2023 (3) TMI 457 - AT - Income Tax

Tribunal invalidates assessment order, upholds exemption claim under India-Mauritius DTAA.

ACIT-3 (1) (1), Versus M/s J.P. Morgan India Investment Company Mauritius Limited, And Vice Versa

The Tribunal held that the draft assessment order under section 144C was invalid as there was no variation in the returned income prejudicial to the ... Benefit of DTAA while claiming exemption from taxation of capital gain - Allowability of carry forward of earlier years losses without setting off with current year's capital gains (claimed to be not subject to tax in India under the India- Mauritius DTAA) - capital gains earned during the year under consideration which are not taxable in India by virtue of Article 13(4) of India Mauritius DTAA - brought forward short-term capital loss and long-term capital loss was carried forward 'as is basis' to subsequent year(s) - Whether in the earlier years when assessee suffered loss it chose not to claim benefit under DTAA and computed the loss as per domestic law, i.e., under the Income Tax Act - HELD THAT:- In the case of a situation of tax relief, the country where a particular income arises (source country), consciously gives up its taxing rights in respect of a particular income arising from source(s) in that country in favour of the other treaty partner country (residence country). The residence country may or may not levy tax on the said income, for e.g. some countries like Singapore, Hong Kong etc. do not levy tax on the income unless it arises in their own territory, as they follow a ‘territorial’ model of taxation. In case of income, where a country consciously gives up its rights to tax 'income' (i.e. positive income) of resident of the treaty partner arising on its own shores, it automatically does not mean that losses which had arisen in earlier year in the subject country are not allowed to be carried forward. The said principle of allocation of taxing rights has also been considered and propagated in various judicial precedents and commentary. The application of a treaty can result in the entire (gross) income being not subject to tax in India in a year where a taxpayer claims treaty benefits. Therefore, in a year in which a taxpayer claims benefit of Article 13(4) of the India- Mauritius tax treaty, the entire gains he earns will not be taxable at all as India has given up its taxing rights in respect thereof. Thus, the entire amount of gains for the year (before set off of brought forward losses) will go out of the taxing provisions if Assessee has chosen to be assessed as per Treaty. Provisions of sections 4 and 5 are expressly made subject to the provisions of the Act which means that they are subject to the provisions of section 90 of the Act. By necessary implication they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections 'subject to the provisions' of the Act. Thus, as a corollary, where treaty provisions are beneficial as compared to the provisions of the Act; the taxpayer has right to rely on the treaty provisions. The provisions of Section 90(2) of the Act can be resorted to only when these are more beneficial (compared to Treaty).. There could however be years where a taxpayer chooses not to claim treaty benefit as we have already noted above that he can do so under the provisions of Section 90(2) of the Act. When he does so, his income will have to be computed under the provisions of the Act for that year. This will include the provisions for carry forward of loss - under DTAA between India Mauritius, the taxing rights on capital gains falling under Article 13(4) is kept with country of residence, i.e., Mauritius and hence the same is not taxable in country of source, i.e., in India. The capital gain as per the Indian Mauritius DTAA is taxable in the resident country and the source country has given up its rights to tax the income. We hold that the losses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year in question for the reason that once the assessee has chosen the benefit of DTAA, then the capital gain is not at all taxable in India and therefore, there is no question of setting off of loss from the earlier years. Accordingly, the Cross Objection raised by the assessee is allowed. Whether the AO could have passed the draft assessment order or not u/s 144C? - In any case once we have held that long term capital gain during the year is not taxable as in accordance with Article 13(4) of Indo Mauritius DTAA and carry forward losses on account of long term capital loss and short term capital loss has been held to be carry forward in the subsequent year, therefore the grounds raised by the revenue are purely academic, hence we are not entering into semantics of whether the AO could have passed the draft assessment order or not u/s 144C. Assessee appeal allowed. Issues Involved:1. Validity of the draft assessment order under section 144C.2. Adjustment of carried forward capital losses against current year capital gains.3. Application of India-Mauritius DTAA provisions.4. Determination of losses and their carry forward to subsequent years.Issue-wise Detailed Analysis of the Judgment:1. Validity of the Draft Assessment Order under Section 144C:The revenue contended that the Ld. CIT(A) erred in holding that a draft order under section 144C was unnecessary despite variations in carried forward short-term capital losses. The Ld. CIT(A) accepted the assessee's contention that the provisions of section 144C apply only when there is a variation in the returned income, prejudicial to the assessee. Since there was no variation in the returned income, the AO should have passed a final order under section 143(3) within the prescribed time limit. Consequently, the assessment order dated 11th February 2018 was held to be invalid.2. Adjustment of Carried Forward Capital Losses Against Current Year Capital Gains:The AO required the assessee to justify not setting off brought forward losses against current year capital gains. The assessee argued that it had the liberty to choose the benefits under either the Income Tax Act or the DTAA, whichever was more beneficial. The AO, however, held that the assessee should have adjusted the short-term and long-term capital losses against the current year's gains. The Ld. CIT(A) quashed the assessment order, emphasizing that the AO's adjustment of losses was incorrect because the income remained NIL, and there was no variation in income.3. Application of India-Mauritius DTAA Provisions:The assessee, a Mauritius tax resident, claimed exemption from taxation of capital gains in India under Article 13(4) of the India-Mauritius DTAA. The AO adjusted the brought forward losses against the exempt capital gains, which the assessee contested. The Tribunal referred to previous ITAT decisions, including Goldman Sachs Investments (Mauritius) Ltd. and Bluebay Mauritius Investment Limited, which held that capital gains exempt under the DTAA should not be adjusted against brought forward losses. The Tribunal upheld the assessee's right to carry forward losses without setting off against exempt gains.4. Determination of Losses and Their Carry Forward to Subsequent Years:The Tribunal emphasized that the treaty provisions allocate taxing rights, and in cases where income is not taxable in the source country, the computation of income in the source country is immaterial. The Tribunal reiterated that the provisions of sections 4 and 5 of the Income Tax Act are subject to section 90, which allows the assessee to rely on treaty provisions if more beneficial. Consequently, the assessee's carry forward of losses without setting off against exempt gains was upheld.Decision:The Tribunal allowed the assessee's cross-objection, permitting the carry forward of brought forward losses without setting off against current year's exempt gains. The revenue's appeal was dismissed as infructuous, given the Tribunal's decision on the merits of the case. The Tribunal concluded that the AO's adjustment of losses and the draft assessment order under section 144C were incorrect, reaffirming the assessee's right to choose the beneficial provisions of the DTAA.