Section 90(2): Beneficial Provisions and the Morgan Stanley Ruling

When a company earns income in India, two sets of rules can apply. The Income Tax Act, 1961 sets the domestic charge. A Double Taxation Avoidance Agreement (DTAA) may give a different answer. Under Section 90(2), the taxpayer may pick the rule that suits it better. That is the promise of the section. In Morgan Stanley Mauritius Company Ltd., the Income Tax Appellate Tribunal (ITAT), Mumbai, tested it. The bench held that a taxpayer may take the treaty for one head of income and the Act for another.

This note sets out the facts, the words of Section 90(2), and what the bench decided. It then asks what the ruling means for a foreign group that holds Indian securities through a treaty jurisdiction.

Understanding Section 90 of the Income Tax Act and the DTAA

Section 90 lets the Central Government sign a tax treaty with another country. The treaty then sets how each type of income is taxed. Capital gains and dividends are the usual flashpoints. Where the treaty gives a different answer from the Act, Section 90(2) decides which one the assessee may rely on.

· Section 90(2) says this in terms. An assessee who is a resident of a treaty country may apply the Act or the treaty. The choice belongs to the assessee. The test is which of the two is more beneficial on the facts.

Article 13(4) of the India-Mauritius DTAA puts tax on such gains in Mauritius alone. A Mauritius resident that sells Indian securities therefore pays no Indian tax on the gain. That is the treaty outcome. The Act would tax the same gain in India. Section 90(2) is what lets the resident choose.

Case Background: Morgan Stanley Mauritius Company Ltd.

Morgan Stanley Mauritius Company Ltd. is a tax resident of Mauritius. It is registered as a Foreign Portfolio Investor (FPI) with the Securities and Exchange Board of India (SEBI). In Assessment Year (AY) 2020-21 the company sold shares listed in India. The sale produced long-term capital gains (LTCG). It claimed exemption from Indian tax on those gains under Article 13(4) of the India-Mauritius DTAA.

Separately, the company had short-term capital losses (STCL) brought forward from earlier years. Those losses arose under the Act. It sought to carry them forward to later years. The Revenue objected. Its case was that a taxpayer cannot take the treaty for the exempt gain and the Act for the loss at the same time.

The Core Dispute: Selective Application of Beneficial Provisions

The question was narrow. Could the company claim the treaty for the LTCG and the Act for the STCL in the same year? The Revenue said no. In its reading, the mix amounted to “treaty shopping”. It argued that such picking goes against the object of a treaty.

The company read Section 90(2) differently. The words give an option, and the option runs item by item. On that reading, the treaty governs the LTCG. The Act governs the STCL. The carry-forward follows from the Act, not from the treaty.

ITAT’s Decision and Analysis

The Mumbai ITAT agreed with the company. It held that the option under Section 90(2) may be used selectively. Neither the section nor the treaty limits the choice to the whole of the income.

1. Right to Choose Beneficial Provisions: Section 90(2) does not require one answer for all the income. The bench read it as an option that applies to each head separately. The treaty can therefore cover the LTCG. The Act can cover the STCL.

2. Exemption of LTCG Under the India-Mauritius DTAA: Article 13(4) puts tax on gains from Indian securities in Mauritius alone. The company met its terms. The gain was therefore outside the Indian charge. Nothing in the Act displaced that result.

3. Carry Forward of STCL: The loss arose under the Act. The treaty says nothing on setting a short-term loss against an exempt long-term gain. Where the treaty is silent, the Act applies. The tribunal held that the loss could be carried forward for use in a later year.

4. Rejecting Revenue’s Argument on Selective Application: The bench turned down the treaty shopping charge. Section 90(2) gives the taxpayer that choice. In its view, the flexibility sits inside India’s tax treaties. It is not a gap in them.

Key Takeaways from the ITAT’s Ruling

Three points carry beyond this file:

1. Independence of Income Streams: Heads of income can be looked at one at a time. The treaty may exempt one stream. The Act may still govern the loss in another. The taxpayer may take the better rule on each.

2. Legitimacy of Selective Treaty Application: The choice is lawful where it does not conflict with the object of the treaty. On these facts the company exercised the option the section gives. The tribunal did not treat that as abuse.

3. Future Implications for Foreign Investors: The ruling matters to groups that hold Indian securities through a treaty jurisdiction. It confirms that a treaty claim on one stream does not bar a domestic claim on another. The bench decided the point on the words of Section 90(2). Later cases will still turn on the terms of the treaty and on the facts.

Conclusion

The Mumbai ITAT has read Section 90(2) as a real option. On this ruling, a taxpayer may take the treaty for one stream and the Act for another. Nothing in the section forces a single answer for the whole return.

The decision gives a reference point for a short point that recurs. A group may hold a treaty exemption on a gain and still carry forward a loss under the Act. The two positions can sit in one return.

The ruling turns on the words of Section 90(2), not on the framing of the debate. Read the section with the treaty in hand. Then test each stream of income on its own facts.