From The Judiciary

Whether a Foreign Portfolio Investor can simultaneously claim capital gains exemption under the India–Mauritius DTAA for grandfathered shares and carry forward long-term capital losses on non-grandfathered shares under the Income tax Act?

Atyant Capital India Fund - I [TS-1136-ITAT-2025(Mum)]

Facts

The assessee is a Foreign Portfolio Investor (FPI) and a tax resident of Mauritius. For the relevant Assessment Year 2022–23, the assessee filed its return of income, claiming a carry forward of long-term capital loss. During the year, the assessee also earned long-term capital gains from the sale of listed equity shares that were acquired prior to 1 April 2017 (referred to as grandfathered shares). Relying on Article 13(4) of the India–Mauritius DTAA, the assessee claimed such capital gains as exempt from tax in India. The Revenue accepted this claim of exemption under the DTAA.

In the same year, the assessee incurred long-term capital losses from the sale of listed shares acquired after 1 April 2017 (i.e. non-grandfathered transactions). The assessee claimed the carry forward of these losses under Section 74 of the Income-tax Act, 1961 (ITA). In the intimation issued by the CPC, it disallowed the assessee's claim to carry forward the long-term capital loss and, additionally, adjusted the dividend income declared under the head ’Income from Other Sources’ against the capital loss, effectively nullifying both items.

Aggrieved, the assessee appealed to the CIT(A), arguing that the CPC lacked jurisdiction under Section 143(1) to disallow the claim, especially since capital gains exemption under the DTAA was accepted and the capital loss was from a different transaction category. However, the CIT(A) upheld the CPC’s action, stating the assessee cannot selectively apply the DTAA to exempt gains while using the ITA to carry forward losses from the same income stream. This selective approach was deemed incorrect and inconsistent, falling within the scope of adjustments allowed under Section 143(1). The CIT(A) emphasized that the choice between the Act and the Treaty must be applied consistently for the entire income stream, not selectively.

Held

The ITAT held in favour of the assessee, observing that the assessee had correctly applied the provisions of the India–Mauritius DTAA and the ITA in respect of two distinct and independent sources of income. It was noted that the assessee claimed exemption under Article 13(4) of the DTAA for capital gains arising from the grandfathered transactions and separately claimed a carry forward of long-term capital loss under Section 74 of the Act for non-grandfathered transactions. The ITAT rejected the CIT(A)’s view that the DTAA or Act must be applied uniformly to the entire stream of income, holding instead that each capital transaction constitutes a separate source of income. Therefore, the assessee was entitled to claim benefit of the DTAA in respect of exempt gains from grandfathered transactions and simultaneously claim carry forward of loss under the Act for taxable post-2017 transactions.

Further, the Tribunal clarified a fundamental principle of international tax law that tax treaties do not themselves levy taxes but only provide relief where taxability arises under domestic law. In this case, while Article 13(4) of the DTAA allocated taxing rights for pre-2017 shares to Mauritius (resulting in exemption in India), Article 13(3A) applied to post-2017 shares, giving India taxing rights. Since the sale of such post-2017 shares resulted in a long-term capital loss, the assessee rightfully claimed carry forward of the same under Section 74 of the Act. The Tribunal also held that dividend income declared under the head ‘Income from Other Sources’ could not be adjusted against capital losses, as such adjustment is not permissible under the law. Accordingly, the AO was directed to allow the carry forward of long-term capital loss of INR 17,96,11,994 to subsequent years.

Our Comments

The case underscores that tax treaties and Indian tax law apply independently to different capital gains transactions, ensuring consistent and fair tax treatment. It reinforces the fact that treaties allocate taxing rights but do not themselves impose taxes.

Whether a Foreign Tax Credit claim can be denied solely on the grounds of delayed filing of Form 67 and procedural deficiencies, even when the assessee has filed a valid revised return, paid the foreign taxes, and furnished supporting documents?

Krishna Dalal [TS-1204-ITAT-2025(Bang)]

Facts

The assessee, an individual, originally filed his income tax return for the Assessment Year 2018-19 on 31 August 2018, declaring a total income of INR 3,12,400 comprising long-term capital gains and bank interest. Subsequently, he discovered that foreign income in the nature of bank interest amounting to INR 10,23,166 and dividend income of INR1,54,460 earned from the USA had been inadvertently omitted. To rectify this, he filed a revised return on 30 January 2019, including the foreign income and claiming Foreign Tax Credit (FTC) of INR 1,85,150/- for taxes paid in the USA. Prior to filing the revised return, he also submitted Form 67 on 24 January 2019 as prescribed under Rule 128 of the Income Tax Rules.

