PRASHANT KOTHARI,SINGAPORE vs. CIT A (57) MUMBAI, OFFICE OF COMMISSIONER OF APPEALS MUMBAI

1. “The Learned CIT(A) has erred in not allowing the benefit of Article 13(4) of the India-Singapore DTAA even though the Appellant is admittedly a resident of Singapore and thereby eligible to avail benefit of the India – Singapore DTAA. ”

Further, the Ld. AR has brought to our notice that the assessee has moved an application seeking permission to raise following additional grounds of appeal which read as under:

It was submitted that all the relevant fact are available on records and the issue raised is purely legal in nature and relying on the decision of Hon'ble Supreme Court in case of the NTPC Vs. CIT (1998) 229 ITR 383, it was submitted that the additional grounds so raised be allowed to be admitted.

The Ld. DR did not raise any specific objection as far as the admission of the additional grounds of appeal are concerned.

Besides that, the AO observed that the assessee has shown net long term capital gains on unlisted shares amounting to Rs. 46,71,374/-. Further, on examination of the nature of the capital asset so held and transferred by the assessee, the AO observed that all unlisted shares, except the shares of Adception Infotech Pvt. Ltd. which have been sold to Prashant Kothari Mr. Neel Kothari, were held by the assessee for not more than 36 months, immediately prior to the date of transfer. Hence, gains on transfer of these shares were held as short term capital gains instead of long term capital gains and the set off of short term loss against short term gain in respect of these shares were recomputed and thereafter, worked out the net short term capital gains of Rs. 73,21,510/- from sale of unlisted shares was determined. Further, as regards the shares of Adception infotech Pvt Ltd which were sold to Mr. Neel Kothari, the AO observed that the assessee has shown long term capital loss in respect of these securities and in terms of Section 70(3) of the Act, the same cannot be set off against short term capital gains and will be liable to be carry forward under the provisions of the Act.

The AO thereafter referred to the Article 13(4) and Article 24 of India Singapore DTAA and the submissions of the assessee that capital gains which arise in India are not taxable under the provisions of article 13(4) of India Singapore DTAA as well as the facts that Article 24 is not applicable and also referred to the decision relied on by the assessee in the case of M/s. Citicorp Investment Bank Pvt. Ltd. As per the AO, the facts and circumstances of M/s. Citicorp Investment Bank Pvt. Ltd. are completely different and the ratio laid down therein cannot be applied in the instant case. The AO noted that in the case of the assessee, the long term capital gain and short term capital gains were from elimination of listed as well as unlisted equity shares of Indian companies whereas in the case of Citicorp Investment Bank Pvt. Ltd., capital gains arose from transfer of Debt instrument. The AO further referred to amended provision of Article 13 of the India-Singapore DTAA which makes a distinction between equity shares and instrument other than equity shares for taxation under the head “capital gains”. As per the AO, a cursory look at the provisions of amended Article 13 clearly differentiates between equity shares and other instruments as capital asset with different taxability and therefore there is no ambiguity that for the purposes of taking benefit of taxation under DTAA Prashant Kothari between India and Singapore, the intention of both sovereign countries are in alignment to treat the equity shares and instruments other than equity shares differently for taxability under the head “capital gains”. The AO further referred to the fact that the assessee is an individual whereas Citicorp Investment Bank Pvt. Ltd. was a registered foreign institutional investor which has to mandatorily follow definitive rules to get registered with Indian Government or statutory body set up by the Indian Government for such purposes. The AO further referred to the fact that Citicorp Investment Bank Pvt. Ltd. had disclosed its global income to Singapore authority on accrual basis whereas the assessee has vehemently denied to disclose the true and correct position in this regard. The AO accordingly held that the claim of the assessee is not acceptable and the provision under limitation of relief is applicable for determining the taxability of capital gains in India or in Singapore and it is not disputed that no capital gain income is remitted or received in Singapore. Therefore, the whole of capital gains consisting of short term capital gains and long term capital gains were held by the AO as taxable in India. However, while computing the taxable income, it is noted that the AO has not brought long term capital gains to tax and has taxed net short term capital gains on listed shares (STT paid) of Rs. 57,94,288/- @ 15% and short term capital gain on unlisted shares (STT not paid) of Rs. 73,23,150/- at normal tax rate and the assessed income was determined at Rs 1,34,36,600/- accordingly.

