In a landmark judgment, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that a taxpayer can claim capital gains exemption under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) for shares acquired before April 1, 2017, and still carry forward capital losses on shares bought after that date under Indian tax law.

This decision provides much-needed clarity for foreign investors and FPIs operating in India.

Background: What Sparked the Dispute?

The case involved TVF Fund Ltd., a Mauritius-based company registered with SEBI as a Foreign Portfolio Investor (FPI). For the Assessment Year 2021–22, the company claimed capital gains exemption under Articles 13(3) and 13(4) of the India-Mauritius DTAA, since the gains were on shares acquired prior to April 1, 2017. Under the treaty, these gains are taxable only in Mauritius—not India.

At the same time, the assessee reported losses on shares acquired after April 1, 2017, and requested to carry forward those losses under the Income Tax Act.

Tax Department’s Stand

The Assessing Officer (AO) rejected the separation of gains and losses. He argued that the capital gains computation must first follow Indian tax laws, which meant adjusting capital losses against capital gains before applying DTAA exemptions. As a result:

  • Long-term losses of ₹11.29 crore were adjusted against exempt gains.

  • A taxable income of ₹35.61 crore was determined.

  • A tax demand of ₹2.33 crore was raised.

The Dispute Resolution Panel (DRP) upheld this view, prompting the assessee to appeal to the ITAT.

ITAT’s Ruling: A Clear Victory for the Assessee

The ITAT ruled in favor of the taxpayer. Key highlights from the judgment include:

  • Gains from shares bought before April 1, 2017, are exempt under the pre-amended DTAA.

  • India has no taxing rights over these gains based on the DTAA.

  • Losses on shares bought after April 1, 2017, fall under Indian taxation and can be carried forward, as allowed by Indian tax law.

Most importantly, the tribunal confirmed that DTAA provisions and Indian tax laws should be applied independently—exempt gains should not be used to adjust or cancel out domestic losses.

❓ Frequently Asked Questions (FAQs)

Q1: What is the significance of April 1, 2017, under the DTAA?
After this date, India gained the right to tax capital gains arising from share transactions by Mauritius-based investors. Prior to this, such gains were taxable only in Mauritius.

Q2: Can Indian tax losses be carried forward if gains are exempt under DTAA?
Yes. As per ITAT’s ruling, losses on shares taxable in India can be carried forward even if the taxpayer is claiming DTAA exemption for other gains.

Q3: Why was there a dispute in this case?
The tax department wanted to offset post-2017 losses against pre-2017 exempt gains, which the ITAT ruled against.

Q4: Who benefits from this ruling?
This is a major relief for Foreign Portfolio Investors (FPIs) and others relying on the India-Mauritius treaty for tax benefits.

Conclusion

The ITAT’s ruling establishes an important precedent for applying international tax treaties in harmony with Indian tax law. It confirms that DTAA exemptions can coexist with the domestic right to carry forward losses, offering a fair and consistent interpretation that supports investor confidence.

As India’s tax regime grows more complex, such judgments are crucial for ensuring transparency and trust for global investors. Taxpayers and advisors alike must stay informed, as the lines between treaty benefits and local law continue to evolve.