TaxTMI 
TaxTMI 
2026 (1) TMI 249
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....n 144C(5) of the Act. 2. Since the issues that arise for our consideration are similar in all the appeals, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order. Further, as the basic facts in all the appeals are the same, we have elaborately mentioned only the facts in the appeal being ITA No.6051/Mum/2025 for the sake of brevity. ITA No.6051/Mum./2025 iShares Core MSCI Emerging Markets ETF - A.Y. 2023-24 3. In this appeal, the assessee has raised the following grounds: - "On the facts and circumstances of the case, the Appellant craves leave to prefer an appeal against the order under section 143(3) read with section 144C(13) of the Act dated 31 July 2025, issued by the Deputy Commissioner of Income Tax (International Taxation) - 2(2)(2), Mumbai ['the learned AO"] in pursuance of the directions under section 144C(5) of the Act issued by the Hon'ble DRP - I, Mumbai dated 25 June 2025 on the following grounds, each of which is without prejudice to and independent of the others: On the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP:....
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....he Act. Grounds of Appeal Nos. 8 - 12: Failure to allow set-off of brought forward long-term capital 7. erred in setting off the long -term capital losses brought forward from earlier Assessment Years amounting to Rs. 26,506,339,311 against the current year's net long-term capital gains amounting to Rs. 7,181,923,425, claimed as not chargeable to tax under Article 13 of the India Mauritius (IM Treaty). 8. erred in holding that long term capital gains not chargeable to tax under the IM Treaty form part of the 'total income' of the Appellant as per section 2(24) of the Act read with section 4 and 5 of the Act. 9. erred in holding that mode of computation of capital gains should be as per the provisions of the Act and the provisions of IM treaty should be applied only to the 'net capital gain which forms part of total income; 10. failed to appreciate that as per section 90(2) of the Act, each provision of the Act should be considered separately and therefore for determining 'total income', the income under head "Capital gains" has to be first determined considering the provisions of the Act or the treaty, whichever i....
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....enal proceedings under section 270A of the Act 20. erred in initiating penalty under section 270A of the Act alleging underreporting of income by the Appellant." 4. Ground no.1 is general in nature. Therefore, the same needs no specific adjudication. 5. The next ground numbered as Ground no.1 raised in assessee's appeal was not pressed during the hearing. Accordingly, the said ground is dismissed as not pressed. 6. The issue arising in Grounds no.2 to 6, raised in assessee's appeal, pertains to the manner of set off of short-term capital loss, which was incurred by the assessee from the transaction in shares on which Securities Transaction Tax ("STT") was paid. 7. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a company incorporated in Mauritius, and is registered with the Securities and Exchange Board of India as a Foreign Portfolio Investor. The assessee makes portfolio investments in Indian securities in accordance with the SEBI (Foreign Portfolio Investors) Regulations, 2019. For the year under consideration, the assessee filed its return of income on 28/11/2023, declaring a total income of Rs. 237,5....
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....rought forward short-term capital loss taxable at 15% amounting to Rs. 796,57,16,860 and the net short-term capital gains amounting to Rs. 62,90,458 taxable at 30% under section 115AD of the Act. 10. The assessee filed detailed objections, inter alia, against the aforesaid addition made by the AO. Vide directions dated 25/06/2025, issued under section 144C(5) of the Act, the learned DRP, inter alia, rejected the objections filed by the assessee on this issue and upheld the computation of capital gains made by the AO vide draft assessment order. The learned DRP further noted that this issue is pending consideration before the Hon'ble Bombay High Court in the case of DIT vs. M/s. DWS India Equity Fund, in ITA No.1414 of 2012, and there is no judicial finality on this issue. 11. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order under section 143(3) read with section 144C(13) of the Act computing the net short-term capital gains amounting to Rs. 950,33,72,269 taxable at 15% under section 111A of the Act after allowing setting off of brought forward short-term capital loss taxable at 15% amounting to Rs. 796,57,16,860 an....
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....nch, in the aforesaid decision, are as follows: - "016. This Leaves us with the only grounds relating to computation of short-term capital gain and set off of short-term capital loss. The only issue in this appeal is that assessee has earned short-term capital gain of 7 791,221/- which is chargeable to tax at the rate of 30%. Assessee claims that it has short-term capital loss on which securities transaction taxes are paid, and therefore such loss should be set-off against the short-term capital gain irrespective of the tax bracket of such gain and losses. 017. The only dispute between the assessee and revenue is as under:- Sr. No. Assessee's version Revenue's Version 1. Short-term capital loss was set off against the net short-term capital gain on which no securities transaction taxes paid Short-term capital loss should be first set of against short-term capital gain on which securities transaction tax is paid 2. Balance short-term capital loss shall be first set of against short-term capital gain on which securities transaction taxes paid If short-term capital loss still remains it is to be carried forward and not that of against....
