2025 (4) TMI 396 - AT - Income Tax

UAE resident's mutual fund gains exempt from Indian tax under Article 13(5) India-Singapore DTAA

The ITAT Mumbai held that short-term capital gains arising from sale of mutual fund units by a UAE resident are not taxable in India under Article 13(5) ... Income taxable in India or not - Taxability of capital gains on mutual funds units - taxability in India and benefits of Article 13(5) under the India -Singapore treaty -HELD THAT:- We find that the facts of the case of DCIT v/s K. E. Faizal [2019 (7) TMI 598 - ITAT COCHIN] are identical from the above definition of 'securities', it is clear that 'shares' and 'units of a mutual fund are two separate types of securities. Applying the above meaning to the provisions of the Tax Treaty, the gains arising from the transfer of units of mutual funds should not get covered within the ambit of Article 13(4) of the Tax Treaty, and should consequently be covered under Article 13(5) of the Tax Treaty. Therefore, the assessee, who is a resident of UAE for the purposes of the Tax Treaty, STCG arising from sale of units of equity oriented mutual funds and debt oriented mutual funds should not be liable to tax in India in accordance with the provisions of Article 13(5) of the Tax Treaty As in the light of the provisions of India-Singapore DTAA and the decisions of the coordinate benches discussed above, we are of the view that the assessee is entitled to deduction in respect of short-term capital gains under the DTAA between India and Singapore is allowable. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment involve the taxability of capital gains arising from mutual fund units for a non-resident Indian under the India-Singapore Double Taxation Avoidance Agreement (DTAA). Specifically, the issues include:1. Whether the short-term capital gains on mutual fund units are taxable in India.2. Whether the provisions of Article 13(5) of the India-Singapore DTAA apply to the capital gains on mutual fund units, thus exempting them from taxation in India.3. Whether the assessee can choose the provisions of the DTAA over the Income Tax Act, 1961, as per Section 90(2) of the Act.4. Whether previous judgments by the Mumbai Tribunal and other coordinate benches, which dealt with similar provisions under other DTAAs, are applicable to the present case.ISSUE-WISE DETAILED ANALYSIS1. Taxability of Capital Gains on Mutual Fund UnitsRelevant Legal Framework and Precedents: The primary legal framework involves the Income Tax Act, 1961, and the India-Singapore DTAA, particularly Article 13(5). Previous cases such as ITO v. Satish Biharilal Raheja and DCIT v. K.E. Faizal were considered, where similar issues were adjudicated under the Indo-Swiss and India-UAE DTAAs.Court's Interpretation and Reasoning: The Tribunal examined whether the gains from mutual fund units fall under the purview of Article 13(5) of the India-Singapore DTAA, which states that gains from the alienation of property other than those referred to in preceding paragraphs are taxable only in the resident state.Key Evidence and Findings: The Tribunal noted that the assessee, a tax resident of Singapore, had directly invested in mutual funds, with gains credited to her bank account. The Tribunal considered bank statements and the nature of investments.Application of Law to Facts: The Tribunal applied Article 13(5) of the DTAA, determining that the gains from mutual fund units do not constitute shares in an Indian company, and thus fall under the exemption provided by the DTAA.Treatment of Competing Arguments: The Revenue argued for the applicability of Indian tax laws, while the assessee relied on the DTAA provisions and precedent cases. The Tribunal favored the assessee's argument, aligning with past judgments that distinguished mutual fund units from shares.Conclusions: The Tribunal concluded that the short-term capital gains on mutual fund units are not taxable in India under Article 13(5) of the India-Singapore DTAA.2. Choice of Provisions under Section 90(2) of the Income Tax ActRelevant Legal Framework and Precedents: Section 90(2) allows taxpayers to apply the provisions of the DTAA if they are more beneficial than the domestic tax laws.Court's Interpretation and Reasoning: The Tribunal affirmed the assessee's right to choose the DTAA provisions over domestic law, as they were more beneficial in this case.Key Evidence and Findings: The Tribunal noted that the DTAA provisions clearly provided a more favorable tax treatment for the assessee.Application of Law to Facts: The Tribunal applied Section 90(2) to allow the assessee to benefit from the DTAA, exempting the gains from Indian taxation.Treatment of Competing Arguments: The Revenue's reliance on domestic tax provisions was overruled by the Tribunal, which emphasized the supremacy of the DTAA in this context.Conclusions: The Tribunal upheld the assessee's choice of the DTAA provisions, reinforcing the principle that taxpayers can select the more beneficial tax treatment.SIGNIFICANT HOLDINGSThe Tribunal established several significant principles in this judgment:1. 'Gains from the alienation of any property other than that referred to in paragraphs 1,2,3,4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident.' This principle from Article 13(5) of the India-Singapore DTAA was pivotal in exempting the gains from Indian taxation.2. The Tribunal reinforced the distinction between mutual fund units and shares, aligning with past judgments that mutual fund units are not equivalent to shares in an Indian company.3. The Tribunal upheld the applicability of Section 90(2), allowing taxpayers to opt for DTAA provisions when they offer more favorable tax treatment.4. The final determination was that the assessee's capital gains on mutual fund units are not taxable in India, allowing the appeal and granting the exemption under the DTAA.