2023 (8) TMI 139 - AT - Income Tax

Revision u/s 263 - carry forward of capital loss by selectively applying provisions of tax treaty/the Act - segregation of capital gains and capital losses for drawing benefits of DTAA - distinction between Source of Income and Head of Income - As per CIT income under the head capital gains would be inclusive of all capital gains and losses as permissible under the Act, the assessee cannot selectively take the benefit of tax treaty and no losses will be selectively allowed to be carry forward under the Act - HELD THAT - The assessee has claimed that it has validly treated gains/losses arising from each type of security to be a distinct source of income though under the head Capital Gains , the assessee is entitled to apply the provisions of the Act/India Singapore DTAA to the extent they are more beneficial. It is evident that there is no impediment in segregating capital losses and capital gains from different source of income under the head capital gains for the purpose of claiming the benefit of DTAA/ provisions of the Act as the case may be, whichever is more beneficial to the assessee in terms of section 90(2) of the Act. Thus, we are of the considered view that on merits, the issue raised in revisional proceedings u/s. 263 of the Act, the assessee has merit. There is no error in the assessment order in accepting claim of the assessee. The twin conditions for invoking section 263 i.e. assessment order should be erroneous and prejudicial to the interest of Revenue are not satisfied in the instant case, hence, the impugned order is set aside and appeal of the assessee is allowed. Revision u/s 263 - whether receipt of foreign remittances had been correctly offered to tax? - Assessee's assessment was selected for limited scrutiny - HELD THAT - The limited scrutiny was confined to examine outward foreign remittances and whether receipt of foreign remittances had been correctly offered to tax. The issue raised by the CIT in proceedings u/s. 263 of the Act relating to carry forward of capital gains was not within the scope of limited scrutiny. Hence, the Assessing Officer could not have enquired into the issue of assessee s claim of carry forward of capital loss. Once the Assessing Officer had no jurisdiction to enquire into an issue on account of limited scrutiny, the revisional powers u/s. 263 of the Act can only be exercised on the issues which are subject matter of limited scrutiny. It is not the case of Revenue that limited scrutiny was expanded to complete scrutiny. CIT under section 263 of the Act cannot delve on the issue which was not within the domain of limited scrutiny under CASS. Similar view was expressed by the Tribunal in the case of Sonali Hemant Bhavsarin 2019 (5) TMI 1547 - ITAT MUMBAI and various other decisions. Decided in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of the carry forward of capital losses by the assessee.
2. Jurisdiction of the CIT under section 263 of the Income Tax Act in the context of limited scrutiny assessments.

Summary:

Issue 1: Legitimacy of the carry forward of capital losses by the assessee (A.Y. 2016-17)

The assessee, a Singapore-based company and Foreign Portfolio Investor, declared a capital loss of Rs. 577,71,58,413/- for the assessment year 2016-17 and carried it forward for future set-off. The CIT invoked section 263 of the Income Tax Act, questioning the carry forward of capital losses without setting them off against capital gains, and issued a show cause notice. The CIT held that the assessee cannot selectively apply the provisions of the tax treaty to claim benefits and disallowed the carry forward of capital losses. The Department argued that the Assessing Officer (AO) failed to make necessary enquiries, rendering the assessment order erroneous and prejudicial to the Revenue's interest.

The Tribunal, referencing decisions such as Montgomery Emerging Market Fund and Goldman Sachs Investments (Mauritius) Ltd., concluded that different sources of income under the head 'Capital Gains' can be segregated, and the assessee is entitled to apply the provisions of the DTAA or the Act, whichever is more beneficial. The Tribunal found no error in the AO's acceptance of the assessee's claim and set aside the CIT's order, allowing the appeal for A.Y. 2016-17.

Issue 2: Jurisdiction of the CIT under section 263 in the context of limited scrutiny assessments (A.Y. 2017-18)

For the assessment year 2017-18, the assessee's return was selected for limited scrutiny focusing on outward foreign remittances and their correct tax treatment. The CIT invoked section 263 to question the carry forward of capital losses, an issue beyond the scope of the limited scrutiny. The Tribunal held that revisional jurisdiction under section 263 cannot be exercised to expand the scope of limited scrutiny assessments, as established in cases like Su-Raj Diamond Dealers Pvt. Ltd. and Mrs. Sonali Hemant Bhavsarin. Consequently, the Tribunal set aside the CIT's order for A.Y. 2017-18, allowing the appeal.

Conclusion:

The Tribunal allowed the appeals for both assessment years 2016-17 and 2017-18, finding that the CIT exceeded his jurisdiction and that the AO's acceptance of the assessee's claims was not erroneous or prejudicial to the Revenue's interest. The order was pronounced on March 9, 2023.