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Facts
The assessee, a tax resident of Mauritius, reported nil income. The case was selected for scrutiny. The assessee claimed exemption on long-term capital gains (LTCG) from selling shares of CFS and Maharana under the India-Mauritius DTAA and sought to carry forward long-term capital loss (LTCL) from the sale of Maharana shares. The AO proposed to set off the LTCL against LTCG, reducing the carry-forward loss.
Held
The Tribunal held that capital gains and losses are to be computed on an aggregate basis. The assessee must choose between the DTAA or the Act for the entire set of transactions and cannot split them. Gains exempted under the DTAA cannot be used to offset losses that are sought to be carried forward under the Act. The assessee's claim to carry forward the LTCL without set-off against exempt LTCG was allowed.
Key Issues
Whether capital gains and losses can be segregated and treated differently under the DTAA and the Act respectively, or if they must be aggregated? Can exempt capital gains be used to offset capital losses sought to be carried forward?
Sections Cited
143(2), 142(1), 270A, 274, 115JB, 234A, 234B, 234C, 234D, 13(4), 90(2), 48, 74(1), 70, 111A, 112A, 112, 115BB, 45, 141, 143(3), 24(2), 4, 2(45), 14, 66, 80, 16, 25(4), 2(15), 7, 8, 15
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & MS. PADMAVATHY S
The present appeal filed by the assessee arises out of final assessment order passed by DCIT circle-3(2)(1), Mumbai for assessment year 2020-21 on following grounds of appeal :
“1. Reduction of Long-Term Capital loss ('LTCL') by INR 31,59,01,013 On the facts and circumstances of the case and in law, the learned AO has erred in reducing the LTCL of INR 75,20,89,749 as claimed by the Appellant under the Act to INR 43,61,88,736 by computing the long term capital gain/loss on an aggregate basis for all the equity share sale transactions in the financial year 2019-20 instead of a "transaction wise" approach/applying the provisions of Act or DTAA on each source of income as adopted by the Appellant. The Appellant prays that the learned AO be directed to allow the carry forward of the LTCL amounting to INR 75,20,89,749 as claimed in income tax return during the year under consideration without setting-off the long-term capital gains of INR 31,59,01,013, being a different source and claimed as exempt under Article 13(4) of the India-Mauritius Double Tax Avoidance Agreement ('DTAA').
2. Erroneous initiation of penalty under section 270A of the Act - On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under Section 274 read with Section 270A of the Act. The Appellant prays that the learned AO be directed to drop the penal proceedings under section 270A of the Act since the Appellant has made all disclosures in the income tax return, supported by legal arguments and judicial precedents at the time of assessment.
3. Levy of tax under section 115JB of the Act (Minimum Alternate Tax ('MAT') provision) – On the facts and in circumstances of the case and in law, the learned AO has erred in stating that tax on total income is levied as per Book profit under section 115JB of the Act. The Appellant prays that the Appellant is a resident of Mauritius with which India has an DTAA and the Appellant does not have a permanent establishment in India. Accordingly, the provisions of section 115JB of the Act does not apply to the Appellant.
4. Levy of interest under section 234A, 234B, 234C and 234D of the Act - On the facts and in circumstances of the case and in law, the learned AO has erred in stating that interest under Section 234A, 234B, 234C and 234D of the Act would be leviable. The Appellant prays that there is no income assessed under the final assessment order and hence interest under section 234A, 234B, 234C and 234D of the Act does not apply to the Appellant.”
