ITAT Allows Carry Forward of Capital Loss Despite DTAA Exemption on Capital Gains

Matrix Partners India Investment Holdings Vs DCIT (ITAT Mumbai)

Summary: The ITAT Mumbai held that a Mauritius tax resident is entitled to claim exemption on long-term capital gains (LTCG) under Article 13(4) of the India–Mauritius DTAA while simultaneously carrying forward long-term capital losses (LTCL) under the Income-tax Act if such treatment is more beneficial under Section 90(2). The assessee earned substantial LTCG from the sale of shares acquired before 1 April 2017 and claimed treaty exemption, while seeking carry forward of LTCL arising from other share transactions. The Assessing Officer adjusted the LTCL against the exempt LTCG and restricted the carry-forward loss. The Tribunal rejected this approach, holding that exempt capital gains under the DTAA do not form part of total income and therefore cannot enter the computation mechanism for set-off of losses. Relying on earlier judicial precedents, the Tribunal observed that each capital asset transaction constitutes a separate source of income and that treaty benefits cannot be applied in a manner detrimental to the taxpayer. Accordingly, the assessee’s full claim for carry forward of LTCL was allowed.

Core Issue: Whether long-term capital loss (LTCL) arising from sale of shares can be adjusted against long-term capital gains (LTCG) which are exempt in India under Article 13(4) of the India-Mauritius DTAA, and whether a Mauritius tax resident can simultaneously claim treaty exemption for capital gains while availing the benefit of carry forward of capital losses under the Income-tax Act by virtue of section 90(2).

Facts: The assessee, a Mauritius-based investment holding company and a valid tax resident of Mauritius, was engaged in making investments in Indian companies. During AY 2022-23, it sold shares of ANI Technologies Pvt. Ltd. and OFB Tech Pvt. Ltd., which had been acquired before 01.04.2017, resulting in LTCG of ₹549.25 crore and ₹226.48 crore respectively, aggregating to about ₹775.72 crore. Since the shares were acquired before 01.04.2017, the gains were covered by the grandfathering provisions of Article 13(4) of the India-Mauritius DTAA and were claimed as exempt from tax in India. During the same year, the assessee also sold shares of other Indian companies such as Techmed Health Centre, DataEmo Technologies, Sarvaloka Services On Call Pvt. Ltd. and Twist Mobile India Pvt. Ltd., resulting in aggregate LTCL of approximately ₹108.67 crore, which was claimed to be carried forward under section 74 of the Act.

AO’s Findings: The AO accepted that the assessee was a Mauritius tax resident and entitled to exemption under Article 13(4) of the DTAA in respect of LTCG from shares acquired before 01.04.2017. However, he held that all capital gains and capital losses under the head “Capital Gains” must first be aggregated and computed together. Accordingly, he adjusted the LTCL of ₹108.67 crore against the exempt LTCG of ₹775.72 crore and thereafter granted treaty exemption only on the net gain. As a result, the carry-forward loss was substantially reduced to about ₹9.80 lakh.

DRP Findings: The DRP concurred with the AO and held that computation under the head “Capital Gains” must be made on a net basis after adjusting losses against gains. Therefore, the assessee was not entitled to carry forward the entire LTCL without first setting it off against the exempt LTCG.

Assessee’s Arguments: The assessee contended that section 90(2) permits an assessee to apply the DTAA wherever it is more beneficial and apply the Act for other matters where the Act is more beneficial. It argued that treaty-exempt capital gains and capital losses constitute separate sources of income even though they fall under the same head of income. Once the gains are exempt under Article 13(4), they do not enter the computation mechanism of total income in India and therefore there is no question of adjusting losses against such exempt gains. The assessee heavily relied on the earlier decision in its group company case, Matrix Partners India Investment Holdings LLC, and several Mumbai Tribunal decisions involving Mauritius residents.

ITAT Findings: The Tribunal accepted the assessee’s contentions and followed its earlier decision in the group company case. It held that section 90(2) specifically provides that the provisions of the Act apply only to the extent they are more beneficial to the assessee. Therefore, the assessee was entitled to adopt the DTAA for claiming exemption of capital gains and simultaneously rely upon the provisions of the Act for carrying forward losses. A DTAA grants relief and cannot be applied in a manner detrimental to the taxpayer.

