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of <h1>Tax ruling: Treaty exempts pre-2017 share gains; post-2017 gains taxable, long-term capital loss carryforward under s.74 only offsets LT gains</h1> <h3>Atyant Capital India Fund - I, C/o IQ EQ Fund Services (Mauritius) Ltd. Versus Asst. Director Of Income Tax, International Tax, Circle-1 (1) (2), Mumbai</h3> Atyant Capital India Fund - I, C/o IQ EQ Fund Services (Mauritius) Ltd. Versus Asst. Director Of Income Tax, International Tax, Circle-1 (1) (2), Mumbai - ... 1. ISSUES PRESENTED AND CONSIDERED Whether a taxpayer who claims exemption for certain long-term capital gains under Article 13(4) of the India-Mauritius DTAA (grandfathered shares acquired prior to 01.04.2017) may, nevertheless, carry forward and set off long-term capital losses arising from distinct transactions (non-grandfathered shares acquired on/after 01.04.2017) under section 74 of the Income Tax Act, 1961. Whether the Assessing Officer/CPC was justified in disallowing the carry forward of long-term capital loss and in adjusting dividend income (income from other sources) against such long-term capital loss in the intimation under section 143(1) of the Act. Whether, for the purposes of applying section 90(2) (choice between Act and DTAA), the choice is to be made qua the head of income or qua each separate stream/source of income (i.e., transaction-wise distinction between grandfathered and non-grandfathered share sales). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to carry forward LTCL under section 74 when LTG from different transactions are exempt under Article 13(4) DTAA Legal framework: Section 74 governs carry forward and set-off of long-term capital loss (LTCL) - LTCL can be set off only against long-term capital gains (LTCG) of the same year and any unabsorbed LTCL can be carried forward for eight years. Article 13(4) of the India-Mauritius DTAA exempts gains from alienation of certain shares acquired prior to 01.04.2017 (resident rule) from taxation in India; Article 13(3A) applies to shares acquired on/after 01.04.2017 (source rule) making such gains taxable in the source state. Section 90(2) permits application of either the Act or DTAA, whichever is more beneficial, on a per-source basis (as interpreted). Precedent treatment: The Tribunal relied on Special Bench and coordinate bench precedents (Montgomery Emerging Markets Fund; IBM World Trade; Dimension Data; Indium IV) - these authorities treat different transactions as distinct sources and hold section 90(2) applies qua each source of income. The coordinate bench decision cited by the CIT(A) (Indium IV) was examined and construed in light of those precedents. Interpretation and reasoning: The Tribunal reasoned that source of income is transaction-specific and not coextensive with the head 'capital gains'. The taxpayer had LTCG exempt under Article 13(4) for grandfathered shares (accepted by Revenue) and, separately, LTCL arising from non-grandfathered share sales. Since the two types of transactions constitute different sources, the taxpayer could apply DTAA to the grandfathered gains while applying domestic law (section 74) to carry forward LTCL on non-grandfathered transactions. The Tribunal rejected the CIT(A)'s approach that the choice between Act and Treaty must be made qua the entire stream/head of income where both gains and losses arise from 'the same stream', finding that the factual matrix here showed distinct transactions/sources. Ratio vs. Obiter: Ratio - where distinct transactions give rise to distinct sources (grandfathered LTCG vs non-grandfathered LTCL), section 90(2) permits choice of Treaty for one source and the Act for another; accordingly LTCL from non-grandfathered transactions can be carried forward under section 74 even though separate LTCG (grandfathered) are exempt under the DTAA. Obiter - general observations on international tax jurisprudence that treaties do not levy tax but only modify domestic tax liability are explanatory. Conclusion: The Tribunal concluded that the assessee was entitled to carry forward the LTCL of Rs. 17,96,11,994 under section 74; dividend income could not be adjusted against LTCL; the AO/CPC's disallowance and adjustment were incorrect and the CIT(A)'s reliance on Indium IV to deny carry forward was misplaced. Issue 2 - Validity of CPC's adjustment under section 143(1) and intra-head set-off with income from other sources Legal framework: Section 143(1) permits processing adjustments to returns for arithmetical errors and incorrect claims; set-off rules for current year losses are governed by sections 70-74 (intra-head/ inter-head rules). LTCL is allowable only against LTCG; it cannot be set off against 'income from other sources' such as dividends. Precedent treatment: The Tribunal referenced authorities delineating the scope of intra-head set-off and the separate character of LTCL/LTCG from other heads; prior decisions upheld that LTCL cannot be adjusted against income from other sources. Interpretation and reasoning: The Tribunal found the AO-CPC erred in adjusting dividend income under 'income from other sources' against LTCL in the intimation under section 143(1). The adjustment conflicted with statutory set-off rules which restrict LTCL set-off to LTCG. Since the LTCG that could absorb losses were either non-existent or exempt under the DTAA for grandfathered transactions, the correct legal consequence under domestic law was carry forward under section 74, not reallocation against dividends. Ratio vs. Obiter: Ratio - CPC's adjustment of dividend income against LTCL in a processed intimation was improper when the statutory scheme permits LTCL set-off only against LTCG; such adjustment cannot be made in lieu of allowing carry forward under section 74. Obiter - remarks on procedure for processing returns and the scope of section 143(1) as addressing arithmetical/incorrect claims. Conclusion: The Tribunal directed the AO to allow carry forward of LTCL and disallowed the CPC's adjustment of dividends against LTCL; no separate adjudication on procedural adequacy of enhancement under section 251 was required given the substantive allowance. Issue 3 - Application of section 90(2): choice qua stream/source of income (interpretive principle) Legal framework: Section 90(2) allows application of the DTAA where it is more beneficial than the Act. The question arises whether the choice applies at head-of-income level or at the level of separate sources/transactions. Precedent treatment: Special Bench in Montgomery and subsequent coordinate bench/High Court decisions (IBM World Trade corroborated by Karnataka High Court) were followed to the effect that 'source' is transaction-specific and that different transactions can be taxed under different regimes (Act or Treaty) under section 90(2). Interpretation and reasoning: The Tribunal adopted the view that the head of income is merely for aggregation and does not obliterate the separate identity of distinct sources/transactions. Therefore, section 90(2) applies to each source/stream; the taxpayer may legitimately apply DTAA benefits to one stream (grandfathered LTCG) and domestic provisions to another (non-grandfathered LTCL carry forward under section 74). Ratio vs. Obiter: Ratio - the choice between Act and Treaty under section 90(2) is to be exercised qua each distinct source/transaction and not mechanically qua the head of income; this permits mixed treatment where justified by transaction-specific facts. Obiter - comparative observations on legislative recognition of ST/LT distinction in sections 70-74. Conclusion: The Tribunal reaffirmed that section 90(2) operates per stream/source of income; hence the assessee's application of DTAA to grandfathered gains and domestic law to non-grandfathered losses was permissible. Cross-reference Issues 1-3 are interlinked: the transactional/source-wise application of section 90(2) (Issue 3) informs the entitlement to carry forward LTCL under section 74 (Issue 1) and negates the CPC's adjustment of dividends against LTCL (Issue 2). The Tribunal's conclusions on each issue are consistent and together form the basis for allowing the carry forward of LTCL and directing correction of the intimation under section 143(1).
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