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TMI Blog2023 (3) TMI 457X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in not appreciating the fact that adjustment in carried forward capital losses amounts to variation in income or loss which is prejudicial to the interest of the assessee and consequently draft order u/s. 144C was correctly passed. 3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in ignoring that the income or loss returned not only refers to income or loss of the current year declared by assessee in the return of income but also the brought forward and carried forward losses declared in the return of income. 4. The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing Officer be restored. 5. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 2. Whereas, assessee has filed Cross Objection on the following grounds:- 1. On the facts and circumstances of the case and in law, the Ld. AO erred in not accepting the order of the Ld. CIT (A) and the contentions of the respondent and further contesting the same before the Hon'ble Tribunal. 2. Without prejudice to the above, the Ld. CIT (A) erred in not dismissing or rever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 2011-12 27,13,84,674 - 3 2012-13 5,33,85,406 - 4 2013-14 16,50,08,923 - 5 2014-15 35,33,58,688 5,27,74,036 Total 2,69,58,94,017 5,27,74,036 4. For the previous year relevant to AY 2016-17, i.e., the year under appeal, the Assessee earned short-term capital gains amounting to INR 5,63,91,201/- and long-term capital gains amounting to INR 2,32,42,72,825/-. These were claimed as not being taxable in India by virtue of Article 13(4) of India-Mauritius Tax Treaty. Thus, the Assessee filed its Return of Income for AY 2016-17 electronically on the web-portal of the Income-tax Department on 27 September 2016 reporting total income at 'NIL'. Since the Assessee did not had any taxable income/ capital gains chargeable to tax in India as per the provisions of India- Mauritius Treaty, the entire brought forward short-term capital loss of INR 2,69,58,94,017 and long-term capital loss of INR 5,27,74,036 was carried forward 'as it is' to the subsequent year(s), without setting off from the current year capital gain. 5. The AO in his draft assessment order required the assessee to file a justification for not setting off of the brought forward losses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, within the time limit prescribed by section 153 of the Act (i.e. on or before 31 December 2018). The final order dated 11th February 2018, should be held to be bad in law and non-est. Ld. CIT (A) has quashed the assessment order itself on this ground alone and did not adjudicate the other grounds. According to him, the only variation made by the AO is with respect to set off of brought forward losses but there is no variation in income, therefore, AO should not have passed a draft assessment order. 7. Accordingly, the revenue's appeal is on validity of assessment order passed u/s 143(3) r.w.s. 144C (3) of the Act and the assessee's Cross Objection is on the merits of the case, i.e., regarding on allowability of carry forward of earlier years losses without setting off with current year's capital gains (claimed to be not subject to tax in India under the India- Mauritius DTAA). It has been contended by the parties that, once the case on merits is decided, then Department's Appeal will become academic. It was thus requested that assessee's Cross Objection may be dealt first. 8. Before us, it has been submitted that the Assessee earned short-term capital gains amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O, vide his order passed under Sec. 143(3), dated 19.03.2015 for A. Y 2012-13, the same could not have thereafter been reviewed in the assessment proceedings of any subsequent year. As the said observation of the DRP has not been assailed any further by the revenue in appeal before us, the same thus had attained finality. Now coming to the claim of the revenue that as Sec. 45 of the Act, by virtue of India-Mauritius tax treaty was rendered unworkable in respect of capital gains" derived by the assessee from transfer of securities in India, therefore, the "capital losses' would also not form part of the assessee's "total income", and thus, could not be computed under the Act, we are afraid does not find favour with us. Apropos the aforesaid observation of the A.O, we are of the considered view that the same had been arrived at by losing sight of the fact that the "capital losses" in Question had been brought forward from the earlier years and had been determined and allowed to be carried forward by the A.O while framing the assessment for A.Y 2012-13, vide his order passed u/s 143(3), date 19.03.2015, and had not arisen during the year under consideration i.e., A.Y 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also approved by the Hon'ble M/s J. P. Morgan India Investment Company Mauritius Limited Mumbai Tribunal in Goldman Sachs Investments (Mauritius) Ltd. (supra) 9. Thus, it was submitted that the Assessee's case is squarely covered by the aforesaid decisions and thus, the claim made by the Assessee to carry forward the brought forward capital losses to subsequent years should be allowed without setting off of capital gains earned during the year under consideration which are not taxable in India by virtue of Article 13(4) of India Mauritius DTAA. 10. On the other hand, Ld. DR first of all submitted that loss has to be determined first which here has to be determined. In support he strongly relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Manmohan Das (deceased) (1996) 59 ITR 699 (SC) wherein it was held as under:- The ITO has under section 24 (3) to notify to the assessee the amount of loss as computed by him, If it is established in the course of assessment of the total income that the assessee has suffered loss of profits. Section 24(2) confers a statutory right (subject to certain condition which are not material) upon the assessee who sus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Mauritius DTAA, without setting off of short term capital loss and long term capital loss from earlier year and be allowed to be carry forward to the subsequent years on the ground that in the earlier years when assessee suffered loss it chose not to claim benefit under DTAA and computed the loss as per domestic law, i.e., under the Income Tax Act. 13. First of all, it is well settled principle that the tax treaties allocate taxing rights to the treaty partner in the following three manners:- (a) Rights are allocated (only) to the source country in respect of certain income (e.g. income from immovable property is taxed in the country where the property is located. In this case the computation of income in the country of residence is of no consequence as the taxing rights are given solely to the country of source. The country of residence gives up the right to tax the income or alternatively gives full credit of the tax paid in the country of source. (b) Income is taxed in the country of source and also the country of residence but as the income is taxed in the country of residence, the country of source limits its right to tax the income. In this case, the computation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in that state, i.e., resident state." The word "only" debars the other contracting state to tax the shipping income, that is, India is precluded from taxing the shipping income even if it is sourced from India. An enterprise which is tax-resident of Singapore is liable for taxation on its shipping income only in Singapore and not in India. Whence India does not have any taxation right on a shipping income of non- resident entity, which is exclusive domain of the resident state, there is no Question of any kind of exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by Article 8. There is no stipulation about exemption under Article 8 of the shipping income which as pointed out by Id. Senior Counsel has been specifically provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have the jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the taxing provisions if Assessee has chosen to be assessed as per Treaty. 18. Further, the provisions of sections 4 and 5 are expressly made subject to the provisions of the Act which means that they are subject to the provisions of section 90 of the Act. By necessary implication they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. 19. Thus, as a corollary, where treaty provisions are beneficial as compared to the provisions of the Act; the taxpayer has right to rely on the treaty provisions. 20. Section 90(2) of the Act reads as under: "90(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case maybe, under sub-section (1) for granting relief of tax, or as the case maybe, avoidance of double ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State." 25. Thus, under DTAA between India Mauritius, the taxing rights on capital gains falling under Article 13(4) is kept with country of residence, i.e., Mauritius and hence the same is not taxable in country of source, i.e., in India. 26. In the previous year for the Assessment year under appeal (A.Y. 2016-17) the Assessee chose to be governed by the provisions of the tax treaty and consequently the gains earned in that year were not offered to tax. The question of touching the brought forward capital losses in this Assessment year does not arise as the eligibility to carry these losses forward was determined in the year they were suffered. The entire capital gains earned during the previous year were claimed to not be taxable under the treaty. As a result, the capital losses were carried forward as it is to the subsequent years. 27. In the instant case, in the earlier years (A.Y. 2009-10, A.Y. 2011-12 to A.Y. 2014-15) the Assessee had incurred capital losses. 28. Thus, it is for an assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is allowed. In view of the aforesaid findings, the other ground in Cross Objection is purely academic in nature. 31. In so far as the revenue's appeal is concerned, we are not in agreement with the opinion of Ld. CIT(A), because AO during the course of assessment proceedings has adjusted the brought forward short term capital losses against the long term capital gain and also net short term capital gains has been allowed only after setting off of earlier year losses, no doubt the income of the assessee is still remain at NIL, but such an adjustment made by the AO has made variation in the amount of capital gains and losses returned by the assessee and therefore AO was justified in passing the draft assessment order u/s 144C as it is applicable even there is a variation in the income and losses returned which is prejudicial to the interest of assessee. The word used income and loss returned which is prejudicial to the interest of the assessee and not the 'Total Income'. However, in any case once we have held that long term capital gain during the year is not taxable as in accordance with Article 13(4) of Indo Mauritius DTAA and carry forward losses on account of long term ..... X X X X Extracts X X X X X X X X Extracts X X X X
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