FLORIDA RETIREMENT SYSTEM ,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION -2(3)(1), MUMBAI

The brief facts and the background of the case are that the assessee, Florida Retirement System, is an Artificial Juridical Person organised in the United States of America, which has invested in Indian capital markets under a multi manager structure through investment managers registered as Foreign Portfolio Investors with the Securities and Exchange Board of India. For the assessment year 2022 23 it filed its return of income on 20 July 2022 declaring total income of Rs. 6,00,22,42,100. The return was selected for complete scrutiny under the Computer Aided Scrutiny Selection and a notice under section 143(2) dated 31 May 2023 was issued.

Pursuant thereto, a Draft Assessment Order under section 144C was passed on 23 March 2024 proposing to assess the income at Rs. 9,12,70,56,580. In doing so, the Assessing Officer rejected the manner in which the assessee had set off its short term capital losses against its short term capital gains and, further, made an addition of dividend income earned on American Depository Receipts and Global Depository Receipts on the footing that the underlying securities were shares of Indian companies and that, irrespective of the manner in which tax was deducted and Florida Retirement System credit reflected, the said dividend had to be offered to tax in the return.

The assessee carried its objections to the Dispute Resolution Panel. The Panel, by directions dated 5 December 2024, upheld the proposed action of taxing the gross non STT short term capital gains at thirty percent by rearranging the sequence of set off of short term capital loss and also endorsed the addition of dividend on ADR and GDR to the total income, while directing that credit of tax deducted at source be granted only subject to strict compliance of rule 37BA of the Income Tax Rules. Consequent to these directions, a final assessment order under section 143(3) read with section 144C(13) dated 27 January 2025 was passed. The assessee, being aggrieved, is in appeal before us.

Ground numbers 2 to 5 relate to the core controversy on the manner of set off of short term capital loss and the resulting tax treatment of short term capital gains subject to securities transaction tax and those not subject to such tax. As a matter of record, during the relevant year the assessee earned net short term capital gains of Rs. 2,05,55,03,809 after setting off current year and brought forward losses in the manner adopted in its return. The granular details of the short term capital gains and losses and their inter se set off, as undertaken by the assessee, have been placed before us in a tabular form, which for ready reference we incorporate as part of our order.

The assessee’s treatment, as explained before us, proceeds on the premise that all short term capital losses are first aggregated and then, in the absence of a statutorily prescribed sequence, are set off in a manner that is tax efficient. In conceptual terms, the approach is that the current year short term capital loss is first applied against the non STT paid short term capital gains and only the balance is thereafter applied against STT paid short term capital gains; brought forward short term capital loss is then utilised against the remaining STT paid gains. In substance, Florida Retirement System therefore, the assessee has, while remaining within the four corners of the computation provisions, exhausted the loss against gains taxable at thirty percent before depleting the gains taxable at fifteen percent.

The legal fulcrum of this controversy lies in the true construction of section 70 of the Act. Sub section (2) of that provision permits the set off of short term capital loss against income as arrived at under a similar computation in respect of any other capital asset. The statute does not bifurcate the capital gains for the purpose of set off into those that will eventually be taxed at one rate or another. Nor does it prescribe any obligatory hierarchy or internal order in which an assessee must apply its losses to different streams of short term gains. The legislative emphasis is on the similarity of computation, that is, that the gains and losses must both be computed under sections 48 to 55, and not on the similarity of the eventual rate of tax.

Once it is appreciated that sections 48 to 55 deal only with the manner in which the capital gains are computed and do not at all descend into the sphere of the rate of tax, it follows as a matter of legislative logic that the expression “similar computation” in section 70 refers only to the computational mechanism and not to the rate of tax that may Florida Retirement System later be applied under other provisions such as section 111A or section 115AD. The scheme of the Act therefore allows the aggregation of all short term capital gains and losses computed under the same machinery provisions, and, in the absence of any contrary mandate, does not compel the assessee to follow a sequence favourable to the Revenue.

