TaxTMI 
TaxTMI 
2025 (6) TMI 1932
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....ntures of Indian companies through recognized stock exchanges in India. The assessee has also obtained registration as Foreign Institutional investor from Securities Exchange Board of India (SEBI) vide Registration No. 20081098. The assessee collects money from participating shareholders (investors) from all over the world and invests the same as per the investment objective of the assessee as defined in the Private Placement Memorandum (PPM) and Supplement of each class of the hand. Each share class of the fund had investment only in SEBI Registered Mutual Funds. The assessee filed return of income for A.Y 2022-23 on 13.10.2022 declaring total income of Rs. 5,460/-. In the AY 2022-23, the assessee earned capital gain income of Rs. 5,93,48,24,274/- on account of sale of equityoriented mutual funds in India. Such capital gains were claimed as exempt under Article 13(4) of the India-Mauritius DTAA. The case was selected for scrutiny under CASS and Notice u/s 143(2) of IT Act dated 31.05.2023 was issue to the assessee by the AO for the following reasons:- * Large Foreign Remittance made (Business ITR) 3. In the Draft Assessment Order, the Assessing Officer held that out of....
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....sessee is deriving the benefit from the capital gains accrued from the sale of the equity when it sells the equity based mutual funds and books capital gains. 8.4 Therefore, when the assessee sells the equity oriented Mutual fund, it is a beneficiary of the capital gains arising from the alienation of underlying asset of the investment, i.e, shares/equity. Given under is the Article 13 of the India- Mauritius DTAA, which clearly inundates that gains arising from alienation of shares acquired on or after 01.04.2017 are taxable in source only. ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains f....
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.... from HDFC Mutual fund wherein the investment is made in Equity/shares by the assessee is computed. Given as under is the screenshot of mutual fund asset allocation. ....................... ................... 8.7 Accordingly, as per the submission of the assessee minimum equity investment percentage is taken to calculate the Capital Gain arising out of shares. Accordingly, the capital gains from share investment comes to be Rs. 385,76,35,779/- out of the total capital gains of Rs. 593,48,24,274/- booked by the assessee. 8.8 As the assessee has underlying assets of transactions is Equity, therefore, the proportionate capital gain amounting to Rs. 385,76,35,779/- is clearly covered under the Article 13(3A) of the India- Mauritius DTAA, as the underlying assets in transaction is shares and is taxable. 8.9 In view of the above discussion, it is evident that the capital gain amount of Rs. 385,76,35,779/- earned by the assessee from transactions in shares is taxable in India as Capital Gain as per Income Tax Act 1961 as per Article 13(A) of DTAA, the same is added back to the income of the assessee. The penalty u/s 270A for underreporting of ....
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....as to be read into nor should anything be implied other than essential inferences while considering a taxation statute." * Similar principles have been held by Hon'ble Supreme Court in the case of State of W.B. v. Kesoram Industries Ltd. and Ors. (2004) 10 SCC 201. * Further, where the intention of the legislature urns to cover underlying assets directly or indirectly, the same has been expressly mentioned in relevant Articles. For eg. Article 13(3) of lndia-UAE DTAA provides for taxability in India on gains from the alienation of shares of the capital stock of a company the property of which, consists directly or indirectly principally of immovable property situated in India. * A language similar to Article 13(3) of India-UAE DTAA can be found in various other DTAA entered into by India for eg. Article 13(4) of India- Sweden DTAA, Article 14(4) of India-Spain DTAA, Article 14(4) of India- France DTAA etc. * Similarly, there are also other treaties such as India-USA DTAA, India-UK DTAA, which expressly provides that all types of transfers are taxable in India including transfer of mutual fund units. Accordingly, where the intention was to tax....
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....exi Cap Fund Regular Plan Growth 13 May 2015 to 22 May 2015 8,01,47,806 HDFC Flexi Cap Fund Regular Plan Growth Option 05 February 2015 to 22 February 2017 302,79,05,203 Total Capital Gains on mutual fund units acquired prior to 1 April 2017 310,80,53,009 * During the course of assessment proceedings, the Assessee duly submitted mutual fund Statements showing details of purchase and sale of mutual fund units vide submission dated * 11 November 2023 which clearly reflected that certain units redeemed during AY 2022-23 were purchased prior to 1 April 2017. The relevant submission along with the annexures was attached as Exhibit 2 in the detailed submissions (refer page 142 to 445 of the paper book). * The Assessee was always of the view that the gains from mutual fund units were not taxable in India under Article 13(4) of India-Mauritius DTAA. * However, since the learned AO has considered such capital gains to be taxable in India, the Assessee would like to submit that gains derived from sale of units acquired prior to 1 April 2017 should not be taxab....
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....which reads as under: ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 3A. Gains from the a....
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....more than sixty-five per cent of the total proceeds of such fund; and which has been set up under a scheme of a Mutual Fund specified under clause (23D), such funds are to be treated as equity oriented mutual funds. Thus, since the composition of equity-oriented mutual funds is mainly into the equity market, therefore, its units are akin to shares and are to be treated as shares. * Secondly, various provisions of the Income Tax Act providing exemption/ tax treatment of equity shares also provide the same exemptions in respect of equity-oriented Mutual Funds, some of such provisions are stated as under: a. Section 10(38) of the Act exempts income arising from the transfer of equity shares in a company. Such section also exempts the income arising from the transfer of unit of an equity-oriented fund also. So, logically it can be deduced that units of equity oriented funds are akin to shares. b. Section 112A of the IT Act exempts long term capital gains arising from the transfer of equity shares of a company. Such a section also exempts capital gains arising from a unit of an equity-oriented fund. This treatment of capital gain to both equity shares and unit....