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....ax. Further such capital gain is also computed as per section 115AD of the act. 020. It is not the case before us that either in the computation of short-term capital gains or short-term capital loss there is any difference in the manner of computation. Therefore, short-term capital gain arising during the year and short-term capital loss arising during the year are computed in a similar manner as provided under section 48 to section 55 of the income tax act. Further as we have already stated that section 48 to section 55 of the income tax act does not lay down any rate of tax payable on short-term capital gain. 021. Therefore, we do not find any reason to deprive the assessee from setoff of short-term capital losses suffered by the assessee for the same year against the short-term capital gains earned by the assessee. Such claim is in accordance with the provisions of section 70 (2) of the act. 022. We find that several judicial precedents relied upon by the assessee also supports the case of the assessee. The honourable Calcutta High Court in Rungamatee Trexim ITA number 812 of 2008 dated 19 December 2008 held that there is no provision nor the act comp....
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....nder Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement ("DTAA"). 21. The AO, vide draft assessment order, held that the assessee had opted for the benefit of India-Mauritius DTAA and at the same time the benefit of ITAs No.6050, 6051 & 6774/Mum/2025 (A.Y. 2022-23 & 2023-24) 13 the Act. However, the assessee has a choice to be governed either by the Act or by the provisions of the DTAA. The AO further held that for any receipt to be exempt under the DTAA, the same must be taxable under the domestic law and for any receipt to be taxable under the Act, it must form part of the total income. Thus, the AO held that the long-term capital gains claimed as exempt by the assessee under the provisions of India-Mauritius DTAA are in the nature of income as per the provisions of section 2(24) of the Act, read with sections 4 and 5 of the Act. The AO held that the operation of section 90(2) of the Act does not change the method of set off for carry forward, and therefore, if there is any income during the year, whether exempt or not, and there is a loss and it fulfils the conditions laid down in section 70, then there must be set off first then only the remaining loss ....
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.... forward long-term capital loss from the non-grandfathered sale against the long-term capital gains earned by the assessee from the grandfathered sale. As per the assessee, by setting off the brought forward long-term capital loss against the long-term capital gains, which is exempt from tax in India as per Article 13(4) of the India-Mauritius DTAA, the Revenue has restricted the benefit granted to the assessee under Article 13(4) of the India-Mauritius DTAA read with section 90(2) of the Act. Thus, as per the assessee, the entire amount of long-term capital gains, i.e. Rs. 718,19,23,425, from the sale of shares acquired prior to 01/04/2017 should be treated as non-taxable in India in view of the provisions of Article 13(4) of the India-Mauritius DTAA and the long-term capital loss brought forward from the previous years should be set off only against the net long-term capital gains accrued during the year from the non-grandfathered sale of shares. 25. We find that a similar issue came up before the Co-ordinate Bench of the Tribunal in Bay Capital India Fund Limited vs. ACIT, in ITA No.4475/Mum/2023, for the assessment year 2021-22. While deciding the issue in favour of the taxp....
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....t from taxation in India, as per Article 13(4) of the India Mauritius DTAA. The Co-ordinate Bench further held that the taxpayer is entitled to carry forward the loss arising from the sale of shares to the subsequent year. The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are reproduced as follows: - "6.4.2. It is noted that, Article 31 of Viena convention on the law of treaties states that, treaties should be interpreted in good faith, in accordance with the ordinary meaning to be given to the terms of the treaties in their context, and in the light of the its object and purpose. It also states that the context for the purpose of interpretation of the treaty shall comprise in addition to the test, including its preamble and annexes. One of the most difficult areas of treaty interpretation is how to cope up with silence of absent terms, if the treaty dose not expressly make provision for the matter in issue, should it be assumed that it is not covered depends on the nature of the treaty and the interaction of the various elements of Viena rules. In the present facts of the case the double taxation avoidance agreements is based on the principle to p....
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.... can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. To that extent, the worldwide basis of taxation in the scheme of the Indian Income-tax Act is no longer applicable in a situation provisions of a double taxation avoidance agreement entered into under section 90 apply. The next question then arises whether in a loss situation in the PE State, as is the case before us, can the assessee be forced to go for taxation in accordance with the provisions of the treaty with the said PE State. The provisions of section 90(2) of the Indian Income-tax Act are quite unambiguous and categorical in this regard. Section 90(2), inter alia, provides that when the Government of India has entered into a double taxation avoidance agreement with Government of any other country, "in relation to an assessee to whom such agreement applies, the provisions of this Act shall apply to the extent these are more beneficial to that assessee". Section 90 only grants relief; it does not impose any liability. Even without such provisions, Courts in US and Germany, as indeed in other parts of the world, have held that a treaty cannot act to the disad....
