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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI GAGAN GOYAL
अपीलाथ� �वारा/ Appellant by : Shri P.J.Pardiwala Sr. Advocate with Shri. Paras Savla ��तवाद� �वारा/Respondent by : Ms. Surabhi Sharma, CIT DR and Ms. Samruddhi Dhananjay Hande, Sr. AR सुनवाई क� �त�थ/ Date of hearing : 16/12/2023 घोषणा क� �त�थ/ Date of pronouncement : 09/03/2023 आदेश/ORDER PER VIKAS AWASTHY, JM: These two appeals by the assessee for assessment year 2016-17 and 2017-18 are directed against the orders of the Commissioner of Income Tax (International Taxation) (hereinafter referred to as ‘the CIT’) passed u/s. 263 of the Income tax Act 1961 [in short ‘the Act’] for the respective assessment years. Both the impugned orders are of even date i.e. 17/03/2022. Since the issue raised in both these appeals germinate from same set of facts, these appeals are taken up for hearing together and are decided by this common order. For the sake of convenience, these appeals are decided in seriatim of assessment years. - A.Y.2016-17: 2. Shri P.J.Pardiwala appearing on behalf of the assessee submits that the assessee is a company incorporated in Singapore. The assessee is a tax resident of Singapore. The assessee is registered with Securities and Exchange Board of India as Foreign Portfolio Investor. The assessee filed its return of income for the assessment year 2016-17 declaring total income of Rs.363,71,29,440/-. In the impugned assessment year the assessee suffered capital loss of Rs.577,71,58,413/-. The assessee carried forward the said loss to be set off in the future as per law. In Notes to the Income Tax return (at page 35 of paper book), the assessee had categorically mentioned about the capital loss suffered by the assessee and after set off of the capital loss against capital gains from same source of income, the unabsorbed capital loss was carried forward to the next financial year. The Assessing Officer allowed carry forward of the said capital loss. Admittedly, no specific query was raised by the Assessing Officer with respect to carry forward of capital loss in scrutiny assessment proceeding. The CIT invoked the provisions of section 263 and issued notice dated 09/02/2022 (at page 66 of the paper book). The ld. Counsel for the assessee submits that the CIT in show cause notice objected to carry forward of capital loss by selectively applying provisions of tax treaty/the Act. The assessee gave a detailed reply to the said notice on 22/02/2022 (copy of reply at page 68 of the paper book). The CIT without considering submissions of the assessee passed the impugned order holding that income under the head capital gains would be inclusive of all capital gains and losses as permissible under the Act, the assessee cannot selectively take the benefit of tax treaty and no losses will be selectively allowed to be carry forward under the Act. The ld. Counsel for the assessee pointed that the assessee had cited various decisions in support of its contentions, however, the CIT rejected the same in a summary manner. The ld. Counsel for the assessee placed reliance on the following decisions:
(i) Montgomery Emerging Market Fund, 100 ITD 217 (Mum-S.B); (ii) Goldman Sachs Investments (Mauritius) Ltd., 120 taxmann.com 23 (Mum); (iii) Flagship Indian Investment Co (Mauaritius) Ltd. 38 SOT 426 (Mum-Trib) The ld. Counsel for the assessee asserted that on merits of the issue, impugned order is contrary to the decisions of the Tribunal.
2.1. The ld. Counsel submitted that only for the reason that the assessment order does not contain a discussion on the issue, does not imply that the Assessing Officer has not applied his mind on the issue, especially when the assessee has brought out the facts clearly in Notes to the Return of Income. To support his argument, he placed reliance on, Deutsche Investments India Pvt. Ltd. vs. CIT in for assessment year 2008-09 decided on 06/11/2020.
Per contra, Ms.Surabhi Sharma representing the Department vehemently supported the order of CIT. The ld. Departmental Representative submits that artificial segregation of capital gains to get treaty benefit is not allowed. Capital gains and capital losses have to be netted and final figure, whether capital gain or loss has to be treated as per the provisions of DTAA.The ld. Departmental Representative submitted that the Assessing Officer without making any enquiry whatsoever accepted the contentions of the assessee. Failure on the part of Assessing Officer to conduct enquiry in scrutiny assessment makes the assessment order erroneous. Merely for the reason that the assessee has made disclosure in books does not mean that the assessee would get immunity from revisional jurisdiction. The Assessing Officer has to make enquiries and examine veracity of assessee’s claim. The Assessing Officer cannot accept claim of the assessee blindly. To support her submissions the ld. Departmental Representative placed reliance on the following decisions: (i) CIT vs. Jawahar Bhattacharjee , 341 ITR 434(Gawahati); (ii) CIT vs. Emery Stone Manufacturing Company , 213 ITR 843(Raj); (iii) Rampyari Devi Saraogi vs. CIT, 67 ITR 84 (SC); (iv) ITO vs. DG Housing Projects Limited, 343 ITR 329 (Del); (v) Gee Vee Enterprises vs. Additional CIT, 99 ITR 375 (Del); & (vi) CIT vs. Ballarpur Industries Ltd. I.T. Reference No.27 of 2002 decided on 31/07/2017 by the Hon’ble Bombay High Court. The ld. Departmental Representative prayed for dismissing appeal of the assessee.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The ld. Counsel for the assessee has admitted the fact that the Assessing Officer in assessment proceedings has not raised any specific question with regard to carry forward of capital losses. Undisputedly, in Notes to Income Tax Return, the assessee has mentioned the fact of clamming treaty benefit on Capital Gains as exempt from tax under Article -13(4) of the India-Singapore DTAA and has also listed the capital loss from different streams of income under the head ‘Capital Gains’ that has been carried forward for set off in future Financial Years in accordance with the provisions of section 74 of the Act.
