Exempt LTCG under India-Mauritius DTAA cannot be Adjusted against Taxable Losses: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai Bench has held that long-term capital gains (LTCG) exempt under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) cannot be adjusted against taxable short-term or long-term capital losses incurred by the assessee.

The appellant, Bay Capital India Fund Limited, a company incorporated in Mauritius and registered as a Foreign Portfolio Investor with SEBI, filed its return of income for Assessment Year 2019–20 declaring nil income and carried forward capital losses aggregating to Rs.3,59,84,420 (3.59 crore). It also claimed exemption of Rs.38,48,55,851 of long-term capital gains from the sale of listed equity shares acquired before 1 April 2017, invoking the grandfathering provisions under Article 13(4) of the India-Mauritius DTAA. However, the Centralized Processing Centre (CPC), Bengaluru, while processing the return under Section 143(1), adjusted the assessee’s non-grandfathered short-term and long-term capital losses against its exempt long-term capital gains. As a result, a net long-term capital gain of Rs.34,88,71,461 was computed and taxed at the applicable special rate. The assessee’s appeal before the Commissioner of Income Tax (Appeals) was dismissed, leading to the present appeal before the Tribunal.

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The Tribunal observed that there was no dispute regarding the quantum of long-term capital gains claimed as exempt or the amount of taxable losses incurred by the assessee. It found that the long-term capital gains earned from the grandfathered shares were exempt from taxation in India by virtue of Article 13(4) of the India-Mauritius DTAA. It held that as per the provisions of Section 70 of the Income Tax Act, 1961, capital loss can only be set off against taxable income under the head "capital gains," and not against exempt income. The Tribunal noted that adjusting taxable losses against exempt gains would result in indirectly taxing exempt income, which would violate the provisions of the DTAA and Section 90(2) of the Act.

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The Tribunal relied on the Coordinate Bench decision in the appellant’s own case for Assessment Year 2021–22, where it was held that long-term capital gains exempt under the India-Mauritius DTAA cannot be adjusted against capital losses. It also referred to similar findings in Matrix Partners India Investment Holdings, LLC vs DCIT and other precedents, reinforcing that exempt income does not form part of the computation of total income under Indian law. The Tribunal rejected the distinction drawn by the Commissioner of Income Tax (Appeals) regarding set-off of losses against gains in different years, stating that in the absence of taxable gains, no adjustment of losses is permissible.

The ITAT Bench comprising B.R. Baskaran (Accountant Member) and Sandeep Singh Karhail (Judicial Member) accordingly directed that the entire amount of Rs.38,48,55,851(38.48 crore) of long-term capital gains earned by the assessee should be treated as exempt. Further, it ordered that the assessee's taxable long-term and short-term capital losses should be carried forward to subsequent years without adjustment against the exempt income.

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