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....uity shares and therefore, the provisions of Article 13(3A) of the India Mauritius DTAA are applicable to the facts of the assessee as against the benefit of Article 13(4) of the India Mauritius DTAA incorrectly claimed by the assessee. Hence, the Panel does not find any infirmity in the order of the AO and confirms the observation of the AO in the DAO that since the underlying asset of transaction is equity therefore the capital gains arising on account of sale of equity oriented mutual funds is covered under Article 13(3A) of the India Mauritius DTAA. The AO is accordingly directed to tax the entire capital gain of Rs. 5,93,48,24,274/- (viii) However, the Panel also finds that the AO was not correct in holding that only 65% (i.e. minimum equity investment percentage) is taken to calculate the Capital Gain arising out of shares. The AO thus, only taxed capital gains of Rs. 385,76,35,779/- out of the total capital gains of Rs. 593,48,24,274/- earned by the assessee from equity oriented mutual funds. In this regard, the Panel observes that once the AO has held that the units of the equity oriented mutual funds were to be treated as shares, the AO was not correct in calculat....
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....ted the averments as mentioned above while the ld. DR relies the findings of the ld. tax authorities below. On giving thoughtful consideration to the material on record and submissions, we are of the considered view that the Dispute Resolution Panel by relying the doctrine of purposive construction has drawn semblance of units of equity oriented mutual fund with equity shares itself and to conclude that intent of legislature was always to treat units of equity oriented mutual fund to equity shares since it carries inherent characteristics of equity shares. However, losing sight of the fact that interpretation involved was of provisions of a DTAA. It is settled law that DTAA should be given an interpretation in which the reasonable meaning of words and phrases is preferred. Principles or rules of interpretation of a tax treaty would be relevant only where terms or words used in treaties are ambiguous, vague or are such that different meanings are possible. If words are clear or unambiguous then there is no need to resort to different rules for interpretation. As far as purposive interpretation, approach is concerned, the treaty is to be interpreted so as to facilitate the attainment....
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....ons stipulated in a limitation of benefit clause set out in Article 27A ("LOB"). Article 13(4) still leaves taxing rights of any property, other than that mentioned in paragraphs 1, 2, 3, and 3A, with the residence state. 10. Relevant to interpret the purport of this protocol is the Press Information Bureau, Government of India, Ministry of Finance release dated 10-May-2016 on India and Mauritius Protocol for amendment of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains which says that major impact of the Protocol is to tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. At the same time, existing investments, i.e. investments made before 1.4.2017 have been grand-fathered and will not be subject to capital gains taxation in India. 11. Analyzing the Protocol and the LOB, we ....
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....f 1961) and registered with the Securities and Exchange Board of India, or such other fund, which raises or collects monies from investors and invests such funds in accordance with such regulations as may be made by the Securities and Exchange Board of India in this behalf;" 14. Then all the aspect with regard to issuance of shares, their types, rights and liabilities of share holders as contributory, right to dividend, transferability of shares and attendant rights are dealt extensively by the Companies Act of 2013. A mutual fund on the other hand in India are established in the form of a Trust under Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996. A mutual fund is a collective investment vehicle that collects & pools money from a number of investors and invests the same in equities, bonds, government securities, money market instruments. The money collected in mutual fund scheme is invested by professional fund managers in stocks and bonds etc. in line with a scheme's investment objective. The income / gains generated from this collective investment scheme are distributed proportionately amongst the investors, after deducting applicable expense....
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....ssee company amounted to a speculation business or not, discarded the revenue's argument that units purchased by the assessee company from UTI were shares. The Hon'ble Supreme Court has held that in the absence of any specific deeming provision in regard to units as shares it would be erroneous to apply the provision of Section 32(3) of UTI Act, which provided income from Units to be dividend, the purpose of holding that units as a share. Hon'ble Bombay High Court in the case of CIT Vs. Hertz Chemicals Ltd (2016) 386 ITR 39 (Bom) as held relying on the case of Apollo Tyres Ltd (supra) that there is no specific provision which would show that units in the mutual fund and/or bonds to be shares either for the purpose of the Income Tax Act, 1961 or for any other purposes. Further, Mumbai Bench of this Tribunal in the case of Vanguard Emerging Markets Stock Markets Stock India Fund Vs. ACIT (2025) 172 taxmann.com 515 (Mum-Tri) has dealt with this issue in regard to Article 13(6) of India-Ireland DTAA and while dealing with the question of short term capital gain on the sale right entitlement (RE) of shares of Indian company that assessee had claimed to be exempt under Article 13(6) ....
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....dian Companies Act, 2013 defines the term "share" to mean "a share in the share capital of a company and includes stock". Further, the term "company" has been defined to mean a "company incorporated under the Companies Act, 2013 or under any previous company law". Under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1995, mutual funds, in India can be established only in the form of "trusts", and not "companies". Therefore, the units issued by Indian mutual funds will not qualify as "shares" for the purpose of Companies Act, 2013. Further, under the Securities Contract (Regulation) Act, 1956, a security is defined to include inter alia - (a) shares, scrips, stocks, bonds, debentures, debenture stock or other body corporate; and (b) units or any other such instrument issued to the investors under any mutual fund scheme. 6.3 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 transfer of units of mutual funds should not get covered within the ambit of Article 13(4) of the tax treaty,....