2023 (10) TMI 1013 - AT - Income Tax

Mauritius company can apply DTAA benefits for short-term gains while carrying forward long-term losses under section 74

ITAT Mumbai allowed a Mauritius tax resident company to apply beneficial provisions of India-Mauritius DTAA for short-term capital gains while ... Beneficial provisions of the India-Mauritius DTAA in respect of STCG - carry forward the LTCL as per section 74 of the Act - Capital gains derived by the tax resident of Mauritius in India - tax treatment adopted in respect of capital gains and losses from transfer/ alienation of Indian securities - HELD THAT:- As assessee is a company incorporated in and a tax resident of Mauritius engaged in investment activities in India through the Foreign Direct Investment Route or through subsidiaries. It holds a valid Tax Residency Certificate (TRC) issued by the Mauritian Tax Authorities. Short term capital loss can be carried forward or adjusted intra head but the long term capital loss can be carried forward or intra head adjusted cannot be made against the short term capital loss or gain. Therefore, the legislature has kept this difference in carry forward as well as intra head adjustment separate for LTCG/LTCL and STCG/STCL. Perusal of Section 70 to Section 74, it can be seen that the Legislature itself has recognized LTCG/LTCL and STCG/ STCL to be two distinct sources owing to computational dissimilarities. Accordingly, the Assessee, by virtue of the provisions of section 90(2) of the Act is eligible to claim the beneficial provisions of the Treaty in respect of STCG and with regard to LTCL, the assessee has only option to apply the provisions of section 74 of the Act, accordingly chose to carry forward LTCL. In this regard, for the proposition that a taxpayer is able to choose the provisions of the Act or those of the Treaty for different sources of income, reliance is placed on decision of Bangalore ITAT in case of IBM World Trade Corpn. [2020 (10) TMI 367 - KARNATAKA HIGH COURT] - In this case, it is held that in case of multiple sources of income an Assessee is entitled to adopt provisions of the Act for one source of Income while applying the provisions of DTAA for the other source. It is clear that source of income has a direct nexus with the stream out of which the income springs to the assessee. The heads of income are provided to aggregate similar incomes derived from different sources for deduction and taxation purposes. In the head of income “Capital Gains”, the short-term and long-term assets are different sources of income, but each transaction constituting the short-term and long-term assets are different sources of income. Accordingly, gains / losses arising from different transactions are distinct transactions and a separate source of income; accordingly, STCG / STCL and LTCG / LTCL are distinct and separate streams of income arising to an assessee. Section 90(2) of the Act provides the provisions of the Act or the provisions of the Treaty, whichever are beneficial, shall apply to the assessee. As held by the Bangalore ITAT and affirmed by the Hon'ble Karnataka High Court in case of IBM World Trade Corporation (supra), the provisions of section 90(2) of the Act will apply to each stream of income and not the head of income. Respectfully, following the decisions in case of IBM World Trade Corporation(supra), Dimension Data Asia Pacific Pte. Ltd. (2018 (12) TMI 57 - ITAT MUMBAI) and Montgomery Emerging Markets Fund (2006 (3) TMI 202 - ITAT BOMBAY-H), the Assessee has claimed beneficial provisions of the India - Mauritius DTAA in respect of STCG and allowed to carry forward the LTCL as per section 74 of the Act. Allow the Assessee's claim for carry forward of LTCL - Decided in favour of assessee. Issues Involved:1. Denial of carry forward of long-term capital losses.2. Applicability of provisions of the Income Tax Act vs. DTAA.3. Adequacy of opportunity of being heard.Summary:1. Denial of Carry Forward of Long-Term Capital Losses:The assessee filed an appeal against the final Assessment Order for A.Y. 2017-18, where the Assessing Officer (AO) denied the carry forward of long-term capital losses amounting to Rs. 143,511,469. The AO observed that the assessee had claimed short-term capital gains as exempt under Article 13 of the India-Mauritius DTAA and simultaneously sought to carry forward long-term capital losses under the Income Tax Act, 1961. The AO concluded that since capital gains derived by a tax resident of Mauritius are exempt in India, the question of carrying forward capital losses does not arise.2. Applicability of Provisions of the Income Tax Act vs. DTAA:The assessee argued that it has the option to apply the provisions of the Income Tax Act or the DTAA, whichever is more beneficial. The assessee claimed the provisions of the Act for set-off of long-term capital losses and the provisions of the DTAA for the taxability of short-term capital gains. The Dispute Resolution Panel (DRP) upheld the AO's decision, stating that the assessee cannot selectively apply the provisions of the DTAA and the Act for different streams of income within the same head.3. Adequacy of Opportunity of Being Heard:The assessee contended that adequate opportunity was not provided by the AO. The DRP rejected this objection, noting that section 144C provides a complete code, and the assessee had an opportunity to object to any addition/adjustment proposed by the AO at the draft stage itself.Tribunal's Findings:1. Separate Treatment of Capital Gains and Losses:The Tribunal observed that the scheme of the Income Tax Act recognizes short-term and long-term capital gains/losses as separate and distinct sources of income. The assessee is eligible to apply the provisions of the Act or the Treaty, whichever is more beneficial, for each separate stream of income.2. Precedents and Legal Provisions:The Tribunal referred to various case laws, including the Special Bench decision in Montgomery Emerging Markets Fund, which held that each source of income is separate, and an assessee can adopt the provisions of the Act for one source while applying the provisions of the DTAA for another. The Tribunal also cited the decisions in IBM World Trade Corporation and Dimension Data Asia Pacific Pte. Ltd., which support the assessee's right to choose the beneficial provisions for different streams of income.3. Conclusion:The Tribunal concluded that the assessee is entitled to claim the beneficial provisions of the India-Mauritius DTAA for short-term capital gains and to carry forward long-term capital losses under section 74 of the Income Tax Act. The AO was directed to allow the assessee's claim for carry forward of long-term capital losses amounting to Rs. 143,511,469.Order Pronounced:The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 06th October, 2023.