TMI Blog2023 (3) TMI 457X X X X Extracts X X X X X X X X Extracts X X X X ..... the said income, for e.g. some countries like Singapore, Hong Kong etc. do not levy tax on the income unless it arises in their own territory, as they follow a territorial model of taxation. In case of income, where a country consciously gives up its rights to tax 'income' (i.e. positive income) of resident of the treaty partner arising on its own shores, it automatically does not mean that losses which had arisen in earlier year in the subject country are not allowed to be carried forward. The said principle of allocation of taxing rights has also been considered and propagated in various judicial precedents and commentary. The application of a treaty can result in the entire (gross) income being not subject to tax in India in a year where a taxpayer claims treaty benefits. Therefore, in a year in which a taxpayer claims benefit of Article 13(4) of the India- Mauritius tax treaty, the entire gains he earns will not be taxable at all as India has given up its taxing rights in respect thereof. Thus, the entire amount of gains for the year (before set off of brought forward losses) will go out of the taxing provisions if Assessee has chosen to be assessed as per T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard losses on account of long term capital loss and short term capital loss has been held to be carry forward in the subsequent year, therefore the grounds raised by the revenue are purely academic, hence we are not entering into semantics of whether the AO could have passed the draft assessment order or not u/s 144C. Assessee appeal allowed. - I.T.A. No. 2382/Mum/2021, Cross Objection No. 41/Mum/2022 - - - Dated:- 27-9-2022 - SHRI AMIT SHUKLA, JM SHRI AMARJIT SINGH, AM For the Appellant : Shri Milind Chavan, Ld. DR For the Respondent : Shri Anish Thacker, Ld. AR ORDER Per Amit Shukla, Judicial Member: The aforesaid appeal has been filed by the revenue and cross objection by the assessee against order dated 17.09.2021, passed by Ld. CIT(A)-57, Mumbai for the quantum of assessment passed u/s 143(3) r.w.s 144C(3) for AY 2016-17. The revenue has raised following grounds of appeal:- 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that draft order under section 144C was not needed to be passed in the impugned case ignoring the fact there is a variation in the income or loss retuned as a result of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al losses instead of first adjusting the same against the brought forward long-term capital losses and the balance taxable long-term capital gains, if any, against the brought forward short-term capital losses. The Respondent craves leave to amend or alter any ground or add new ground at any time before or at the time of hearing of the appeal. 3. The brief facts of the case are that, assessee is a company incorporated in and is a tax resident of Mauritius and holds a valid Tax Residency Certificate (TRC). During the year under consideration, the Assessee was registered with the Securities and Exchange Board of India (SEBI) as a sub-account of JP Morgan Indian Investment Trust Plc. During the financial year ending 31st March 2016, investments by Assessee in the Indian capital markets have resulted in net short-term capital gains amounting to Rs.5,63,91,201/- and net long-term capital gains amounting to Rs. 232,42,72,825/-. The Assessee had also brought forward short-term capital loss of Rs. 269,58,94,017/- and long-term capital loss of Rs. 5,27,74,036/- from previous AYs [i.e., the years for which ROI was filed under the provisions of the Act and assessee had not sought for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire carry forward losses would have been adjusted for LTCG/STCG for which the carry forward losses being carried forwarded. He further noted that assessee has claimed LTCG and STCG as exempt under Article 13 of India Mauritius Treaty for AY 20016-17 and that is why it has not adjusted STCL of assessment years 2009-10, 2011-12, 2012-13 and 2014-15 and Long Term Capital Losses of the Assessment Year 2014-15 against the said gains has been carried forward as the provisions of the Act. He has also referred to DRP direction in some other case of M/s Goldman Sachs Investments (Mauritius) Limited for AY 2013-14 vide order dated 21.11.16 wherein it was adjudicated that loss from exempt source can neither be allowed to be set off or nor can be allowed to be carry forward and absorbed against income from taxable source in subsequent years. Accordingly, he computed income at Rs. NIL after adjusting the brought forward capital loss of Rs. 234,25,35,329/- from LTCG claimed to be under Article 13 of Rs. 232,42,72,825 and absorbed only amount of Rs. 31,52,29,991/ would be allowed to be carried forward for the short term capital loss and long term capital loss of Rs. 5,27,74,036/- for the subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed these losses brought forward against the current year income which was claimed as exempt under India-Mauritius DTAA. Ld. Counsel submitted that this issue is now squarely covered by the decision of ITAT in the case of Goldman Sachs Investments (Mauritius) Ltd. (ITA No. 2201/Mum/2017) dated 24 September 2020 (Refer Pg. No. 113 to 123 of the Legal Paperbook) and in case of Bluebay Mauritius Investment Limited (ITA No. 1369/Mum/2021 and ITA No. 1370/Murn/2021) dated 29 April 2022. The relevant extracts of the said decisions are reproduced as under: We are unable to comprehend that now when admittedly the short term and long term capital gains earned by the assessee from transfer of securities during the year in question are exempt under Article 13 of the India-Mauritius Tax Treaty, where would there be any occasion for seeking adjustment of the brought forward STCL against such exempt income. Our aforesaid view is squarely covered by the order