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 simultaneously carrying forward long-term capital losses under section 74 of the Income Tax Act. The tribunal held that STCG/STCL and LTCG/LTCL constitute distinct income streams, enabling taxpayers to choose between domestic law and treaty provisions for different sources under section 90(2). Following precedents including IBM World Trade Corporation, the tribunal recognized that beneficial provisions can be applied separately to each income stream rather than the entire head of income, allowing optimal tax treatment for different types of capital gains and losses.

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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.

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