Introduction

The case of Shashidhar Seetharam Sharma v. Assistant Director of Income Tax Officer, CPC, Bangalore adjudicated by the Income Tax Appellate Tribunal (ITAT) Bangalore Bench on September 19, 2022, marks a significant development in the realm of tax law, particularly concerning the Foreign Tax Credit (FTC) mechanism. The appellant, Shri. Shashidhar Seetharam Sharma, contested the rejection of his FTC claim based on the delayed submission of Form No.67, a procedural requirement for claiming FTC under the Income Tax Act, 1961.

The crux of the dispute revolved around whether the late filing of Form No.67, submitted after the due date prescribed under Section 139(1) of the Income Tax Act, could lead to the denial of FTC claims. The Income Tax Department had initially rejected the FTC claim on these grounds, prompting the appellant to seek redressal through appellate channels.

Summary of the Judgment

Shri. Sharma filed his income tax return for the assessment year 2017-18, acknowledging an income from other sources, which included dividend income from a Danish company. Although Tax Deducted at Source (TDS) was deducted on this income in Denmark, Sharma did not claim this TDS in his return. Subsequently, he attempted to rectify this omission by filing Form No.67 and a rectification application. The Centralized Processing Centre (CPC) Bangalore rejected this rectification, asserting that Sharma had made a fresh claim not attributable to an error in the original records.

The National Faceless Appeal Centre (NFAC) dismissed Sharma's appeal, citing that the delay in filing Form No.67 precluded the claim for FTC. However, upon further appeal to the ITAT Bangalore Bench, the Tribunal overturned the NFAC's decision. The Tribunal referenced the earlier decision in Brinda Ramakrishna v. ITO, emphasizing that the filing of Form No.67 is a procedural requirement and that non-compliance does not necessarily negate the right to FTC, especially when governed by a Double Taxation Avoidance Agreement (DTAA).

The Tribunal concluded that Rule 128(9) of the Income Tax Rules, which mandates the timely filing of Form No.67, is not of a mandatory nature but rather procedural. Furthermore, the provisions of the DTAA between India and Australia take precedence, ensuring that Sharma's right to FTC is upheld despite the procedural lapse.

Analysis

Precedents Cited

The judgment prominently cites the case of Brinda Ramakrishna v. ITO, where the ITAT Bangalore Bench held that the non-filing of Form No.67 did not disqualify the assessee from claiming FTC. The Tribunal in Sharma's case extended this reasoning, reinforcing that Rule 128(9) is procedural and not mandatory. Additionally, the judgment references the Supreme Court's stance in Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner and Sambhaji And Others v. Gangabai And Others, which emphasize that procedural requirements should not hinder substantive rights.

Legal Reasoning

The Tribunal's legal reasoning pivots on distinguishing between procedural (directory) and substantive mandates within the Income Tax Act and accompanying rules. Rule 128(9), which prescribes the filing of Form No.67 by the due date, was interpreted as a procedural requirement aimed at facilitating the FTC process, rather than as a substantive condition that could negate the FTC claim outright.

Furthermore, the Tribunal underscored the supremacy of DTAA provisions over domestic rules. Since the DTAA between India and Australia provides for FTC to avoid double taxation, and does not stipulate conditions regarding procedural compliance, it forms the primary basis for granting FTC. Therefore, any procedural lapses in filing Form No.67 should not obstruct the FTC entitlement as per the treaty.

The Tribunal also addressed the argument that Rule 128(9) is mandatory, clarifying that the Income Tax Board's rule-making power under Section 295 cannot impose conditions contrary to the Act or DTAA provisions. Hence, procedural delays should not override the established right to FTC under the treaty framework.

Impact

This judgment has profound implications for taxpayers seeking FTC under DTAA provisions. It establishes that procedural lapses, such as the delayed filing of Form No.67, should not automatically lead to the denial of FTC claims when such claims are substantiated under a valid DTAA. Consequently, taxpayers can have increased confidence in asserting their treaty rights without undue fear of procedural non-compliance nullifying substantive credits.

Additionally, this decision serves as a guiding precedent for lower tribunals and appellate authorities, emphasizing the need to prioritize treaty provisions over internal procedural rules when interpreting and applying FTC-related claims.

Complex Concepts Simplified

Foreign Tax Credit (FTC)

FTC is a mechanism that allows taxpayers to avoid double taxation by permitting a credit for taxes paid to a foreign country against their domestic tax liabilities on the same income. This ensures that income earned abroad is not taxed twice.

Form No.67

Form No.67 is a specific form prescribed under Rule 128 of the Income Tax Rules. It is used to declare income earned outside India and the foreign taxes paid or deducted on such income. Timely filing of this form is a procedural step in claiming FTC.

Double Taxation Avoidance Agreement (DTAA)

DTAA is an agreement between two countries to prevent the same income from being taxed by both countries. It outlines the tax rights of each country and provides methods like FTC to alleviate the burden of double taxation on individuals and businesses.

Section 139(1) of the Income Tax Act

This section mandates the filing of income tax returns by individuals and entities. It sets the deadline by which returns should be submitted, and compliance is crucial for availing various tax benefits, including FTC.

Conclusion

The ITAT Bangalore Bench's decision in Shashidhar Seetharam Sharma v. ITO underscores the judiciary's commitment to upholding taxpayers' substantive rights over procedural formalities, especially when governed by international treaties like DTAA. By recognizing Rule 128(9) as a procedural rather than a mandatory requirement, the Tribunal has reaffirmed that the essence of FTC—preventing double taxation—takes precedence over technical lapses in form submission.

This judgment not only fortifies the rights of taxpayers to claim FTC without being unduly burdened by procedural nuances but also aligns domestic tax practices with international standards of tax relief mechanisms. Consequently, taxpayers can now approach FTC claims with greater assurance, knowing that minor procedural delays may not necessarily impede their entitlement to rightful tax credits under applicable DTAA provisions.

In the broader legal context, this decision serves as a pivotal reference point for future cases concerning FTC and the interpretation of procedural requirements within tax law. It advocates for a balanced approach that harmonizes strict adherence to procedural rules with the overarching objectives of tax treaties and equitable taxation principles.