Treaty residence rule for capital gains on share alienation prevails over domestic tax law for UAE resident.

Capital gains from alienation of shares in Indian companies by a UAE resident were treated as taxable only in the State of residence under Article 13(3) of the applicable double taxation treaty. The ruling applied the treaty rule for gains from alienation of property other than immovable property or property connected with a permanent establishment, and held that the resident status of the alienator brought the gains within that residence-based allocation. Section 90(2) of the Income-tax Act, 1961 was also applied so that the more beneficial treaty provision prevailed over domestic law. Accordingly, the gains were not taxable in India and were taxable only in the United Arab Emirates.

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Issues: Whether capital gains arising from alienation of shares in Indian companies by a resident of the United Arab Emirates were taxable in India under the Income-tax Act, 1961, in view of Article 13(3) of the double taxation avoidance treaty.

Analysis: The ruling considered Article 13 of the treaty and found that paragraph 3 governs gains from alienation of property other than immovable property or property connected with a permanent establishment, making such gains taxable only in the State of residence of the alienator. It was held that the applicant, being a resident of the United Arab Emirates, fell within that residence-based rule. The ruling also applied Section 90(2) of the Income-tax Act, 1961, under which treaty provisions prevail where they are more beneficial than the Act, and therefore the fact that the gains might otherwise be taxable under domestic law did not alter the treaty position.

Conclusion: The capital gains from alienation of shares were held not taxable in India and taxable only in the United Arab Emirates.

Ratio Decidendi: Where a tax treaty specifically assigns taxing rights over capital gains to the State of residence, and Section 90(2) makes the treaty beneficial to the assessee operative over the domestic Act, Indian taxing provisions yield to the treaty allocation.

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