Likewise, in earlier decisions such as Legg Mason Asia and VEMF A, the Tribunal has emphasised that where short term capital losses and gains are both arrived at by applying sections 48 to 55, they fall within a common computational field for the purpose of section 70(2). The fact that some transactions attract securities transaction tax and carry a concessional rate of tax, whereas others do not, has been held to be irrelevant for determining the order in which losses are to be set off. The thread that runs through these precedents is 13.The assessee has also drawn support from the decision of the Calcutta High Court in Rungamtee Trexim. That decision, after analysing section 70, holds in terms that there is no provision compelling the assessee to first adjust its losses against one category of gain rather than another and that, where the Act confers a choice without prescribing a particular sequence, the option most beneficial to the assessee must prevail. The High Court also relied upon the long standing circular of the Board which enshrines the principle that where two courses are open on the language of the statute, the one favourable to the assessee should be adopted.

The decision in Shares MSCI India UCITS ETF, concerning a foreign portfolio investor, further clarifies the position in the specific context of differential rates. In that case, the assessee had incurred a short term capital loss on STT paid transactions and earned short term capital gains on non STT transactions taxable at thirty percent. The Tribunal, after examining section 70 and the interplay with sections 48 to 55, held that the assessee was entitled to set off its short term capital loss on STT transactions against the non STT gains and that nothing in the Act required the loss to be exhausted against concessional gains first. It was specifically observed that the rate of tax does not form part of the computation and that the Revenue could not, by

It is in this statutory and precedential backdrop that the present case must be assessed. The assessee’s method of first setting off the short term capital loss against the non STT gains taxable at thirty percent, and then applying the balance against the STT gains taxable at fifteen percent, is entirely consistent with the wording of section 70(2) and the judicial exposition of that provision. There is no statutory bar to this approach; on the contrary, there is clear judicial affirmation that, in the absence of an explicit prohibition or a prescribed order, the assessee’s choice cannot be overridden merely because it reduces the tax payable.

We therefore find ourselves unable to endorse the approach adopted by the Assessing Officer and affirmed by the Panel. By compelling the assessee to first apply its losses against concessional rate gains, the Revenue has effectively introduced into the statute a constraint which the Legislature has deliberately omitted. Such a reading would rewrite section 70 and is not permissible. The assessee’s computation of short term capital gains and losses and the sequence of set off adopted by it must, in our considered view, be accepted.

Turning to Ground numbers 6 and 7, the next issue relates to the addition of dividend income earned in respect of ADR and GDR holdings and the consequential denial of credit for tax deducted at source. The assessee is a non resident Florida Retirement System investor in such depository receipts, whose underlying assets are equity shares of Indian companies. During the relevant year it received dividend income of Rs. 22,48,14,532 in respect of such ADR and GDR investments.

The statutory regime for this income is governed by section 115AC, which provides that dividend in respect of such depository receipts, received by a non resident, is taxable at the concessional rate of ten percent. The obligation to deduct tax at source rests upon the Indian company paying the dividend, which does so under section 196D in the name of the Overseas Depository Bank acting as the depository agent. The assessee receives the net dividend, that is, the gross amount declared less the tax withheld and remitted to the Government account. The assessee has placed on record tax vouchers evidencing such withholding as well as public announcements issued at the time of declaration of dividend, all of which show that tax has been duly deducted.

The practical difficulty arises because the credit for such tax, having been initially recorded in the name of the depository bank, does not automatically flow into the Form 26AS of the ultimate beneficial owner of the ADR or GDR. The assessee has set out, in some detail, the sustained efforts undertaken to have this position regularised under rule 37BA of the Rules. It has written repeatedly to the Overseas Depository Banks, namely Bank of New York Mellon, Deutsche Bank Trust Company Americas and J P Morgan Chase Bank, requesting that the mechanism under rule 37BA Florida Retirement System be activated so that the tax credit may be transferred and reflected in the assessee’s account. However, these entities have expressed their inability to process such requests citing operational and informational constraints.

In parallel, the assessee has also approached the Indian dividend paying companies directly, requesting confirmation that taxes were withheld on the ADR and GDR dividends and seeking their assistance in arranging transfer of the tax credit to the assessee. On this front, there has been a measure of success. Several Indian companies have confirmed that tax was deducted at source on the dividends paid to the depository banks and, in some cases, have also indicated their willingness to facilitate transfer of the tax credit. However, the absence of cooperation or response from the depository banks has proved to be a practical bottleneck.

The net position that emerges from these facts is that tax has undeniably been deducted at source on the very dividends which have been added to the assessee’s income; that such tax has been deposited with the Government; and that neither the assessee nor, on the available material, the depository banks have taken any credit in their Indian tax computations for the same. The difficulty in reflection of the credit in the assessee’s Form 26AS is thus a matter of procedural transmission rather than a matter of substantive entitlement.