The revised return was processed under Section 143(1) of the ITA, and the claim for FTC was disallowed without providing any reasons or prior intimation. A rectification application filed under Section 154 was also rejected. On appeal, the CIT(A) upheld the disallowance, citing failure to file supporting documents required under Rule 128(8)(ii), and noted that Form 67 was not submitted within the due date of filing the original return under Section 139(1). Aggrieved by this, the assessee filed the present appeal, contending that there was substantial compliance with the law, that Form 67 was filed prior to the revised return, and that the denial of FTC on technical grounds without giving an opportunity to be heard violated the principles of natural justice.

Held

The Tribunal reviewed submissions and evidence, including the assessee’s paper book, which showed foreign tax paid in the USA and a revised return claiming Foreign Tax Credit (FTC) of INR 1,85,150. It noted that Form 67 was submitted before the revised return, fulfilling procedural requirements. The lower authorities had denied FTC due to lack of documentation, but the Tribunal found valid proof, such as the US Tax Return and payment voucher. Emphasizing substance over procedure, the Tribunal ruled that FTC should not be denied for technical lapses, especially when proper documents were later provided, and referred to legal precedents treating the Form 67 deadline as directory, not mandatory.

Accordingly, the Tribunal held that the assessee was entitled to claim the FTC of INR 1,85,150 as per law. It directed the Assessing Officer to verify the documents submitted (Federal Tax Payment Voucher and US Tax Return) and to allow the FTC claim upon satisfaction. As a result, the assessee’s appeal was allowed, subject to this verification. The order was pronounced on 26 August 2025.

Our Comments

This ruling highlights the importance of substantial compliance over mere procedural technicalities in claiming Foreign Tax Credit. It reinforces that genuine payment of foreign taxes and timely furnishing of relevant documents, even if delayed, should not deprive an assessee of the credit. The decision also underscores the need to uphold principles of natural justice by providing opportunity before denying such substantive benefits.

Whether refund of unutilized Input Tax Credit (ITC) is eligible upon discontinuation or closure of business?

SICPA India Pvt. Ltd. vs. Union of India [(2025) 34 Centax 200 (Sikkim)]

Facts

• In June 2025, the Single Judge Bench of Sikkim HC had allowed the petitioner to claim refund of accumulated unutilized ITC upon closure of business.
• The judgment was founded on the following key considerations:
  • Section 49(6), when read with Section 54 of the CGST Act, 2017, contains no express bar on refund of credit in cases of business closure.
  • Under Article 265 of the Constitution, no tax can be retained without legal authority; withholding ITC in such circumstances would amount to unauthorized retention of property.
  • Reliance was placed on Karnataka HC ruling in the case of Union of India vs. Slovak India Trading Co. Pvt. Ltd. [(2006) 5 STT 332 (Karnataka)], which had delivered similar verdict in the context of Rule 5 of CENVAT Credit Rules, 2002.
• Assailing the said decision, Revenue filed an appeal before the Division Bench.

Ruling

• Disagreeing with the view of the Single Judge Bench, the Division Bench observed that the same was contrary to the opinion of Supreme Court in Union of India vs. VKC Footsteps India (P) Ltd. [2021 (52) GSTL 513 (SC)].
• In the said judgement, the Apex Court had clarified inter alia that while recognizing an entitlement to refund, it is open to the legislature to define the circumstances in which a refund can be claimed.
• The Bench emphasized that Section 49(6) does not create an independent right to refund but merely provides that the balance in the electronic credit ledger may be refunded in accordance with Section 54 and in no other manner.
• Since Section 54(3) envisages only two scenarios, viz. zero-rated supplies without payment of tax and inverted duty structure, the opinion of Single Judge Bench would involve a judicial re-writing of the provision, which is impermissible in law.
• In fact, Section 54(3) is a restriction on refund on account of closure of business as it does not fall in either of its two clauses, held the Court.

• Accordingly, the Bench observed that the impugned opinion deviated from the well-established principles of statutory interpretation of taxing statutes and ventured into the legislative domain of the Parliament. ‘Perceived hardship or inequality cannot permit interpreting taxing statute beyond well-settled parameters laid down by the Hon'ble Supreme Court,’ it remarked.
• Given this, it held that the rejection of refund application vis-à-vis closure of business was within the parameters of Section 54 and therefore lawful. In such view of the matter, it could not have been held (by the Single Judge Bench) that the Revenue was retaining tax without the authority of law.
• Moreover, it found considerable force in the submission of Revenue that the accumulated ITC must be reversed under Section 29(5) of the CGST Act, 2017. However, it did not delve further into this issue as it would involve fact finding that was beyond the pleadings before the Bench.

