Matrix Partners India Investment Holdings Vs DCIT (ITAT Mumbai)
In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai bench, has held that a Mauritius-based investment fund, Matrix Partners India Investment Holdings, is entitled to carry forward capital losses from the sale of shares under the Indian Income-tax Act, 1961, even while claiming exemption on capital gains from the sale of other shares under the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. The case hinged on the interpretation of the India-Mauritius DTAA concerning shares acquired before April 1, 2017, and the application of domestic tax laws when they are more beneficial to the assessee.
The core dispute before the tribunal was whether the assessee could selectively apply the provisions of the Income-tax Act for carrying forward losses while simultaneously availing the beneficial provisions of the India-Mauritius DTAA for exempting capital gains on shares acquired prior to the amendment to the DTAA. These shares fall under the “grandfathered” clause, where the right to tax capital gains remained with the country of residence of the investor (Mauritius), not India.
Matrix Partners India Investment Holdings, registered in Mauritius, is engaged in investment activities in unlisted Indian companies. During the relevant assessment year, the fund had earned capital gains from the sale of certain shares and incurred capital losses from the sale of others. The assessee claimed the capital gains as exempt in India based on Article 13(4) of the India-Mauritius DTAA, which was applicable to shares acquired before April 1, 2017. Simultaneously, it sought to carry forward the capital losses under the provisions of the Income-tax Act.
The tax authorities contended that if the assessee opted for the DTAA benefit for capital gains, it should also be governed by the treaty for capital losses, and therefore, the losses should not be allowed to be carried forward under the Act. The authorities argued for an aggregate approach to computing capital gains and losses.
The assessee, however, argued that Section 90(2) of the Income-tax Act provides that the provisions of the Act would apply to the extent they are more beneficial to the assessee. Since the DTAA was silent on the treatment of losses and did not explicitly prohibit the carry forward of losses under the domestic law, the assessee was free to choose the more beneficial option, which was to carry forward the losses under the Act.
The tribunal considered the principle of good faith interpretation of treaties as per Article 31 of the Vienna Convention on the Law of Treaties, noting that the primary purpose of DTAAs is to prevent double taxation and provide tax relief. It observed that the India-Mauritius DTAA, prior to its amendment, clearly provided for the taxation of capital gains from shares only in the country of residence of the investor for shares acquired before April 1, 2017. The tribunal emphasized that the non-taxability of capital gains in India under the DTAA could not be detrimental to the taxpayer.
A key aspect of the assessee’s argument, which found favour with the tribunal, was the distinction between ‘source of income’ and ‘head of income’. Relying on the decision of the Mumbai Special Bench in the case of Montgomery Emerging Market Fund, the tribunal reiterated that different transactions involving the sale of shares, even within the same head of ‘capital gains’, constitute different sources of income. Therefore, the gain from one set of shares and the loss from another set are from distinct sources.
The tribunal also drew upon judicial precedents to support the contention that income which is exempt under the DTAA does not enter the computation of total income under the Income-tax Act. The Bombay High Court in CIT vs. M. N. Raigi had held that sums exempted from taxation do not form part of the total income for the purpose of determining the rate of tax unless expressly included by the statute. Applying this principle, the tribunal concluded that the capital gains exempt under the DTAA could not be included in the computation of total income, and therefore, the losses could not be set off against such exempt gains. Setting off losses against exempt gains would effectively amount to indirectly taxing the gains, which is contrary to the DTAA.
Further support for the assessee’s position came from decisions of coordinate benches of the ITAT, including the case of Credit Suisse (Singapore) Co. (Mauritius) Ltd. and Flagship Indian Investment Co (Mauritius) Ltd. These rulings had previously upheld the principle that an assessee can segregate capital gains and losses and avail the benefit of the DTAA for gains while seeking carry forward of losses under the Act, as permitted by Section 90(2).
The tribunal also referred to the Pune Bench decision in Patni Computers Systems Ltd., which held that an assessee is not obligated to apply the DTAA provisions if the domestic law is more beneficial, and that the choice of applying the more beneficial law can be made on a year-to-year basis.
Considering the legal framework, the principles of treaty interpretation, and the judicial precedents, the ITAT held that the assessee was correct in claiming the exemption on capital gains under the India-Mauritius DTAA for shares acquired before April 1, 2017, and simultaneously seeking to carry forward the capital losses under the provisions of the Income-tax Act. The tribunal directed the Assessing Officer to allow the carry forward of the capital loss as claimed by the assessee. The ruling underscores the taxpayer’s right to choose the more beneficial provisions between the domestic tax law and the DTAA, particularly when the treaty is silent on the treatment of losses.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
