TaxTMI 
TaxTMI 
2026 (3) TMI 948
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....ssee is registered as a Collective Investment Scheme (CIS) fund and constructs a hedged portfolio. The assessee is registered with SEBI as Category II Foreign Portfolio Investor. It filed its return of income for the assessment year 2022-23 on 7th November, 2022 declaring total income of Rs. 1,32,75,000/-. During the period relevant to assessment year under appeal, the assessee had traded in Futures and Options (F&O) in two segments i.e. (i) currency derivatives, and (ii) stock derivatives. The Assessing Officer accepted F&O transactions in currency derivatives are covered under Article 13(4) of India-Mauritius DTAA, hence, not taxable in India. As regards stock derivatives, the Assessing Officer held that the assessee has invested in shares via derivatives. After amendment to India-Mauritius DTAA, share based capital gains are taxable in India under Article 13(3A) of the DTAA and thus, rejected assessee's arguments that gain on trading of stock derivatives is exempt. The assessee filed objections before the DRP against the draft assessment order. The DRP concurred with the Assessing Officer's view and upheld the addition. Thereafter, the Assessing Officer passed the final assessme....
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....he Assessing Officer and the DRP in treating transaction in stock derivatives akin to transaction of shares is faulty. Here it would be imperative to first understand the fundamental difference between derivatives and equity shares. For convenience of understanding the difference between the two, a comparative analysis on various factors is tabulated herein below:- S.No. Factors Equity Derivatives 1. Meaning Represents ownership in a company. Financial contracts that derive value from an underlying asset like stocks, indices or commodities. 2. Purpose Ideal for long term investing and wealth creation. Used for hedging, speculation, or leveraged trading. 3. Ownership Shareholding with ownership rights. No ownership - only rights or obligations tied to price movements. 4. Risk Level Moderate, and usually lower than derivatives. High due to leverage, volatility, and expiry pressures. 5. Holding Period Short term to Long term. Limited to weekly or monthly expiries. 6. Returns Grows steadily with company performance through capital appreciation and dividends. Potentially very high, depending on type of d....
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....auritius does not have a short-term capital gains tax which would mean that investors using these instruments would continue to escape paying taxes in both countries. "There are three categories of instruments which arise between two countries-shares, immovable assets, and other instruments, including derivatives," he explained. "Insofar as shares are concerned, they are covered by the new agreement. As regards immovable property, all along the right to taxation is in India. The right to taxation is in the country where an immovable asset is located. So, if an immovable asset is located in India, we have the taxation right. With regard to other instruments, "the right to tax is always in that country. There cannot be a change that is the position all over the world". "It is their country's decision The right to tax is with that country with the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has a Double Taxation Avoidance Agreement), It is for that country to decide whether it wants to tax at 10, 20, or zero per cent (And) Just because some country has made it zero, I can't say I will tax, he further clarified" 21. Accordingly, it has be....
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....he option to get shares or decline the offer for shares. 23. Hence, in our opinion, rights entitlement would also be covered under the provisions of Article 13(6) of India Ireland DTAA and in that case it would not be subjected to tax in India but it shall be taxable in the resident state i.e. Ireland." Thus, the Tribunal concluded that shares and RE are separate and distinct assets. They fall under Articles 13(6) of India- Ireland DTAA. Any gain on sale of RE would be taxable only in the state of residence. 9. Here it would be imperative to refer to the provisions of India-Mauritius DTAA. The relevant clauses of Article 13 dealing with 'Capital Gains' are extracted below: "3A. Gains from the alienation of 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 xxx 4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident. 5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment o....
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....der to mitigate the risk of price fluctuation of the underlying asset. The derivative contract is a complex financial product that gets traded in the exchange or over the counter and the investor earns profits or ends up in making loss without actually buying or selling the underlying asset. For example in order to avoid the risk of movement in fuel price a contract would be entered into between parties to buy / sell the fuel at a fixed price at a future date in order to protect the risk of fuel price fluctuation. This contract is a derivate whose price would move up or down depending on the movement in the fuel price and is traded in the market as it is. The investor of the derivative would end up in making profit or loss without actually buying or selling fuel depending on the price movement of the fuel. Derivative trade offers leverage to the investor to have control over a large asset portion with a relatively small initial investment since the investor may not actually buy or sell the underlying asset. This financial leverage comes with risk of significant gain or loss situation which makes Derivative high-risk, high rewarding instrument. The following key features of Derivati....