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Introduction
The Income Tax Appellate Tribunal (ITAT) “I” Bench, Mumbai, in the case of Matrix Partners India Investment Holdings, II LLC vs. Dy. CIT (ITA No. 8788/Mum/2025), delivered a significant ruling on the interplay between treaty-exempt income and domestic loss carry-forward provisions. The assessee, a Mauritius tax resident, challenged the final assessment order dated 06.11.2025 passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961. The core issue was whether Long Term Capital Loss (LTCL) from sale of shares could be set off against Long Term Capital Gain (LTCG) that was exempt under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The Tribunal allowed the appeal, holding that exempt income under a treaty cannot enter the computation of total income for set-off purposes, thereby permitting the assessee to carry forward the LTCL without reduction.
Facts
The assessee is a non-resident corporate entity incorporated in Mauritius, a tax resident of that country, and thus entitled to benefits under the India-Mauritius DTAA. During the Assessment Year (A.Y.) 2022-23, the assessee sold shares of Indian unlisted companies. It earned LTCG from shares of ANI Technologies Pvt. Ltd. (Rs. 5,49,24,95,600) and OFB Tech Pvt. Ltd. (Rs. 2,26,47,54,114) – both acquired prior to 01.04.2017. Simultaneously, it suffered LTCL from sale of shares in five other companies (e.g., Techmed Health Centre, DataEmo Technologies, etc.). In its return of income, the assessee claimed exemption for the LTCG under Article 13(4) of the DTAA (grandfathering clause) and sought to carry forward the LTCL under the Act.
The Assessing Officer (AO) rejected this approach. He computed capital gains on an aggregate basis, set off the LTCL against the LTCG, and determined a net LTCG of Rs. 676,85,36,006/-. While he allowed the treaty exemption on that net amount, he restricted the carry forward of LTCL to only Rs. 9,80,72,432/-. The Dispute Resolution Panel (DRP) upheld the AO’s action. Aggrieved, the assessee appealed to the ITAT.
Reasoning
The ITAT’s reasoning, authored by Vice President Saktijit Dey, centered on the following key legal principles:
1. Treaty Exemption and Scope of Section 90(2)
The Tribunal first noted that section 90(2) of the Act permits an assessee to opt for either the provisions of the Act or the DTAA, whichever is more beneficial. In this case, the assessee claimed exemption for LTCG under the DTAA and sought to carry forward LTCL under the Act. The AO himself conceded that the LTCG on pre-01.04.2017 shares was exempt under Article 13(4). However, he insisted on setting off the LTCL before granting exemption. The ITAT rejected this approach, holding that once an income stream is exempt under a treaty, it does not form part of the total income, and therefore cannot be used for set-off against losses.
2. Each Transaction as a Separate Source
The assessee argued that each sale of shares of a different company constitutes a separate source of income. The date of sale, the nature of the asset, and the applicable tax treatment are independent. The Tribunal agreed, observing that the first proviso to section 48 read with Rule 115A (exchange rate conversion) uses the date of sale for each transaction, reinforcing the view that each scrip is a distinct capital asset. Consequently, the applicability of the DTAA must be analysed independently for each transaction. The LTCG from shares acquired before 01.04.2017 was fully grandfatherd and exempt; the LTCL from other shares was not taxable income and thus not set-off-able against exempt gain.
3. Precedent: Matrix Partners India Investment Holdings, LLC
The ITAT placed heavy reliance on its own coordinate bench decision in Matrix Partners India Investment Holdings, LLC vs. Dy. CIT (ITA No. 3097/Mum/2023), which involved an identical dispute for a group company. In that case, the Tribunal held that “if the stream of income is exempt under the treaty provision, it will not enter into computation of income.” Therefore, there is no question of setting off loss against such income. The key observations from that decision were quoted:
– The DTAA must be interpreted in good faith under the Vienna Convention.
– Section 90(2) allows the assessee to claim the more beneficial provision – here, treaty exemption for gains and Act provisions for losses.
– The term “gains” in Article 13(3)/(4) does not include “loss”; the DTAA only grants relief from double taxation, not impose liability.
– Exempt income cannot be netted with losses because the purpose of the DTAA is to provide relief, not to operate as a disadvantage to the taxpayer.
4. Rejection of Department’s Contention
The Departmental Representative relied on the AO’s and DRP’s observations that capital gain/loss for the year must be computed as a whole. The ITAT, however, found that such aggregation would defeat the purpose of the DTAA’s grandfathering clause. If the LTCL were set off against exempt LTCG, the assessee would effectively lose the benefit of carry forward of genuine losses, which is contrary to the principle that treaties cannot be used to increase tax liability.
5. Final Direction
The Tribunal concluded that the LTCL on sale of shares acquired prior to 01.04.2017 cannot be set off against LTCG on sale of shares also acquired prior to 01.04.2017. The AO was directed to allow the assessee to carry forward the entire LTCL without any such set-off. The appeal was allowed.
Conclusion
The ITAT’s ruling in Matrix Partners India Investment Holdings, II LLC reaffirms a taxpayer-friendly principle: exempt income under a DTAA must be excluded from the computation of total income ab initio, and cannot be used to absorb losses that would otherwise be allowable for carry forward. The decision underscores the importance of section 90(2) in allowing taxpayers to pick the most beneficial regime for each source of income. The Tribunal’s reliance on the coordinate bench precedent ensures consistency in the application of India-Mauritius DTAA provisions. This judgment will have a significant impact on foreign portfolio investors and investment holding entities who earn both tax-exempt gains and taxable losses from different transactions.
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