TaxTMI 
TaxTMI 
TaxTMI 
2025 (3) TMI 947
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....only issue which has been argued before us is with respect to ground No.3, i.e., taxation of short term capital gain on sale of „rights entitlement‟. First we are dealing this issue in ITA No.4658/Mum/2023. For the sake of ready reference ground of appeal No.3 is reproduced hereunder:- "Ground of Appeal No. 3: Taxation of short-term capital gains on sale of rights entitlement. 6. The learned AO erred in treating the short-term capital gains on sale of rights entitlement of INR 16, 024, 148, as being income from shares and intrinsically and inextricably linked to shares and therefore, falling within the purview of Article 13(5) of the Treaty and chargeable to tax in India under the provisions of the Act, instead of the same being exempt under Article 13(6) of the Treaty, by virtue of being taxable only in Ireland. 7. The learned AO erred in setting-off short-term capital loss (incurred during the year and brought forward from earlier years), computed under the provisions of the Act, read with Article 13(5) of Treaty, against short-term capital gain on sale of rights entitlement of INR 16, 024, 148." 4. The brief facts qua the issue involved are that the assessee (i....
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....es at a discounted price or sell the rights entitlement: * Rights entitlement by virtue of it being able to be used to purchase shares at a discount, is a part equity share. Further, rights entitlement can only be used to buy the company's shares at a discounted price and hence, source and application are for shares only. * Merely because the holder of rights entitlement is not entitled to receive dividend does not have any bearing on its nature being that of a share since the dividend entitlement is available only when shares are fully subscribed. Shares and rights entitlements are exactly similar assets and the rights embedded therein may be slightly different. * Shares as per Article 13(5) can be given a broad interpretation to include similar or comparable interest in light of Article 13(4) as amended by the MLI since rights entitlement are linked to shares in origin and also in final conversion upon exercise of subscription * Shareholder's eligibility to apply for the rights issue are closer to 'shares' under a broad interpretation of Article 13(5) than other property as per Article 13(6) - Shares have broader connotation and meaning than 'equity....
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....ed to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident." 7. Para 5 of Article 13 provides that taxability of gains from alienation of shares in a company which is resident of that contracting state may be taxed in that contracting state. For example, if a resident of Ireland State sells shares of a Company in India then it may be taxed in India, that is, source state. Article 13(6) on the contrary is applicable to the gains other than those from the alienation of any property referred to in para 1 to para 5 of the Article 13, which is taxable only in the resident state. The issue before is, whether rights entitlement is akin to shares and whether shares and rights entitlements are exactly similar assets? It has been argued before us on behalf of the assessee that there is a distinction between shares and rights entitlement under the companies and SEBI law. 8. First of all, our attention was drawn to Section 62 of the Companies Act, 2013 which for the sake of ready reference is reproduced hereunder:- "62. Further issue of share capital (1) Where at any time, a company having a share capital proposes to increase it....
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....t is an asset, which is different from shares of the company and therefore, a separate ISIN is given for rights entitlement. Even the National Stock Exchange of India Limited (NSE) had issued a similar Circular dated 19/02/2020 according to which trading in dematerialized rights entitlements on the stock exchanges shall be chargeable to Securities Transaction Tax (STT) at the rate specified in Finance (No.2) Act, 2004, in respect of "Sale of an option in securities (i.e. payable by the seller at the rate of 0.05% of the value at which such rights entitlements are traded). Thus, rights entitlements have been treated differently from shares by the SEBI and NSE. 12. It has been further brought to our notice that as per the Finance Act, 2004 "option in securities" has been defined to have the same meaning assigned to it in clause (d) of section 2 of the Securities Contracts (Regulation) Act. 1956 (SCRA). Clause (d) of section 2 of the SCRA defines "option in securities to mean purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a taji mandi, a galli, a put, a call or a put and call in securities. Accordingly, it h....
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....ial asset or shares. 16. Our attention was also drawn to para 30 of OECD Model Tax Convention on Income & on Capital, 2017 wherein, it has been brought that gains from alienation of capital assets not covered elsewhere are taxable in the country of residence. The relevant extract of para 30 reads as under:- "30. The Article does not contain special rules for gains from the alienation of shares in a company (other than shares of a company dealt with in paragraph 4) or of securities bonds debentures and the like. Such gains are therefore taxable only in the State of which the alienator is a resident." Similarly, para 17 of UN Model Double Taxation Convention, 2017 had reiterated the same OECD commentary in the following manner:- 17. This paragraph reproduces Article 13, paragraph 5, of the OECD Model Convention with a drafting adjustment replacing the words "in paragraphs 1 2 3 and 4" with "in paragraphs 1 2 3, 4 and 5 The Commentary on Article 13, paragraph 5 of the 2010 OECD Model Convention is therefore relevant mutatis mutandis, to paragraph 6." 17. However, it is seen that Article 13(4) & 13(5) of UN Model convention were amended in 2017 to expand their scope to include &....