The provisions of section 263 of the Act empowers the CIT to call for the records of any proceedings under the Act and examine the same if, the CIT is of the view that the Assessing Officer has failed to conduct enquiries which he ought to have made before passing the assessment order, thus, making the assessment order erroneous and prejudicial to the interest of Revenue. In the instant case, one of the contention is that since the assessee has filed relevant details before the Assessing Officer during assessment proceedings the reasonable belief is that the Assessing Officer has applied his mind on the same before passing the order. If the Assessing Officer has not recorded any finding and has not made any addition it should not be presumed that the Assessing Officer has not applied his mind. On the contrary, the Revenue has placed reliance on various decision to contend that even if facts have been disclosed by the assessee and the Assessing Officer accepted the same without making enquiries, it would make the assessment order erroneous and prejudicial to the interest of Revenue. In the instant case, we are of the view that though assessee may have furnished details disclosing treatment given to the capital gains and the capital losses from different sources under the head ‘Capital Gains’, the Assessing Officer has not made further enquires which he ought to have made before accepting claim of the assessee. The issue raised by CIT in proceedings u/s. 263 of the Act is that the assessee has claimed carry forward of capital losses without setting of the same against capital gains and at the same time has claimed capital gains as exempt under Article-13 of the India-Singapore DTAA. This is an artificial segregation of transactions resulting in capital gains/losses under the head ‘Capital Gains’. The assessee has applied beneficial provisions of DTAA selectively, which is not permissible under the Act.
The assessee has segmented various sources of income under the head ‘Capital Gains’. The assessee claimed long term/ short term capital gains realized during the relevant period as exempt under Article -13(4) of the India- Singapore DTAA. The source of incomes/segments on which the assessee has claimed treaty benefit are: (a) Net LTCG on sale of equity shares; (b) Net LTCG on sale of units of equity oriented fund; (c) Net STCG on sale of exchange traded derivatives; (d) Net STCG on sale of preference shares; and (e) Net STCG/LTCG on sale of debt securities. Whereas, net Short Term Capital losses on: (a) Sale of equity shares; (b) Sale of units of equity oriented funds; and (c) Sale of equity shares underlying IDRs have been carried forward for set off in future Financial Years under section 74 of the Act. The arguments of the assessee is that the assessee has different sources of income under the head “Capital Gains”. The assessee has set of losses within the same segment i.e. short term capital loss from sale of equity shares have been set against short term capital gain from sale of equity shares and the net amount (Losses) has been carry forward to be set off in future Financial Years to the extent permitted under the Act. Similar treatment has been given to short term capital loss from sale of units of equity oriented funds and sale of equity shares underlying IDRs. The contention of the assessee is that treatment given by assessee for intra segment set off i.e. within the same segment/source of income under the same head without setting off of losses from other source of income is permissible under the law. In other words, the assessee has claimed that it has validly treated gains/losses arising from each type of security to be a distinct source of income though under the head ‘Capital Gains’, the assessee is entitled to apply the provisions of the Act/India – Singapore DTAA to the extent they are more beneficial.
We find that in the case of Montgomery Emerging Market Fund (supra), the Special Bench has explained distinction between ‘Source of Income’ and ‘Head of Income’. There can be multiple source of income under the same head of income. The Special Bench explained, what is taxed by the Income Tax Act is not different source of income, independently. Income from different source is clubbed under respective heads that are finally aggregated into the total income. The relevant extract of the observations of the Special Bench in this regard reads as under:- “44. Therefore, it is very apparent that source of income does not mean head of income. The Assessing Officer has proceeded on a hypothesis as if the source of income is the head of income itself. This is not a proper construction of law provided in section 70. Short term capital gains/loss as well as long term capital gains/loss both arc computed under the head "capital gains" for the aggregation jof 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 l 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 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.
