Treaty-exempt capital gains cannot be reduced by later share losses; such losses must be carried forward under the Income-tax Act.

Capital losses arising from shares acquired after 01.04.2017 could not be netted against capital gains that were exempt in India under the pre-amended India-Mauritius DTAA, because gains not chargeable to tax in India do not form part of the total income against which losses can be set off. The Tribunal treated the exempt gains from shares and derivatives acquired before 01.04.2017 as governed by Article 13(3)/(4) of the pre-amended treaty, while the losses arose under a different tax regime. It therefore rejected the Assessing Officer's computation and held that the brought forward and current losses were to be carried forward under section 74(1) without set-off against the exempt gains.

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Issues: Whether capital losses arising from shares acquired after 01.04.2017 could be set off against capital gains that were exempt in India under the pre-amended India-Mauritius DTAA, and whether such losses were required to be carried forward under the Income-tax Act, 1961.

Analysis: The assessee was a Mauritius resident and the capital gains from shares and derivatives acquired before 01.04.2017 were covered by Article 13(3)/(4) of the India-Mauritius DTAA as it stood prior to amendment, under which India had given up its right to tax such gains. The losses, both brought forward and current, arose from shares acquired after 01.04.2017 and were therefore linked to a different tax regime. The computation adopted by the Assessing Officer by netting off those losses against gains exempt under the DTAA was not accepted. The Tribunal held that gains not chargeable to tax in India could not be reduced by losses and that such losses were instead eligible for carry forward in accordance with section 74(1), consistent with the principle that losses cannot be set off against income that does not form part of the total income.

Conclusion: The assessee succeeded on the substantive treaty-computation and loss-carry-forward issue, and the brought forward and current losses were directed to be carried forward without set-off against the exempt capital gains.

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