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....t of amendment to the India-Mauritius DTAA. In 2016, the India-Mauritius DTAA was amended which re-allocated the taxation rights in respect of sale of shares between India and Mauritius. Pursuant to the amendment, India gained rights to tax gains arising on sale of share of Indian companies. At the time some ambiguity was perceived with regards to applicability of the amended provisions to gains arising on sale of other capital assets. The Government's stand was clarified by then Economic Affairs Secretary Mr. Shaktikanta Das to Business Standard' news paper which has been quoted verbatim in an news article dated 21 August 2015, reproduced as under:- "Derivatives and other forms of securities, such as compulsory convertible debentures (CCDs) and optionally convertible debentures (OCDs) will continue to be governed by the existing provision of being taxed in Mauritius, said economic affairs secretary Shaktikanla Das. He said India had gained a source- based taxation right only for shares (equity) under the treaty Residence-based taxation will continue for derivatives under the Mauritius pact Meaning non-equity securities would be taxed in Mauritius if routed through there.....
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....be adopted. We find that the definition of shares even in Section 2(84) of the Companies Act, 2013 provides a restrictive definition of shares to mean a share in the share capital of a company and includes stock. Otherwise also an asset, which may come into existence or derive its value from another underlying asset, cannot be regarded as being same as the original asset. An analogy may be drawn to a 'derivative', which may derive its value from the underlying equity but it is a well- established principle that the derivative contract is a distinct and separate asset. Under the India-Ireland DTAA a derivative deriving its value from underlying equity would not be subject to tax in India under Article 13(6). Likewise rights entitlement which is granted on account of shareholding cannot be regarded as being the same as shares especially since the rights shares are allotted, only on subscription. The rights entitlement, being a distinct asset, may be sold lapsed or subscribed and thus, akin to derivatives, ought to be not subject to tax under Article 13(6) of the India-Ireland DTAA. Similarly, the investor can either sell the rights entitlement option or exercise the option to....
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....rt of the business property of a permanent establishment. 13(3) - Not applicable as it deals with alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft. 13(4) - Not applicable as it deals with alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property 13(5)- Not applicable as it deals with alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State (i.e., India). The AO has sought to allege that rights entitlement is similar to shares of an Indian company and therefore should fall within the purview of Article 13(5). In this regard, reliance is placed on decision of the Hon'ble Supreme Court of India in the case of Navin Jindal v. Assistant Commissioner of Income Tax[187 Taxmann 283 [2010], wherein it was held that" The right to subscribe to additional offer of shares/debentures on right basis on the strength of existing shareholding in the company comes into existence when the company decides to come out with the rights offer. Prior to that, such right....
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....the OECD Model Convention made it more aligned with the UN Model Convention. Thereafter the India- Ireland DTAA was amended in 2019 and the reference to comparable interest was only given at Article 13(4) and not at Article 13(5) in the India-Ireland DTAA. Thus, is clear that no reference to comparable interest was made in Article 13(5} of the India-Ireland DTAA, evidencing that it only refers to share of a company. 3. 'Shares' have broader connotation and meaning than 'equity' capital' and stand for tradable securities related to the underlying company. Further, separate ISIN is assigned to rights entitlements to distinguish it from the normal equity shares traded in the market. In terms of section 2(84) of the Companies Act, 2013, 'share' means a share in the share capital of a company and includes stock. Further, in terms of section 43 of the Companies Act, 2013, equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital. Accordingly, it can be appreciated that shares are the means through which equity capital is obtained, so shares cannot be broader than equity capital. Equi....
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.... has been held as under:- "Thus, the application of a treaty can result in the entire (gross) income being not subject to tax in India in a year where a taxpayer claims treaty benefits. Therefore, in a year in which a taxpayer claims benefit of article 13(4) of the India-Mauritius tax treaty, the entire gains he earns will not be taxable at all as India has given up its taxing rights in respect thereof. Thus, the entire amount of gains for the year (before setoff of brought forward losses) will go out of the taxing provisions if assessee has chosen to be assessed as per treaty. Thus, it is for an assessee to examine whether or not, in the light of the applicable legal provisions and in the light of the precise factual position, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation avoidance agreement. Thus, these losses were therefore computed under the provisions of the Act, as in those earlier years, the assessee chose not to be governed by provisions of the treaty for those years but by the provisions of the Act. These provisions included the provisions of section 74 which deal with carry forward and set-off of these losses. The....