Brief facts of the case are as under:
The assessee is tax residence of Mauritius and filed its return of income on 10/11/2020 declaring total income at nil. The case was selected for scrutiny and notice u/s.143(2) and 142(1) was issued along with questioner. In response to the notice, the representative of the assessee appeared before the Ld.AO and filed requisite details through e-proceedings. 2.1. From the details filed, the Ld.AO noted that assessee has earned long-term capital gains on transfer of unlisted shares of the companies which was claimed exempt u/s.13(3)/(4) of India Mauritius DTAA. It was further noted that, there was carry forward of long-term capital loss, that was not set off against the gains. The Ld.AO thus issued notice to the assessee to show- cause as to why, the loss should not be set off against the gains earned and thereafter to compute exemption under Article 13 of DTAA. 2.2. The assessee in response submitted that it sold shares of New Delhi Centre for Sight Pvt.Ltd., (hereinafter referred to as CFS) and Maharana Infrastructure and Professional Services Pvt.Ltd., (hereinafter referred to as Maharana). 2.3. The assessee submitted before the Ld.AO vide letter dated 21/12/2021 that, the above sale was as per share purchase agreements. The assessee claimed the benefit of tax treaty between India and Mauritius on the long-term capital gain earned on sale of shares. Whereas, the loss was carry forwarded under the act. The Ld.AO after considering the submissions of the assessee held that, the long-term capital gains and loss should be computed on aggregate basis, instead of transaction wise approach computed by the assessee. The Ld.AO thus reduced the long-term capital loss of Rs.75,20,89,749/- originally claimed by the assessee to Rs.43,61,88,736/- after netting off against the gains.
Aggrieved by the proposed adjustment, the assessee filed objection before the DRP.
Before the DRP the Ld.AR submitted that, Long-term capital loss amounting to Rs.75,20,89,749/- has to be allowed to be carried forward without setting off against the Long-term capital gain of Rs. 31,59,01,013/-. In support the assessee relied on following decisions: • decision of Hon’ble Supreme Court in case of CIT vs. P.K.K Kochammu Amma Peroke reported in (1980)125 ITR 624 • decision of coordinate bench of this Tribunal in case of GK Rammurti vs. JCIT reported in (2010) 37 SOT 345 • decision of Hon’ble Bangalore Tribunal in case of IBM World Trade Corporation vs DIT reported in (2012) 54 SOT 39 3.1. The assessee contended that, it can apply beneficial provisions qua each transaction, though flowing under the same source. It was submitted that, these decisions also support the contention of the assessee that, capital loss arising from a taxable source cannot be set off against exempt income, either under the act or under the DTAA, which is not part of the computation of the income.
3.2. The DRP however, after considering the submissions of the assessee rejected the same by observing as under:
“6.13. Summary of Findings:
1. 1. The question is how to determine the Capital gains for an Assessee? The Capital gains are to be determined on an aggregate basis from all transactions (sources) and then the "net" capital gains as per M.S.P. Nadar Sons v. CIT [1993] 68 Taxman 152 (SC) are to be examined for DTA v. DTAA benefits.
2. Applicant has not netted off the capital gains, even from the same Share Sale Agreement, and has alternated between DTA v. DTAA provisions.
3. Following the Rule laid down by the Apex Court for determination of quantum of "Capital gains", the gain or loss had to be determined first vis a vis the "A.Y" as a whole, on an aggregate. The individual transactions do not reflect the capital gains/loss position of the assessable time period, the "Assessment Year".
4. Once the "capital gains" are determined for the entire A.Y., then Act v. Treaty (DTA v. DTAA) preference as provided under sub-section 90(2) will come.
5. Question is exactly not whether Applicant can be allowed carry forward of loss under DTAA provisions. But, rather the question is when the net Capital gains are negative, whether the individual transactions can be segregated and cherry-picked for application of Domestic Income Tax Act or DTAA.
6. In our considered opinion, the capital gains are to be determined first with aggregation of all transactions/sources. Then upon the "net capital gains" the question of Domestic Income Tax Act or DTAA provisions are to be examined.
7. As per Law, the capital gains are to be examined from the vantage point of a complete "A.Y." (section 45) and on an aggregative "net" basis (sub-section 74(1)).
8. The case of DIT (International Taxation) v. IBM World Trade Corpn. [2020] 120 taxmann.com 151 (Kar.) IBM World Trade Corpn. v. DDIT (International Taxation) [2012] 20 taxmann.com 728/54 SOT 39 (URO) (Bang.) pertaining to A.Y. 2007-08 deal with royalty and provisions of sub-clauses (A), (AB), (BB) and (C) of clause (a) of sub- section 115A(1), where the statute itself has differentiated rates of tax on different nature/sources of income. Such is not the case in relevant capital gains section 45 of the Income Tax Act, 1961.
