Appeal details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 2404 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
9 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-09-2022
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
I
Assessment Year
2016-2017
Appeal Filed On
16-12-2021
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, JM & SHRI AMARJIT SINGH, AM आयकरअपीलसं./ I.T.A. No. 2382/Mum/2021 (ननधधारणवर्ा / Assessment Year: 2016-17) ACIT-3(1)(1), R. No. 1628, 16 th floor, Air India Building, Nariman Point, Mumbai-400 021 बनाम/ Vs. M/s J. P. Morgan India Investment Company Mauritius Limited, C/o- SRB and Associates LLP, 14 th Floor, The Ruby 29 Senapati Bapat Marg, Dadar (w), Mumbai-400 028 स्थधयीलेखधसं./जीआइआरसं./PAN No. AAACF0626J (अपीलधथी/Appellant) : (प्रत्यथी / Respondent) & Cross Objection No. 41/Mum/2022 (ननधधारणवर्ा / Assessment Year: 2016-17) M/s J. P. Morgan India Investment Company Mauritius Limited, C/o- SRB and Associates LLP, 14 th Floor, The Ruby 29 Senapati Bapat Marg, Dadar (w), Mumbai-400 028 बनाम/ Vs. ACIT-3(1)(1), R. No. 1628, 16 th floor, Air India Building, Nariman Point, Mumbai-400 021 (अपीलधथी/Appellant) : (प्रत्यथी / Respondent) अपीलधथीकीओरसे/ Appellant by : Shri Milind Chavan, Ld. DR प्रत्यथीकीओरसे/Respondent by : Shri Anish Thacker, Ld. AR सुनवधईकीतधरीख/ Date of Hearing : 18.05.2022 & 23.09.2022 घोर्णधकीतधरीख / Date of Pronouncement : 27.09.2022 2 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited आदेश / O R D E R 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 assessment order in the form of variation in carried forward short term capital losses in subsequent years. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that adjustment in carried forward capital losses amounts to variation in income or loss which is prejudicial to the interest of the assessee and consequently draft order u/s. 144C was correctly passed. 3. On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in ignoring that the income or loss returned not only refers to income or loss of the current year declared by 3 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited assessee in the return of income but also the brought forward and carried forward losses declared in the return of income. 4. The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing Officer be restored. 5. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 2. Whereas, assessee has filed Cross Objection on the following grounds:- 1. On the facts and circumstances of the case and in law, the Ld. AO erred in not accepting the order of the Ld. CIT (A) and the contentions of the respondent and further contesting the same before the Hon'ble Tribunal. 2. Without prejudice to the above, the Ld. CIT (A) erred in not dismissing or reversing the actions of the Ld. AO in denying the Assessee's right to carry forward the capital losses brought forward from the earlier assessment years. 3. Without prejudice to the above, the Ld. AO erred in setting off the short-term capital losses brought forward from earlier assessment years against the net short-term and long-term capital gains earned in the current assessment year which were claimed as not chargeable to tax under the provisions of the India-Mauritius tax treaty (Treaty). 4 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 4. Without prejudice to the above, the Ld. AO has erred in taking a view that the brought forward short-term capital losses ought to be set off against the long-term capital gains exempt under section 10(38) of the Income-tax Act, 1961 (Act). 5. Without prejudice to the above, the Ld. AO has erred in adjusting the net long-term capital gains (including long-term capital gains exempt under section 10(38) of the Act) earned during the year against the brought forward short-term capital 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 31 st March 2016, investments by Assessee in the Indian capital markets have resulted in net short-term capital gains amounting to Rs. 5 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 benefit under India- Mauritius Treaty, being more beneficial. The details of which were as under:- Sr. No. AY Short term capital loss (in INR) Long term Capital Loss (In INR) 1 2009-10 1,85,27,56,326 - 2 2011-12 27,13,84,674 - 3 2012-13 5,33,85,406 - 4 2013-14 16,50,08,923 - 5 2014-15 35,33,58,688 5,27,74,036 Total 2,69,58,94,017 5,27,74,036 4. For the previous year relevant to AY 2016-17, i.e., the year under appeal, the Assessee earned short-term capital gains amounting to INR 5,63,91,201/- and long-term capital gains 6 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited amounting to INR 2,32,42,72,825/-. These were claimed as not being taxable in India by virtue of Article 13(4) of India-Mauritius Tax Treaty. Thus, the Assessee filed its Return of Income for AY 2016-17 electronically on the web-portal of the Income-tax Department on 27 September 2016 reporting total income at 'NIL'. Since the Assessee did not had any taxable income/ capital gains chargeable to tax in India as per the provisions