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TMI Blog2025 (2) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... from sale of shares of Maharana are therefore different sources of income 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. Provision relating to carry forward of the loss suffered from sale of shares of Maharana the assessee in the present case as carry forwarded long-term capital loss as per section 74 of the Act - Reference is made to the CBDT Circular No. 22 of 1944 dated 29/07/1944 that states that: "If the total income is a loss it has to be carry forwarded subject to the provisions us. 24(2) of the Indian income tax act 1922 and cannot be set off against any income which does not form part of the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. The Appellant prays that the Appellant is a resident of Mauritius with which India has an DTAA and the Appellant does not have a permanent establishment in India. Accordingly, the provisions of section 115JB of the Act does not apply to the Appellant. 4. Levy of interest under section 234A, 234B, 234C and 234D of the Act - On the facts and in circumstances of the case and in law, the learned AO has erred in stating that interest under Section 234A, 234B, 234C and 234D of the Act would be leviable. The Appellant prays that there is no income assessed under the final assessment order and hence interest under section 234A, 234B, 234C and 234D of the Act does not apply to the Appellant." Brief facts of the case are as under: 2. The assessee is tax residence of Mauritius and filed its return of income on 10/11/2020 declaring total income at nil. The case was selected for scrutiny and notice u/s. 143(2) and 142(1) was issued along with questioner. In response to the notice, the representative of the assessee appeared before the Ld.AO and filed requisite details through e-proceedings. 2.1. From the details filed, the Ld.AO noted that assessee has earned long-term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the DTAA, which is not part of the computation of the income. 3.2. The DRP however, after considering the submissions of the assessee rejected the same by observing as under: "6.13. Summary of Findings: 1. The question is how to determine the Capital gains for an Assessee? The Capital gains are to be determined on an aggregate basis from all transactions (sources) and then the "net" capital gains as per M.S.P. Nadar Sons v. CIT [1993] 68 Taxman 152 (SC) are to be examined for DTA v. DTAA benefits. 2. Applicant has not netted off the capital gains, even from the same Share Sale Agreement, and has alternated between DTA v. DTAA provisions. 3. Following the Rule laid down by the Apex Court for determination of quantum of "Capital gains", the gain or loss had to be determined first vis a vis the "A.Y" as a whole, on an aggregate. The individual transactions do not reflect the capital gains/loss position of the assessable time period, the "Assessment Year". 4. Once the "capital gains" are determined for the entire A.Y., then Act v. Treaty (DTA v. DTAA) preference as provided under sub-section 90(2) will come. 5. Questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted 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 earned LTCG and in the other transaction the assessee earned LTCL. The assessee in case of LTCG in both cases, claimed exemption under article 13(4) of the Indo-Mauritius tax treaty (DTAA). However, the LTCL including the LTCL from one of the same shares where LTCG was also earned, the assessee claimed to carry forward these LTCL to next year u/s. 74 of the Act. The assessing officer did not agree with the assessee and stated that gains would include losses on transfer of equity shares and if gains are taken as exempt under the DTAA, then the losses would also be taken to the same DTAA. The assessing officer objected to change of stand by the assessee in such transactions. The assessing officer distinguished the case laws quoted by the assessee. The assessee now contending the decision of the assessing officer with same set off arguments and pleadings before us. Having considered the relevant provisions of law and the DTAA as well as the facts attending to the case, we are of the considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard 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 account, as approved by the board resolution dated 07/03/2016 placed at page 242 -243 of the paper book. The said equity shares were D-mated and held in the D-mat account from 2016. 5.1.1. It was submitted that, share purchase agreement was entered into by assessee for sale of equity shares of CFS on 16/05/2019 wherein, the assessee earned capital gains of Rs. 28,38,35,763/-. The Ld AR submitted that the above sale of shares of CFS includes 16,67,958/- bonus equity shares out of which 10,78,794/- equity shares were allotted on 06/11/2015 and 5,89,164/- equity shares were allotted on 07/03/2016. 