadline.
Directory vs. Mandatory Rules: Directory rules provide guidance on how procedures should be followed but do not impose strict obligations, whereas mandatory rules are binding and enforceable.
Assessment Proceedings: The process wherein the tax authorities evaluate the accuracy and completeness of a taxpayer’s submissions to determine the final tax liability.

Conclusion

The ITAT's decision in Nirmala Murli Relwani vs. The Commissioner of Income Tax (Appeal), Mumbai underscores the paramount importance of the substantive provisions of the Income Tax Act over procedural requirements. By ruling that the delay in filing Form 67 does not inherently disqualify a taxpayer from claiming foreign tax credit, the Tribunal has provided clarity and relief to taxpayers facing genuine hardships and delays. This judgment not only reinforces the legislative intent that substantive rights should not be undermined by procedural technicalities but also sets a progressive precedent for future tax litigations. Taxpayers and practitioners alike can view this decision as an affirmation that the tax system acknowledges and accommodates the complexities of real-world circumstances, ensuring fair and just outcomes.