TaxTMI 
TaxTMI 
TaxTMI 
2025 (6) TMI 1932
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.... 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 the total capital gain of Rs. 593,48,24,274/-, the ca....
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.... 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 from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, ....
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............. 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 income is being initiated." 4. Aggrieved with the order of the AO, the assessee filed objections before the Dispute Resolution Panel (DRP). The case set up before DRP was that the capital gains arising on sale of units of equity oriented ....
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....1. * 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 gains on units of mutual fund, the same has been expressly provided in certain tax treaties. * Further, the Assessee submits that redemption of units of mutual fund cannot be considered as sale of shares of a company and hence, shall not be covered by Article 13(3)/ Article 13(3B) of India-Mau....
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.... 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 taxable in India * Accordingly, in the instant case, without prejudice to the submission that capital gains on redemption of mutual fund units is not taxable in India as per Article 13(4) of India-Mauritius DTAA, the Assessee submits that long-term capital gains of INR 310,80,53,009 derived on units acquired prior to 1 April 2017 shall not be liable to tax in India under India-Mauritius DTAA and hence 65% of the aforesaid amount i.e. INR 202,....
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....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 alienation o f shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State. 3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated; 4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2. 3 an....
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....tion 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 units of equity oriented funds logically establish that units of equity funds are analogous/have semblance with the equity shares. * Thus, the intent of Income Tax Law is very clear to treat the units of equity- oriented mutual funds as equity shares and therefore, all the exemptions as available for equity shares have been extended to the units of equity- oriented mutual funds also. * The Panel seeks to examine the above semblance of units of equity oriented mutual funds and units of equity shares under the "'Doctrine of Purposive Construction' which provides that the transaction must be considered in the sense in which the ....
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....s 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 calculating the proportionate capital gains at 65%. Once units of equity oriented mutual funds were held to be shares, the entire capital gains of Rs. 593,48,24,274/- was liable to be taxed as per Article 13(3A) of the India Mauritius DTAA. (ix) Further, the assessee in its submissions has also submitted before the Panel that out of the total capital gains of Rs. 593,48,24,274/-, capital gains aggregating to Rs. 310,80,53,009/- were arising on account of sale of mutual funds acquired prior to 01/04/2017 and thus, the same was not liable to be taxed as per Article 13(3A) of the India Mauritius DTAA. In this regards, the Panel considers it appropriate to direct the AO to verify the claim o....
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.... 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 of the aims and objectives of the treaty. In case of Union of India v. Azadi Bachao Andolani, (2003) 263 ITR 706, the Hon'ble Supreme Court of India observed that "the principles adopted for interpretation of treaties are not the same as those in interpretation of statutory legislation. The interpretation of provisions of an international treaty, including one for double taxation relief, is that the treaties are entered into at a political level and have several considerations as their bases." The Hon'ble Apex Court also agreed to the argument put forth by the Appellant that "the preamble to the Indo-Mauritius DTAC recites that it is for the 'encouragement of mutual trade and investment and this aspect of the matter ca....
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.... 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 can see that the Protocol confines itself to 'shares' and "Shares" is not defined in the Treaty. Article 10(4) defines dividends as income from shares or other rights, and juxtaposes it from debt-claims, participating in profits, and other corporate rights subject to same tax treatment as shares. Hence, the Protocol does not disturb the allocation of taxing rights in respect of other fiscal instruments like debentures, hybrid instruments such as compulsory convertible debentures, futures and options contracts, alienation of interests in limited liability partnerships, and participatory notes. 12. As the context does not otherwise suggests, the meaning attributed to 'shares' in the DTAA would thus depend on the Indian domestic ....
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....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 expenses and levies, by calculating a scheme's "Net Asset Value" or NAV. In return, mutual fund charges a small fee. In short, mutual fund is a collective pool of money contributed by several investors and managed by a professional Fund Manager. Section 30 of the Securities and Exchange Board of India Act, 1992, provides that the Board, with the previous approval of Central Government, can make regulations relating to regulation of mutual fund in area like Formation, Documents, Code of advertisement, Assurance on returns, Minimum corpus and Valuation of investment. 15. In Mutual Fund schemes, dividends are distributed when the fund has booked profits on the sale of securities in its portfolio. Mutual Fund dividend and stock dividends are t....
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....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) of India-Ireland DTAA which provided that gain from transfer/ alienation of any property other than those mentioned in Article 13(1) and Article 13(5) would be taxable only in Ireland has held that rights entitlement to equity shares of a company does not fall in definition of 'shares'. This indicates that the deeming provisions for purposive interpretation cannot be extended absurdly to include in the definition of shares even a right entitlement to allotment of the shares of a company. Then in ITO Vs. Satish Beharilal Raheja [2013] 37 taxmann.com 296 (Mumbai Trib) while dealing with Article 13(6) of the India Swiss DTAA, the coordinate bench has following the decision of the of Hon'ble Supreme Court in the case of Apollo Tyres Ltd (sup....