Tax treatment of compulsorily convertible debentures follows their legal character, not surrounding commercial arrangements.

Gains from transfer of compulsorily convertible debentures were held not to be taxable as interest income under Section 2(28A) and Article 11 of the India-Mauritius treaty, because the legal character of the instrument was not altered by the surrounding commercial arrangements. The Tribunal relied on the jurisdictional High Court's view that the joint venture was a genuine commercial venture, there was no basis to disregard the debentures or treat the entities as a single unit, and that ruling continued to govern the issue despite the pendency of the Revenue's special leave petition. The Revenue's appeal was rejected.

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Issues: Whether gains arising on transfer of compulsorily convertible debentures were to be assessed as interest income under Section 2(28A) of the Income-tax Act, 1961 and Article 11 of the India-Mauritius tax treaty, or as capital gains under Article 13 of the treaty.

Analysis: The Tribunal noted that the jurisdictional High Court had already held that the commercial arrangements between the parties did not alter the legal nature of the compulsorily convertible debentures, that the joint venture was a genuine commercial venture, and that there was no basis to disregard the instrument or treat the entities as a single unit. It further noted that the High Court ruling continued to govern the issue notwithstanding the pendency of the Revenue's special leave petition.

Conclusion: The gains on transfer of the compulsorily convertible debentures were not taxable as interest income under Section 2(28A) and Article 11, and the Revenue's appeal was rejected.

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