Treaty classification of mutual fund units: capital gains from UAE resident's sale fell under the residuary article, not shares.

Short-term capital gains from a UAE resident's sale of equity-oriented mutual fund units were held not to fall within Article 13(4) of the India-UAE DTAA, because the treaty term "shares" was given its domestic meaning and mutual fund units are distinct from shares under the Companies Act and the broader securities framework. As the treaty provision for shares did not apply, the residuary Article 13(5) governed the transfer of property other than shares. The gains were therefore not taxable in India under Article 13(4), and the addition was deleted in favour of the assessee.

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Issues: Whether short-term capital gains arising to a UAE resident from sale of units of equity-oriented mutual funds were taxable in India under Article 13(4) of the India-UAE Double Taxation Avoidance Agreement as gains from transfer of shares, or fell under Article 13(5) as gains from transfer of property other than shares.

Analysis: The assessee was a non-resident resident of UAE and had sold units of equity-oriented mutual funds. Under section 5(2) read with section 9(1)(i) of the Income-tax Act, 1961, the transfer of a capital asset situated in India could be deemed to accrue in India, but section 90(2) required the treaty to be applied if more beneficial. The decisive question was whether mutual fund units could be treated as shares for Article 13(4). The term "share" was not defined in the treaty, so Article 3(2) required the domestic meaning to be applied. The Court noted that the Companies Act definition of share refers to a share in the share capital of a company, while mutual funds are constituted as trusts and their units are distinct from shares. The statutory scheme also treated shares and mutual fund units as separate forms of securities. On that basis, units of mutual funds did not fall within Article 13(4), which is confined to shares, and the residuary Article 13(5) applied.

Conclusion: The short-term capital gains from sale of equity-oriented mutual fund units were not taxable in India under Article 13(4) and were covered by Article 13(5), resulting in deletion of the addition and decision in favour of the assessee.

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