The Tribunal further observed that capital gains and capital losses arising from different share transactions are separate sources of income, even though they are assessed under the same head “Capital Gains”. Relying on the Special Bench decision in Montgomery Emerging Markets Fund, it held that each share transaction constitutes an independent source and the tax treatment of one source does not automatically govern another source. Thus, treaty-exempt gains and domestic-law losses can be treated separately.

The Tribunal also examined the scheme of the Act and held that income exempt under a DTAA does not enter the computation of total income at all. Relying on the Bombay High Court decision in N.M. Raiji, it held that where an item of income is exempt and does not form part of total income, it cannot be brought into the computation mechanism for the purpose of reducing or absorbing losses. Since the LTCG from shares acquired before 01.04.2017 was exempt under Article 13(4), such gains were outside the scope of computation of taxable income in India. Consequently, the LTCL could not be forced to be adjusted against those exempt gains.

The Tribunal further noted that the India-Mauritius DTAA is silent regarding treatment of capital losses. Applying principles of treaty interpretation under the Vienna Convention and section 90(2), it held that what is not expressly denied by the treaty cannot be used against the taxpayer. Since the treaty only exempts gains and does not prohibit carry forward of losses under domestic law, the assessee remained entitled to carry forward the LTCL under section 74.

The Tribunal also referred to CBDT Circular No. 22 of 1944, which clarifies that losses cannot be set off against income that does not form part of total income and should instead be carried forward in accordance with law. Thus, forcing adjustment of LTCL against treaty-exempt gains would defeat the statutory scheme governing carry forward of losses.

Case Laws Relied Upon

Matrix Partners India Investment Holdings LLC vs. DCIT

Bay Capital India Fund Ltd. vs. Addl. DIT

Qualcomm Asia Pacific Pte. Ltd. vs. CIT(A)

Credit Suisse (Singapore) Ltd. vs. CIT (International Taxation)

Goldman Sachs Investments (Mauritius) Ltd. vs. DCIT

Flagship Indian Investment Co. (Mauritius) Ltd. vs. ADIT

Patni Computer Systems Ltd. vs. DCIT

CIT vs. Manmohan Das

CIT vs. Western India Oil Distributing Co. Ltd.

CIT vs. N.M. Raiji.

Relevant Paras: 11 and 12, read with the extensively reproduced findings from the group company decision.

Held: Once the assessee’s LTCG is exempt under Article 13(4) of the India-Mauritius DTAA, such gains do not form part of the total income and do not enter the computation mechanism under the Act. Consequently, LTCL cannot be adjusted against such exempt gains. By virtue of section 90(2), the assessee is entitled to adopt the DTAA for exempt gains and simultaneously rely upon the Act for carry forward of losses. The restriction imposed by the AO and DRP was therefore held to be unsustainable, and the AO was directed to allow carry forward of the entire LTCL without set-off against the treaty-exempt LTCG

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Captioned appeal by the assessee, challenges the final assessment order dated 06.11.2025 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (‘the Act’ for short), passed in pursuance to the directions of learned Dispute Resolution Panel (‘ld. DRP’ for short), pertaining to Assessment Year (A.Y. for short) 2022-23.

2. In ground no.1, the assessee has challenged the decision of the departmental authorities in setting off Long Term Capital Loss (‘LTCL’ for short) against the Long Term Capital Gain (‘LTCG’ for short) and, thereafter, allowing claim of carry forward of loss.