The assessee thereafter carried the matter in appeal before the learned CIT(A). During the appellate proceedings, the appellant submitted that the India-Singapore DTAA was amended w.e.f. 01.04.2017 with a savings clause in form of para 4A to Article 13 that investment made prior to 01.04.2017 to continue to enjoy the benefit of pre-amended Article 13(4) of DTAA. The appellant submitted that prior to amendment in India- Singapore DTAA, there was no different treatment in the case of capital gains arising from shares or that arising from debentures. Even though shares and debentures are different types of assets, for taxation purpose, it Prashant Kothari makes no difference in the DTAA. The appellant also submitted that the amendment made in India-Singapore DTAA is not applicable to A.Y 2016- 17. The appellant also submitted that for the purpose of Article 24 of DTAA, the item of income on first principles should be taxable and thereafter the question of exempting the same from taxation arise. It was submitted that the provisions of section 4 and 5 of Indian Income-tax Act are subject to provisions of section 90 of the Act and by force of Article 13(4) of DTAA and section 90(2) of the IT Act, capital gain arising to resident of Singapore is not taxable in India and therefore, Article 24 was not applicable in the case of the appellant. To support the argument, the appellant relied upon the decisions in the case of DCIT vs. D.B International (Asia) Ltd. [2018] 96 taxmann.com 75 (Mumbai Trib.), Citicorp Investment Bank (Singapore) Ltd. vs DCIT [2017] 81 taxmann.com 368 (Mumbai Trib.), SET Satellite (Singapore Pve. Ltd., now known as MSM Satellite (Singapore) Pte. Ltd. vs. ADIT (MA No 520/Mum/2010), Sanofi Pasteur Holding SA vs. Department of Revenue, Ministry of Finance [2013] 354 ITR 316 (Andhra Pradesh), Aroon Purie vs. CIT [2015] 375 ITR 188 (Delhi), Union of India vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). Kasinka Trading vs. Union of India a [1995] SCC 274 and APL Co Pte. Ltd vs. ADIT [2017] 185 TTJ 305 (Mumbal-Trib.). It was submitted that the appellant should be allowed benefit of Article 13(4) of India-Singapore DTAA in respect of capital gains.

The submissions so filed by the assessee were considered by the Ld. CIT(A). As per Ld. CIT(A), the appellant has reiterated the submission made by him before the AO during the assessment proceedings. It was held by the ld CIT(A) that the AO has clearly distinguished the facts of the case and decision of ITAT in Citicorp Investment Bank Ltd and during the appellate proceedings, the appellant has not made out any case on the facts, which were distinguished by the AO in the assessment order. It was held by the ld CIT(A) that the appellant has not provided the nature of global income offered by the assessee for taxation in Singapore Thus, the ratio laid down

Referring to the decision of M/s. Citicorp Investment Bank Pvt. Ltd.[2023] 151 taxmann.com 501 (Bom), the Ld. CIT(A) noted that the Hon’ble Bombay High Court in the said case has held that in respect of capital gains on sale of debt instrument, the assessee FII, a tax resident of Singapore was entitled to benefit of Article 13(4) of India-Singapore DTAA without reference to amount remitted or received in Singapore. The Ld. CIT(A) further stated that the Hon’ble Bombay High Court in the said decision has taken note of certificate given by Singapore authorities to the effect that capital gains income would be brought to tax in Singapore.

The ld CIT(A) further referred to the decision of the Hon’ble Bombay High Court in case of CIT vs APL Co. Pte Ltd [2023] 156 taxmann.com 530 (Bom) and stated that in the said case, the Hon’ble Bombay High Court held that since the assessee submitted certificate issued by Singapore Tax Authority confirming taxability of income in Singapore on accrual basis, the same would constitute sufficient evidence and freight income from shipping business would not be taxable in India.

