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‘‘Arth’-Shastri’, well yes Friends, presently, the official twitter handle of our Income Tax Department, is tweeting some insightful tweets with ‘‘Arth’’ as the student and ‘Shastri’ as the guru.
Thus, while penning down this article, ‘‘Arth’’ and ‘Shastri’, came up as a natural choice of characters, for me also, to present some real-life practical case studies, demonstrating the paradox of ‘Procedure Over Substantive Law and Legislative Intent’, widely prevailing and duly evident in the Intimation Orders u/s 143(1), being generated mechanically, by the faceless CPC robot, now a days.
So, ‘Picture’ this….
‘‘Arth’’ is an ordinary resident in India for income tax purposes and files his return of income in the capacity of a resident Indian. During the FY 2020-21, he also works in a foreign company, for a fraction of the year and earns some salary income from that foreign company. The applicable withholding tax (like TDS in India) has been deducted by that foreign company as per the applicable tax laws of that foreign country on this salary income. India has entered into a ‘double taxation avoidance agreement’ (DTAA), with that foreign country.
Influenced by the launch of the new taxpayer friendly income tax return filing portal, ‘Arth’ decides to file his ITR himself without the help of any professional.
For an ordinary resident, entire global income is taxable in India. Some of his friends advise ‘Arth’ not to disclose his foreign salary income in his ITR in India. But, as a law-abiding citizen and national, ‘Arth’ ignores such advice and files his ITR for the AY 2021-22, within the specified due date as per section 139(1), fully disclosing and offering his entire foreign salary income to income tax in India and claiming the corresponding credit for the withholding tax deducted by the foreign company on his foreign salary income.
However, due to ignorance of one procedural requirement as provided by Rule 128 of the Income Tax Rules, he doesn’t file the specified Form 67 before filing his ITR. Due to the faster processing capabilities of the new income tax portal, his ITR gets processed by the faceless CPC, Bengaluru, within a few days, and he receives an Intimation Order u/s 143(1) on his registered email id. So far, so good…
But trouble starts for ‘Arth’, when he opens his intimation order u/s 143(1) and scrolls down till the end of the order and finds out that a huge demand has been raised on him by CPC, Bengaluru. Then scratching his head and scrolling a little upwards, he comes to know the reason for this demand and observes that no credit of his withholding tax or foreign tax deducted on his foreign salary income has been given in the intimation order.
Struck by this sudden blow, he finally decides to consult a professional ‘Shastri’, and finds out about the requirement of filing Form 67 before filing of his return as per sub rules (8) and (9) of Rule 128 of the Income Tax Rules, in order to claim his foreign tax credit.
Realising his mistake, and on advice of the professional, ‘Shastri’, ‘Arth’ files the online Form 67, though belated and again files his revised return of income u/s 139(5) of the Act, hoping that this time he will get his due credit of his foreign tax.
However, as luck would have it, the faceless CPC robotic machine does not give credit for his foreign withholding tax this time also and again raises the same demand. ‘Arth’ now files a Rectification Application u/s 154, fully substantiated by the documentary evidences of deduction of withholding tax on his foreign salary income.
However, his rectification application is again rejected by the faceless CPC robot. Having left with no other option, ‘Arth’ deposits 20% of the said demand and files an appeal before the first appellate authority which also happens to be a faceless appellate authority i.e., the National Faceless Appeal Centre. In his appeal, ‘Arth’ submits all the substantiating and corroborating documentary evidences in support of his claim of foreign tax credit. But unfortunately, this faceless first appellate authority also upholds the disallowance made by the faceless CPC, in respect of the foreign tax credit and after this adverse appeal order, now ‘Arth’ is being forced to deposit the entire demand with penal interest u/s 221/234A/B/C.
Points of Contentions to Be taken in Appeal Submissions in Response to Such Intimation Orders u/s 143(1)
The above real-life case study is a classic example wherein the procedure has been given a precedence over the substantive law and legislative intent by the faceless assessing and appellate authorities.
However, in doing so, somehow, it has not been appreciated by both the faceless income tax authorities that non-fulfilment of a procedural requirement can’t lead to the denial of a lawful claim of the assessee fully backed by a substantive law.
