2025 (1) TMI 1182 - AT - Income Tax

Income deemed to accrue or arise in India - exclusive right to tax the gains as per the state of residence of the recipient - India Mauritius DTAA - restricting exemption under Article 13(3)/(4) of India Mauritius DTAA after setting off the short-term and long-term capital losses against the short-term and long-term capital gain - HELD THAT - Any capital gain arising out of sale of shares acquired prior to 01/04/2017 was exempt under article 13(3)/(4) of DTAA as it was taxable based on the residency of the recipient. In the present facts the assessee is admittedly a resident of Mauritius as defined under Article 4 of DTAA. Thus the gain earned by the assessee upon sale of shares /derivatives acquired prior to 01/04/2017 cannot be subjected tax in India. In the year 2016 Article 13 of DTAA was amended which was notified on 10/08/2016 wherein any gains on sale of shares of an Indian company acquired after 01/04/2017 is liable to be taxed on full rate under the provisions of the Income Tax Act. Admittedly the losses in the present facts of the case suffered by the assessee arises out of sale of shares of Indian company acquired post 01/04/2017. AO while computing the exemption under Article 13(3)/(4) netted off the losses against the gains thereby taxing the gains which otherwise is exempt as per the pre-amended Article 13(3)/(4) of India Mauritius DTAA. Computation of capital gains earned will have to be as per the provisions of DTAA prior to amendment and will be taxable as per the residency of the assessee as India had given up its right to tax such gains prior to 01/04/2017. As there is no dispute that assessee is resident of Mauritius the question of taxing capital gains earned on sale of share/derivatives acquired prior to 01/04/2017 cannot arise to be in India as they do not enter into the computation of income as per the Income Tax Act. Brought forward losses from A.Y. 2020-21 are concerned these are from the sale of share/derivatives acquired post 01/04/2017 and can only be set of against any gains that would arise from sale of share /derivatives acquired after 01/04/2017. Assessee will have to be allowed the carry forward losses and cannot be set off against the foreign income. Accordingly as the gain is not chargeable to tax no loss can be set off against such exempt income. As relying on GOLDMAN SACHS INVESTMENTS (MAURITIUS) LIMITED 2020 (9) TMI 1049 - ITAT MUMBAI and PATNI COMPUTER SYSTEMS LIMITED. 2007 (6) TMI 277 - ITAT PUNE-B no hesitation in holding that the assessee is entitled to claim benefit of carry forward of the brought forward losses of the earlier years and it cannot be set off against the capital gains earned by the assessee during the year that is exempt in present facts. Assessee appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered several core legal questions in this case:

1. Whether the assessment order was void ab initio for being passed beyond the statutory time limit.

2. Whether the Assessing Officer erred in setting off carried forward short-term and long-term capital losses against capital gains claimed as exempt under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

3. Whether the computation of capital gains should be as per domestic laws, with DTAA benefits applied only to the net capital gain.

4. Whether the Assessing Officer erred in interpreting the appellant's approach as a hybrid use of both the Act and the DTAA.

5. Whether the Assessing Officer failed to differentiate the appellant's case from other precedents where no set-off was allowed against income not chargeable under the DTAA.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Assessment Order

The appellant initially challenged the assessment order as void ab initio for being issued beyond the statutory time limit, referencing precedents from the Bombay and Madras High Courts. However, this issue was not pursued further during the appeal, and the ground was dismissed as infructuous.

2. Set-off of Capital Losses Against Exempt Gains

The appellant argued that the carried forward capital losses should not be set off against capital gains that were exempt under the DTAA. The appellant relied on section 90(2) of the Income Tax Act, which allows for the application of more beneficial provisions, whether from the Act or the DTAA. The appellant cited several judicial decisions supporting the non-set-off of losses against exempt income, including the Supreme Court and various High Court rulings.

The Assessing Officer, however, set off the losses against the gains, arguing that the computation should be as per the Income Tax Act, and only net gains should be exempt under the DTAA. The Officer cited decisions from the Delhi Tribunal and other High Courts to support this approach.

The Tribunal, after reviewing submissions and relevant precedents, held that the gains from shares acquired before 01/04/2017 were exempt under the DTAA and should not have been offset by losses. The Tribunal emphasized that the DTAA provisions should prevail over domestic law when more beneficial to the taxpayer.

3. Computation of Capital Gains

The appellant contended that the computation of capital gains should be as per the DTAA, with no set-off of losses against exempt gains. The Tribunal agreed, stating that the gains from shares acquired before the amendment were not taxable in India, and thus, losses should not be set off against them. The Tribunal referenced CBDT Circular No. 22 of 1944, which supports the non-set-off of losses against exempt income.

4. Alleged Hybrid Approach

The Assessing Officer accused the appellant of adopting a hybrid approach by claiming benefits under both the Act and the DTAA. The appellant refuted this, asserting that their computations were entirely based on the DTAA. The Tribunal sided with the appellant, finding no evidence of a hybrid approach and affirming the appellant's right to rely on the DTAA for exempting gains while carrying forward losses under the Act.

5. Distinction from Precedents

The appellant argued that the Assessing Officer failed to distinguish their case from precedents where no set-off was allowed against exempt income. The Tribunal agreed, noting that the appellant's situation was consistent with prior rulings that supported the non-set-off of losses against exempt gains, reinforcing the appellant's position.

SIGNIFICANT HOLDINGS

The Tribunal established several core principles:

"The provisions of the DTAA, when more beneficial, should override domestic law, allowing exemptions for gains from shares acquired before 01/04/2017."

"Losses from shares acquired post-01/04/2017 should be carried forward and not set off against exempt gains."

The Tribunal concluded that the appellant was entitled to claim the DTAA benefits for exempting gains and carrying forward losses, and the assessment order was partly allowed in favor of the appellant.