Treaty-exempt capital gains cannot be used to absorb carried-forward capital losses under the India-Mauritius tax framework.

Brought forward short-term and long-term capital losses could not be adjusted against capital gains exempt from Indian tax under the India-Mauritius treaty. Once the current-year gains were not chargeable to tax in India by virtue of treaty exemption, there was no basis to first set off earlier carried-forward losses against those exempt gains. Losses already determined and permitted to be carried forward in prior assessments remained available for carry forward without reduction, and the same principle applied to both short-term and long-term capital losses.

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Issues: Whether brought forward short-term and long-term capital losses could be adjusted against capital gains that were exempt under Article 13 of the India-Mauritius treaty before permitting carry forward of those losses.

Analysis: The assessee, a Mauritius tax resident, earned capital gains from transfer of securities in India and claimed treaty exemption. The tax authority sought to first adjust brought forward capital losses against those exempt gains and then permit only the balance losses to be carried forward. The Tribunal followed its earlier decision on the same issue and held that once the current-year capital gains were not chargeable to tax in India by virtue of the treaty, there was no occasion to set off brought forward losses against such exempt income. Losses already determined in earlier assessments and allowed to be carried forward could not be reduced merely because corresponding gains of the current year were treaty-exempt. The same reasoning applied equally to both short-term and long-term capital losses.

Conclusion: The brought forward capital losses were entitled to be carried forward without adjustment against the treaty-exempt capital gains, and the Revenue's challenge failed.

Ratio Decidendi: Capital losses already allowed to be carried forward cannot be set off against capital gains that are exempt from tax under the applicable treaty.

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