Treaty-exempt capital gains need not absorb brought forward losses before carry forward under the India-Mauritius DTAA.

Where capital gains are exempt in India under Article 13(4) of the India-Mauritius DTAA, brought forward short-term and long-term capital losses under section 74 are not first required to be set off against those exempt gains. The Tribunal followed its earlier binding view that treaty-exempt capital gains do not attract adjustment of carried forward losses, and that losses already determined and allowed to be carried forward in an earlier assessment cannot be reopened or denied in later proceedings merely because the current year's gains are exempt. The Revenue's reliance on section 74 did not displace the treaty position, and the assessee was allowed to retain the exemption and carry forward the losses.

---

---

Issues: Whether capital gains exempt under Article 13(4) of the India-Mauritius DTAA could be subjected to first set-off of brought forward short-term and long-term capital losses under section 74 of the Income-tax Act, 1961, and whether such brought forward losses could be carried forward to subsequent years without adjustment against the current year's exempt capital gains.

Analysis: The Tribunal followed its earlier decision holding that once the current year's capital gains were admittedly exempt from tax in India under the treaty, there was no occasion to adjust brought forward capital losses against such exempt income. It further held that losses already determined and permitted to be carried forward in an earlier assessment could not be reviewed or denied in a subsequent year's proceedings merely because the corresponding capital gains of that year were treaty-exempt. The same reasoning applied to both short-term and long-term capital losses, and the Revenue's reliance on section 74 did not alter the treaty position accepted in the earlier binding tribunal precedent.

Conclusion: The Revenue's challenge failed, and the order allowing the Assessee to retain the treaty exemption on current year capital gains and to carry forward the brought forward capital losses was upheld.

---