Hon’ble Supreme Court, in the case of Sambhaji and Others v. Gangabai and Others, reported in (2008) 17 SCC 117, has held that procedure cannot be a tyrant but only a servant. It is not an obstruction in the implementation of the provisions of the Act, but an aid. It is a lubricant and not a resistance. A procedural law should not ordinarily be construed as mandatory; the procedural law is always subservient to and is in aid to justice.
Section 90 of the Income Tax Act, provides that Government of India can enter into an agreement with other countries for granting relief in respect of income on which taxes are paid in country outside India and such income is also taxable in India. Such agreements are popularly referred to as ‘double taxation avoidance agreements’ or the ‘DTAAs’. Accordingly, any income can’t be taxed twice in the resident country as well as in the source country and infact, the provisions of the DTAAs shall prevail over the provisions of the Income tax Act, if they are more beneficial to the assessee. Reliance in this regard can be placed upon the judgements of Apex Court in the cases of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) CIT v Eli Lily & Co (India) P Ltd (2009) 178 Taxman 505 (SC) GE India Technology Centre P Ltd v CIT (2010) 193 Taxman 234 (SC) Engineering Analysis Centre of Excellence P Ltd v CIT (2021) 125 CBDT Circular No 333 dated 2/4/82 137 ITR (St.).
Therefore, once the authenticity and genuineness of the claim of the assessee in respect of his foreign tax credit has been established by him, and an express article in the applicable DTAA read with section 90 of the Act, mandates for the providing of benefit of such foreign tax credit, while filing return of income in India, then merely due to a procedural lapse of filing of belated Form 67, the assessee should not and infact must not be denied and deprived of his lawful and substantive claim of foreign tax credit.
Hon’ble Supreme Court, in the case of Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner, (1992 Supp (1) Supreme Court Cases 21) has observed that: “The mere fact that it is statutory does not matter one way or the other. There are conditions and conditions. Some may be substantive, mandatory and based on considerations of policy and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance of all conditions irrespective of the purposes they were intended to serve.”
It needs to be further appreciated that even in some specific sections like 80IA(7), 10A(5), 12A(b) etc, wherein there is specific provision for disallowance of deduction/exemption, if audit report in prescribed form is not filed along with the return, various High Courts have taken a view that filing of audit report is directory and not mandatory. Reliance in this regard can be placed on the cases of: CIT vs Axis Computers (India) (P.) Ltd [2009] 178 Taxman 143 (Delhi) PCIT, Kanpur vs Surya Merchants Ltd [2016] 72 com 16 (Allahabad) CIT, Central Circle vs American Data Solutions India (P.) Ltd [2014] 45 com 379 (Karnataka) CIT-II vs Mantec Consultants (P.) Ltd [2009] 178 Taxman 429 (Delhi) CIT vs ACE Multitaxes Systems (P.) Ltd [2009] 317 ITR 207 (Karnataka).
Other similar instances where the faceless CPC has given unjustified supremacy to procedure over legislative intent and substantive law are the denial/disallowance of the benefit of reduced personal tax rates under the newly inserted section 115BAC in case of individuals, merely due to the procedural lapse of non/delayed filing of the specified Form 10IE, before the original due date of return filing and similarly, denial of benefit of reduced corporate tax rates in case of specified corporate entities under sections 115BAA/115BAB, simply on account of non/delayed filing of the specified Form 10IC, before the original due date of return filing, even though all the prescribed statutory conditions including the foregoing of the specified exemptions and deductions viz. 80C deductions, standard deduction in case of salaried employees, brought forward MAT credit and brought forward unabsorbed depreciation loss in case of companies etc., are being fulfilled by such assessees. As a result, many assessees are in receipt of huge demand notices, raised by the faceless CPC, by way of Mechanical Intimation Orders u/s 143(1) of the Income Tax Act.
And what makes these unjustified instances of supremacy of procedure over substantive law and legislative intent, more problematic, is the mechanical generation or issuance of such intimation orders u/s 143(1), containing such huge demands by the faceless CPC, Bengaluru, without appreciating that such debatable issues requiring an independent and thorough application of mind and judicious discretion by the assessment authority, must not come under the purview of the limited and confined scope of section 143(1) of the Income Tax Act.
Note: For any related queries, the Author, ‘Mayank Mohanka, FCA’, Founder Director in Tax Aaram India Pvt Ltd, can be reached at mayankmohanka@gmail.com.