The ld CIT(A) held that in the present case, the AO asked the assessee to give details of global income offered in Singapore however the assessee never provided such details to the AO. Even during the appellate proceedings, the assessee has not provided such details, even the certificate from Singapore Authorities to the effect that such capital gain income would be brought to tax in Singapore has not been placed on record by assessee. Therefore on facts of the case, the benefit of exemption of capital gain under Indian Income tax Act as well as Article 13(4) of India-Singapore DTAA cannot be given to the assessee and accordingly, he upheld the AO’s action in denial of benefit of Article 13(4) of DTA as so claimed by the assessee and the taxation of capital gains in India was upheld.

During the course of hearing, the Appellant submitted that under Article 13(4) of the India Singapore DTAA, it is only country of residence, that is Singapore in the present case, who has the right to tax the capital gains and thus, the gains accrued to the Appellant would not be subjected to tax in India. The Assessing Officer has invoked provisions of Article 24(1) of the DTAA to deny the benefit of Article 13(4) of the DTAA. The Appellant submitted that Article 24(1) provides for conditions in respect of non- taxability of exempt incomes and the Appellant submits that since the capital gains are not taxable in India in view of the language provided under Article 13(4) of the DTAA, question of exemption of said income in India would not arise and thus, the provisions of Article 24(1) are not applicable. In support, reliance was placed on the decision of the Coordinate Benches in case of DCIT vs. D. B. International (Asia) Lid [2018] 96 taxmann.com 75 (Mumbai - Trib.), Citicorp Investment Bank (Singapore) Ltd vs. DCIT [2017] 81 taxmann.com 368 (Mumbai - Trib.) and APL Co. Pte Lid vs. ADIT [2017] 185 TTJ 305 (Mumbai). It was submitted that the Tribunal in case of Citicorp Investment Bank (Singapore) Lid (supra) and APL Co. Pte Ltd (supra) has held that Article 24(1) is not applicable for the following two reasons. • Income earned outside Singapore are not taxable. However, since the income was considered for taxation at the time of filing the return of income on accrual basis, provisions of Article 24(1) which deals with taxation on remittance basis in Singapore would not apply. • Capital gains are not taxable in India and thus, the question of exemption does not arise. Consequently, Article 24(1) of the India- Singapore DTAA does not apply.

It was submitted that the Hon’ble Bombay High Court in case of CIT vs. Citicorp Investment Bank (Singapore) Ltd (2023) 457 ITR 203 (Bombay)

Per contra, the Ld. DR relied on the order of the lower authorities and our reference was drawn to the reference of the finding of the AO as well as the Ld. CIT(A) as well as the decisions of the Hon’ble Bombay High court in case of M/s. Citicorp Investment Pvt. Ltd. as well as the CIT Vs. APL Co. Pte. Ltd. It was accordingly submitted that there is no infirmity in the order of the Ld. CIT(A) in denying the benefit of Article 13(4) of India-Singapore DTAA to the assessee and the capital gains has been rightly brought to tax.

We have heard the rival contentions and purused the material available on record. There is no dispute to the fact that the assessee is a tax resident of Singapore and has thus claimed the benefit of Article 13(4) of the India Singapore DTAA in respect of short term capital gains on sale of shares of Indian companies. The first point of dispute relates to whether the amended provisions of India-Singapore DTAA apply or the pre-amended provisions of India – Singapore DTAA applies in the instant case. By Notification dated 23.03.2017, paragraph 4 of Article 13 was omitted and paragraph 4A, 4B, 4C and 5 were inserted in Article 13 of India- Singapore DTAA. It is noted that both the omission and insertion have been made effective w.e.f 1.04.2017 and therefore relates to transactions effected on or after 1.04.2017 in respect of which the taxability has to be examined under the said provisions. In the instant case, the transactions by way of alienation of shares have been effected during the financial year 2015-16 relevant to assessment year 2016-17 and therefore, the amended provisions