3. Briefly the facts are, the assessee is a non-resident corporate entity incorporated in Mauritius and is a tax resident of Mauritius. Hence, the assessee is covered under India-Mauritius Double Taxation Avoidance Agreement (‘DTAA’ for short). As stated by the Assessing Officer (‘A.O.’ for short), the assessee is an investment company and in course of such business, it has invested in shares of unlisted companies in India. In course of such investment activity, the assessee had invested in shares of ANI Technologies Pvt. Ltd. and OFB Tech Pvt. Ltd. These investments were made by the assessee during the period September, 2015 and August, 2016. In the previous year, relevant to the assessment year under dispute, the assessee sold the shares and derived LTCG as under:

4. Likewise, the assessee sold shares of some other Indian companies and suffered LTCL as under:

5. In the return of income filed for the assessment year under dispute, the assessee on the strength of Tax Resident Certificate issued by the Competent Authority in Mauritius, claimed exemption from taxability under Article 13(4) of India Mauritius DTAA in respect of LTCG derived from sale of shares. Insofar as, LTCL in respect of shares sold during the year, the assessee claimed carry forward of such losses. While examining assessee’s claim, in course of assessment proceeding, the A.O. was of the view that the capital gain/loss for the previous year, relates to the assessment year under dispute has to be computed as a whole on aggregate basis and not transaction-wise. Accordingly, he concluded that the LTCL has to be set off against the LTCG while computing the income under the head ‘capital gain’. Accordingly, he issued a show cause notice to the assessee proposing to compute the capital gain after set off LTCL against the LTCG. In response, the assessee filed its submissions objecting to the proposed action of the A.O. The A.O., however, did not find merit in the submissions of the assessee. Ultimately, he proceeded to compute capital gain by aggregating all the transactions, thereby, setting off the LTCL against the LTCG. Since, the LTCG was derived from shares acquired prior to 01.04.2017, the A.O. set off LTCL on shares acquired before 01.04.2017 against such gain and determined the net LTCG on shares acquired prior to 01.04.2017 at Rs.676,85,36,006/-. However, being of the view that the assessee, being a tax resident of Mauritius is entitled to treaty benefit, allowed exemption under Article 13(4) of DTAA in respect of such gain. Resultantly, he restricted assessee’s claim of carry forward of LTCL to an amount of Rs.9,80,72,432/-. In the aforesaid manner, he framed the draft assessment order.

6. Against the draft assessment order, the assessee raised objections before ld. DRP.

7. While disposing of the objections of the assessee, ld. DRP concurred with the decision of the A.O. Accordingly, the assessment was finalized vide the impugned order.

8. Before us, ld. Counsel appearing for the assessee submitted that as per section 90(2) of the Act, the provisions of DTAA, wherever is beneficial, is applicable to the assessee. He submitted, insofar as, LTCG derived from sale of shares, the provisions of DTAA being more beneficial, the assessee has claimed relief under the DTAA. Whereas, in respect of shares sold resulting in LTCL, the assessee has opted to be covered under the provisions of the Act for claiming carryforward of loss. He submitted, though the LTCG and LTCL come under the head of ‘income from capital gain’, however, each transaction of sale has to be treated as a separate source of income with reference to the specific circumstances for which application of DTAA and the provisions of Act need to be considered independently. He submitted, shares of each company sold during the year are transferred at different dates and statute recognizes such time differentiation and, hence, provides a separate computation mechanism u/s. 48 of the Act for each such stream as per the date of sale. Drawing our attention to first proviso to section 48 read with Rule 115A, he submitted, the said provision considers exchange rate as on date of sale for converting the full value of consideration received or accruing as a result of the transfer of the capital asset. He submitted, applying the same analogy, each scrip/share, therefore, is a capital asset and a separate source of income being transacted at different point of time, hence, DTAA applicability should be accordingly analysed independent of the other transaction. He submitted, since the LTCG derived by the assessee is in respect of shares purchased prior to 01.04.2017, it is subject grandfathering in terms of Article 13(3) r.w.s. 13A, 13B and 13(4) of the Treaty. He submitted, LTCG covered under the grandfathering clause of the treaty, cannot be set off against LTCL or STCL, as such gain is not taxable in India, in terms with Article 13(4) of the Treaty. In support of such contention, he relied upon the following decisions:

a) Bay Capital India Fund Limited vs. Addl. CIT [TS]382-ITAT-2025-(Mum)]

b) Qualcomm Asia Pacific Pte. Ltd. vs. CIT(A) [2025] 173 com 839

9. Without prejudice, he submitted, the issue stands fully covered in favour of the assessee by the decision of the co-ordinate bench in case of the assessee’s group company, Matrix Partners India Investmnet Holdings, LLC vs. Dy. CIT (ITA No. 3097/Mum/2023), wherein while deciding identical nature of dispute, the bench has held that LTCL cannot be set off against LTCG exempt under Article 13(4) of the Treaty.