In spite of this, the Assessing Officer, and thereafter the Panel, have proceeded to treat the dividend income as taxable in the hands of the assessee without granting credit for the Florida Retirement System tax deducted thereon, solely for the reason that the credit is not visible in Form 26AS and that the formal requirements of rule 37BA have not been complied with by third parties situated outside the control of the assessee. On these facts, the question is whether substantive tax incidence can be imposed ignoring both the deduction already suffered and the statutory intent of sections 115AC, 196D, 199 and 205, merely because of a procedural lacuna in the flow of TDS credit.

The assessee has rightly drawn our attention to the decision of the Ahmedabad Tribunal in Testec Asia Ltd, which dealt with a closely analogous situation involving ADR related income and non reflection of TDS in Form 26AS. The Tribunal in that case held that where tax has been deducted at source and deposited, and where the income has been offered to tax by the assessee, credit for the tax so deducted cannot be denied solely on the ground of a procedural lapse by a third party in complying with rule 37BA. The Tribunal emphasised that section 205, which protects the assessee from being called upon to pay tax again where tax has already been deducted at source, embodies a substantive safeguard that cannot be rendered nugatory by a mechanical insistence on procedural formalities.

Similar sentiments are echoed in the decisions of other coordinate benches such as Naresh Kumar Jain and Reliance Infrastructure, where it has been repeatedly underscored that denial of TDS credit because of mismatches or non reflection in Form 26AS, when the underlying tax has been deducted and the corresponding income taxed, is contrary to both the scheme and the equity of the Act. The emphasis in all these decisions is on substance over form: if the exchequer has already received the tax and the assessee is the person chargeable on the income, the credit should follow the tax rather than be stymied by procedural imperfections.

Applying these principles to the facts before us, it is evident that the addition of the ADR and GDR dividend to the assessee’s income without giving credit of the tax already deducted thereon results in a manifest double taxation of the same income in the hands of the same economic owner. The absence of credit in Form 26AS is a function of the depository Florida Retirement System banks’ reluctance or inability to align their systems with rule 37BA, not a reflection of any default on the part of the assessee. To treat this as a ground to both tax the income and deny the corresponding credit would be to visit upon the assessee the consequences of third party omissions which it has assiduously, but unsuccessfully, tried to rectify.

In our considered view, the dividend income on ADR and GDR has already suffered tax in the manner contemplated by sections 115AC and 196D. The Revenue has not controverted the deduction and deposit of tax; indeed, the confirmations from several Indian companies fortify this position. On these facts, it would be wholly unjust and legally unsustainable to disregard the tax already paid and to treat the assessee as if it were receiving gross untaxed dividend. The addition on this account cannot therefore be sustained.

Even assuming for a moment that the dividend were to be brought to tax in the hands of the assessee, the denial of credit for tax deducted would still not withstand judicial scrutiny. The substantive right to such credit flows from section 199 read with section 205, and the procedural framework of rule 37BA cannot be construed as a barrier to that right where the assessee is prepared to demonstrate, through vouchers, confirmations and other evidences, that the tax has been deducted on its income and has not been claimed elsewhere.

In the light of the above discussion, we hold that the additions made in respect of the ADR and GDR dividend are unsustainable both on the merits of taxability and on the denial of credit for tax deducted at source. The income having already suffered tax in accordance with the special provisions and the assessee having placed sufficient material to show that there is no prejudice to the Revenue, there is no warrant to tax it again or to refuse the corresponding TDS credit.

Summarising our conclusions, we therefore direct as follows. First, the method of set off of short term capital loss against short term capital gains as adopted by the assessee is in consonance with section 70(2) and the binding judicial precedents and must be accepted. The Assessing Officer shall recompute the short term capital gains accordingly and delete the addition arising from the re sequencing undertaken in the assessment. Second, the addition in respect of dividend income on ADR and GDR is deleted. Consequent to this, and without prejudice, the Assessing Officer shall, to the extent necessary, verify on the basis of the evidences already placed on record that tax has been deducted at source on such dividends and that the same has not been claimed as credit by the depository banks, and shall thereupon grant full credit for such tax to the assessee in accordance with sections 199 and 205. The indemnity offered by the assessee may be taken on record as an additional measure to obviate any apprehension of double credit.