Can Taxpayers Use DTAA for Profits and Income-tax Act for Losses? Mumbai ITAT Delivers Big Relief
In a ruling that could significantly impact foreign investors and cross-border investment structures, the Mumbai ITAT has clarified that taxpayers may selectively apply DTAA provisions and domestic tax law for different capital gain transactions, even when such transactions fall under the same head of income.
The dispute arose where a Singapore tax resident company claimed exemption under the India–Singapore DTAA for gains arising from shares acquired prior to 1 April 2017 while claiming carry forward of losses under the domestic law for other transactions.
What the Tribunal held
“Each investment or transaction giving rise to capital gains or capital losses constitutes a separate source of income.”
Key observations of the Tribunal
- Merely because multiple transactions fall under the same head “Capital Gains”, they do not lose their independent character as separate sources of income
- Section 90(2) allows taxpayers to choose whichever is more beneficial between the DTAA and the Income-tax Act
- Such beneficial choice can be exercised separately for each transaction/source of income
- There is no requirement under the Act or the DTAA to follow one uniform approach for all capital gain transactions
- Capital gains exempt under the DTAA cannot be artificially pulled into domestic tax computation merely for adjustment or set-off of losses
Key takeaways
- Taxpayers can apply DTAA and domestic tax provisions in parallel across different transactions
- Each share transfer transaction can be treated as an independent source of income
- Treaty exempt gains cannot be forced into domestic tax computation for set-off purposes
- The ruling strengthens treaty protection available under grandfathering provisions of tax treaties
Conclusion
The ruling is expected to have major implications for foreign investors, PE/VC funds and multinational investment holding structures operating through treaty jurisdictions such as Singapore and Mauritius.
By recognising each transaction as a separate source of income, the Tribunal has reinforced the principle that treaty benefits cannot be indirectly neutralised through domestic computational provisions.