Treaty-exempt capital gains cannot be reduced by set-off losses; exempt gains stay protected, with losses carried forward.

Treaty-protected long-term capital gains on grandfathered shares under Article 13(4) of the India-Mauritius DTAA could not be reduced by setting off capital losses from non-grandfathered share transactions, because section 90(2) preserved the treaty exemption. The Tribunal reasoned that set-off under sections 70 and 74 presupposes taxable income under the head "Capital Gains"; exempt treaty income is not available for adjustment. It followed earlier coordinate bench rulings that exempt capital gains cannot be offset against other losses. The losses themselves remained eligible for carry forward under the Act, and the set-off reflected in the intimation was held unsustainable.

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Issues: Whether long-term capital gains protected by Article 13(4) of the India-Mauritius DTAA could be reduced by setting off capital losses arising from non-grandfathered share transactions, and whether such losses were liable to be carried forward.

Analysis: The assessee's gains from shares acquired before 01.04.2017 were treated as exempt under Article 13(4) of the India-Mauritius DTAA and, by virtue of section 90(2) of the Income-tax Act, 1961, the treaty benefit could not be curtailed by bringing such exempt gains into the computation of taxable income for set-off purposes. The Tribunal held that set-off of loss under sections 70 and 74 presupposes the existence of taxable income under the head "Capital Gains", and exempt treaty-protected gains do not constitute income available for such adjustment. It followed earlier coordinate bench rulings that exempt capital gains cannot be offset by losses from other transactions, while the losses themselves remain eligible for carry forward under the Act.

Conclusion: The set-off made in the intimation was unsustainable, the assessee was entitled to full treaty exemption on the grandfathered gains, and the capital losses were to be carried forward to subsequent years.

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