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TMI Blog2025 (4) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to Rs. 38,48,55,881/- 2. On the facts and in law, the Id. CIT(A) has erred in not following the decision of the Hon'ble the Tribunal in the assessee's own case for the A.Y. 2021-22." 3. The brief facts pertaining to this issue as emanating from the record are: The assessee is a company incorporated in Mauritius and licensed by the Financial Services Commission of Mauritius as Collective Investment Schemes and holds a tax residency certificate issued by the Mauritius Revenue Authority. Further, the assessee is also registered with the Securities and Exchange Board of India ("SEBI") as a Foreign Portfolio Investor. For the year under consideration, the assessee filed its return of income on 23.09.2019, declaring a total income of Rs. Nil and carried forward current year short-term and long-term capital losses, total amounting to Rs. 3,59,84,420/-. In its return of income, the assessee claimed exemption of long-term capital gains amounting to Rs. 38,48,55,851/- earned on sale of listed equity shares in India on the basis that the same are not taxable under section 195 read with Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement ("DTAA"), since thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently relied upon the impugned order passed by the learned CIT(A). 7. We have considered the submissions of both sides and perused the material available on record. The solitary grievance of the assessee is against the setting off of the non-grandfathered (taxable) short-term and long-term capital losses against the grandfathered (exempt) long-term capital gains. 8. In the present case, there is no dispute regarding the fact that during the year under consideration, the assessee earned long-term capital gains of Rs. 38,48,55,851/-, which were claimed as non-taxable under section 195 r.w. Article 13(4) of the India-Mauritius DTAA on the basis that since these shares were acquired before 01.04.2017, therefore, the gain arising therefrom is not taxable in India. Further, there is also no dispute regarding the fact that during the year under consideration, the assessee incurred long-term and short-term capital losses total amounting to Rs. 3,59,84,420/- from the sale of shares which were acquired after 01.04.2017. As is evident from the record, the assessee in its return of income for the year under consideration, claimed the long-term capital gains earned by it on the grandfathe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the section that capital loss, after being carried forward, can be set off only against income under the head capital gains. Therefore, existence of a taxable income is a precondition for a set of losses against such income. In this appeal, the gains of Rs. 26,36,44,954/- are admittedly exempt by virtue of article 13(4) of the treaty. The said gains, therefore, cannot be termed as income for the purpose of section 74 of the Act. We relied on the orders of the Coordinate Bench of ITAT-Mumbai in the cases of Swiss Finance Corporation (Mauritius) Ltd(supra) and J.P. Morgan India Investment Company Mauritius Ltd(supra). In our considered view the answer is against revenue. The exempted income is not a part of taxable Gross Total Income. The non-grandfathered LTCG will be adjusted with brought forwarded loss, following the order of Goldman Sachs Investments (Mauritius) Ltd.(supra). The orders which are relied on by the ld. DR are distinguishable. The impugned final assessment order is dismissed. The appeal of the assessee is succeeded." 10. We find that the learned CIT(A) distinguished the decision rendered in assessee's own case on the basis that in earlier years, the exempt long-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of Viena rules. In the present facts of the case the double taxation avoidance agreements is based on the principle to provide tax relief by preventing double taxation. 6.4.3. As per India Mauritius DTAA read with section 90(2), capital gains are to be taxed based on the place of residence of the recipient, by granting relief of tax on such gains in India. Admittedly, the treaty is silent in respect of the loss if earned by an assessee and leaves it unclear whether, one has to deduce to interpret loss being included along with gain. This in our opinion can be possible subject to later negotiations and are not regulated 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 appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, as indeed in other parts of the world, have held that a treaty cannot act to the disadvantage to the taxpayer. In other words, therefore, merely because India has entered into a double taxation avoidance agreement with a foreign country, the assessee cannot be denied the taxability under the scheme of the Indian Income-tax Act. The scheme of the double taxation avoidance agreement cannot, therefore, be thrust upon the assessee. In this particular case, it is obviously to the advantage of the assessee that he is taxed in India on the basis of his worldwide income, which includes losses incurred abroad, and not to invoke the 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head "capital gains" for the aggregation of income culminating into total income which is taxable under the Income-tax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources clubbed under respective heads and finally aggregated into the total income. The classification of income under different heads for computing the total income does not interfere with the independent character of different sources of income available to an assessee. Both, short term capital gains/loss and long term capital gains/loss are different sources of income, falling under the same 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is justified in claiming carry forward of brought forward losses of the earlier years to the subsequent years and at the same time upheld assessee's claim of capital gains as exempt under the provisions of Article -13 of the DTAA. Thus, the Tribunal accepted the theory of segregation of capital gains and capital losses for drawing benefits of DTAA/the Act to the extent they are more beneficial to the assessee. 9. In the case of Goldman Sachs Investments (Mauritius) Ltd. (supra), the Coordinate Bench placing reliance on the decision of Flagship Indian Investment Co (Mauritius) Ltd.(supra) reiterated the position 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loosing 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. while framing the assessment for A.Y 2012-13, vide his order passed u/s 143(3), date 19-3- 2015 and had not arisen during the year under consideration i.e A.Y 2013- 14. Accordingly, the claim of the A.O that the "capital losses" b/forward from the earlier years, pertaining to a source of income that was exempt from tax was thus not to be carried forward to the subsequent years, being devoid of any merit, is thus rejected. At this stage, we may herein observe 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 thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lthough certain sums may be exempted from taxation, still they may form part of the total income of an assessee in order to determine the rate at which income-tax is payable. Therefore it follows that the total income of an assessee is not necessarily wholly subject to tax. Portions of it may be exempt from taxation and yet may be computed for the purpose of determining the rate at which tax is payable. Mr. Joshi's contention is that all sums which are exempted from taxation must still be brought into the total income of the assessee for the purpose of determining the rate at which income-tax is payable, except where the statute 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 exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the Legislature indends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it is done in Section 16, and therefore Prima facie, when we come to Section 25(4) and when we find that the assessee is not liable to pay tax on the sum received by him as his share of the partnership, that sum cannot and does not form part of his total income. Mr. Joshi has not succeeded in pointing out to us any provision in the Act whereby this particular sum covered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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