2022 (10) TMI 1208 - AT - Income Tax

Beneficial provisions of the India - Mauritius DTAA in respect of STCG - setting off the brought forward Short/Long Term Capital Losses with the current year Short/Long Term Capital Gains as exempted as per India Mauritius DTAA - whether relevant Articles of the DTAA has to be taken on the net taxable income calculated after giving effect to all the provisions of the IT Act including Section 74 as argued by revenue? - HELD THAT - Tribunal in the case of Goldman Sachs Investments (Mauritius) Ltd. 2020 (9) TMI 1049 - ITAT MUMBAI rejected the aforesaid contention of the Revenue holding that the Assessee was entitled to claim benefit of Article 13(4) of DTAA in respect of the entire current year Short/Long Term Capital Gains (without setting of the Brought Forward Short/Long Term Capital Gains). The Tribunal also permitted carry forward of the Brought Forward Short/Long Term Capital Gains to the subsequent assessment years holding that the Short/Long Term Capital Loss permitted to be carried forward in a previous assessment could not be reviewed in the assessment proceedings of a subsequent assessment year. Thus we find merit in the contention of Assessee that all the issues raised by the Revenue in the present appeal stand decided in favour of the Assessee.

Summary

Issues Involved:
1. Applicability of India-Mauritius DTAA on capital gains.
2. Set-off of brought forward Short-Term and Long-Term Capital Losses against current year gains.
3. Carry forward of capital losses to subsequent years.

Detailed Analysis:

1. Applicability of India-Mauritius DTAA on Capital Gains:
The primary issue revolves around whether the capital gains earned by the Assessee, a non-resident Foreign Institutional Investor (FII) registered in Mauritius, are exempt from tax in India under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The Assessee claimed exemption for Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) under Article 13(4) of the DTAA. The Assessing Officer (AO) contended that the Assessee should first set off the brought forward Short-Term and Long-Term Capital Losses (STCL and LTCL) against the current year's gains before claiming the DTAA benefits. The Tribunal, referencing the case of Goldman Sachs Investments (Mauritius) Ltd., upheld that the Assessee is entitled to claim the DTAA benefit without setting off the brought forward losses.

2. Set-off of Brought Forward Short-Term and Long-Term Capital Losses:
The AO argued that as per Section 74 of the Income Tax Act, the Assessee should first set off the brought forward STCL and LTCL against the current year's STCG and LTCG before claiming any exemption under the DTAA. The CIT(A), however, allowed the Assessee's appeal, referencing the Tribunal's decision in the case of Goldman Sachs Investments (Mauritius) Ltd., which held that the exempt capital gains under the DTAA do not form part of the assessable income and hence, cannot be set off against brought forward losses. The Tribunal reaffirmed this position, stating that since the capital gains are exempt under the DTAA, there is no occasion to set off brought forward losses against such exempt gains.

3. Carry Forward of Capital Losses to Subsequent Years:
The AO also contended that if the capital gains are exempt, the related capital losses should also be treated as exempt and not be allowed to be carried forward. The Tribunal, however, disagreed, citing the case of Flagship Indian Investment Co. (Mauritius) Ltd., which allowed the carry forward of capital losses determined in previous assessment years. The Tribunal held that once the losses are determined and permitted to be carried forward by the AO in a scrutiny assessment, they cannot be reviewed in subsequent assessment years. Thus, the Assessee is entitled to carry forward the brought forward STCL and LTCL to subsequent years.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both Assessment Years 2015-16 and 2017-18, upholding the CIT(A)'s orders. The Tribunal concluded that the Assessee is entitled to the benefits of the India-Mauritius DTAA for the entire current year's capital gains without setting off the brought forward losses and is also entitled to carry forward the brought forward capital losses to subsequent years.