Treaty residence and section 68 limits bar Indian taxation of Mauritius investment gains and banking-channel remittances

A Mauritius-incorporated company's tax residence was examined under domestic law first: under section 6(3), a foreign company becomes resident in India only if its control and management is wholly situated in India, and the treaty tie-breaker applies only after dual residence is established. On the facts, incorporation and tax residence in Mauritius, along with RBI-approved investment activity, did not justify treating the company as resident in India; capital gains on share sales were therefore covered by article 13(4) and Circular No. 789. Remittances received through banking channels for share ment from outside India were also not taxable as unexplained cash credit under section 68, which cannot expand section 5(2).

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Issues: (i) Whether the assessee, a Mauritius-incorporated company, was liable to be treated as resident in India and taxed in India on capital gains from sale of shares in the Indian capital market. (ii) Whether remittances received through banking channels for investment in shares could be brought to tax as unexplained cash credit under section 68.

Issue (i): Whether the assessee, a Mauritius-incorporated company, was liable to be treated as resident in India and taxed in India on capital gains from sale of shares in the Indian capital market.

Analysis: The residential status of a company under the treaty had to be examined first under the domestic law of the relevant State, and under section 6(3) of the Income-tax Act, 1961 a foreign company becomes resident in India only if its control and management is wholly situated in India. The tie-breaker rule in article 4(3) of the treaty could operate only after dual residence was otherwise established. On the facts, the material showed incorporation and tax residence in Mauritius, RBI approval for investment activity, and no sufficient basis to hold that the company's control and management or effective management was wholly in India. The capital gains from sale of shares were covered by article 13(4) of the treaty and Circular No. 789 was binding and valid.

Conclusion: The assessee was not taxable in India on the capital gains from sale of shares.

Issue (ii): Whether remittances received through banking channels for investment in shares could be brought to tax as unexplained cash credit under section 68.

Analysis: The amounts were received from outside India through banking channels for investment purposes, and the governing circular recognised that such remittances are not liable to Indian income-tax merely because they are credited in India. The principle applied was that section 68 cannot enlarge the scope of section 5(2), and for a non-resident it cannot be used to tax amounts whose source is outside India and which are otherwise not chargeable in India. On the evidence, the Revenue had no sustainable basis to treat the remittances as unexplained income.

Conclusion: The addition under section 68 was not sustainable and had to be deleted.

Final Conclusion: The appeal succeeded, and the additions made by the Revenue were deleted on both issues decided.

Ratio Decidendi: For a Mauritius resident company, treaty residence and capital gains taxation must be determined under the treaty and section 6(3), and remittances received through banking channels from outside India cannot be taxed under section 68 where they are not otherwise chargeable in India.

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