10. Ld. Departmental Representative (ld. DR for short) strongly relied upon the observations of the A.O. and ld. DRP.

11. We have considered rival contentions, in the light of the decisions relied upon and perused the materials on record. Insofar as, the factual aspect of the issue is concerned, there is no dispute that the assessee is a tax resident of Mauritius and is covered under India-Mauritius DTAA. In fact, the A.O. himself has extended the benefit of Article 13(4) of the treaty to the assessee in respect of LTCG, derived from sale of shares acquired prior to 01.04.2017. The only issue in dispute is ‘Whether the LTCL on sale of shares acquired prior to 01.04.2017 can be set off against the LTCG on sale of shares acquired prior to 01.04.2017’. It is the case of the assessee that no such set off is permissible considering the fact that once the stream of income is exempt under the treaty provision, it will not enter into computation of income. Hence, there is no question of setting off loss against such income. In this context, we may refer to the following observations of the co-ordinate bench in case of Matrix Partners India Investmnet Holdings, LLC (supra):

6. The case of the assessee before us is to analyse whether assessee can be allowed to carry forward the loss without being set off against the capital gains in circumstances where both the situation aroses out of shares acquired prior to 01/04/2017 in the Indian Mauritius DTAA. It is also necessary to analyse if the DTAA between India Mauritius is interpreted in good faith as per Article 31of Viena Convention on the Law of Treaties in the present facts of the case.

6.1. Admittedly, the assessee is registered under the laws of Mauritius and is engaged in investing in unlisted companies to achieve long term capital appreciation through multi-stage and multi-sector investments. It is involved in investing activity as per the objects of the DTAA which encouraged mutual trade and investment. It has made several investments over the years and earned profits as well as losses from these investments.

6.2. It cannot be ignored that, a prudent businessman makes investments for earning profits but also incurs losses, as it is part and parcel of making investments. The provisions of section 90(2) of the Act itself provides that, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. Accordingly, the Appellant has claimed the exemption on capital gains earned on some shares and carried forward the capital loss on some shares under the Act. This is not in contravention of the object but is only a beneficial position opted by the assessee which is provided under law.

6.3. As far as the capital gain earned by the assessee from sale of shares of CFS during the year under consideration, claimed as exempt in view of Article 13(4) of the India Mauritius DTAA, Ld.AO allowed it. The Ld.AO disputed only carry forward of the short term capital loss suffered from sale of shares of Maharana, without being set off against the gain earned from sale of shares of Maharana.

6.4. A query was therefore raised by the bench whether, ‘Gains’ under Article 13(3)/(4) includes ‘loss’ ?

6.4.1. It was submitted that the primary purpose of a DTAAs amongst others is to provide tax relief by preventing double taxation. Further, section 90(2) of the Act, inter alia, provides that when the Government of India has entered into a DTAA with Government of any other country for granting relief of tax, or as the case may be for avoidance of double taxation, in relation to an assessee to whom such agreement applies, the provisions of the Act shall apply to the extent these are more beneficial to that assessee. It was also submitted that, Section 90 of the Act, only grants relief, it does not impose any liability and the DTAA cannot act to the disadvantage of the taxpayer, and merely because India has entered into DTAA with Mauritius, the assessee can neither be denied the taxability under the scheme of the Act, nor can the DTAA be forced upon the assessee, who may wish to avail tax treaty benefit for one source of income and avail benefit in respect of loss under the Act as beneficial to the assessee as provided by law.

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 provide tax relief by preventing double taxation.

6.4.3. As per India Mauritius DTAA read with section 90(2), capital gains are to be taxed based on the place of residence of the recipient, by granting relief of tax on such gains in India. Admittedly, the treaty is silent in respect of the loss if earned by an assessee and leaves it unclear whether, one has to deduce to interpret loss being included along with gain. This in our opinion can be possible subject to later negotiations and are not regulated by the treaty. The nature of the treaty in the present fact is key factor and therefore, what is not expressly granted is not permitted.