Having said that, even though there is no ambiguity that the amendment will apply prospectively, we find that the amendment which has been brought about in Article 13 of India-Singapore DTAA has no impact as far as the facts of the present case are concerned. Paragraph 4 of Article 13 of DTAA, prior to its omission, provides that gains derived by a resident of a contracting state from the alienation of any property other than those mentioned in paragraph 1, 2 and 3 of this Article shall be taxable only in that state. In terms of Article 13(4), the gains derived by resident of Singapore from alienation of shares shall thus be taxable only in Singapore and India doesn’t have the right to tax such gains. Now, coming to Paragraph 4A of Article 13 of DTAA, as inserted, it provides that gains from the alienation of shares acquired before 1 April 2017 in a company which is a resident of contracting state shall be taxable only in the contracting state in which the alienator is a resident. In the instant case, the shares, of the Indian companies, which are admittedly tax residents of India, have been alienated by the assessee who is admittedly a tax resident of Singapore, during the financial year 2015-16 relevant to assessment year 2016-17. Thus, it is evident that the shares so alienated were acquired well before 1 April 2017 and the gains on alienation of such shares shall be taxable only in Singapore where the assessee is resident of. Both under the pre-amended and post-amended provisions, gains on alienation of shares of Indian companies acquired prior to 1 April 2017 are taxable only in the state of residence of the assessee, i.e, Singapore and there is thus no ambiguity in this regard. The assessee, a tax resident of Singapore, is thus eligible for benefit of Article 13(4) of India- Singapore DTAA and gains from alienation of shares of Indian companies are not taxable in India.

Now, coming to Article 24 which has been invoked by the AO to deny the benefit claimed by the assessee under Article 13(4) of India-Singapore Prashant Kothari DTAA. In this regard, we refer to the provisions of Article 24(1) which provides that where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.

We therefore find that what Article 24(1) envisages is a situation where income derived from a contracting state is either exempt from tax or taxed at a reduced rate of tax in that contracting state under the DTAA. It then goes further and provides that where under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, the exemption or reduction of tax shall be limited to the amount remitted or received in the other contracting state. In other words, where the taxability of such income in the other state is based on amount remitted or received in the other state and not on accrual basis, then the exemption or reduction shall be limited to the amount actually remitted or received. There are thus two conditions and both the conditions need to be fulfilled cumulatively before the provisions of Article 24(1) can be invoked in a given case.

Now, let’s examine the satisfaction of these conditions in the instant case. Coming to the first condition, Article 13(4) doesn’t provide that capital gains derived by a resident of Singapore is exempt from tax or taxed at a reduced rate in India, rather, it clearly provides that capital gains derived by a resident of Singapore shall be taxable only in Singapore. Article 13(4) is clearly a taxing provision and the right of taxation has been given to the Prashant Kothari state of residence instead of state of source of such income. There is clearly a material distinction between the exemption provision and the taxability provisions and only in case of former, Article 24(1) can be invoked.

The Coordinate Bench in case of D.B. International(Asia) Ltd (supra) has held that Article 13(4) in clear and unambiguous term expresses itself as not an exemption provision but it speaks of taxability of particular income in a particular state by virtue of residence of the assessee and that being a case, the provision of Article 24 of India Singapore DTAA doesn’t have much relevance in so far as it relates to applicability of Article 13(4) is concerned and by virtue of overriding nature of Article 13(4) of tax treaty makes the capital gains taxable only in the country of residence of the assessee.

Similarly, the Coordinate Bench in case of APL Co. Pte Ltd (supra) in the context of Article 8 of India- Singapore DTAA, which is similarly worded to Article 13(4) and which provides that “profits derived by an enterprise of a contracting state from the operation of ships…in international traffic shall be taxable only in that state” held that where India doesn’t have any taxation right on the shipping income of non-resident entity, which is exclusive domain of the resident state, there is no question of any kind of exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing rights which are governed by Article 8. There is no stipulation about exemption under Article 8 unlike other Articles such as Article 20, 21 and 22 where it has been specifically provided. It was held that it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate which is a condition precedent for applicability of Article 24 and thus, India doesn’t have the jurisdiction to tax shipping income of the non-resident entity. The said findings of the Coordinate Bench were sought to be challenged by the Revenue before the Hon’ble Bombay High Court (by way of one of the Prashant Kothari grounds of appeal) in decision referred supra, however, the Hon’ble Bombay High Court didn’t find any merit and held that no substantial question of law arises and dismissed the same.