In the case in hand, the Applicant has one species of "income" - capital gains, that too, "Long Term Capital Gains", being uniform across all transactions under the Statute. The Statute does not provide for any sub-species of Long Term Capital Gains under any provision. The ratio of IBM World Trade Corpn. case that pertains to the different varieties of Royalty, is not at all applicable.
In the instant case, no matter whether the Applicant opts for Domestic Income Tax Act or DTAA, the subject "capital gains" are a loss of Rs. 43,61,88,736/- for the relevant A.Y. Abiding with sub- section 90(2), the Ld. A.O. has granted the beneficial option to the applicant at the preference of the Applicant itself.
Treaty Provisions are applicable in re/ qua "Income" and not "sources". In this case, there has been one single species of Income, "capital gains" that too, Long Term Capital Gains.
7. To sum up, as per facts of the case, the assessee is tax resident of Mauritius. During the year under consideration the assessee has earned MauritiLTCL from transfer of two unlisted shares. In one case, there is only LTCG arising from transfer of the said share. In another case there are two transactions on two different dates, wherein in one transaction the assessee earned LTCG and in the other transaction the assessee earned LTCL. The assessee in case of LTCG in both cases, claimed exemption under article 13(4) of the Indo-Mauritius tax treaty (DTAA). However, the LTCL including the LTCL from one of the same shares where LTCG was also earned, the assessee claimed to carry forward these LTCL to next year u/s. 74 of the Act. The assessing officer did not agree with the assessee and stated that gains would include losses on transfer of equity shares and if gains are taken as exempt under the DTAA, then the losses would also be taken to the same DTAA. The assessing officer objected to change of stand by the assessee in such transactions. The assessing officer distinguished the case laws quoted by the assessee. The assessee now contending the decision of the assessing officer with same set off arguments and pleadings before us.
Having considered the relevant provisions of law and the DTAA as well as the facts attending to the case, we are of the considered opinion that the stand taken by the assessing officer is legally correct. Because, what we are dealing with is 'capital gains', which would certainly include losses from the same set of asset. Here, the underlying assets are equity shares. We do not agree with the approach of the assessee where transactions of share are given different treatment, one under the DTAA and the other under the provisions of the Act. In our considered opinion, the assessee needs to select between the DTAA and the provisions of Act, and then accordingly both gains and losses are to be taken together for the chosen treatment. We find that the Hon'ble SC in the case of M.S.P. Nadar Sons vs. CIT (Central), Madras 1994 AIR 1298/1993 SCR (3) 446, held that the amount of 'capital gains' during the relevant previous year means the profits derived minus the losses suffered. The Hon'ble SC relied upon another judgement given by itself in CIT vs. Venkatchalam (Civil appeal no. 3044 of 1983, dated 13.04.1993/1993, 201 ITR 737 (SC)/ AIR 1994 SC 1267). In our considered opinion meaning of 'capital gains' in article 13 of the DTAA would obtain the same meaning as held by the Hon'ble SC (supra). Thus, in view of the above authentic meaning of 'capital gains', the assessee cannot be allowed to split gains and losses from transfer of equity shares during the relevant previous year, and treat them separately, i.e., claiming gains as exempt under the DTAA and claiming losses to be carried forward under the provisions of the Act.”
On receipt of the DRP directions, the Ld.AO passed the impugned assessment order by reducing the Long-term capital loss against the long term capital gains, thereby allowed to be carry forward the loss of Rs.43,61,88,736/-.
Aggrieved by the impugned order the assessee is in appeal before this Tribunal.