6.4.4. In so far as, applicability of good faith in interpreting the treaty provisions, we note that good faith differs from most of the other elements under the Viena rules. It applies to the whole process of interpreting for treaty rather than solely to the meaning of particular words or phrases within it. Although, it is difficult to give precise content to the concept generally, it does include one principle that applies to the interpretation of specific terms used in a treaty, commonly described as the principal “effectiveness”. The aspect of the principle of effectiveness is preferring an interpretation that fulfils the aims of the treaty and the intent of the contracting states as given in various Articles.

6.4.5. Applying the above rules to Article 13(4) of India Mauritius DTAA, it is clear that non taxability of the capital gains in India prior to 01/04/2017 cannot act to the disadvantage of the tax payer. This is because section 90(2) is clear to mean that Government of India entered into DTAA with the Government of Mauritius, according to which the capital gains is not taxable in India. However, the provisions of the act shall apply to the extent they are more beneficial to the tax payer.

6.4.6. The Ld.AR in support relied on following observations from the decision of Hon’ble Pune Bench in case of Patni Computers Systems Ltd., reported in (2008) 114 ITD 159

8. The law laid down by the Hon’ble Supreme Court in binding on us under Article 141 of the Constitution of India. The prevailing legal position, therefore, is that once an income is held to be taxable in a tax jurisdiction under a double taxation avoidance agreement, and unless there is a specific mention that it 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 I.T.A. No.3097/Mum/2023 A.Y. 2020­21 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 disadvantage to the taxpayer. In other words, therefore, merely because India has entered into a double taxation avoidance agreement with a foreign country, the assessee cannot be denied the taxability under the scheme of the Indian Income-tax Act. The scheme of the double taxation avoidance agreement cannot, therefore, be thrust upon the assessee. In this particular case, it is obviously to the advantage of the assessee that he is taxed in India on the basis of his worldwide income, which includes losses incurred abroad, and not to invoke the provisions of the India- Japan tax treaty. The provisions of the Indian Income-tax Act must, therefore, apply to that extent. Then comes the objection of the revenue that in the event of the assessee not opting for treatment on the basis of India-Japan tax treaty this year, he will be shut out from availing the benefits of the said treaty in the subsequent years. We see no support for this proposition. Under the Income-tax Act, every year is an independent unit, and it is for the 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. There is no specific bar on such an approach of the assessee, and in the absence thereof, we cannot impose the same. In any event, this question is relevant only in the year in which the assessee claims the treaty benefits and not in this year in which the provisions of the Act are clearly more beneficial to the assessee, and, therefore, the assessee does not claim the treaty protection. Just because the assessee may, in Assessing Officer’s perception, may claim treaty protection in a subsequent year, the treaty provisions cannot be thrust on the assessee this year as well. In this view of the matter, the assessee was indeed eligible to claim taxation on worldwide basis, disregard the scheme of taxability under the India-Japan tax treaty, and, in effect, claim deduction of loss incurred by the PE in Japan. The CIT(A) was thus justified in his conclusion to the effect that losses of assessee’s PE in Japan are to be taken into account while computing assessee’s total income liable to tax in India.

Now coming to the contention whether each transaction can be considered as a separate 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 total income which is taxable under the Income-tax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources clubbed under respective heads and finally aggregated into the total income. The classification of income under different heads for computing the total income does not interfere with the independent character of different sources of income available to an assessee. Both, short term capital gains/loss and long term capital gains/loss are different sources of income, falling under the same head “capital gains”. Even under short term capital gains, different transactions will be different sources of income resulting in short term capital gains/loss. Likewise, different transactions of long term capital assets will be different sources of income for an assessee to arrive at long term capital gains/loss. This is reflected in the scheme of computation of capital gains provided in section 48 where gains or loss is computed on the basis of individual asset and transaction and not on the basis of class of assets. Therefore, I.T.A. No.3097/Mum/2023 A.Y. 2020-21 we have to agree with the argument of the learned senior counsel that every transaction of a property is a different source of income for the assessee. Head of income is not the source of income. Source of income is having the direct nexus with the stream or fountain out of which the income springs to the assessee. Head of income is provided for clubbing purpose of those like minded incomes derived from different sources for the purpose of aggregation and allowable deductions.

