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Facts
The assessee, a Mauritius tax resident and FPI, claimed capital gains as exempt under DTAA for AY 2016-2017. The assessee also sought to carry forward brought forward capital losses from AYs 2012-13 to 2014-15, during which it had opted for the Income Tax Act provisions. The Assessing Officer disallowed the carry forward of these losses.
Held
The Tribunal held that the assessee has the option to choose beneficial provisions of either the Income Tax Act or the DTAA for each assessment year independently. Since the capital losses were validly claimed and allowed to be carried forward in earlier years under the Income Tax Act, they should be allowed to be carried forward in the current year.
Key Issues
Whether brought forward capital losses, incurred in years where the assessee opted for the Income Tax Act, can be carried forward to an assessment year where capital gains are claimed exempt under DTAA.
Sections Cited
250, 143(3), 144C(3), 90(2), 139(1)
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Appearance For the Appellant/Department : Shri Krishna Kumar For the Respondent/Assessee : Shri Anish Thacker, Shri Pranay Gandhi, Shri Lekh Mehta Date Conclusion of hearing : 11.06.2025 Pronouncement of order : 12.06.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
The present appeal preferred by the Revenue is directed against the order, dated 26/11/2024, passed by the Commissioner of Income Tax (Appeals) – 57, Mumbai [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 31/12/2018, passed under Section 143(3) read with Section 144C(3) of the Act for the Assessment Year 2016-2017.
The Revenue has raised following grounds of appeal :
1. Whether on the facts and circumstances of the case and in law Assessment Year 2016-2017 the Ld. CIT(A) was correct in holding that the losses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year for the reason that once the assessee has chosen the benefits of DTAA then the capital gain is not at all taxable in India even when it is a settled law that loss and income from same source of income cannot be treated differently.
2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) was correct in not considering that the loss from an exempt source of income cannot be allowed to be carried forward as there can be no income accruing to the assessee which is eligible to tax, until the DTAA is applicable.
3. Whether on the facts and circumstances of the case and in law the Ld. CIT(А) has erred in allowing carry forward of losses which is available only within the ambit of Income Tax Act, when the assessee has chosen to be governed by DTAA thus in contravention to the intention of the legislature.”
The relevant facts in brief are that the Assessee is organized as a trust in and is a tax resident of Mauritius holding a valid Tax Residency Certificate (TRC). At the relevant time the Assessee was registered with the Securities and Exchange Board of India (SEBI) as a Foreign Portfolio Investor (FPI).
For the Assessment Year 2016-2017, the Assessee filed return of income declaring 'Nil' income on 28/07/2016. The Assessee claimed benefit of Section 90(2) of the Act, since the provisions of Article 13(4) of the Double Taxation Avoidance Agreement between Indian and Mauritius [for short ‘DTAA’] are more beneficial to the Assessee. Thus, the Assessee claimed the short-term capital gains of INR.16,27,76,461/- and long-term capital gains of INR.101,76,72,395/- as not taxable in India. Further, the Assessee had the following Brought Forward Capital Losses pertaining to Assessment Year 2012-2013, 2013-2014 & 2014-2015 aggregating to INR.15,18,34,922/- which were carried forward by the Assessee to subsequent assessment year as on claiming the benefit of DTAA 2 Assessment Year 2016-2017 provisions, the Assessee did not have any taxable income to set-off the brought forward losses. Sr. No. Assessment Year Short Term Capital Loss (in INR.) 1. 2012-13 11,41,65,418 2. 2013-14 1,73,24,012 3. 2014-15 2,03,45,492 Total 15,18,34,922
In the assessment framed under Section 143(3) read with Section 144C of the Act vide Assessment Order, dated 31/12/2018, the Assessing Officer did not allowed Assessee’s claim of carry forward of the above Brought Forward Capital Losses aggregating to INR.15,18,34,922/-.
In appeal preferred by the Assessee against the aforesaid Assessment Order, the CIT(A) granted relief to the Assessee on this issue and vide impugned order, dated 26/11/2024, the CIT(A) accepted the Assessee’s claim of carry forward the aforesaid Brought Forward Capital Losses.
Being aggrieved the Revenue has preferred the present appeal before the Tribunal on the ground reproduced in paragraph 2 above.
We have heard the rival submissions and perused the material on record and examined the judicial precedents cited during the course of hearing.