of India- Mauritius Treaty, the entire brought forward short-term capital loss of INR 2,69,58,94,017 and long-term capital loss of INR 5,27,74,036 was carried forward 'as it is' to the subsequent year(s), without setting off from the current year capital gain. 5. The AO in his draft assessment order required the assessee to file a justification for not setting off of the brought forward losses against the current year capital gain. In response, assessee submitted that it is the liberty of the assessee to choose the benefit either under the Income Tax Act or the benefit under DTAA whichever is beneficial. Thus, it was submitted that it has rightly claimed carried forward losses of the earlier years to the subsequent years as it has not claimed any benefit under DTAA. Ld. AO after 7 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited detail discussion held that assessee ought to have adjusted STCL /LTCL against the STCG or LTCG as the case may be. In that scenario, the entire 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/- 8 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 subsequent years. Since the assessee intimated the Ld. AO about the non-acceptance of adjustments of the draft assessment order and choose to file the appeal before the Ld. CIT (A) u/s 246A of the Act. 6. However, the Ld. CIT (A) accepted the contention of the assessee on the ground that the provisions of section 144C of the Act would trigger or apply where there is any variation to the returned income, which is prejudicial to the interest of the Assessee. Here there was no variation in the return income and assessed income as it was nil only. Thus, given that the said condition is not satisfied, the Ld. AO ought to have passed a final order under section 143(3) of the Act, within the time limit prescribed by section 153 of the Act (i.e. on or before 31 December 2018). The final order dated 11 th February 2018, should be held to be bad in law and non-est. Ld. CIT (A) has quashed the assessment order itself on this ground alone and did not adjudicate the other grounds. According to him, the only variation made by the AO is 9 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited with respect to set off of brought forward losses but there is no variation in income, therefore, AO should not have passed a draft assessment order. 7. Accordingly, the revenue’s appeal is on validity of assessment order passed u/s 143(3) r.w.s. 144C (3) of the Act and the assessee’s Cross Objection is on the merits of the case, i.e., regarding on allowability of carry forward of earlier years losses without setting off with current year's capital gains (claimed to be not subject to tax in India under the India- Mauritius DTAA). It has been contended by the parties that, once the case on merits is decided, then Department's Appeal will become academic. It was thus requested that assessee’s Cross Objection may be dealt first. 8. Before us, it has been submitted that the Assessee earned short-term capital gains amounting to Rs. 5,63,91,201/- and long- term capital gains amounting to Rs. 232,42,72,825/-. These were claimed as not being taxable by virtue of the India-Mauritius Tax Treaty. Since the Assessee did not have any taxable income/ capital gains chargeable to tax in India as per the provisions of India- 10 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited Mauritius Treaty, the entire brought forward short-term capital loss of INR 2,69,58,94,017 and long-term capital loss of INR 5,27,74,036 was carried forward 'as is basis' to subsequent year(s). However, the Ld. AO adjusted 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)- 11 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 3(2), Mumbai (2010) 133 TTJ 792 (Mum)....""..As regards the reliance placed by the Id. D.R on the observations of the lower authorities that as the words "income" or "profits and gains" were to include losses also, therefore, now when Sec. 45 of the Act, by virtue of the India-Mauritius tax treaty was rendered unworkable in respect of "capital gains" derived by the assessee from transfer transactions carried out in India, the "capital losses" would also not form part of its "total income", and thus, were not required to be computed under the Act, we are afraid the same does not find favour with us. Before adverting any further, we may herein reiterate that the DRP vide its order passed u/s 144C(5), dated 21.11.2016, had concluded, that now when the "capital loss" was allowed to be carried forward by the A.O, vide his order passed under Sec. 143(3), dated 19.03.2015 for A. Y 2012-13, the same could not have thereafter been reviewed in the assessment proceedings of any subsequent year. As the said observation of the DRP has not been assailed any further by the revenue in appeal before us, the same thus had attained finality. 