Treaty-exempt capital gains cannot be netted against separate capital loss, preserving carry-forward under the income tax regime.

Capital gains exempt under the India-Mauritius DTAA are treated as excluded from total income under section 90(2) and therefore do not enter the computation process for compulsory set-off against a separate long-term capital loss. On that basis, the loss arising from another share transaction remained eligible for carry forward under section 74, subject to the Act's conditions. The analysis applies the more beneficial treaty regime and the principle that income excluded from total income cannot be netted against loss for computation purposes. The Assessing Officer's adjustment was not sustained, and the assessee was entitled to carry forward the loss without setting off the exempt gains.

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Issues: Whether long-term capital loss arising from transfer of shares could be carried forward without setting off exempt long-term capital gains earned on other share transactions under the India-Mauritius tax treaty and the Income-tax Act, 1961.

Analysis: The relevant treaty and section 90(2) of the Income-tax Act, 1961 were applied on the footing that the assessee could choose the more beneficial regime. The gains exempt under Article 13 of the India-Mauritius DTAA were treated as not entering the computation of total income, and therefore not available for compulsory set-off against the loss. The loss arising from another transaction was held to be eligible for carry forward under section 74 of the Income-tax Act, 1961. The Tribunal also relied on the principle that treaty provisions are to be interpreted in good faith and that income excluded from total income does not participate in the computation process.

Conclusion: The assessee was entitled to carry forward the long-term capital loss without setting it off against the exempt capital gains, and the adjustment made by the Assessing Officer was not sustained.

Ratio Decidendi: Where capital gains are exempt under the applicable treaty and therefore excluded from total income, they cannot be netted against a separate capital loss for computation purposes, and the loss remains eligible for carry forward under the Act if otherwise allowable.

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