We find that the CIT(A) has decided the issue in favour of the Assessee holding as under:
“6.2.1 The appellant has claimed that the AO has erred in not appreciating the fact that the Appellant had disclosed short term capital loss as per the provisions of the Income Tax Act and not as per the DTAA Treaty in these earlier assessment years AYs.2012-13, 2013-14 and 2014-15 , whereas in the instant assessment year, it has offered LTCG/STCG earned during the year under the relevant provisions of DTAA and thus claimed exemption thereon. The appellant has claimed that in each assessment year, it has the right to offer its income, either as 3 Assessment Year 2016-2017 per the provisions of the Act or as per the provisions of the relevant tax Treaty, whichever is more beneficial to the Appellant, as provided under section 90(2) of the Act. In the context of adopting a different position for each tax year with respect to electing to be taxed under the provisions of the Act vis-à-vis the Treaty, the appellant has relied upon the case of DCIT v. Patni Computer Systems Limited (2008) 114 ITD 159 (Pune ITAT), Flagship Indian Investment Co. (Mauritius) Ltd v. ADIT (IT) [2010] 38 SOT 426 (Mumbai ITAT). It is noted that in the above decision of Patni Computer Systems Ltd., the Hon’ble Pune Income-tax Appellate Tribunal (ITAT) has held as under:
....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 light of the precise factual position, the provisions of the Act are more beneficial to him or that of the applicable double tax 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 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 perception, claim treaty protection in a subsequent year, the treaty provisions cannot be thrust on the assessee this year as well.
Further it is noted that that in the case of Flagship Indian Investment Co. (Mauritius) Ltd vs. ADIT (IT) [2010] (38 SOT 426), the Hon’ble Jurisdictional Mumbai ITAT, relying on the decision of Patni Computers (discussed above), held that where income is not assessable to tax for a particular assessment year under the provisions of the Treaty, the losses incurred in an earlier assessment year, carried forward to the assessment year in question, would be available for set-off against taxable income earned in subsequent assessment years and the same were not required to be adjusted against the income not chargeable to tax of the current assessment year. It is noted that the facts of the instant AY are similar to the facts of this decision of Hon’ble ITAT and hence the said decision of Hon’ble ITAT is found to be squarely applicable to the instant case.
6.2.2 It is noted that the AO had considered these decisions cited by the appellant during the assessment proceedings, yet not 4 Assessment Year 2016-2017 accepted the findings contained therein by referring to the decision of Hon’ble Supreme Court in the case of Harprasad & Co. (99 ITR 118 (SC)) and other decisions including Hon’ble Mumbai ITAT decision in the case of Dresdner Bank referred above. However, in the above quoted submissions, the appellant has distinguished the facts of its case with the decision cited by the AO. These claims of the appellant are found to be correct, and it is noted that the decisions cited by the AO are not applicable to the facts of the instant case. On the contrary, Hon’ble ITAT-Mumbai which is the jurisdictional Bench has rendered its decision on similar facts and legal issues as are found to be involved in the instant case and thus the same are binding in nature and hence reliance is placed thereon. In this regard, it is further necessary to refer to the order of Hon’ble ITAT dated 28th June 2024 in the case of Bay Capital Fund India Funds Ltd. in for AY.2021- 22. It is noted that in this decision, Hon’ble ITAT has also referred to its earlier decision in the case of M/s. Goldman Sach Investment (Mauritius) Ltd. and J.P. Morgan Indian Investment Co. Ltd. (2022) (143 taxman.com 82). The relevant portion of this decision is quoted below:-
“Apropos the aforesaid observation of the A.O, we are of the considered view that the same had been arrived at by losing 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" brought 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 assessee. 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 Patni Computer Systems Ltd. (supra). We thus in 5 Assessment Year 2016-2017 terms of our aforesaid observations, not being able to persuade ourselves to subscribe to the view taken by the A.O/DRP”, ( emphasis supplied) .
6.2.3 It is clear from the various judicial decisions discussed above and as per the provisions of the Section 90 of the Act, that for every Assessment year the appellant has an option to choose the provisions of the Income- Tax Act or the provisions of relevant tax treaty, whichever is more beneficial to the appellant. From the above, it is very clear that while determining taxability of the income of the Appellant, if provisions of the Act are more beneficial as compared to the Treaty, then the beneficial provisions of the Act will apply if assessee chooses so in determining the taxability of such income to every AY independently. Accordingly, based on the rulings discussed above, it is up to the appellant to decide whether to report the income earned in a particular year as per the provisions of the Act or the Treaty. In the instant case, during the relevant financial year, the appellant had earned short term capital gains and long term capital gains on equity shares, and the appellant has chosen the provisions of DTAA for the instant assessment year. Therefore, the option available to the appellant has been exercised by the appellant by choosing the DTAA provisions in the instant AY and not the provisions of the Income Tax Act. The AO in the assessment order u/s.143(3) of the Act has also accepted the applicability of the provisions of the DTAA w.r.t. the LTCG/STCG earned during the relevant financial year. Similarly , the appellant has claimed that it had exercised its option as per the provisions of section 90 of the Act in its ITR filed u/s 139(1) of the Act