The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that a taxpayer can avail capital gains exemption under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) for shares acquired before April 1, 2017, and still carry forward capital losses under Indian domestic tax law for shares acquired thereafter.
TVF Fund Ltd. (assessee), a company incorporated in Mauritius and registered with the Securities and Exchange Board of India (SEBI) as an FPI, filed its return of income for Assessment Year (AY) 2021–22.
The assessee claimed exemption under Article 13(3) and 13(4) of the India-Mauritius DTAA, as they were taxable in Mauritius based on the assessee’s residency. The Assessing Officer (AO) set off brought forward short-term capital losses of Rs. 9.94 crore and long-term capital losses of Rs. 45.67 crore from AY 2020–21.
The AO brought long-term capital losses of Rs. 11.29 crore incurred during AY 2021–22, against the exempt gains. The AO argued that the computation of capital gains must follow the provisions of the Income Tax Act before applying DTAA benefits, resulting in a net taxable gain. The AO computed the total income at Rs. 35.61 crore, raising a demand of Rs. 2.33 crore.
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On appeal, the Dispute Resolution Panel (DRP) upheld the AO’s computation. Aggrieved by the order, the assessee appealed to the ITAT. The Counsel for the assessee argued that the gains from shares acquired before April 1, 2017, were exempt under the pre-amended Article 13 of the DTAA, as India had no taxation rights over such gains.
The counsel further contended that losses from shares acquired post-April 1, 2017, which were taxable in India, could not be set off against exempt gains and should be carried forward. The counsel relied on precedents to support their claim that the assessee could avail DTAA benefits for gains while claiming loss carry-forward under the Act.
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The revenue argued that the tax liability must first be computed under the Income Tax Act, including provisions for set-off under Sections 70 and 74, before applying DTAA benefits.
The two-member bench comprising Beena Pillai (Judicial Member) and Padmavathy S (Accountant Member) observed that gains from shares acquired prior to April 1, 2017, were exempt under Article 13(3) and 13(4) of the DTAA, as India had relinquished its taxation rights for such gains.
The tribunal also observed that these gains did not form part of the assessee’s total income under the Income Tax Act, so no losses could be set off against them. The tribunal further observed that the losses in question arose from shares acquired after April 1, 2017, which were taxable in India and could only be set off against similar taxable gains in future years.
The tribunal ruled that the assessee was entitled to carry forward the brought forward losses and current year losses under Section 74 of the Income Tax Act, citing CBDT Circular No. 22 of 1944 and judicial precedents.
The appeal of the assessee was partly allowed.
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