of the IT AT, Mumbai in the case of Flagship Indian Investment Company (Mauritius) Ltd. Vs. ADIT(I.T)- 3(2), Mumbai (2010) 133 TTJ 792 (Mum).... ..As regards the reliance placed by the Id. D.R on the observations of the lower authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In any case, the tax treaty cannot be thrust upon an assessee. In case the assessee during one year does not opt for the tax treaty, it would not be precluded from availing the benefits of the said treaty in the subsequent years. Our aforesaid view is fortified by the order of the ITAT, Pune in DCIT Vs. Patni Computer Systems Ltd. (2008) 114 ITD 159 (Pune). We thus in terms of our aforesaid observations, not being able to persuade ourselves to subscribe to the view taken by the A.O/DRP. who as noticed by us hereinabove had sought adjustment of the b/forward STCL against the exempt short term and long term capital gains earned by the assessee during the year in question, thus .set aside the order of the A.O in context of the issue under consideration. Accordingly, we direct the A.O to allow cany forward of the b/forward STCL of Rs. 3926,36,70,910/- to the subsequent years... Bluebav Mauritius Investment Limited (supra) 3.2. We find that the issue in dispute is no longer res Integra in view of the decision of this Tribunal in the case of Goldman Sachs Investments (Mauritius) Ltd., referred to supra. The facts prevailing in Goldman Sachs Investments (Mauritius) Ltd., and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined by the ITO dealing with the assessment in the subsequent year to determine whether the loss of the previous year may be set off against the profits of that year. A decision recorded by the ITO who computers the loss in the previous year under section 24(3) that the loss cannot be set off against the income of the subsequent year is not binding on the assessee. 11. Ld. DR has filed written submission and contended that the variation of section 4 5 of the I.T. Act of section 90 is only for the purpose of enabling the central government to notify the tax treaty that it has entered. He has also tried to justify the decision of Hon ble Supreme court in the Azadi Bachao Andolan (2003) 263 ITR 706 (SC). He has further placed reliance decision of Hon ble Karnataka High Court in the case of R. M. Muthiah (202 ITR 508) and contended that the tax liability has to be calculated first as per the Income Tax Act and if there is tax liability as per the Act then DTAA must be resorted for negating or reducing the tax liability. If there is no tax liability resorting to DTAA does not arise. He also referred CBDT Circular 333 dated 2 April 1992 to state that mode of computation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a PE in India, there is no computation done when the income is reported in India]. 14. In the case of a situation of tax relief, the country where a particular income arises (source country), consciously gives up its taxing rights in respect of a particular income arising from source(s) in that country in favour of the other treaty partner country (residence country). The residence country may or may not levy tax on the said income, for e.g. some countries like Singapore, Hong Kong etc. do not levy tax on the income unless it arises in their own territory, as they follow a territorial model of taxation. 15. In case of income, where a country consciously gives up its rights to tax 'income' (i.e. positive income) of resident of the treaty partner arising on its own shores, it automatically does not mean that losses which had arisen in earlier year in the subject country are not allowed to be carried forward. 16. The said principle of allocation of taxing rights has also been considered and propagated in various judicial precedents and commentary. ITAT Mumbai in this regard in case of APL Co. Pte. Ltd. (2017) (49 CCH 49) (Mum Trib.) has observed as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source of situs a full or limited right to tax, the State of residence must allow the relief so as to avoid double taxation; this is the purpose of Articles 23A and 236. The Convention leaves it to the Contracting States to choose between two methods of relief i.e. the exemption method and the credit method. Further in Third class: Exclusive residence State taxation] Other items of income or capital may not be taxed in the State of source or situs; as a rule they a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein it was held as under:- A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of changeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s but by the provisions of the Act. These provisions included the provisions of section 74 of the Act which deal with carry forward and set off of these losses. 29. In so far as reliance placed by Ld. DR in the case of R. M. Muthaiah (supra), the Hon ble Court has clearly held as under:- When a power is specifically recognized as vesting in one, exercise of such a power by others, is to be read, as not available; such a recognition of power with the Malays/an Government, would take away the said power, from the Indian Government; the Agreement thus operates as a bar on the power of the Indian Government in the instant case. This bar would operate on ss. 4 and 5 of the IT Act, 1961. 30. As stated above, the capital gain as per the Indian Mauritius DTAA is taxable in the resident country and the source country has given up its rights to tax the income. The question of computation in the source country does not therefore arise. Accordingly, the income from capital gains is not taxable in India as per Article 13(4) DTAA and accordingly, the mode of computation income in India as the source country will not arise. If the particular income is not to be taxed at all, the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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