5.2. In respect of the shares pertaining to Maharana, the Ld.AR submitted that, the assessee entered into shares subscription agreement on 04/04/2011 towards subscription of 1,78,572/- shares at price of Rs. 50 crores. The copy of share subscription agreement is placed on page 246-308 of the paper book. 5.2.1. The Ld.AR submitted that, bonus shares were allotted to the assessee by Maharana at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Relevant extract of the section is reproduced below for the ready reference: "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 may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee." (B) The expression 'to the extent' used in the section 90(2) of the Act signifies that, the provisions of the Act or the tax treaty, whichever is beneficial, are to be considered. He submitted that, the said principle has is also upheld by Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan reported in (2002) 125 taxmann 826. (C) The provisions of the Act and Treaty are to be compared in respect of each source of income. Thus, it is very important to understand what constitutes 'source of income. He submitted that Hon'ble Allahabad High Court in the case of Shri Sobhag Mal Lodha vs. CIT reported in (1967) 63 ITR 424, held that; " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 May, 2019 INR 28,38,35,763 1 Exempt under Article 13(4) of DTAA Maharana 30 May, 2019 (INR 75,20,89,749) Loss carried forward under the Act 14 August, 2019 INR 3,20,65,250 1 Exempt under Article 13(4) of DTAA (G) The Ld.AR thus submitted that, the assessee applying the above principle to the present facts exercised the option of being governed under the provisions of the Act for sale of shares sold on 30/05/2019 since there is loss from the said source and simultaneously the gains from sale of shares on 16/05/2019 and 14/08/2019 were claimed as exempt under DTAA 5.5. On the contrary the Ld.DR vehemently opposed the submissions of the assessee he submitted that the word "income" or "profit and gains" should be understood as including losses. He submitted that while computing capital gains loss also must be considered and enters the computation mechanism under the Income Tax Act. 5.6. The Ld.DR submitted that computation mechanism must be done as per the income tax act and therefore assessee can be allowed to carry forward the loss only after set off from the capital gains earned if any. He placed reliance on the provisions of section 74(1) to sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide tax relief by preventing double taxation. Further, section 90(2) of the Act, inter alia, provides that when the Government of India has entered into a DTAA with Government of any other country for granting relief of tax, or as the case may be for avoidance of double taxation, in relation to an assessee to whom such agreement applies, the provisions of the Act shall apply to the extent these are more beneficial to that assessee. It was also submitted that, Section 90 of the Act, only grants relief, it does not impose any liability and the DTAA cannot act to the disadvantage of the taxpayer, and merely because India has entered into DTAA with Mauritius, the assessee can neither be denied the taxability under the scheme of the Act, nor can the DTAA be forced upon the assessee, who may wish to avail tax treaty benefit for one source of income and avail benefit in respect of loss under the Act as beneficial to the assessee as provided by law. 6.4.2. It is noted that, Article 31 of Viena convention on the law of treaties states that, treaties should be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaties in their context, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the act shall apply to the extent they are more beneficial to the tax payer. 6.4.6. The Ld.AR in support relied on following observations from the decision of Hon'ble Pune Bench in case of Patni Computers Systems Ltd., reported in (2008) 114 ITD 159 8. The law laid down by the Hon'ble Supreme Court in binding on us under Article 141 of the Constitution of India. The prevailing legal position, therefore, is that once an income is held to be taxable in a tax jurisdiction under a double taxation avoidance agreement, and unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. To that extent, the worldwide basis of taxation in the scheme of the Indian Income-tax Act is no longer applicable in a situation provisions of a double taxation avoidance agreement entered into under section 90 apply. The next question then arises whether in a loss situation in the PE State, as is the case before us, can the assessee be forced to go for taxation in accordance with the provisions of the treaty with the said PE State. The provisions of section 90(2) of the Indian Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aty provisions cannot be thrust on the assessee this year as well. In this view of the matter, the assessee was indeed eligible to claim taxation on worldwide basis, disregard the scheme of taxability under the India-Japan tax treaty, and, in effect, claim deduction of loss incurred by the PE in Japan. The CIT(A) was thus justified in his conclusion to the effect that losses of assessee's PE in Japan are to be taken into account while computing assessee's total income liable to tax in India. Now coming to the contention whether each transaction can be considered as a separate source of income. 