In the present facts of the case, the Ld.AR submitted that assessee entered into share subscription agreement on 14/10/2010, agreeing to subscribe 2,77,993 compulsory convertible series of A preference shares of CFS. Reliance was placed on the agreement at page 183 -236 of the paper book being the Share Subscription agreement of the said company. It is submitted that vide board resolution dated 06/11/2015 the assessee was issued bonus shares in the ratio of 1:6 of compulsory convertible series of A preference shares vide board resolution placed at page 237 -236 of the paper book 5.1. Subsequently, these compulsory convertible preference share were converted into equity shares in the year 2016 and was held in D-mat account, as approved by the board resolution dated 07/03/2016 placed at page 242 -243 of the paper book. The said equity shares were D-mated and held in the D-mat account from 2016. 5.1.1. It was submitted that, share purchase agreement was entered into by assessee for sale of equity shares of CFS on 16/05/2019 wherein, the assessee earned capital gains of Rs.28,38,35,763/-. The Ld AR submitted that the above sale of shares of CFS includes 16,67,958/- bonus equity shares out of which 10,78,794/- equity shares were allotted on 06/11/2015 and 5,89,164/- equity shares were allotted on 07/03/2016. 5.2. In respect of the shares pertaining to Maharana, the Ld.AR submitted that, the assessee entered into shares subscription agreement on 04/04/2011 towards subscription of 1,78,572/- shares at price of Rs.50 crores. The copy of share subscription agreement is placed on page 246-308 of the paper book.
5.2.1. The Ld.AR submitted that, bonus shares were allotted to the assessee by Maharana at the ratio of 1:25 and thus the assessee received additional shares of Rs 48,94,525/- equity shares on 13/11/2014 vide board resolution dated 13/11/2014 placed at page 307-308 of the paper book. It was submitted that in relation to sale of shares of Maharana, there was a consent terms drawn in Award dated 24/05/2019 and thereafter the said shares were D-mated during financial year 2019-20. 5.2.2. It was submitted that, the shares of Maharana were sold on 30/05/2019 and the assessee suffered capital loss of Rs.75,20,89,749/-. Subsequently, on 14/08/2019 assessee sold another lot of shares that resulting in capital gains of Rs.3,20,65,250/-. 5.3. The Ld.AR submitted that, the assessee computed capital gains earned from sale of shares of CFS and Maharana to be exempt in Article 13(3)/(4) of India Mauritius DTAA. The loss that suffered from sale of shares of Maharana was carry forwarded to the subsequent assessment year. The Ld.AR placed reliance on page 88 of the paper book wherein the said computation is filed, which is reproduced hereunder for sake of convenience:-
5.4. The ld AR submitted that as under :- (A) As per Section 90(2) of the Act, where the Government of India has entered into an agreement with any other country or specified territory for granting relief of tax or for avoidance of double taxation, then in effect the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Relevant extract of the section is reproduced below for the ready reference:
“Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”
(B) The expression 'to the extent' used in the section 90(2) of the Act signifies that, the provisions of the Act or the tax treaty, whichever is beneficial, are to be considered. He submitted that, the said principle has is also upheld by Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan reported in (2002) 125 taxmann 826.
(C)The provisions of the Act and Treaty are to be compared in respect of each source of income. Thus, it is very important to understand what constitutes 'source of income. He submitted that Hon’ble Allahabad High Court in the case of Shri Sobhag Mal Lodha vs. CIT reported in (1967) 63 ITR 424, held that;
“under the same head of income, there can be various sources and Section 2(11) defines 'the previous year' with reference to sources of income and not heads of income. Under the same heads, there can be two sources..... the language used in Section 2(11) is itself clear and quite distinct from the language used in Section 6 and a clear distinction is made between a 'source of income' and 'head of income”. (D) He submitted that, source wise income principle is also recognized under the various provisions of the Act. Referring to section 111A, 112A, 112 and 115BB he submitted that, these sections encapsulate levy of tax on different sources of income and supports that the tax needs to be computed separately in respect of income earned from different streams. He further submitted that, the concept of source of income is also well recognized under provisions of section 70 of the Act, wherein loss from one source is eligible for set off against the other source within the same head of income.
(E) He submitted that, the expression 'to the extent' in section 90(2) of the Act, reinforces the principle that, the provisions of the Act or treaty whichever is beneficial is applicable to the assessee for each source. It is argued that, on the conjoint reading of section 90 of the Act and applying the principles emerging from the above judicial precedents, in the context of capital gains/ (loss) arising from sale of shares, each scrip and tranche should be treated as a separate source of income with reference to the specific circumstances for which application of tax treaty and provisions of the Act need to be considered independently.