(emphasis supplied)

6.5.1. From the above one can infer that there is no basis in grouping long term/short term capital assets. It can also be inferred that, long term and short term are different sources of income. Further, Hon’ble Special bench also observed that even the different short term assets and long term assets involved in the respective transactions are again different sources of income. In the present facts of the case, losss earned from sale of shares of Maharana and the gain earned from sale of shares of Maharana are therefore different sources of income. And further as per the observations of Hon’ble Special Bench, even under short term/long term computation, every transaction is a different source.

6.5.2. Further, the Co-ordinate Bench of this Tribunal in the case of 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 I.T.A. No.3097/Mum/2023 A.Y. 2020-21 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 forward of brought forward losses of the earlier years to the subsequent years and at the same time upheld assessee’s claim of capital gains as exempt under the provisions of Article -13 of the DTAA. Thus, the Tribunal accepted the theory of segregation of capital gains and capital losses for drawing benefits of DTAA/the Act to the extent they are more beneficial to the assessee.

9. In the case of Goldman Sachs Investments (Mauritius) Ltd. (supra), the Co-ordinate Bench placing reliance on the decision of Flagship Indian Investment Co (Mauritius) Ltd.(supra) reiterated the position that the assessee is entitled to the benefit of Article-13 of DTAA in respect of capital gains and allowed carry forward of capital loss under the provisions of the Act. For the sake of completeness relevant extracts of the findings of the Coordinate Bench are reproduced herein under:-

“12….. 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 ITAT, Mumbai in the case of Flagship Indian Investment Company (Mauritius) Lid. (supra). In the case of the assessee before the Tribunal that pertained to A. Y. 2005-06 the assessee had brought fonvard capital loss of Rs. 87,06,49,335/-from transfer of securities in A.Y. 2002-03. The aforesaid loss was determined in the hands of the assessee vide an intimation under Sec. 143(1) for A.Y 2002-03. Observing, that since the capital gains were not taxable in India as per Article 13 of the Indian- Mauritius Tax Treaty, the A.O being of the view that capital loss would also be exempted, and therefore, the assessee would not be entitled to claim the set-off of the same against the capital gains for the relevaye assestment years. On benefit of carry forward of such capital losses of the earlier years, thus, declined the appeal, the CIT(A) upheld the order of the A.O. On further appeal, the Tribunal concluded that the assessee was fully justified in claiming the carry forward of the capital losses of the earlier years to the subsequent years, and both the A.O and the CIT(A) 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 vears 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 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. while framing the assessment for A.Y 2012-13, vide his order passed u/s 143(3), date 19-3-2015 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 assesses. 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 Palm Computer Systems Ltd. (supra). 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 carry forward of the b/forward STCL of Rs. 3926,36,70,910/- to the subsequent years.”

From the reading of above decisions, it is evident that there is no impedement in segregating capital losses and capital gains from different source of income under the head ‘capital gains’ for the purpose of claiming the benefit of DTAA/ provisions of the Act as the case may be, whichever is more beneficial to the assessee in terms of section 90(2) of the Act.”

