9911796707
TMI Blog2025 (2) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant prays that the learned AO be directed to allow the carry forward of the LTCL amounting to INR 75,20,89,749 as claimed in income tax return during the year under consideration without setting-off the long-term capital gains of INR 31,59,01,013, being a different source and claimed as exempt under Article 13(4) of the India-Mauritius Double Tax Avoidance Agreement ('DTAA'). 2. Erroneous initiation of penalty under section 270A of the Act - On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under Section 274 read with Section 270A of the Act. The Appellant prays that the learned AO be directed to drop the penal proceedings under section 270A of the Act since the Appellant has made all disclosures in the income tax return, supported by legal arguments and judicial precedents at the time of assessment. 3. Levy of tax under section 115JB of the Act (Minimum Alternate Tax ('MAT') provision) - On the facts and in circumstances of the case and in law, the learned AO has erred in stating that tax on total income is levied as per Book profit under section 115JB of the Act. The Appellant prays that the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 75,20,89,749/- originally claimed by the assessee to Rs. 43,61,88,736/- after netting off against the gains. Aggrieved by the proposed adjustment, the assessee filed objection before the DRP. 3. Before the DRP the Ld.AR submitted that, Long-term capital loss amounting to Rs. 75,20,89,749/- has to be allowed to be carried forward without setting off against the Long-term capital gain of Rs. 31,59,01,013/-. In support the assessee relied on following decisions: * decision of Hon'ble Supreme Court in case of CIT vs. P.K.K Kochammu Amma Peroke reported in (1980)125 ITR 624 * decision of coordinate bench of this Tribunal in case of GK Rammurti vs. JCIT reported in (2010) 37 SOT 345 * decision of Hon'ble Bangalore Tribunal in case of IBM World Trade Corporation vs DIT reported in (2012) 54 SOT 39 3.1. The assessee contended that, it can apply beneficial provisions qua each transaction, though flowing under the same source. It was submitted that, these decisions also support the contention of the assessee that, capital loss arising from a taxable source cannot be set off against exempt income, either under the act or under the DTAA, which is not part of the computation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that too, "Long Term Capital Gains", being uniform across all transactions under the Statute. The Statute does not provide for any sub-species of Long Term Capital Gains under any provision. The ratio of IBM World Trade Corpn. case that pertains to the different varieties of Royalty, is not at all applicable. 10. In the instant case, no matter whether the Applicant opts for Domestic Income Tax Act or DTAA, the subject "capital gains" are a loss of Rs. 43,61,88,736/- for the relevant A.Y. Abiding with subsection 90(2), the Ld. A.O. has granted the beneficial option to the applicant at the preference of the Applicant itself. 11. Treaty Provisions are applicable in re/ qua "Income" and not "sources". In this case, there has been one single species of Income, "capital gains" that too, Long Term Capital Gains. 7. To sum up, as per facts of the case, the assessee is tax resident of Mauritius. During the year under consideration the assessee has earned MauritiLTCL from transfer of two unlisted shares. In one case, there is only LTCG arising from transfer of the said share. In another case there are two transactions on two different dates, wherein in one transaction the assessee earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year, and treat them separately, i.e., claiming gains as exempt under the DTAA and claiming losses to be carried forward under the provisions of the Act." 4. On receipt of the DRP directions, the Ld.AO passed the impugned assessment order by reducing the Long-term capital loss against the long term capital gains, thereby allowed to be carry forward the loss of Rs. 43,61,88,736/-. Aggrieved by the impugned order the assessee is in appeal before this Tribunal. 5. In the present facts of the case, the Ld.AR submitted that assessee entered into share subscription agreement on 14/10/2010, agreeing to subscribe 2,77,993 compulsory convertible series of A preference shares of CFS. Reliance was placed on the agreement at page 183 -236 of the paper book being the Share Subscription agreement of the said company. It is submitted that vide board resolution dated 06/11/2015 the assessee was issued bonus shares in the ratio of 1:6 of compulsory convertible series of A preference shares vide board resolution placed at page 237 -236 of the paper book 5.1. Subsequently, these compulsory convertible preference share were converted into equity shares in the year 2016 and was held in D-mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Income Less: Exempt u/s 10(34) of the Income-tax Act, 1961 CAPITAL GAINS/LOSS (As per Annexure 1) Long Term Capital Gain/(Loss) on sale of shares of New Delhi Centre For Sight Limited 283,835,763 Less: Exempt under India-Mauritius Treaty (283,835,763) Long Term Capital Gain/(Loss) on sale of shares of Maharana infrastructure and Professional services Limited (Tranche 1) (752,089,749) (752,089,749) Long Term Capital Gain/(Loss) on sale of shares of Maharana Infrastructure and Professional services Limited (Tranche 2) 32,065,250 Exempt under India-Mauritius Treaty (32,065,250) GROSS TOTAL INCOME (752,089,749) TAXABLE INCOME ROUNDED OFF TO (752,089,750) 5.4. The ld AR submitted that as under :- (A) As per Section 90(2) of