for earlier AY 2012-13, AY 2013-14 and AY 2014-15 to be governed by the provisions of Income Tax Act and not the DTAA, Further ,in its submissions, the appellant has claimed that the short term capital losses were also validly carried forward from prior AY.2012-13 of Rs.11,41,65,418/-, from AY.2013-14 of Rs.1,73,24,012/- and from AY.2014-15 amounting to Rs.2,03,45,492/-, respectively, and that these losses were claimed under the provisions of the Income Tax in the respective ITR’s of these AY which were filed on time u/s 139(1) of the Act within the stipulated due dates applicable to these years . Further, it has been claimed that no adverse action was taken by the AO in these assessment years in this regard i.e the claims of the appellant have been accepted by the AO . Therefore, the claim of the appellant is that these losses were validly claimed and validly allowed to be carried forward to subsequent years and that the AO cannot disallow these losses from carry forward by passing order for instant assessment year AY.2016-17. 6 Assessment Year 2016-2017 6.2.4 Thus, what needs to be examined by the AO is that whether these losses were validly claimed in the ITR’s of the AY of the years(filed u/s 139(1) of the Act ) to which they pertain, ie. in AYs.2012-13 to 2014-15 by choosing the option of being governed by the provisions of the Income Tax ; whether such losses were eligible for carry forward in AY 2012-13 to 2014-15 and further whether they were allowed to be carried forward by the AO in these 3 Assessment years. If these losses of the quantum claimed were validly allowed to be carried forward as per law in AY 2012-13 to 2014-15 by the AO under the provisions of the Income Tax Act for upto 8 years as per the provisions of the Act, then the same will be eligible for further carry forward accordingly in the instant Assessment year also. It is noted that the AO has not disputed the claim of the appellant that these STCL were validly claimed under the provisions of Income-tax Act (and not the DTAA) in the respective ITRs of earlier assessment years and were validly allowed to be carried forward in these years for setting off in subsequent assessment years. In such circumstances, the action of the AO in taking an inconsistent view than the position adopted while passing assessment orders of earlier years is not correct. Based on the above discussion, grounds 1 and 2 of the appeal are Allowed.” (Emphasis Supplied)
On perusal of above, we find that the CIT(A) granted relief to the Assessee by following the recent decision of the Tribunal, inter alia, in the case of Bay Capital Fund India Funds Ltd. [ITA No. 4475/Mum/2023, dated 20/06/2024, AY.2021-22] wherein reference was made to the earlier decision in the case of M/s. Goldman Sach Investment (Mauritius) Ltd. [ITA No. 2201/Mum/2017, dated 24/09/2020, AY.2013-2014] and J. P. Morgan India Investment Company Mauritius Ltd. [2023] 198 ITD 392 (Mumbai - Trib.)[27- 09-2022]. During the course of hearing the Learned Authorised Representative for the Assessee had also placed reliance in decisions forming part of legal paper-book including decision of the Pune Bench of the Tribunal in the case of Deputy Commissioner of Income-tax, Circle 4, Pune vs. Patni Computer Systems Ltd. [2008] 114 ITD 159 (Pune)/[2007] 109 TTJ 742 (Pune)[29-06-2007]. In the aforesaid decisions the Co-ordinate Benches of the Tribunal have 7 Assessment Year 2016-2017 permitted carry forward of the Brought Forward Capital Losses to the subsequent assessment years holding, inter alia, where income is not assessable to tax for a particular assessment year under the provisions of the DTAA, the losses incurred in an earlier assessment year carried forward to the assessment year in question, would be available for set-off against taxable income earned in subsequent assessment years and the same are not to be adjusted against the income not chargeable to tax of the current assessment year. Further, the capital losses permitted to be carried forward in a previous assessment years could not be reviewed in the assessment proceedings of a subsequent assessment year.
In the present case, there was no dispute that the Assessee was entitled to claim the benefit of exemption from tax in India granted by Article 13(4) of the DTAA in respect of capital gains arising during the relevant previous year. The Revenue has also not disputed that the Assessee had exercised option not to avail the provisions of DTAA in case of income tax returns filed for Assessment Years 2012-2013, 2013-2014 and 2014-2015 and had carried forward the capital losses incurred during the respective previous years. The CIT(A) has returned a findings that the Assessing Officer has not disputed the claim of the Assessee that the losses were validly claimed in the return of income for the Assessment Year 2012-2013, 2013-2014 & 2014-2015 and that the same were validly allowed to be carried forward in the assessment years prior to Assessment Year 2016-2017. The aforesaid finding has not been controverted by the Revenue in the appellate proceedings before the Tribunal. We have already noted hereinabove that in identical facts and circumstances, the Co-ordinate Benches of the Tribunal has permitted carry forward of the Brought Forward Capital Losses to the subsequent assessment years. In view of the aforesaid, we find merit in the contention of the Ld. Authorised Representative for the Assessee that all the issues raised by the Revenue in the present appeal stand decided against 8 Assessment Year 2016-2017 the Revenue and in favour of the Assessee by the decision of Tribunal in the case of Bay Capital Fund India Funds Ltd. [ITA No. 4475/Mum/2023, dated 20/06/2024, AY.2021-22], M/s. Goldman Sach Investment (Mauritius) Ltd. [ITA No. 2201/Mum/2017, dated 24/09/2020, AY.2013-2014] and J. P. Morgan India Investment Company Mauritius Ltd. [2023] 198 ITD 392 (Mumbai - Trib.)[27- 09-2022]. Accordingly, we do not find any infirmity in the order passed by the CIT(A). Ground No. 1, 2 and 3 raised by the Revenue are dismissed.
In result, the appeal preferred by the Revenue is dismissed.