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 12 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited that the same had been arrived at by losing sight of the fact that the "capital losses" in Question had been brought forward from the earlier years and had been determined and allowed to be carried forward by the A.O while framing the assessment for A.Y 2012-13, vide his order passed u/s 143(3), date 19.03.2015, and had not arisen during the year under consideration i.e., A.Y 2013-14. Accordingly, the claim of the A.O that the "capital losses" b/forward from the earlier years, pertaining to a source of income that was exempt from tax was thus not to be carried forward to the subsequent years, being devoid of any merit, is thus rejected. At this stage, we may herein observe that it is for the assessee to examine whether or not in the light of the applicable legal provisions and the precise factual position the provisions of the IT Act are beneficial to him or that of the applicable DTAA. 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 13 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 the action of the Id. AO in that case are as under-............. 3.3. The findings of the Tribunal are as under.............. 3.4. Respectfully following the aforesaid decision, we do not find any infirmity in the order of Id. CIT(A) granting relief to the assessee" 8.1 Further, the Hon'ble Mumbai Tribunal in case of Flagship India Investment Co.(Mauritius) Ltd. (2010) (133 TTJ 792) has held that in the absence of taxable income in the subsequent year, the capital loss brought forward by the Assessee (a Mauritius Company) was allowed to be carried forward to the subsequent years without any set off of non-taxable gains of the relevant previous year. The said decision was also approved by the Hon'ble 14 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited Mumbai Tribunal in Goldman Sachs Investments (Mauritius) Ltd. (supra) 9. Thus, it was submitted that the Assessee's case is squarely covered by the aforesaid decisions and thus, the claim made by the Assessee to carry forward the brought forward capital losses to subsequent years should be allowed without setting off of capital gains earned during the year under consideration which are not taxable in India by virtue of Article 13(4) of India Mauritius DTAA. 10. On the other hand, Ld. DR first of all submitted that loss has to be determined first which here has to be determined. In support he strongly relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. Manmohan Das (deceased) (1996) 59 ITR 699 (SC) wherein it was held as under:- The ITO has under section 24 (3) to notify to the assessee the amount of loss as computed by him, If it is established in the course of assessment of the total income that the assessee has suffered loss of profits. Section 24(2) confers a statutory right (subject to certain condition which are not material) upon the assessee who sustains a loss of profits in a year in any business, profession or vocation to carry forward the loss as is not set off 15 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited under sub-section (1) to the following year, and to set it off against his profits and gains, if any, from the same business, profession or vocation for that year. Whether the loss of profits or gains in any year may be carried forward to the following year and set off against the against the profits and gains of the same business, profession or vocation under section 24(2) has to 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 16 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 of income is to be seen under the Income-tax Act, since there is no specific provision in India- Mauritius DTAA for computation of Capital gains. Total Income as per provisions of the Act is to be calculated to determine the tax liability and thereafter DTAA benefit is to be granted by negativing or reducing the tax liability. If there is no tax liability resorting to DTAA does not arise. DECISION 12. We have heard the rival submissions and also perused the relevant findings and material placed on record. The controversy involved in this appeal is, whether in the year in which assessee has claimed benefit of DTAA while claiming exemption from taxation of capital gain as per Article 13(4) of Indian Mauritius DTAA, without setting off of short term capital loss and long term capital loss from earlier year and be allowed to be carry forward to the subsequent years on the ground that in the earlier years when assessee suffered loss it chose not to claim benefit under DTAA and 17 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited computed the loss as per domestic law, i.e., under the Income Tax Act. 13. First of all, it is well settled principle that the tax treaties allocate taxing rights to the treaty partner in the following three manners:- (a) Rights are allocated (only) to the source country in respect of certain income (e.g. income from immovable property is taxed in the country where the property is located. In this case the computation of income in the country of residence is of no consequence as the taxing rights are given solely to the country of source. The country of residence gives up the right to tax the income