Mumbai Tribunal ruling on transaction-wise application of DTAA and Income tax act

Background

In a recent ruling, the Mumbai Income-tax Appellate Tribunal (“the Tribunal”), in the case of Atyant Capital India Fund-I¹ (“the Company” or “the Assessee”), examined the tax treatment of long-term capital gains and losses arising from investments by a Foreign Portfolio Investor (FPI) resident in Mauritius. The central issue relates to the interplay between the India–Mauritius Double Taxation Avoidance Agreement (DTAA) and the provisions of the Income-tax Act, 1961 (“the Act”), particularly in relation to the grandfathering provisions applicable to shares acquired prior to 1 April 2017 and the carry forward of long-term capital loss.

The dispute arose when the assessee sought to carry forward long-term capital loss incurred on post–1 April 2017 share transactions, while simultaneously claiming exemption under the DTAA on gains from pre–1 April 2017 transactions. The tax authorities denied the carry forward of such losses, leading to appellate proceedings before the Tribunal.

Facts of the case

• The Company is an FPI and a tax resident of Mauritius.
• For AY 2022–23, it filed a return of income declaring INR 5.08 crore as taxable income and claimed carry forward of long-term capital loss of INR 17.96 crore.
• During the year:
  • Gains of INR 38.60 crore arose from shares acquired prior to 1 April 2017, which was claimed exempt under Article 13(4) of the India–Mauritius DTAA (grandfathered).
  • Net losses of INR 17.96 crore were incurred on shares acquired after 1 April 2017 (non-grandfathered).
• The Central Processing Centre (CPC), while issuing intimation u/s 143(1):
  • Denied carry forward of the long-term capital loss, and
  • Adjusted dividend income declared under “Income from Other Sources” against the capital loss.
• On appeal, the CIT(A) upheld the CPC action, holding that the assessee could not simultaneously rely on the DTAA for exempt gains and on the Act for carry forward of losses from the same stream of income.
• Aggrieved by the above findings, the assessee filed an appeal before the Tribunal.

Key Issues

1. Whether long-term capital loss from post–1 April 2017 share transactions can be carried forward under section 74 of the Act when gains from pre–1 April 2017 transactions are exempt under the DTAA.
2. Whether CPC was justified in adjusting dividend income under “Income from Other Sources” against long-term capital loss in the intimation issued u/s 143(1).
3. Whether the assessee is entitled to apply different provisions (Act or DTAA) for different transactions within the same head of income.

Key Takeaways

1. Carry Forward of Losses under Section 74

• The Tribunal reaffirmed that gains from grandfathered shares and losses from non-grandfathered shares are separate transactions, each constituting a distinct “source of income.”
• The Tribunal noted that under Section 74, long-term capital loss (LTCL) can be carried forward if it is not wholly set off against long-term capital gain (LTCG).
• Since LTCG from grandfathered transactions were exempt under Article 13(4) of the DTAA, LTCL could not be wholly set off in the relevant period.
• Accordingly, the Tribunal held that such losses can be carried forward in accordance with Section 74.

2. Adjustment of Dividend Income against Capital Loss

• Dividend Income is taxable under “Income from Other Sources,” whereas long-term capital loss falls under the head “Capital Gains.”
• Cross-head setoff between these heads is not allowed under Section 74 of the Act.
• CPC, while processing the return u/s 143(1), wrongly adjusted dividend income against LTCL, even though such adjustment is beyond the limited scope of permissible prima facie adjustments under this section.
• The Tribunal held that the CPC action was incorrect and the dividend income could not be offset against LTCL.

3. Choice of Act or Treaty for Different Sources of Income

• Relying on judicial precedents including Montgomery Emerging Markets Fund (SB) and Indium IV (Mauritius) Holdings Ltd., the Tribunal held that each transaction constitutes a separate source of income.
• Under Section 90(2), an assessee may apply the more beneficial provisions of either the IT Act or the DTAA on a transaction-by-transaction basis.
• Thus, claiming exemption for grandfathered gains under the DTAA and carry forward of non-grandfathered losses under the Act is permissible.

Conclusion

The Tribunal upheld the assessee’s position and clarified that treaty benefits and domestic law provisions can operate independently on different transactions. The decision reinforces the principle of transaction-wise application of the Act and DTAA, while also curbing unwarranted adjustments under section 143(1), providing greater certainty to FPIs on capital gains and loss treatment.

1. ITA No.573/MUM/2024 ↩︎