Treaty relief for UAE residents on mutual fund gains applies even without actual tax payment in the UAE.

A UAE resident selling mutual fund units can claim India-UAE DTAA relief even if no tax was actually paid or payable in the UAE on that income. Section 90 permits treaty relief where the treaty applies to residents of the contracting states, and Article 4 links residence to liability to tax by reason of domicile, residence, management, incorporation or a similar criterion. Actual tax payment in the other state is not a condition precedent for treaty protection. On these facts, the taxpayer's UAE residency and the treaty allocation of taxing rights brought the capital gains within Article 13(5), so the gains were not taxable in India under the treaty.

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Issues: Whether the assessee, a resident of the UAE, was entitled to the benefit of the India-UAE DTAA in respect of capital gains arising from sale of mutual fund units, even though no actual tax was paid or payable in the UAE on such income.

Analysis: Section 90 of the Income-tax Act, 1961 enables treaty relief for avoidance of double taxation and for granting relief where the treaty applies to residents of the contracting states. The applicable treaty provisions cover residents of one or both states, and the expression "resident" in Article 4(1) is linked to being liable to tax by reason of domicile, residence, place of management, place of incorporation, or a similar criterion. The reasoning adopted follows the settled view that actual payment of tax in the other contracting state is not a condition precedent for treaty protection. The treaty operates even where the other state has the right to tax but does not in fact levy tax, and it is not confined to cases of current double taxation alone. On the facts, the assessee's UAE residency and the treaty allocation of taxing rights brought the capital gains within Article 13(5), so the gains were not taxable in India under the treaty.

Conclusion: The assessee was entitled to the benefit of the India-UAE DTAA, and the capital gains from sale of mutual fund units were not taxable in India under the treaty.

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