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....ate source of income. 6.5. The Ld.AR placed reliance on the following observations by Hon'ble Mumbai Special Bench in case of Montgomery Emerging Market Fund reported in (2006) 100 ITD 217 in support of the above argument. Hon'ble Special bench observed the distinction between 'source of income' and 'head of income' and that there can be multiple source of income under the same head of income. Hon'ble Special Bench also observed that, what is taxed by the Act is not different source of income, independently and that income from different source is clubbed under respective heads that are finally aggregated into the total income. The relevant extract of the observations of the Hon'ble Special Bench in this regard held as under:- "44. Therefore, it is very apparent that source of income does not mean head of income. The Assessing Officer has proceeded on a hypothesis as if the source of income is the head of income itself. This is not a proper construction of law provided in section 70. Short term capital gains/loss as well as long term capital gains/loss both are computed under the head "capital gains" for the aggregation of income culminating into t....
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.... Credit Suisse (Singapore) Co. (Mauritius) Ltd. In ITA No. 1107 and 1108/Mum/2022, upheld the theory of the segregation of capital gain for drawing DTAA to the extent of more beneficial to the assessee. The relevant finding of the Tribunal is reproduced as under: "8. In the case of Flagship Indian Investment Co (Mauritius) Ltd.(supra), the assessee had claimed benefit of Article -13 of the DTAA in respect of 'Capital Gains' and had sought to carry forward capital losses of the earlier years as the same could not be set off against capital gains for the relevant assessment year. The Assessing Officer and CIT(A) rejected assessee's claim of carry forward of capital losses on the pretext that since the assessee had claimed benefit of exemption under Article 13 of the DTAA on capital gains, capital losses are also exempt. When the issue reached before the Tribunal, the Coordinate Bench placing reliance on the decision in the case of CIT vs. Western India Oil Distributing Co. Ltd., 249 ITR 517 (SC) and CIT vs. Manmohan Das 59 ITR 699(SC) and also after considering CBDT Circular No.22 of 1944 dated 29/07/1944 held that the assessee is justified in claiming carry forw....
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....were in error in not allowing the same. Accordingly, the A.O was directed to allow the carry forward of the capital losses of the earlier years to the subsequent years, according to law. As in the aforesaid case, in the case of the present assessee before us, as the short term and long term capital gains earned by the assessee from transfer of securities during the year in question are admittedly exempt from tax under Article 13 of the India- Mauritius tax treaty, therefore, the brought forward STCL of the previous years was rightly carried forward by the assessee to the subsequent years......... The Tribunal further held: ........... Now coming to the claim of the revenue that as Sec. 45 of the Act, by virtue of India-Mauritius tax treaty was rendered unworkable in respect of "capital gains" derived by the assessee from transfer of securities in India, therefore, the "capital losses" would also not form part of the assessee's "total income", and thus, could not be computed under the Act. we are afraid does not find favour with us. Apropos the aforesaid observation of the A.O, we are of the considered view that the same had been arrived at by loosing sight of ....
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.... rates on income charged for a particular assessment year. Section 2(45) defines the total income to be the amount of income referred to section 5 and computed in the manner laid down in the Act. Section 14 of the act categorises income under various heads of income like salaries, income from house property, profit and gains from business of profession, capital gains and income from other sources. Section 66 to 80 deals with the aggregation of income and set off /carry forward of loss. 7.1. Hon'ble Bombay High Court in case of CIT vs. M. N. Raigi reported in (1949) 17 ITR 180 considered as to whether share income of a partner which does not form part of the total income, is to be added to the total income in order to determine the rate at which income tax was payable by the partner. Section 16 of Income Tax Act 1922, corresponding to section 66 of the Income tax Act 1961 was subject matter for consideration in the aforesaid decision. Hon'ble Court after analysing the scheme of computation observed and held as under : Now, the scheme of the Indian Income-tax Act is that income, profits and gains of an assessee are liable to tax subject to certain exemptions and exc....