the Act, where the Government of India has entered into an agreement with any other country or specified territory for granting relief of tax or for avoidance of double taxation, then in effect the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principle that, the provisions of the Act or treaty whichever is beneficial is applicable to the assessee for each source. It is argued that, on the conjoint reading of section 90 of the Act and applying the principles emerging from the above judicial precedents, in the context of capital gains/ (loss) arising from sale of shares, each scrip and tranche should be treated as a separate source of income with reference to the specific circumstances for which application of tax treaty and provisions of the Act need to be considered independently. (F) The Ld.AR thus submitted that the sale of shares of each tranche on different dates therefore, requires a separate computation mechanism as per section 48 of the act. He submitted that, each script/shares is a separate capital asset being transacted at different point of time and hence the treaty applicability should be accordingly analysed independent of the other transaction/tranche. The Ld.AR summarized it is claim to adopt treaty benefit in respect of capital gains earned from sale of securities and benefit under the income tax act to carry forward the loss earned from sale of securities as under :- Name of the scrip Date of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the years and earned profits as well as losses from these investments. 6.2. It cannot be ignored that, a prudent businessman makes investments for earning profits but also incurs losses, as it is part and parcel of making investments. The provisions of section 90(2) of the Act itself provides that, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Accordingly, the Appellant has claimed the exemption on capital gains earned on some shares and carried forward the capital loss on some shares under the Act. This is not in contravention of the object but is only a beneficial position opted by the assessee which is provided under law. 6.3. As far as the capital gain earned by the assessee from sale of shares of CFS during the year under consideration, claimed as exempt in view of Article 13(4) of the India Mauritius DTAA, Ld.AO allowed it. The Ld.AO disputed only carry forward of the short term capital loss suffered from sale of shares of Maharana, without being set off against the gain earned from sale of shares of Maharana. 6.4. A query was therefore raised by the bench whether, 'Gains' under Article 13(3)/(4) includes 'loss' ? 6.4.1. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the treaty. The nature of the treaty in the present fact is key factor and therefore, what is not expressly granted is not permitted. 6.4.4. In so far as, applicability of good faith in interpreting the treaty provisions, we note that good faith differs from most of the other elements under the Viena rules. It applies to the whole process of interpreting for treaty rather than solely to the meaning of particular words or phrases within it. Although, it is difficult to give precise content to the concept generally, it does include one principle that applies to the interpretation of specific terms used in a treaty, commonly described as the principal "effectiveness". The aspect of the principle of effectiveness is preferring an interpretation that fulfils the aims of the treaty and the intent of the contracting states as given in various Articles. 6.4.5. Applying the above rules to Article 13(4) of India Mauritius DTAA, it is clear that non taxability of the capital gains in India prior to 01/04/2017 cannot act to the disadvantage of the tax payer. This is because section 90(2) is clear to mean that Government of India entered into DTAA with the Government of Mauritius, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of the India- Japan tax treaty. The provisions of the Indian Income-tax Act must, therefore, apply to that extent. Then comes the objection of the revenue that in the event of the assessee not opting for treatment on the basis of India-Japan tax treaty this year, he will be shut out from availing the benefits of the said treaty in the subsequent years. We see no support for this proposition. Under the Income-tax Act, every year is an independent unit, and it is for the assessee to examine whether or not, in the light of the applicable legal provisions and in the light of the precise factual position, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation avoidance agreement. There is no specific bar on such an approach of the assessee, and in the absence thereof, we cannot impose the same. In any event, this question is relevant only in the year in which the assessee claims the treaty benefits and not in this year in which the provisions of the Act are clearly more beneficial to the assessee, and, therefore, the assessee does not claim the treaty protection. Just because the assessee may, in Assessing Officer's percepti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head "capital gains". Even under short term capital gains, different transactions will be different sources of income resulting in short term capital gains/loss. Likewise, different transactions of long term capital assets will be different sources of income for an assessee to arrive at long term capital gains/loss. This is reflected in the scheme of computation of capital gains provided in section 48 where gains or loss is computed on the basis of individual asset and transaction and not on the basis of class of assets. Therefore, we have to agree with the argument