2025 (4) TMI 913 - AT - Income Tax

Singapore company can carry forward short-term capital losses despite revenue objections under Section 74

DCIT (IT) -1 (3) (1), Mumbai Versus BNS Asia Limited., C/o SRBC and Associates LLP

ITAT Mumbai held that a Singapore incorporated company could carry forward STCL despite revenue's objection regarding DTAA benefits. The assessee computed ... Carry forward of Short Term Capital Loss (STCL) whereas the assessee has taken the benefit of the DTAA between India and Singapore with respect to the Short Term Capital Gains (STCG) - assessee is a company incorporated in Singapore and is a tax resident of Singapore - HELD THAT:- On perusal of the computation of income we notice that the assessee during the year under consideration has not availed any Treaty benefits and has computed the net the STCL after setting off the STCG and claimed the carried forward of STCL under the Act. Hence in our view the ground raised by the revenue is based on the incorrect understanding of facts. On perusal of the rectification order u/s 154 passed by the AO we notice that the brought forward loss was not allowed to be carried forward based on a rectification order pertaining to AY 2013-14 in which the loss of AY 2011-12 and AY 2012-13 was not allowed to be carried forward. AR during the course of hearing drew our attention to the returns filed for AY 2011-12 and AY 2012-13 to substantiate the brought forward loss was incurred during the said assessment years - DR did not controvert the submission of the ld AR that these losses were allowed to be carried forward in the respective AYs. In our view the revenue cannot deny the benefit of carry forward of loss under the head capital gains pertaining to earlier years by an order passed in the subsequent year and that the right to carry forward can be denied only in the year in which the loss is first incurred. This is so for the reason that the section 74 of the Act has a restriction eight years during which the loss under the head capital gains can be carried forward and for this purpose the loss pertaining to each AY are to be determined in the assessment year in which the loss is first computed. Therefore in our view the CIT(A) has correctly held that the right to carry forward the loss of AY 2011-12 and AY 2012-13 cannot be denied by a rectification order passed in AY 2013-14. Decided against revenue. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in these appeals were:Whether the assessee is entitled to carry forward Short Term Capital Losses (STCL) from previous assessment years (AYs) when the benefit of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore was claimed for Short Term Capital Gains (STCG).Whether the rectification orders passed under section 154 of the Income Tax Act, which denied the carry forward of capital losses from earlier AYs, were valid.Whether the assessee's decision not to claim treaty benefits for the year under consideration affects the carry forward of losses.ISSUE-WISE DETAILED ANALYSIS1. Entitlement to Carry Forward STCLRelevant legal framework and precedents: The relevant legal provisions include section 74 of the Income Tax Act, which allows the carry forward of capital losses for up to eight years. The Tribunal referred to the case of Bay Capital India Fund Limited and other precedents to support the position that the right to carry forward losses cannot be denied in a subsequent year if they were validly claimed in the original year.Court's interpretation and reasoning: The Tribunal emphasized that the right to carry forward losses must be determined in the year the loss is first incurred. It cannot be denied in a subsequent year unless rectification orders are passed for the original years in question.Key evidence and findings: The Tribunal found that the assessee had not claimed treaty benefits for the years under consideration and had appropriately set off STCG against STCL, which was supported by the computation of income.Application of law to facts: The Tribunal applied section 74 and relevant case law to conclude that the assessee's right to carry forward losses from AY 2011-12 and AY 2012-13 could not be denied by a rectification order for AY 2013-14.Treatment of competing arguments: The Revenue argued that the assessee's use of the DTAA for STCG should preclude the carry forward of STCL. However, the Tribunal found this argument based on an incorrect understanding of the facts, as the treaty benefits were not claimed for the years in question.Conclusions: The Tribunal concluded that the assessee was entitled to carry forward the STCL from earlier years, and the AO's denial based on subsequent rectification orders was not sustainable.2. Validity of Rectification Orders under Section 154Relevant legal framework and precedents: Section 154 of the Income Tax Act allows for rectification of mistakes apparent from the record. The Tribunal considered whether the AO's rectification orders were appropriately applied.Court's interpretation and reasoning: The Tribunal held that rectification orders should be passed for the original years in which the losses were incurred, not in subsequent years.Key evidence and findings: The Tribunal noted that the AO had denied the carry forward of losses based on a rectification order for AY 2013-14, which improperly addressed losses from AY 2011-12 and AY 2012-13.Application of law to facts: The Tribunal determined that the AO's rectification orders were incorrectly applied, as they should have been issued for the years when the losses were first claimed.Treatment of competing arguments: The Tribunal dismissed the Revenue's reliance on the rectification orders, finding them procedurally flawed.Conclusions: The Tribunal concluded that the rectification orders denying the carry forward of losses were invalid, as they were not issued for the correct assessment years.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized, 'In our view the revenue cannot deny the benefit of carry forward of loss under the head capital gains pertaining to earlier years by an order passed in the subsequent year and that the right to carry forward can be denied only in the year in which the loss is first incurred.'Core principles established: The Tribunal established that the right to carry forward capital losses must be determined in the year the loss is incurred, and subsequent rectification orders cannot retroactively deny this right.Final determinations on each issue: The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decision to allow the carry forward of STCL from earlier years for AY 2014-15, AY 2015-16, and AY 2018-19.