Now, coming to the second condition of Article 24(1) which provides that where under the laws in force in the other Contracting State, the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. In other words, where under the laws of Singapore, such income is taxed not on the basis of accrual but on the basis of remittance or amount received, the benefit under the treaty shall be restricted to the amount remitted to or received in Singapore. It doesn’t provide that in every case of non-remittance of income to Singapore, the benefit under the treaty shall be restricted or shall not allowed irrespective of tax treatment thereof under the laws of Singapore. The decision of the Coordinate Bench in case of APL Co. Pte Ltd (supra), which has been followed in subsequent decision in case of Citicorp Investment Bank (Singapore) (Supra) and both these decisions on appeal by the Revenue were latter on affirmed by the Bombay High Court, were in context of non-applicability of Article 24(1) on the basis of taxability of income in Singapore on accrual basis rather than on remittance basis. In that context, the Coordinate Bench in APL Co. Pte Ltd has relied the certificate issued by the Singapore Revenue authorities and held that freight income derived by the assessee company from Indian operations was accrued in or derived from business carried on in Singapore and regarded as Singapore sourced income and assessed to tax in Singapore on accrual basis and not on remittance basis and held that Article 24(1) would not be applicable. Similarly, in case of Citicorp Citicorp Investment Bank, has relied on a certificate issued by the Singapore tax authorities to the effect that income derived by CIBSL from buying and Prashant Kothari selling of India Debt securities and from foreign exchange transactions in India would be considered under Singapore tax law as accruing in or derived from Singapore and such income would be brought to tax in Singapore without reference to the amount remitted or received in Singapore.

In the instant case, we however find that there is no discussion either by the AO or by the ld CIT(A) as to how such income on alienation of shares of Indian companies is liable to tax in Singapore and what are the taxing provisions in Singapore whether on accrual or remittance basis and onus has been entirely placed on the assessee to produce his Singapore tax filings as well as appropriate certificate from the Singapore tax authorities to the effect that such capital gains would be brought to tax in Singapore. Equally, we find that the assessee in his submissions before the AO besides stating that he is assessed to tax on global income in Singapore, has not corroborated the same in terms of his Singapore tax filings or any certification from Singapore tax authorities. Further, nothing has been brought on record by either of the parties during the course of hearing before us. Therefore, in absence of requisite information which has a bearing on the matter under consideration, we are unable to decide whether second condition of Article 24(1) has been satisfied in the instant case or not.

In any case, as we have stated above, both the conditions so prescribed in Article 24(1) need to be fulfilled cumulatively and in the instant case, since the first condition has not been satisfied as we have examined supra, the question of examination of the second condition becomes academic in nature and in view of the same, we deem it appropriate to leave it open to be decided at appropriate stage, should the need for the same arise in future.

Regarding additional grounds of appeal, the ld AR submitted that the assessee during the previous year 2015-16 relevant to assessment year 2016-17 has had long-term and short-term capital gains and losses in respect of the different shares and securities. Long-term capital gains was exempt in view of section 10(38) of the Act and are not subject matter of dispute. During the assessment proceedings, the claim of the Assessee in respect of the capital gains was modified by the AO and the details of the claim made by the Appellant in the return of income and treatment by the AO in the assessment order which is the subject matter of present appeal are tabulated below: Particulars (claim made in the Amount Treatment by return of income the AO

It was submitted that by way of the additional grounds, the Appellant prays that the short-term capital losses aggregating to Rs. 53,13,457/- Prashant Kothari must be allowed to be carried forward in accordance with the provisions of the Act. The Appellant has suffered long-term capital loss of Rs. 21,77,193/- The said loss has already been allowed by the AO to be carried forward for set off in future assessment years and is therefore not a subject matter of dispute.