or alternatively gives full credit of the tax paid in the country of source. (b) Income is taxed in the country of source and also the country of residence but as the income is taxed in the country of residence, the country of source limits its right to tax the income. In this case, the computation income is also provided in the treaty (e.g. Royalties/FTS are taxed on gross basis in the country of source but at a lower rate). (c) Income is taxed only in the country of the taxpayer's residence. In this case, the country of source gives up its taxing rights of such income entirely and therefore the computation of income in the country of source is immaterial, [e.g. Business income in the 18 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited absence of the Permanent Establishment (PE) when a foreign enterprise does not 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 19 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited commentary. ITAT Mumbai in this regard in case of APL Co. Pte. Ltd. (2017) (49 CCH 49) (Mum Trib.) has observed as under: "12. There is another angle to interpret Article 24, which is that, the said Article purports to exclude tax exemption in India if the income is not remitted or received in Singapore for taxation purpose on the premise that this is a foreign income to Singapore. First of all, it has to be seen whether shipping income is exempt from tax in India and; secondly, whether the shipping income is foreign income to Singapore which would then be taxable upon receipt or remittance to Singapore. The shipping income is dealt with under Article 8, which states that "profits derived by an enterprise of a contracting state from the operation of ships ....................................... in international traffic shall be taxable only in that state, i.e., resident state." The word "only" debars the other contracting state to tax the shipping income, that is, India is precluded from taxing the shipping income even if it is sourced from India. An enterprise which is tax-resident of Singapore is liable for taxation on its shipping income only in Singapore and not in India. Whence India does not have any taxation right on a shipping income of non- resident entity, which is exclusive domain of the resident state, there is no Question of any kind of exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by 20 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited Article 8. There is no stipulation about exemption under Article 8 of the shipping income which as pointed out by Id. Senior Counsel has been specifically provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have the jurisdiction to tax the shipping income of the non-resident entity........." 16.1 Eminent author Klaus Vogel in his commentary on "Double Taxation Conventions" has opined as under:- "19.[Allocation of taxing rights; exclusive or shared] For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs 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 21 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 are taxable only in the State of residence of the taxpayer. This applies, for example, to royalties (Article 12), gains from alienation of shares or securities (Paragraph 5 of Article 13, subject to the exception of paragraph 4 of Article 13)........." 17. Thus, 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 22 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited losses) will go out of the taxing provisions if Assessee has chosen to be assessed as per Treaty. 18. Further, the provisions of sections 4 and 5 are expressly made subject to the provisions of the Act which means that they are subject to the provisions of section 90 of the Act. By necessary implication they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. If it was not the intention of the legislature to make a departure from the general principle of chargeability 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. 19. Thus, as a corollary, where treaty provisions are beneficial as compared to the provisions of the Act; the taxpayer has right to rely on the treaty provisions. 20. Section 90(2) of the Act reads as under: "90(2) Where the Central Government has entered into an agreement with the Government of any country outside India or 23 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited specified territory outside India, as the case maybe, under sub- section (1) for granting relief of tax, or as the case maybe, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee." 21. From the above, it is clear that the provisions of the Act can be resorted to only when these are more beneficial (compared to Treaty). 