We, therefore, find that there is no basis in grouping short term capital assets as a separate source of income and long term capital assets as a separate source of income. Not only short term and long term assets are different sources of income, but even the different short term assets and different long term assets involved in the respective transactions are again different sources of income. When section 70 provides that a loss falling under a source of income can be set off against income from any other source under the same head, it means that the long term capital loss being a separate source can be set off against short term capital gains, which is another separate source of income. Within the provisions of law contained in section 70, there is no further identification of sources of income against which alone loss of a particular source can be set off. What is mentioned in the law is only source of income. As far as the head of income "capital gains" is concerned, the sources could be transfer of short-term capital asset as well as transfer of long term capital assets and transfer of different assets will be different sources of income. There is no further identification or qualification with respect to any source so that the law would presume any sort of restriction on set off of loss arising from one source against income arising from any other source. Therefore, the contention of the assessee that irrespective of the identity of the source of income, it is possible for the assessee to set off the loss of a particular source against income from another source, both falling under the same head of income is tenable in law. Accordingly, the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law.”
In the case of Flagship Indian Investment Co (Mauaritius) 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 and CIT(A) rejected assessee’s claim of carry forward of capital losses on the pretext that since the assessee had claimed benefit of exemption under Article 13 of the DTAA on capital gains, capital losses are also exempt. When the issue reached before the Tribunal, the Coordinate Bench placing reliance on the decision in the case of CIT vs. Western India Oil Distributing Co. Ltd., 249 ITR 517 (SC) and CIT vs. Manmohan Das 59 ITR 699(SC) and also after considering CBDT Circular No.22 of 1944 dated 29/07/1944 held that the 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.
In the case of Goldman Sachs Investments (Mauritius) Ltd. (supra), the Co-ordinate Bench placing reliance on the decision of Flagship Indian Investment Co (Mauaritius) 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 Co- ordinate 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 the Indian-Mauritius 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 benefit of carry forward of such capital losses of the earlier years, thus, declined the set-off of the same against the capital gains for the relevant assessment years. On 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 years 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 fonvard by the assessee to the subsequent years…………..”
The Tribunal further held:
“………….. 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 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.O 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 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 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.
Thus, we are of the considered view that on merits, the issue raised in revisional proceedings u/s. 263 of the Act, the assessee has merit. There is no error in the assessment order in accepting claim of the assessee. The twin conditions for invoking section 263 i.e. assessment order should be erroneous and prejudicial to the interest of Revenue are not satisfied in the instant case, hence, the impugned order is set aside and appeal of the assessee is allowed.
A.Y. 2017-18: 11. The ld. Counsel for the assessee submits that the CIT has wrongly exercised revisional powers u/s. 263 of the Act in respect of an issue which was not within the scope of scrutiny assessment. The Ld.Counsel pointed that the return of the assessee was selected for limited scrutiny under CASS. The scope of enquiry under limited scrutiny was; (a) outward foreign remittances, and (b) whether receipt of foreign remittances has been correctly offered to tax. The Assessing Officer issued notice u/s. 143(2) of the Act dated 17/08/2018. The assessee filed detailed reply to the said notice on 05/09/2018. Enquiries were made by the Assessing Officer on the issues which were confined to limited scrutiny. The CIT cannot exercise jurisdiction u/s. 263 of the Act on the issues which were not within the ambit of limited scrutiny. In support of his submissions, the assessee placed reliance on the decision of Tribunal in the case of M/s. Su-Raj Diamond Dealers Pvt. Ltd. in decided on 27/11/2019 and the decision in the case of Mrs. Sonali Hemant Bhavsarin ITA No.742/Mum/2019 decided on 17/05/2019.
Per contra, ld. Departmental Representative vehemently supported the impugned order and prayed for dismissing appeal of the assessee.
Both sides heard. A perusal of the documents on record reveal that the assessment for assessment year 2017-18 was selected for limited scrutiny. The limited scrutiny was confined to examine outward foreign remittances and whether receipt of foreign remittances had been correctly offered to tax. The issue raised by the CIT in proceedings u/s. 263 of the Act relating to carry forward of capital gains was not within the scope of limited scrutiny. Hence, the Assessing Officer could not have enquired into the issue of assessee’s claim of carry forward of capital loss. Once the Assessing Officer had no jurisdiction to enquire into an issue on account of limited scrutiny, the revisional powers u/s. 263 of the Act can only be exercised on the issues which are subject matter of limited scrutiny. It is not the case of Revenue that limited scrutiny was expanded to complete scrutiny.
In the case of Su-Raj Diamond Dealers Pvt. Ltd. (supra), the Co-ordinate Bench has held that revisional jurisdiction cannot be exercised for broadening the scope of jurisdiction that was vested with the Assessing Officer for framing the assessment. The CIT under section 263 of the Act cannot delve on the issue which was not within the domain of limited scrutiny under CASS. Similar view was expressed by the Tribunal in the case of Sonali Hemant Bhavsarin (supra) and various other decisions.
Thus, in view of undisputed facts and the decision cited above, we hold that the CIT exceeded his jurisdiction in exercising revisional powers in assessment year 2017-18. Hence, impugned order is set-aside and appeal of the assessee is allowed.
In the result, appeals by the assessee for 2016-17 and 2017-18 are allowed. Order pronounced in the open court on Thursday the 09th day of March, 2023.