6.5. The Ld.AR placed reliance on the following observations by Hon'ble Mumbai Special Bench in case of Montgomery Emerging Market Fund reported in (2006) 100 ITD 217 in support of the above argument. Hon'ble Special bench observed the distinction between 'source of income' and 'head of income' and that there can be multiple source of income under the same head of income. Hon'ble Special Bench also observed that, what is taxed by the Act is not different source of income, independently and that income from different source is clubbed under respective heads that are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, Hon'ble Special bench also observed that even the different short term assets and long term assets involved in the respective transactions are again different sources of income. In the present facts of the case, losss earned from sale of shares of Maharana and the gain earned from sale of shares of Maharana are therefore different sources of income. And further as per the observations of Hon'ble Special Bench, even under short term/long term computation, every transaction is a different source. 6.5.2. Further, the Co-ordinate Bench of this Tribunal in the case of Credit Suisse (Singapore) Co. (Mauritius) Ltd. In ITA No. 1107 and 1108/Mum/2022, upheld the theory of the segregation of capital gain for drawing DTAA to the extent of more beneficial to the assessee. The relevant finding of the Tribunal is reproduced as under: "8. In the case of Flagship Indian Investment Co (Mauritius) Ltd.(supra), the assessee had claimed benefit of Article -13 of the DTAA in respect of 'Capital Gains' and had sought to carry forward capital losses of the earlier years as the same could not be set off against capital gains for the relevant assessment year. The Assessing Officer an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itius Tax Treaty, the A.O being of the view that capital loss would also be exempted, and therefore, the assessee would not be entitled to claim the set-off of the same against the capital gains for the relevaye assessment years. On benefit of carry forward of such capital losses of the earlier years, thus, declined the appeal, the CIT(A) upheld the order of the A.O. On further appeal, the Tribunal concluded that the assessee was fully justified in claiming the carry forward of the capital losses of the earlier years to the subsequent years, and both the A.O and the CIT(A) were in error in not allowing the same. Accordingly, the A.O was directed to allow the carry forward of the capital losses of the earlier vears to the subsequent years, according to law. As in the aforesaid case, in the case of the present assessee before us, as the short term and long term capital gains earned by the assessee from transfer of securities during the year in question are admittedly exempt from tax under Article 13 of the India- Mauritius tax treaty, therefore, the brought forward STCL of the previous years was rightly carried forward by the assessee to the subsequent years……… ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is evident that there is no impedement 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." 7. It is relevant to understand the scheme of the act, to find out if the capital gains earned by the assessee from sale of shares that does not form part of total income of virtue of DTAA would enter the computation of total income. Section 4 of the act is the charging section that describes the rates on income charged for a particular assessment year. Section 2(45) defines the total income to be the amount of income referred to section 5 and computed in the manner laid down in the Act. Section 14 of the act categorises income under various heads of income like salaries, income from house property, profit and gains from business of profession, capital gains and income from other sources. Section 66 to 80 deals with the aggregation of income and set off /carry forward of loss. 7.1. Hon'ble Bombay High Court in case of CIT vs. M. N. Raigi reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed and determined depends upon the various provisions contained in the Act as a whole. Then we might look at various sections which provide for exemptions from the payment of tax. There is Section 7 which contains various provisos which cover sums not liable to tax. Similarly Section 8. Section 14 also contains exemptions with regard to certain sums on which no tax is payable, and Section 15 contains exemptions in cases of life insurance. It will be noticed that the language used in all these sections, to which I have referred, is similar, if not indentical, with the language used in Section 25(4), viz., that the tax is not payable on these different sums. Now, if Mr. Joshi's contention was sound, then with regard to these various exemptions which I have enumerated, although tax is not payable, they should all be included in the total income for the purpose of determining the rate payable in respect of income-tax. Now, the short and conclusive answer to that contention is Section 16 of the Indian Income-tax Act. It is that section which in terms includes in the total income of an assessee only certain sums which are exempted from the payment of tax. Therefore, by impli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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