Court: Mumbai bench of the Income Tax Appellate Tribunal

Citation: Flagship Indian Investment Company (Mauritius) Limited (2010-TII-93-ITAT-MUM-INTL)

Brief: Ruling  allows the non-resident assessees to toggle between the DTAA and the Act. The logic of the decision is also in consonance with the provisions of the section 90(2) of the Act which allows the non-residents to be governed by the provisions of the DTAA or Act, whichever is beneficial to them.

Facts: Flagship Indian Investment Company (Mauritius) Limited (‘assessee’) was incorporated and a tax resident of Mauritius. The assessee was registered with the Securities Exchange Board of India (‘SEBI’) as a sub-account of JP Morgan Fleming Asset Management, which was registered with the SEBI as a Foreign Institutional Investor. The return was filed declaring total income at `Nil for the Assessment Year 2005-06 after claiming capital gains tax exemption in terms of Article 13 of Double Tax Avoidance Agreement between India and Mauritius (‘DTAA’).

During the course of assessment proceeding it was observed by the Assessing officer (‘AO’) from the return of income that the assessee has claimed carry forward of capital losses pertaining to Assessment Year 2002- 03. According to the AO since the capital gains are not taxable in India as per the provisions of Article 13 of DTAA, the capital loss is also exempt. Accordingly, it is not correct for the assessee to claim carry forward of such capital loss, which may, for instance, could be set off with capital gains on immovable property. Therefore, he disallowed the claim of carry forward of the said losses to the assessee.

On appeal, on relying upon the provisions of section 90(1) of the Act, Article 13(4) of the DTAA, UOI Vs. Azadi Bachao Andolan (263 ITR 706)(SC), CIT Vs. P.V. A.L. Kulandagan Chettiar (267 ITR 654)(SC) and Board Circular No. 333 dated 2 April 1982 the Commissioner of Income  Tax (Appeals) [‘CIT(A)’] held that the income or loss arising out of transfer of securities in India is taxable only in Mauritius because the assessee is a tax resident of Mauritius and accordingly, the assessee is not entitled to carry forward short term capital loss or long term capital loss arising out of the transfer of securities in India.

Aggrieved by the order of the CIT(A), the assessee preferred an appeal before Income Tax Appellate Tribunal (‘Tribunal’).

Contention of the assessee before the Tribunal:

• The assessee had claimed carry forward of capital losses pertaining to Assessment Year 2002-03, which were assessed under section 143(1) in that Assessment Year.

• For the impugned Assessment Year 2005-06, the entire capital gains earned by the assessee was exempt from tax under the DTAA and hence, the assessee did not have any capital gains asses sable to tax for the year.

• Even, in the absence of capital gains chargeable to tax (as per DTAA) in the year under consideration, the assessee was entitled to carry forward the brought forward capital losses of the earlier years to the subsequent years.

• Since the assessee had not claimed that such loss to be set off for the year under consideration, the AO and the CIT(A) have erred in not allowing carry forward of such set off of loss for the subsequent years.

• Relying upon the decision of the Supreme Court in CIT Vs. Manmohan Das (59 ITR 699)(SC), it was contended that the loss in any year may be carried forward to the following year and set off against the profits and gains of the subsequent year and the same has to be determined by the AO who deals with the assessment of the subsequent year and not in the year under consideration.

• In the light of the above, it was submitted that the assessee’s claim to carry forward the capital loss brought forward from the earlier Assessment Year to the subsequent years should be allowed. The reliance was also placed in the case of DCIT Vs. Patni Computer Systems Ltd. (2007-TII-24-ITAT-PUNE-INTL)(Pune, Tribunal).

Contention of the Revenue before the Tribunal:

• As per Article 13 of the DTAA, capital gains are taxable only in Mauritius and not be subject to tax in India.

• The assessee, while claiming capital gains on sale of shares, should have first set off the brought forward losses arising from the preceding Assessment Years. Under the Act the assessee is not entitled to claim exemption of capital gain on the ground that the same is not taxable being a non resident and to claim carry forward of brought forward losses of preceding Assessment Years to subsequent years.

• Such loss has to be adjusted in the year under consideration and hence, the AO was justified in disallowing the claim of the assessee.

• The assessment for the Assessment Year 2002-03 was completed under section 143(1) of the Act, therefore, in the year under consideration the AO, while considering the impugned claim of the assessee, had passed a speaking order under section 143(3) that the claim of carry forward of brought forward losses is not allowable.

• In light of the above, it was argued that the order passed by the AO and confirmed by the CIT (A) be upheld.

Observation and decision of the Tribunal:

• Section 72 of the Act deals with the provisions for carry forward and set off of business losses. Section 157 of the Act provides that when, in the course of the assessment of the total income of any assessee, it is established that a loss of profits or gains has taken place which he is entitled to have set off under provisions of this section, the AO shall notify to the assessee by order in writing the amount of loss as computed by him for the purposes of this section.

• The Tribunal has referred the Circular No.22 of 1944 dated 29 July 1944 which allows the Indian loss incurred by the Non-resident to be carried forward and not to set off the same against foreign income.

• The Tribunal has also taken a note of the decision of the Supreme Court in the case of CIT Vs. Western India Oil Distributing Co. Ltd. (249 ITR 517)(SC) wherein the Supreme Court, after relying upon the Supreme Court decision in the case of CIT Vs. Mohan Das (supra), held that if the quantification of loss is properly and duly notified by following the prescribed procedure, such quantification may be impressed with the principle of finality, but the principle of finality did not apply to the determination of the source of income and to a decision whether the loss can or cannot be allowed to be carried forward by reason of the determination of the source.

• Applying the above ratio of the law laid down by the Supreme Court and keeping in view the CBDT Circular (supra), the Tribunal has held that it is not the case of the revenue that the assessee has no brought forward losses to be carried forward to the subsequent year or the same have already been adjusted. The assessee was fully justified in claiming the carried forward of brought forward losses of the earlier years to the subsequent years.

Our View: This ruling is a first of its kind in India which allows the non-resident assessees to toggle between the DTAA and the Act. The logic of the decision is also in consonance with the provisions of the section 90(2) of the Act which allows the non-residents to be governed by the provisions of the DTAA or Act, whichever is beneficial to them.

This issue was first flagged out by the Comptroller of Auditor General of India (‘CAG’) in its report on “Non-Resident Taxation” in 2005 that the tax department had accepted the claim of the Mauritius based FIIs to carry forward the capital loss incurred by them, which is not correct as per the CAG and the Government is depriving of tax revenue on such account.

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