It was submitted that the capital gains/ losses arising on account transfer of share is a separate source of income and it is eligible to claim the benefit of Article 13(4) in respect of the capital gains under India -Singapore DTAA. In respect of losses, the Appellant is not claiming the benefit of article 13(4) of the India - Singapore DTAA and claims to be governed by the provisions of the Act in respect of carry forward of losses. It was submitted that in respect of each source of income, the Appellant is entitled to claim the provisions of the Act or the provisions of the India Singapore DTAA, whichever is more beneficial at the option of the Assessee. This is in accordance with provisions of section 90(2) of the Act and reliance in this regard was placed on the following decisions:

Per contra, the Ld. DR has submitted that the set off of short term losses against the short term gains has already been allowed by the AO and it is only the net short term capital gains which have been considered by the AO. It was further submitted that though the assessee has a right to Prashant Kothari avail the benefits of the provisions of the India Singapore DTAA or the domestic law whichever is beneficial, the issue is not about the taxability per se of the short term capital gains rather the issue is whether the assessee has an option not to set off short term losses against the short term capital gains and such an option has not been provided under the provisions of section 70 of the Act. Therefore once the AO has taxed the net short term capital gains after setting off the short term losses against the short term gains, there is no infirmity in the order so passed by the AO and therefore the additional ground so taken by the assessee deserved to be dismissed.

We have heard the rival contentions and purused the material available on record. The limited issue under consideration relates to short-term capital losses amounting to Rs. 53,13,457/- incurred during the year on sale of specified listed and unlisted shares which the assessee seeks to carry forward to subsequent years in accordance with the provisions of the Act instead of setting off against the short term capital gains. As far as short term capital gains is concerned, it has been submitted that the assessee seek to avail the benefit of Article 13(4) of India- Singapore DTAA and the short term losses thus should not be set off against short term capital gains and being allowed to be carried forward to subsequent years. We find that the AO has brought to tax the net short term capital gains (after setting off short term capital loss) and has denied the benefit of Article 13(4) of India- Singapore DTAA. We have already held supra that the assessee is eligible for the benefit of Article 13(4) of India-Singapore DTAA. Therefore, in light of the additional ground of appeal, the issue relates to segregation of short term capital losses and short term capital gains whereby the short term capital losses are sought to be carried forward and short term capital gains are sought to be eligible for benefit of Article 13(4) of India-Singapore DTAA.

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 Prashant Kothari 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 (1949) 17 ITR 180 considered as to whether share income of a partner which does not form part of the total income, is to be added to the total income in order to determine the rate at which income tax was payable by the partner. Section 16 of Income tax Act 1922, corresponding to section 66 of the Income tax Act 1961 was subject matter for consideration in the aforesaid decision. Hon’ble Court after analysing the scheme of computation observed and held as under : Now, the scheme of the Indian Income-tax Act is that income, profits and gains of an assessee are liable to tax subject to certain exemptions and exceptions. Although 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 exemption is given to the assessee because there is a succession to the business carried on and no tax is payable by the assessee, the sum which is exempted under this sub-section does form part of the total income for the purpose of determining the rate. Total income is defined in Section 2(15) of the Act, and it means total amount of income, profits and gains computed in the manner laid down in this Act. Therefore, it would be erroneous to suggest that total income is to be determined only in the light of Section 4, sub-section (3), of the Act. How total income is to 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 implication, where the sums are not included in the total income by Section 16, those sums are not only exempted from the payment of tax, but they are also excluded from the total income. Now, when we look at Section 16, it does not include the sum covered by Section 25(4) as a sum which is to be included in the total income of the assessee. The scheme, therefore, of the Income-tax Act is clear and is very different from what Mr. Joshi suggests it is. The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only 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 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.

Now we shall examine the 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 income.” The circular also stated that, “the non resident otherwise would not get any relief in the Indian Taxation on account of loss incurred by in India.” Accordingly the Ld.AO is directed to grant the carry forward of the loss as claimed by the assessee.”