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...., that the tax is not payable on these different sums. Now, if Mr. Joshi's contention was sound, then with regard to these various exemptions which I have enumerated, although tax is not payable, they should all be included in the total income for the purpose of determining the rate payable in respect of income-tax. Now, the short and conclusive answer to that contention is Section 16 of the Indian Income-tax Act. It is that section which in terms includes in the total income of an assessee only certain sums which are exempted from the payment of tax. Therefore, by implication, where the sums are not included in the total income by Section 16, those sums are not only exempted from the payment of tax, but they are also excluded from the total income. Now, when we look at Section 16, it does not include the sum covered by Section 25(4) as a sum which is to be included in the total income of the assessee. The scheme, therefore, of the Income-tax Act is clear and is very different from what Mr. Joshi suggests it is. The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total inc....
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.... directed to grant the carry forward of the loss as claimed by the assessee." 27. Therefore, from a careful perusal of these decisions, it is evident that all the submissions of the Revenue, raised in the instant appeal, have already been considered by the Co-ordinate Benches. Thus, respectfully following the decisions of the Co-ordinate Bench as cited supra, we are of the considered view that the long-term capital gains earned by the assessee from the transactions, which are grandfathered as per the provisions of Article 13(4) of the India-Mauritius DTAA, cannot be adjusted against the brought forward long-term capital loss incurred by the assessee. Accordingly, the AO is directed to allow the exemption of the entire long-term capital gains amounting to Rs. 718,19,23,425 earned by the assessee from the transactions which are covered under the provisions of Article 13(4) of the India-Mauritius DTAA. Further, the AO is directed to allow the set off of longterm capital loss brought forward from the previous years against the net long-term capital gains accrued during the year from the non-grandfathered sale of shares. Accordingly, the impugned order on this issue is set aside, and....
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....rned AO/ Hon'ble DRP: Ground of Appeal Nos. 1 - 4: Rejecting the hierarchy of set-off of Short-Term Capital losses adopted by the Appellant 1. erred in rejecting the hierarchy of set-off of short-term capital losses adopted by the Appellant and thereby, taxing the gross short-term capital gains (STCG) in respect of transactions on the sale of shares not chargeable to STT; 2. failed to appreciate that income under the head 'Capital Gains' is determined as per sections 45 to 55A of the Act whilst sections 111A and 115AD only provide for determination of tax in certain cases and therefore, gains arising on transactions subjected to STT and those not subjected to STT are no different and satisfy the 'similar computation' condition specified in section 70(2) of the Act; 3. failed to appreciate that since section 70 of the Act does not provide any hierarchy for set-off, the short-term capital loss arising from sale of shares subjected to Securities Transaction Tax ('STT") can first be set-off against the STCG arising from sale of securities not subjected to STT instead of STCG arising from sale of shares subjected to STT; ....
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....e's appeal, pertains to the initiation of penalty proceedings under section 270A of the Act, which is premature in nature. Therefore, the said ground is dismissed. 38. In the result, the appeal by the assessee is partly allowed for statistical purposes. ITA No.6774/Mum./2025 iShares Core MSCI Total International Stock ETF - A.Y. 2023-24 39. In this appeal, the assessee has raised the following grounds: - "On the facts and circumstances of the case, the Appellant craves leave to prefer an appeal against the order under section 143(3) read with section 144C(13) of the Act dated 28 August 2025, issued by the Deputy Commissioner of Income Tax (International Taxation) - 2(2)(2), Mumbai ['the learned AO'] in pursuance of the directions under section 144C(5) of the Act issued by the Hon'ble DRP - I, Mumbai dated 2 July 2025 on the following grounds, each of which is without prejudice to and independent of the others: On the facts and in the circumstances of the case and in law, the learned AO/ Hon'ble DRP: Ground of Appeal No. 1: General Erred in assessing the total income of the Appellant at Rs. 26,37,72,43,346 i....
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.... 10. erred in levying surcharge, health and education cess on the additional tax liability (mentioned above at point no. 9) which is erroneous and bad in law; Ground of Appeal No. 11 : Levy of interest under section 234B of the Act - Rs. 3,68,24,02,310 11. erred in levying interest under Section 234B of the Act amounting to Rs. 3,68,24,02,310 Ground of Appeal No. 12: Initiation of penal proceedings under section 270A of the Act 12. erred in initiating penalty under section 270A of the Act alleging underreporting of income by the Appellant." 40. Ground no.1 is general in nature. Therefore, the same needs no specific adjudication. 41. The issue arising in Grounds no.2-6, raised in assessee's appeal, pertains to the set off of the brought forward long-term capital loss (non-grandfathered) against the exempt (grandfathered) long-term capital gains. Since we have already adjudicated a similar issue in the foregoing paragraphs, our findings/conclusions as rendered therein shall apply mutatis mutandis to this appeal. Accordingly, the AO is directed to allow the exemption of the entire long-term capital gains earned by the assessee from the....