(F) The Ld.AR thus submitted that the sale of shares of each tranche on different dates therefore, requires a separate computation mechanism as per section 48 of the act. He submitted that, each script/shares is a separate capital asset being transacted at different point of time and hence the treaty applicability should be accordingly analysed independent of the other transaction/tranche. The Ld.AR summarized it is claim to adopt treaty benefit in respect of capital gains earned from sale of securities and benefit under the income tax act to carry forward the loss earned from sale of securities as under :-
Name of the Date of Long Term Tranche Tax Position scrip transfer Capital Gain / adopted (Loss) CFS 16 May, INR 1 Exempt under 2019 28,38,35,763 Article 13(4) of DTAA Maharana 30 May, (INR Loss carried 2019 75,20,89,749) forward under the Act 14 August, INR 1 Exempt under 2019 3,20,65,250 Article 13(4) of DTAA (G) The Ld.AR thus submitted that, the assessee applying the above principle to the present facts exercised the option of being governed under the provisions of the Act for sale of shares sold on 30/05/2019 since there is loss from the said source and simultaneously the gains from sale of shares on 16/05/2019 and 14/08/2019 were claimed as exempt under DTAA 5.5. On the contrary the Ld.DR vehemently opposed the submissions of the assessee he submitted that the word "income" or "profit and gains" should be understood as including losses. He submitted that while computing capital gains loss also must be considered and enters the computation mechanism under the Income Tax Act.
5.6. The Ld.DR submitted that computation mechanism must be done as per the income tax act and therefore assessee can be allowed to carry forward the loss only after set off from the capital gains earned if any. He placed reliance on the provisions of section 74(1) to submit that the tax treatment adopted in respect of Capital gains and loss from transfer of Indian securities must be adopted. He thus placed supported orders passed by the authorities below.
We have perused the submissions additions by both sides in the light of the records placed before us.
The case of the assessee before us is to analyse whether assessee can be allowed to carry forward the loss without being set off against the capital gains in circumstances where both the situation aroses out of shares acquired prior to 01/04/2017 in the Indian Mauritius DTAA. It is also necessary to analyse if the DTAA between India Mauritius is interpreted in good faith as per Article 31of Viena Convention on the Law of Treaties in the present facts of the case.
6.1. Admittedly, the assessee is registered under the laws of Mauritius and is engaged in investing in unlisted companies to achieve long term capital appreciation through multi-stage and multi-sector investments. It is involved in investing activity as per the objects of the DTAA which encouraged mutual trade and investment. It has made several investments over the years and earned profits as well as losses from these investments.
6.2. It cannot be ignored that, a prudent businessman makes investments for earning profits but also incurs losses, as it is part and parcel of making investments. The provisions of section 90(2) of the Act itself provides that, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Accordingly, the Appellant has claimed the exemption on capital gains earned on some shares and carried forward the capital loss on some shares under the Act. This is not in contravention of the object but is only a beneficial position opted by the assessee which is provided under law.
6.3. As far as the capital gain earned by the assessee from sale of shares of CFS during the year under consideration, claimed as exempt in view of Article 13(4) of the India Mauritius DTAA, Ld.AO allowed it. The Ld.AO disputed only carry forward of the short term capital loss suffered from sale of shares of Maharana, without being set off against the gain earned from sale of shares of Maharana. 6.4. A query was therefore raised by the bench whether, ‘Gains’ under Article 13(3)/(4) includes ‘loss’ ?
6.4.1. It was submitted that the primary purpose of a DTAAs amongst others is to provide tax relief by preventing double taxation. Further, section 90(2) of the Act, inter alia, provides that when the Government of India has entered into a DTAA with Government of any other country for granting relief of tax, or as the case may be for avoidance of double taxation, in relation to an assessee to whom such agreement applies, the provisions of the Act shall apply to the extent these are more beneficial to that assessee. It was also submitted that, Section 90 of the Act, only grants relief, it does not impose any liability and the DTAA cannot act to the disadvantage of the taxpayer, and merely because India has entered into DTAA with Mauritius, the assessee can neither be denied the taxability under the scheme of the Act, nor can the DTAA be forced upon the assessee, who may wish to avail tax treaty benefit for one source of income and avail benefit in respect of loss under the Act as beneficial to the assessee as provided by law.
