ITAT Bangalore remands FTC denial under Section 90 for reconsideration where Form 67 was belated but evidence is now available

Background and parties involved

The Bangalore Bench of the Income Tax Appellate Tribunal in Pradeep Lankapalli Vs DCIT examined an appeal concerning denial of Foreign Tax Credit (FTC) claimed under Section 90 of the Income Tax Act 1961 read with Article 25 of the India–US DTAA.

The assessee, a United States Green Card holder employed with Thomson Reuters India Pvt. Ltd., had income chargeable to tax in India and also suffered tax in the US. He sought credit in India for taxes paid in the US in terms of Article 25 of the India–US DTAA and Section 90.

The dispute did not revolve around eligibility of the income as such for FTC, but turned primarily on procedural compliance with Rule 128, especially the timing and filing of Form 67 and supporting foreign tax payment documents.

Chronology of returns and FTC claims

Original return under Section 139(1)

  1. The assessee filed his original return of income on 07.08.2018 under Section 139(1).
  2. Total income declared was ₹9,08,20,122.
  3. FTC of ₹2,95,156 was claimed in this original return in respect of US taxes paid, invoking Article 25(2)(a) of the India–US DTAA.

Revised return under Section 139(5)

  1. Subsequently, a revised return was filed under Section 139(5).
  2. In the revised return, total income was reduced to **₹9,04,62,460`.
  3. The FTC claim was substantially increased to ₹18,83,129, still under Article 25(2) of the India–US DTAA.

The case was picked up for limited scrutiny, and the assessment was completed on 18.03.2021. The Assessing Officer accepted the revised income figure but refused to grant the enhanced FTC claimed under Section 90.

Proceedings before CIT(A) and findings

The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals) in faceless mode.

The CIT(A) analysed:

  • Section 90(2) of the Income Tax Act 1961
  • Article 25 of the India–US DTAA
  • Rule 128 of the Income-tax Rules

The CIT(A) acknowledged, in principle, that where an assessee has paid or suffered tax in the US on income that is also offered in India, FTC is allowable under the statute and the DTAA. However, the CIT(A) emphasized that this entitlement was contingent upon compliance with the procedure prescribed in Rule 128.

Under Rule 128(9), an assessee seeking FTC is required to:

  • Furnish Form 67
  • Attach foreign tax deduction certificates
  • Provide proof of foreign tax payment and other prescribed evidence

all of which must be submitted on or before the due date for filing the return of income under Section 139(1).

Alleged non-compliance with Rule 128

The CIT(A) recorded that:

  1. For the assessment year in question, the due date under Section 139(1) was 31 July 2018, later extended to 31 August 2018.
  2. The assessee, according to the CIT(A), did not demonstrate that Form 67 and supporting foreign tax documentation had been filed prior to filing the original return.
  3. On examination of the records, the CIT(A) noted that Form 67 was filed on 30.03.2019, i.e., one day before the date of filing the revised return, not before the original return in which FTC of ₹2,95,156 was first claimed.

On this basis, the CIT(A) concluded that the assessee had failed to satisfy Rule 128(9) because Form 67 and the necessary supporting documents were not filed within the stipulated timeline relative to the original return under Section 139(1).

Distinguishing earlier case law

The assessee had relied on certain judicial precedents to support his FTC claim. The CIT(A), however, rejected reliance on those rulings on two grounds: