2025 (4) TMI 860 - AT - Income Tax

Grandfathered long-term capital gains under India-Mauritius DTAA Article 13(4) cannot be set off against non-grandfathered capital losses

Bay Capital India Fund Limited, C/o Minesh Shah & Associates LLP Versus Additional Director Of Income Tax, CPC Bengaluru

Bay Capital India Fund Limited, C/o Minesh Shah & Associates LLP Versus Additional Director Of Income Tax, CPC Bengaluru - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:Whether the non-grandfathered (taxable) short-term and long-term capital losses can be set off against the grandfathered (exempt) long-term capital gains under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).Whether the assessee is entitled to carry forward the capital losses incurred during the year for subsequent years.Whether the decision in the assessee's own case for the previous assessment year should be applicable to the current assessment year.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Set-off of Non-grandfathered Losses Against Grandfathered GainsRelevant Legal Framework and Precedents: The India-Mauritius DTAA, particularly Article 13(4), provides that capital gains from the sale of shares acquired before April 1, 2017, are exempt from tax in India. Section 70 of the Income Tax Act, 1961, governs the set-off of capital losses against gains.Court's Interpretation and Reasoning: The Tribunal noted that the long-term capital gains from grandfathered sales are exempt under Article 13(4) of the DTAA and thus cannot be considered as income for the purpose of setting off capital losses under Section 70 of the Act. The Tribunal emphasized that the existence of taxable income is a precondition for setting off losses.Key Evidence and Findings: The assessee's long-term capital gains were exempt under the DTAA, and the Tribunal found no taxable income against which the losses could be set off.Application of Law to Facts: The Tribunal applied the provisions of the DTAA and Section 70, concluding that the exempt gains could not be offset by losses.Treatment of Competing Arguments: The Department argued for the set-off, relying on the CIT(A)'s order, but the Tribunal found the assessee's position consistent with the DTAA and prior Tribunal decisions.Conclusions: The Tribunal concluded that the non-grandfathered losses could not be set off against the grandfathered gains, as the latter were exempt from tax.Issue 2: Carry Forward of Capital LossesRelevant Legal Framework and Precedents: Section 74 of the Income Tax Act allows the carry forward of capital losses to subsequent years.Court's Interpretation and Reasoning: The Tribunal held that since the capital gains were exempt, the losses could not be set off against them and should be carried forward.Key Evidence and Findings: The Tribunal relied on precedent cases where similar issues were adjudicated, allowing the carry forward of losses.Application of Law to Facts: The Tribunal directed the AO to allow the carry forward of the losses to subsequent years as per the Act.Treatment of Competing Arguments: The Tribunal found no valid counterarguments from the Department that would prevent the carry forward of losses.Conclusions: The Tribunal concluded that the assessee is entitled to carry forward the capital losses to subsequent years.Issue 3: Applicability of Previous Tribunal DecisionRelevant Legal Framework and Precedents: The Tribunal's previous decision in the assessee's own case for the assessment year 2021-22.Court's Interpretation and Reasoning: The Tribunal found the CIT(A)'s distinction of the previous decision on factual grounds unmeritorious.Key Evidence and Findings: The Tribunal noted that the primary condition for setting off losses is the existence of taxable income, which was nil in this case.Application of Law to Facts: The Tribunal applied the reasoning from the previous decision, confirming its applicability to the current year.Treatment of Competing Arguments: The Tribunal rejected the CIT(A)'s factual distinction as irrelevant to the legal principles involved.Conclusions: The Tribunal concluded that the previous decision's reasoning applies to the current assessment year.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'The entire long-term capital gains earned by the assessee is exempted from taxation in India by virtue of Article 13(4) of the Treaty and long-term capital loss, whether brought forward or not, cannot be adjusted against the same.'Core Principles Established: Exempt income under a DTAA cannot be offset by losses, as it does not constitute taxable income. The DTAA provisions prevail over domestic law to the extent they are more beneficial to the taxpayer.Final Determinations on Each Issue: The Tribunal allowed the assessee's appeal, directing the AO to exempt the entire long-term capital gains under the DTAA and allow the carry forward of the capital losses to subsequent years.