6.4.2. It is noted that, Article 31 of Viena convention on the law of treaties states that, treaties should be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaties in their context, and in the light of the its object and purpose. It also states that the context for the purpose of interpretation of the treaty shall comprise in addition to the test, including its preamble and annexes. One of the most difficult areas of treaty interpretation is how to cope up with silence of absent terms, if the treaty dose not expressly make provision for the matter in issue, should it be assumed that it is not covered depends on the nature of the treaty and the interaction of the various elements of Viena rules. In the present facts of the case the double taxation avoidance agreements is based on the principle to provide tax relief by preventing double taxation. 6.4.3. As per India Mauritius DTAA read with section 90(2), capital gains are to be taxed based on the place of residence of the recipient, by granting relief of tax on such gains in India. Admittedly, the treaty is silent in respect of the loss if earned by an assessee and leaves it unclear whether, one has to deduce to interpret loss being included along with gain. This in our opinion can be possible subject to later negotiations and are not regulated by the treaty. The nature of the treaty in the present fact is key factor and therefore, what is not expressly granted is not permitted.
6.4.4. In so far as, applicability of good faith in interpreting the treaty provisions, we note that good faith differs from most of the other elements under the Viena rules. It applies to the whole process of interpreting for treaty rather than solely to the meaning of particular words or phrases within it. Although, it is difficult to give precise content to the concept generally, it does include one principle that applies to the interpretation of specific terms used in a treaty, commonly described as the principal “effectiveness”. The aspect of the principle of effectiveness is preferring an interpretation that fulfils the aims of the treaty and the intent of the contracting states as given in various Articles. 6.4.5. Applying the above rules to Article 13(4) of India Mauritius DTAA, it is clear that non taxability of the capital gains in India prior to 01/04/2017 cannot act to the disadvantage of the tax payer. This is because section 90(2) is clear to mean that Government of India entered into DTAA with the Government of Mauritius, according to which the capital gains is not taxable in India. However, the provisions of the act shall apply to the extent they are more beneficial to the tax payer.
6.4.6. The Ld.AR in support relied on following observations from the decision of Hon’ble Pune Bench in case of Patni Computers Systems Ltd., reported in (2008) 114 ITD 159
8. The law laid down by the Hon'ble Supreme Court in binding on us under Article 141 of the Constitution of India. The prevailing legal position, therefore, is that once an income is held to be taxable in a tax jurisdiction under a double taxation avoidance agreement, and unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. To that extent, the worldwide basis of taxation in the scheme of the Indian Income-tax Act is no longer applicable in a situation provisions of a double taxation avoidance agreement entered into under section 90 apply. The next question then arises whether in a loss situation in the PE State, as is the case before us, can the assessee be forced to go for taxation in accordance with the provisions of the treaty with the said PE State. The provisions of section 90(2) of the Indian Income-tax Act are quite unambiguous and categorical in this regard. Section 90(2), inter alia, provides that when the Government of India has entered into a double taxation avoidance agreement with Government of any other country, "in relation to an assessee to whom such agreement applies, the provisions of this Act shall apply to the extent these are more beneficial to that assessee". Section 90 only grants relief; it does not impose any liability. Even without such provisions, Courts in US and Germany, as indeed in other parts of the world, have held that a treaty cannot act to the disadvantage to the taxpayer. In other words, therefore, merely because India has entered into a double taxation avoidance agreement with a foreign country, the assessee cannot be denied the taxability under the scheme of the Indian Income-tax Act. The scheme of the double taxation avoidance agreement cannot, therefore, be thrust upon the assessee. In this particular case, it is obviously to the advantage of the assessee that he is taxed in India on the basis of his worldwide income, which includes losses incurred abroad, and not to invoke the provisions of the India- Japan tax treaty. The provisions of the Indian Income-tax Act must, therefore, apply to that extent. Then comes the objection of the revenue that in the event of the assessee not opting for treatment on the basis of India-Japan tax treaty this year, he will be shut out from availing the benefits of the said treaty in the subsequent years. We see no support for this proposition. Under the Income-tax Act, every year is an independent unit, and it is for the assessee to examine whether or not, in the light of the applicable legal provisions and in the light of the precise factual position, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation 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 treaty 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, may claim treaty protection in a subsequent year, the treaty provisions cannot be thrust on the assessee this year as well. In this view of the matter, the assessee was indeed eligible to claim taxation on worldwide basis, disregard the scheme of taxability under the India-Japan tax treaty, and, in effect, claim deduction of loss incurred by the PE in Japan. The CIT(A) was thus justified in his conclusion to the effect that losses of assessee's PE in Japan are to be taken into account while computing assessee's total income liable to tax in India.