of the learned senior counsel that every transaction of a property is a different source of income for the assessee. Head of income is not the source of income. Source of income is having the direct nexus with the stream or fountain out of which the income springs to the assessee. Head of income is provided for clubbing purpose of those like minded incomes derived from different sources for the purpose of aggregation and allowable deductions. (emphasis supplied) 6.5.1. From the above one can infer that there is no basis in grouping long term/short term capital assets. It can also be inferred that, long term and short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee is entitled to the benefit of Article-13 of DTAA in respect of capital gains and allowed carry forward of capital loss under the provisions of the Act. For the sake of completeness relevant extracts of the findings of the Coordinate Bench are reproduced herein under:- "12. ..........We are unable to comprehend that now when admittedly the short term and long term capital gains earned by the assessee from transfer of securities during the year in question are exempt under Article 13 of the India-Mauritius Tax Treaty, where would there be any occasion for seeking adjustment of the brought forward STCL against such exempt income. Our aforesaid view is squarely covered by the order of the ITAT, Mumbai in the case of Flagship Indian Investment Company (Mauritius) Lid. (supra). In the case of the assessee before the Tribunal that pertained to A. Y. 2005-06 the assessee had brought fonvard capital loss of Rs. 87,06,49,335/-from transfer of securities in A.Y. 2002-03. The aforesaid loss was determined in the hands of the assessee vide an intimation under Sec. 143(1) for A.Y 2002-03. Observing, that since the capital gains were not taxable in India as per Article 13 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve that it is for the assessee to examine whether or not in the light of the applicable legal provisions and the precise factual position the provisions of the IT Act are beneficial to him or that of the applicable DTAA. In any case, the tax treaty cannot be thrust upon an assesses. In case the assessee during one year does not opt for the tax treaty, it would not be precluded from availing the benefits of the said treaty in the subsequent years. Our aforesaid view is fortified by the order of the ITAT, Pune in Palm Computer Systems Ltd. (supra). We thus in terms of our aforesaid observations, not being able to persuade ourselves to subscribe to the view taken by the A.O/DRP, who as noticed by us hereinabove had sought adjustment of the b/forward STCL against the exempt short term and long term capital gains earned by the assessee during the year in question, thus 'set aside' the order of the A.O in context of the issue under consideration. Accordingly, we direct the A.O to allow carry forward of the b/forward STCL of Rs. 3926,36,70,910/- to the subsequent years." From the reading of above decisions, it is evident that there is no impedement in segregating capital loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms excludes these sums from the total income of the assessee. It is pointed out that in Section 4, sub-section (3), certain incomes, profits or gains falling within the classes mentioned in that sub-section are not to be included in the total income of the person receiving the income, and Mr. Joshi argues that except in these cases, in every other case, although the tax is not payable on certain sums, they must be included in the total income for the purpose of determining the rate. It is therefore argued that although under Section 25(4) an exemption is given to the assessee because there is a succession to the business carried on and no tax is payable by the assessee, the sum which is exempted under this sub-section does form part of the total income for the purpose of determining the rate. Total income is defined in Section 2(15) of the Act, and it means total amount of income, profits and gains computed in the manner laid down in this Act. Therefore, it would be erroneous to suggest that total income is to be determined only in the light of Section 4, sub-section (3), of the Act. How total income is to be computed and determined depends upon the various provisions contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered by Section 25 (4) has been made a part of the total income of the assessee. Therefore, in my opinion, the share of the profit of the assessee in the firm of S.B. Billimoria & Co., in the accounting year 1942 cannot be included in the total income of the assessee for ascertaining the rate of income-tax. 7.2. It is thus clear from the above observation from the Hon'ble Bombay high court that, income does not form part of the total income do not enter the computation of the total income at all applying the above principle above ratio to the present facts of the case the capital gains that are already exempt under the DTAA which are binding on the parties being exempt in India, cannot enter the computation of total income of assessee in India. Therefore, setting off the loss suffered by the assessee from sale of shares of Maharana, against the gains earned from sale of shares of Maharana would tantamount to taxing the gain in India which is in violation of Article 13(3)(4) of DTAA as it stood prior to amendment. 8. Now we shall examine the provision relating to carry forward of the loss suffered from sale of shares of Maharana the assessee in the present case as carry forwarded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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