2014 (2) TMI 508 - AT - Income Tax

Capital gains from mutual fund units not taxable in India under Indo-Swiss treaty

The Tribunal upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision that capital gains from the sale of mutual fund units were not taxable in ... Taxability of capital gain – Sale of mutual fund units – DTAA between India and Switzerland – Scope of Article 13(6) of the tax treaty - Held that:- Even though the section 32(3) had created the fiction to make the UTI a deemed company and distribution of income received by the unit holder a deemed dividend, the deeming provision had to be applied for the purpose for which it had been specifically created – Relying upon Apollo Tyres Ltd. Versus Commissioner of Income Tax [2002 (5) TMI 5 - SUPREME Court] It was confined only to deeming UTI a company and deeming the income from units as dividend - There were no specific provisions for deeming the units as shares - units of UTI are not shares of companies - in the absence of any specific provision under the Act to deem the unit as shares, it could not be considered as shares of companies and, therefore, the provisions of Article 13 (5) (b) cannot be applied in case of units – the order of the CIT(A) upheld that provisions of Article 13(6) are applicable in case of units as per which the capital gain cannot be taxed in India – Decided against Revenue. Issues:Taxability of capital gain arising from sale of mutual fund units under the Indo-Swiss tax treaty.Analysis:The appeal concerned the taxability of capital gains from the sale of mutual fund units for the assessment year 2004-05 under the Indo-Swiss tax treaty. The assessee, a non-resident individual, claimed the benefit of the Double Tax Avoidance Agreement (DTAA) between India and Switzerland, arguing that the capital gain was taxable only in Switzerland as per Article 13(6) of the treaty. The Assessing Officer (AO) contended that the gain was effectively from the alienation of shares of Indian companies and thus taxable in India under Article 13(5) (b) of the treaty. The AO also highlighted that the assessee had initially paid taxes in India and sought a refund later. The AO rejected the assessee's arguments citing the judgment in the Apollo Tyres case, stating that units of mutual funds were akin to shares.The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], emphasizing the distinction between shares and units of mutual funds under the Income Tax Act. The CIT(A) agreed with the assessee, noting that the Supreme Court's judgment in the Apollo Tyres case supported the view that units of mutual funds were not shares. The CIT(A) held that the capital gain was not taxable in India under Article 13(6) of the treaty. The revenue, dissatisfied with the CIT(A)'s decision, appealed to the Tribunal.The Tribunal analyzed the dispute, focusing on whether the units of mutual funds could be considered shares under the Indo-Swiss tax treaty. Referring to the Apollo Tyres case, the Tribunal concurred with the CIT(A) that units of mutual funds were distinct from shares of Indian companies. The Tribunal emphasized that in the absence of specific provisions deeming units as shares, Article 13(5) (b) could not be applied to units. Consequently, the Tribunal upheld the CIT(A)'s decision that the capital gain was not taxable in India under Article 13(6) of the treaty. The appeal of the revenue was dismissed, affirming the CIT(A)'s order.In conclusion, the Tribunal's decision clarified the taxability of capital gains from the sale of mutual fund units under the Indo-Swiss tax treaty, emphasizing the distinction between shares and units as per the Income Tax Act and judicial precedents like the Apollo Tyres case. The judgment upheld the assessee's position that the capital gain was not taxable in India, providing a comprehensive analysis of the relevant provisions and legal interpretations.