Now coming to the contention whether each transaction can be considered as a separate source of income. 6.5. The Ld.AR placed reliance on the following observations by Hon’ble Mumbai Special Bench in case of Montgomery Emerging Market Fund reported in (2006) 100 ITD 217 in support of the above argument. Hon’ble Special bench observed the distinction between 'source of income' and 'head of income' and that there can be multiple source of income under the same head of income. Hon’ble Special Bench also observed that, what is taxed by the Act is not different source of income, independently and that 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 Hon’ble Special Bench in this regard held 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 are computed under the head "capital gains" for the aggregation of income culminating into total income which is taxable under the Income-tax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources clubbed under respective heads and finally aggregated into the total income. The classification of income under different heads for computing the total income does not interfere with the independent character of different sources of income available to an assessee. Both, short term capital gains/loss and long term capital gains/loss are different sources of income, falling under the same head "capital gains". Even under short term capital gains, different transactions will be different sources of income resulting in short term capital gains/loss. Likewise, different transactions of long term capital assets will be different sources of income for an assessee to arrive at long term capital gains/loss. This is reflected in the scheme of computation of capital gains provided in section 48 where gains or loss is computed on the basis of individual asset and transaction and not on the basis of class of assets. Therefore, we have to agree with the 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. (emphasis supplied) 6.5.1. From the above one can infer that there is no basis in grouping long term/short term capital assets. It can also be inferred that, long term and short term are different sources of income. Further, Hon’ble Special bench also observed that even the different short term assets and long term assets involved in the respective transactions are again different sources of income. In the present facts of the case, losss earned from sale of shares of Maharana and the gain earned from sale of shares of Maharana are therefore different sources of income. And further as per the observations of Hon’ble Special Bench, even under short term/long term computation, every transaction is a different source.
6.5.2. Further, the Co-ordinate Bench of this Tribunal in the case of Credit Suisse (Singapore) Co. (Mauritius) Ltd. In and 1108/Mum/2022, upheld the theory of the segregation of capital gain for drawing DTAA to the extent of more beneficial to the assessee. The relevant finding of the Tribunal is reproduced as under:
“8. In the case of Flagship Indian Investment Co (Mauritius) 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.
9. In the case of Goldman Sachs Investments (Mauritius) Ltd. (supra), the Co-ordinate Bench placing reliance on the decision of Flagship Indian Investment Co (Mauritius) Ltd.(supra) reiterated the position that the assessee is entitled to the benefit of Article-13 of DTAA in respect of capital gains and allowed carry forward of capital loss under the provisions of the Act. For the sake of completeness relevant extracts of the findings of the Coordinate Bench are reproduced herein under:- "12. ……….We are unable to comprehend that now when admittedly the short term and long term capital gains earned by the assessee from transfer of securities during the year in question are exempt under Article 13 of the India-Mauritius Tax Treaty, where would there be 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 set-off of the same against the capital gains for the relevaye assestment years. On benefit of carry forward of such capital losses of the earlier years, thus, declined the 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 vears 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 forward 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. 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.”
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 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.
Accordingly the grounds 1 raised by the assessee stands allowed.
9. Ground no.2 & 4 raised by the assessee are consequential in nature.
10. Ground no.3 is on applicability of MAT becomes infructous in view of the decision on Ground no.1. Hence this ground is dismissed.
In the result the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 29/01/2025