22. The said proposition has been accepted by the Supreme Court in the case of Azadi Bachao Andolan (2003) (263 ITR 706) (SC), wherein 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 24 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC." 23. There could however be years where a taxpayer chooses not to claim treaty benefit as we have already noted above that he can do so under the provisions of Section 90(2) of the Act. When he does so, his income will have to be computed under the provisions of the Act for that year. This will include the provisions for carry forward of loss. 24. In the present case, Assessee being the resident of Mauritius holding valid TRC is eligible to claim treaty benefits. In this regards, Article 13 of India- Mauritius DTAA on Capital gains is noteworthy. The relevant extracts of Article 13 of India- Mauritius treaty are reproduced as under: 25 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited "4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State." 25. Thus, under DTAA between India Mauritius, the taxing rights on capital gains falling under Article 13(4) is kept with country of residence, i.e., Mauritius and hence the same is not taxable in country of source, i.e., in India. 26. In the previous year for the Assessment year under appeal (A.Y. 2016-17) the Assessee chose to be governed by the provisions of the tax treaty and consequently the gains earned in that year were not offered to tax. The question of touching the brought forward capital losses in this Assessment year does not arise as the eligibility to carry these losses forward was determined in the year they were suffered. The entire capital gains earned during the previous year were claimed to not be taxable under the treaty. As a result, the capital losses were carried forward as it is to the subsequent years. 26 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 27. In the instant case, in the earlier years (A.Y. 2009-10, A.Y. 2011-12 to A.Y. 2014-15) the Assessee had incurred capital losses. 28. Thus, it is for an assessee to examine whether or not, in the light of the applicable legal provisions and in the light of the precise factual position, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation avoidance agreement. Thus, these losses were therefore computed under the provisions of the Act, as in those earlier years, the Assessee chose not to be governed by provisions of the treaty for those years 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 27 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited 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 question of including the same under the total income and determining the taxability on the same will not arise and the contention of Ld. DR that the total income as per Act is to be calculated to determine the tax liability and thereafter, the benefit is to be given cannot upheld. Accordingly, we hold that the losses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year in question for the reason that once the assessee has chosen the benefit of DTAA, then the capital gain is not at all 28 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited taxable in India and therefore, there is no question of setting off of loss from the earlier years. Accordingly, the Cross Objection raised by the assessee is allowed. In view of the aforesaid findings, the other ground in Cross Objection is purely academic in nature. 31. In so far as the revenue’s appeal is concerned, we are not in agreement with the opinion of Ld. CIT(A), because AO during the course of assessment proceedings has adjusted the brought forward short term capital losses against the long term capital gain and also net short term capital gains has been allowed only after setting off of earlier year losses, no doubt the income of the assessee is still remain at NIL, but such an adjustment made by the AO has made variation in the amount of capital gains and losses returned by the assessee and therefore AO was justified in passing the draft assessment order u/s 144C as it is applicable even there is a variation in the income and losses returned which is prejudicial to the interest of assessee. The word used income and loss returned which is prejudicial to the interest of the assessee and not the ‘Total Income’. However, in any case once we have held that long term capital gain during the year is not taxable as in accordance with 29 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited Article 13(4) of Indo Mauritius DTAA and carry forward 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. 32. In the result, the CO filed by the assessee is allowed and appeal filed by the revenue becomes infructuous as dismissed. Orders pronounced in the open court on 27 th September 2022. Sd/ Sd/- (Amarjit Singh) (Amit Shukla) Accountant Member Judicial Member मुंबई Mumbai;नदनधंक Dated : 27.09.2022 Sr.PS. Dhananjay आदेशकीप्रतितितिअग्रेतिि/Copy of the Order forwarded to : 1. अपीलधथी/ The Appellant 2. प्रत्यथी/ The Respondent 3. आयकरआयुक्त(अपील) / The CIT(A) 4. आयकरआयुक्त/ CIT- concerned 5. नवभधगीयप्रनतनननध, आयकरअपीलीयअनधकरण, मुंबई/ DR, ITAT, Mumbai 6. गधर्ाफधईल / Guard File आदेशानुसार/ BY ORDER, 30 I . T . A . N o . 2382/ M u m / 2 0 2 1 C O N o . 4 1 / M u m / 2 0 2 2 M/s J. P. Morgan India Investment Company Mauritius Limited .उि/सहायकिंजीकार (Dy./Asstt.Registrar) आयकरअिीिीयअतिकरण, मुंबई/ ITAT, Mumbai
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