The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) has held that Rule 128(9) of the Income Tax Rules regarding the disallowance of foreign tax credit (FTC) in cases where filing Form 67 is delayed is in contradiction with the double taxation avoidance agreement (DTAA) between India and USA and shall be read down.
The assessee Mr. Purushothama Reddy 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. Income Tax department, 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 Income Tax Act.
The assessee contended that 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.
A bench of Shri Rama Kanta Panda, Accountant Member & Shri K.Narasimha Chary, Judicial Member observed that the Apex Court including the case in Union of India Vs. Azadi Bachao Andolan, 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.
Relying on the above decision, the ITAT held that “We find 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 over riding 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.”
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