Our Comments

This ruling reaffirms the Supreme Court’s binding interpretation in VKC Footsteps India (P) Ltd.

The Division Bench has applied this precedent to emphasize that a taxing statute must be interpreted based solely on its clear and unambiguous language, and that judicial expansion of refund eligibility would amount to impermissible judicial legislation.

However, a broader and more purposive reading of the GST framework particularly in light of constitutional principles presents an alternative view.

Moreover, Section 29(5), which governs cancellation of registration, mandates reversal of ITC on inputs, semi-finished goods, finished goods, and capital goods held in stock, but remains silent on the treatment of any residual ITC balance remaining in the electronic credit ledger after such reversal. The provision does not expressly provide for the lapse or extinguishment of this surplus balance.

This legislative vacuum creates uncertainty. Once the statutory reversals are completed, there is no clarity on the fate of the unutilized ITC that represents tax already paid but not passed through the value chain. Retaining such amounts in the absence of an express provision for lapsing of credit can arguably be said to contravene Article 265 of the Constitution, which forbids retention of tax without lawful authority.

Assessment order stands vitiated due to procedural lapse — Draft order not issued

Zuari Cement Limited. [ITA no 927 / HYD / 2025] for Assessment Year (AY) 2010-11

The assessee is engaged in the business of manufacturing and selling cement. For AY 2010-11, the assessee filed its income tax return, and the assessment was completed by the Ld. AO by making an addition in the total income of the assessee. Pursuant to the directions of the Dispute Resolution Panel (DRP), the Ld. AO issued the final AO order.

Aggrieved by the final AO order, the assessee filed an appeal before the ITAT. The ITAT set aside the Ld. AO’s order and remanded the case back to the file of the Ld. Transfer Pricing Officer (TPO) and Ld. AO for fresh consideration.

Following the remand, the Ld. AO relooked into the facts of case and passed the final assessment order. Aggrieved with the Ld. AO’s final order, the assessee filed an appeal before the Ld. Commissioner of Income Tax (Appeals) (‘CIT(A)’), who ruled in favor of the assessee.

Aggrieved by the appeal the Revenue filed an appeal before the ITAT in the second round of proceeding.

Assessee contention before the Hon’ble ITAT

The assessee contended that during the first round of proceedings, the Ld. AO issued a draft assessment order in accordance with Section 144C(1) of the ITA. This section mandates that the AO shall issue a draft order to the assessee whenever any variation is proposed in the income or loss declared, which adversely affects the assessee. Subsequently, following the directions of the DRP, the Ld. AO passed the final assessment order.

However, in the second round of proceedings, the Ld. AO passed the final assessment order without issuing a draft order, thereby violating the provisions of Section 144C(1) of the Act. The assessee stated that the requirements of Section 144C(1) of the Act are applicable even when the case is remanded back for fresh consideration. The assessee placed its reliance on judicial precedent by the High Court (HC) in its own case.

Held by the ITAT

The ITAT observed that during the first round of proceedings, the Ld. AO issued the final assessment order in accordance with the DRP’s directions, following the issuance of a draft assessment order under Section 144C(1). However, in the second round of proceedings, the Ld. AO directly passed the final assessment order without issuing a draft order.

Relying on Section144C(1) of the Act and the judicial precedent by the Hon’ble HC in the assessee’s own case, the ITAT noted that Section 144C(1) clearly states that the Ld. AO is required to issue draft order to the assessee before making any variation in income that is prejudicial to its interest.

Considering these facts, the Hon’ble ITAT upheld the Ld. CIT(A)’s decision which in favor of the assessee, holding the impugned order to be invalid.

Our Comments

It is pertinent to note that the language of the Section 144C(1) of the Act is clear that where the Ld. AO proposes to make any variations in the income of the eligible assessee, which is prejudicial to its interest, the AE ‘shall’ first forward the draft assessment order to the assessee. The word ‘shall’ makes the provisions mandatory and non-negotiable.

It is imperative for the assessee to carefully examine the procedural compliance of any order issued by the tax authorities - such as whether a draft assessment order was properly issued, whether the Document Identification Number (DIN) is correctly mentioned, and whether other mandatory procedural requirements have been fulfilled. Even if the assessment is legally and factually correct on merits, any lapse in following the prescribed procedure may render the entire order invalid in the eyes of law. Therefore, attention to procedural details is as critical as challenging the substantive aspects of the assessment.