Big Win for Foreign Investors: ITAT Allows Rs. 179 Cr Loss Carry Forward Under India, Mauritius DTAA

Big Win for Foreign Investors: ITAT Allows Rs. 179 Cr Loss Carry Forward Under India, Mauritius DTAA

The assessee, a Foreign Portfolio Investor and tax resident of Mauritius, filed its return of income on 20/10/2022 declaring total income of Rs. 5,08,66,850 and claiming carry forward of long-term capital loss of Rs. 17,96,11,994 under Section 74 of the Income-tax Act, 1961. The return disclosed long-term capital gains of Rs. 38,60,93,938 on shares acquired before 01/04/2017 (claimed as not taxable under Article 13(4) of the India-Mauritius DTAA, accepted in processing). For shares acquired on/after 01/04/2017, the assessee showed total LTCL of Rs. 24,70,12,291 and LTCG of Rs. 6,74,00,297, yielding a net LTCL of Rs. 17,96,11,994 carried forward.

On processing under Section 143(1), AO-CPC disallowed the carry forward and adjusted dividend income of Rs. 5,08,66,853 (declared under “income from other sources”) against the LTCL. CIT(A), by order dated 18/11/2024, sustained the adjustment on the view that the assessee could not simultaneously claim DTAA exemption for gains and carry forward losses under the Act as arising from the same stream.

Main Issue: Whether carry forward of long-term capital loss u/s. 74 is permissible where long-term gains from grandfathered transactions are claimed as exempt under Article 13(4) of the India-Mauritius DTAA, while losses arise from non-grandfathered transactions governed by Article 13(3A); and whether dividend income can be adjusted against LTCL in processing u/s 143(1).

ITAT’s Ruling: The Tribunal concluded that various transactions are distinct sources of revenue. Profits realised from shares purchased before 01/04/2017 were rightly dealt with as exempt under Article 13(4) and transactions in shares purchased on/after 01/04/2017 are covered under Article 13(3A). Invoking Section 90(2), the assessee can choose to follow the Treaty or the Act in respect of every different source where appropriate, thus availing DTAA relief on grandfathered gains is not excluded from availing carry forward LTCL on account of non-grandfathered transactions under Section 74.

The Tribunal further held that LTCL can be set off only against LTCG and that dividend income under “income from other sources” cannot be adjusted against LTCL. The AO was directed to allow carry forward of LTCL of Rs. 17,96,11,994 to subsequent years under Section 74. The appeal was allowed.

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