7. It is relevant to understand the scheme of the act, to find out if the capital gains earned by the assessee from sale of shares that does not form part of total income of virtue of DTAA would enter the computation of total income. Section 4 of the act is the charging section that describes the 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 exceptions. Although certain sums may be exempted from taxation, still they may form part of the total income of an assessee in order to determine the rate at which income-tax is payable. Therefore it follows that the total income of an assessee is not necessarily wholly subject to tax. Portions of it may be exempt from taxation and yet may be computed for the purpose of determining the rate at which tax is payable. Mr. Joshi’s contention is that all sums which are exempted from taxation must still be brought into the total income of the assessee for the purpose of determining the rate at which income-tax is payable, except where the statute in terms excludes these sums from the total income of the assessee. It is pointed out that in Section 4, sub-section (3), certain incomes, profits or gains falling within the classes mentioned in that sub-section are not to be included in the total income of the person receiving the income, and Mr. Joshi argues that except in these cases, in every other case, although the tax is not payable on certain sums, they must be included in the total income for the purpose of determining the rate. It is therefore argued that although under Section 25(4) an exemption is given to the assessee because there is a succession to the business carried on and no tax is payable by the assessee, the sum which is exempted under this sub-section does form part of the total income for the purpose of determining the rate. Total income is defined in Section 2(15) of the Act, and it means total amount of income, profits and gains computed in the manner laid down in this Act. Therefore, it would be erroneous to suggest that total income is to be determined only in the light of Section 4, sub-section (3), of the Act. How total income is to be computed and determined depends upon the various provisions contained in the Act as a whole. Then we might look at various sections which provide for exemptions from the payment of tax. There is Section 7 which contains various provisos which cover sums not liable to tax. Similarly Section 8. Section 14 also contains exemptions with regard to certain sums on which no tax is payable, and Section 15 contains exemptions in cases of life insurance. It will be noticed that the language used in all these sections, to which I have referred, is similar, if not indentical, with the language used in Section 25(4), viz., 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 income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the Legislature indends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it is done in Section 16, and therefore Prima facie, when we come to Section 25(4) and when we find that the assessee is not liable to pay tax on the sum received by him as his share of the partnership, that sum cannot and does not form part of his total income. Mr. Joshi has not succeeded in pointing out to us any provision in the Act whereby this particular sum covered by Section 25 (4) has been made a part of the total income of the assessee. Therefore, in my opinion, the share of the profit of the assessee in the firm of S.B. Billimoria & Co., in the accounting year 1942 cannot be included in the total income of the assessee for ascertaining the rate of income-tax.

7.2. It is thus clear from the above observation from the Hon’ble Bombay high court that, income does not form part of the total income do not enter the computation of the total income at all applying the above principle above ratio to the present facts of the case the capital gains that are already exempt under the DTAA which are binding on the parties being exempt in India, cannot enter the computation of total income of assessee in India. Therefore, setting off the loss suffered by the assessee from sale of shares of Maharana, against the gains earned from sale of shares of Maharana would tantamount to taxing the gain in India which is in violation of Article 13(3)(4) of DTAA as it stood prior to amendment.

8. Now we shall examine the provision relating to carry forward of the loss suffered from sale of shares of Maharana the assessee in the present case as carry forwarded long-term capital loss as per section 74 of the Act. Reference is made to the CBDT Circular No. 22 of 1944 dated 29/07/1944 that states that: “If the total income is a loss it has to be carry forwarded subject to the provisions us. 24(2) of the Indian income tax act 1922 and cannot I.T.A. No.3097/Mum/2023 A.Y. 2020-21 be set off against any income which does not form part of the total income.” The circular also stated that, “the non resident otherwise would not get any relief in the Indian Taxation on account of loss incurred by in India.” Accordingly the Ld.AO is directed to grant the carry forward of the loss as claimed by the assessee.

Accordingly the grounds 1 raised by the assessee stands allowed.

12. As could be seen from the aforesaid observations of the co-ordinate bench, essentially, it has been held that once an item of income does not form part of the total income, it does not enter the computation of total income at all. Therefore, since, LTCG is exempt under Article 13(4) of the Treaty, it does not enter the computation mechanism, the set off LTCL and STCL as provided under the domestic law against such gain, is not permissible. No contrary decision has been brought to our notice by ld. DR. Thus, respectfully following the ratio laid down in the decisions referred above, we hold that the LTCL for sale of shares acquired prior to 01.04.2017 cannot be set off against LTCG from sale of shares acquired prior to 01.04.2017. We direct the A.O. to recompute the carry forward of LTCL accordingly. In view of our decision above, ground no. 2 has become academic. The other grounds being consequential or premature, do not require adjudication.

13. In the result, the appeal is allowed as indicated above.

Order pronounced in the open court on 29.05.2026