Capital gains treatment for compulsorily convertible debentures upheld under the India-Mauritius tax treaty.

Gains on transfer of compulsorily convertible debentures were held to be capital gains and not interest income, so the amount was not taxable as interest under the India-Mauritius tax treaty. The ITAT followed its earlier decision in the assessee's own case for a prior year, found no distinguishing factual feature for the year under consideration, and noted that the earlier ruling had neither been stayed nor set aside. The CIT(A)'s reasoning was therefore upheld and the issue was decided in favour of the assessee.

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Issues: Whether gains arising on transfer of compulsorily convertible debentures were taxable as interest income or as capital gains, and consequently taxable in India under the India-Mauritius tax treaty.

Analysis: The identical controversy had already been decided in the assessee's own case for an earlier year, where the gains on transfer of compulsorily convertible debentures were held to be capital gains. The Court found no distinguishing feature in the facts for the year under consideration and noted that the earlier decision had neither been stayed nor set aside by a higher forum. Following the earlier decision and the coordinate bench ruling in the assessee's own case for a subsequent year, the reasoning adopted by the CIT(A) was upheld.

Conclusion: The gains on transfer of compulsorily convertible debentures were not taxable as interest income and were to be treated as capital gains. The issue was decided in favour of the assessee.

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