Emerging India Focus Funds Vs ACIT (ITAT Delhi)
ITAT Delhi held that for the purpose of taxing an income earned from selling a security the DTAA should be strictly interpreted. Accordingly, capital gains arising on sale of equity-oriented mutual funds are not taxable under India-Mauritius DTAA.
Facts- Assessee is a foreign company and a tax resident of Mauritius. The assessee is carrying on investment activity in India by way of investments in shares and debentures of Indian companies through recognized stock exchanges in India.
AO held that out of the total capital gain of Rs. 593,48,24,274/-, the capital gains of Rs. 385,76,35,779/-were to be covered under Article 13(3A) of the India-Mauritius DTAA and hence, taxable. In doing so, the AO held that when the assessee sells the equity-oriented Mutual Funds, it becomes the beneficiary of capital gains arising from the alienation of the underlying asset of investment i.e. shares/ equity.
DRP decided the issue against the assessee and even differed with the view of AO to tax only 65% of the capital gains but held that whole of the capital gain from Mutual funds disinvestment are taxable and benefit of grandfathering clauses was though given to assessee.
Conclusion- There is no doubt left that under the Indian Laws, the shares and mutual fund both are different forms of securities and investment in both of them have significant differences in terms of the rights of investors, regulation, nature of return and taxability under the domestic laws. Equity Mutual Funds are merely a class of mutual funds. They may be treated along with equity shares for giving exemption or rate of taxation by virtue of section 10(38) or 112 of the Act, but for the DTAA the gain on sale of Equity Mutual Funds cannot be said be out of alienation of ‘shares’.
