Jh jktsunz flag ys[kk lnl;,oa Jh foods oekz U;kf;d lnl; ds le{k BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA JUDICIAL MEMBER

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Cornelius Roberts
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1 vk;dj vihyh; vf/kdj.k ^^,y^^ U;k;ihB eqacbz esaa IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI Jh jktsunz flag ys[kk lnl;,oa Jh foods oekz U;kf;d lnl; ds le{k BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA JUDICIAL MEMBER vk;dj vihy la[;k/ita NO.4627/Mum/2009 ¼fu/kkZj.k o"kz@assessment year: ITO (IT) 2(1) Scindia House, Room No. 14, Gr. Floor, N.M. Road, Ballard Pier Mumbai vihykfkhz@appellant cuke@ Vs. Shri Satish Beharilal Raheja C/o M/s. G.M. kapadia & Co., 1001, Raheja Chambers, 213, Nariman Point, Mumbai - 21 PAN:- AGJR3622G izr;fkhz@respondent vihykfkhz dh vksj ls@appellant by izr;fkhz dh vksj ls@respondent by Mr. R.S. Srivastava Mr. Nitesh Joshi lquokbz dh rkjh[k@date of hearing ?kks"k.kk dh rkjh[k@date of pronouncement PER RAJENDRA SINGH, AM vkns'k@order This appeal by the revenue is directed against the order dated of CIT(A) for the assessment year The only dispute raised by the revenue in this appeal is regarding taxability of capital gain arising on account of sale of mutual fund units. 2. The facts in brief are that the assessee who is a non resident individual had received capital gain from sale of mutual funds units both long term and short term as per details given below:- i) Long term capital gain (with indexation) Rs. 1,80,31,475/- ii) Long term capital gain (without indexation) Rs. 11,95,52,457/- iii) Short term capital gain Rs. 75,44,598/

2 3 The assessee being a citizen of Switzerland claimed benefit of Double Tax Avoidance Agreement (DTAA) between India and Switzerland. The assessee filed tax residence certificate from Swiss authorities. It was submitted that as per Article 13(6) of the tax treaty between India and Switzerland, the capital gain of sale of units of mutual funds was taxable only in Switzerland and not in India. The said Article is reproduced below as ready reference:- Article 13: Capital gains 1. Gains derived by a resident of Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other state. 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 with the whole enterprise) or of such fixed base, may also be taxed in that other State 3. Gains from the alienation of ships or aircraft operating in International Traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains from alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State

3 5. Gains from the alienation of shares other than those mentioned in Paragraph 4, of a company which is a resident of a Contracting State. (a) (b) shall be taxable in the Contracting State of which the alienator is a resident notwithstanding the provision of sub-paragraph (a), India may tax gains from the alienation of shares in a company which is a resident in India. 6. Gains from the alienation of any property other than that referred to in paragraphs 1,2,3, 4 and 5 shall be taxable only in the Contracting State of which the alienation is a resident. 4. The AO however asked the assessee to explain as to why the capital gains should not be taxed in India under the provisions of Article 13(5) of the Indo-Swiss tax treaty. The assessee submitted that Article 13(5) dealt with capital gain arising on alienation of shares whereas the capital gains in case of the assessee had arisen on account of sale of mutual fund units. It was also submitted that terms company and mutual funds have been distinctly defined in the Income Tax Act and, therefore, the two was different. The assessee placed reliance on the judgment of Hon ble Supreme Court in case of Apollo Tyres ( 255 ITR 273) in which it was held that units of UTI are not shares. AO however did not accept the contentions raised. It was observed by him that the assessee who was a non resident had basically invested in Indian capital market and in Indian shares through selective investment routes known as mutual funds. The capital gain was basically attributable to gains in of companies in which mutual funds had made investments. Therefore, effectively the gain were from alienation of shares of companies resident in India. Therefore, the AO held that provisions of Article 13(5) (b) were applicable and the capital gains was taxable in India. AO also observed that the assessee at the time of occurrence of capital gain had paid taxes in India and was now claiming refund during the course of assessment which shows that the assessee himself was aware that the capital gain was taxable in India and he just took a chance in the assessment to somehow - 3 -

4 claim the refund. AO also observed that the judgment of Hon ble Supreme Court in case of Apollo Tyres (Supra) was not applicable as the same had been rendered in the context of Explanation to section 73 of the Income Tax Act. The AO thus held the capital gain taxable. 5. The assessee disputed the decision of AO and submitted before CIT(A) that there was clear distinction between shares issued by Indian companies and units issued by mutual funds. The shares held by a share holder entitles him for voting rights in the company whereas the unit holder only hold the units of mutual fund and are not entitled to voting rights in the companies in which the investments had been made by the mutual fund. The Income Tax Act has also given different treatment to shares and units of mutual funds as dividend from shares was covered u/s 10(34) and in respect of mutual fund section 10(35) was applicable. The provisions under the Act relevant to tax on distributed income in case of shares and in case of mutual funds were also provided under different chapters. Further the income from mutual fund was exempt u/s 10(23d) whereas the company was liable to pay tax at specific rates. It was thus argued that units of mutual funds cannot be treated as shares of companies. Therefore, it was submitted that the capital gain arising from mutual funds units was covered by Article 13(6) of DTAA and was thus not taxable in India. CIT(A) after considering the submissions of the assessee observed that mutual funds were clearly distinct and separate from shares of Indian companies. CIT(A) also observed that judgment of Hon ble Supreme Court in case of Apollo Tryres (Supra) though rendered in the context of section 73 was clearly applicable. In that case it has been categorically held that units are not shares. The principle laid down will apply in the present case also. Merely because the benefits of DTAA had not been claimed by the assessee at the time of obtaining certificate u/s 197 is no ground to deny the benefits available under the law. CIT(A) accordingly held that the assessee was correct in claiming that units of mutual funds are not shares of Indian companies and, therefore, provisions of Article 13(6) were applicable. CIT(A) thus held that capital gain was not taxable in India. Aggrieved by the said decision of CIT(A), the revenue is in appeal before Tribunal

5 6. Before us, the learned AR for the assessee reiterated the submissions made before lower authorities and argued that the case of the assessee was covered by the Judgment of Hon ble Supreme Court in case of Apollo Tyres (Supra). It was thus pleaded that the order of CIT(A) should be upheld. The learned DR on the other hand supported the order of AO and placed reliance on the finding given in the assessment order. 7. We have perused the records and considered the rival contentions carefully. The dispute is regarding taxability of capital gain arising on account of sale of mutual fund units in India by the assessee, who is a non resident based in Switzerland. The assessee has claimed the benefit of Indo- Swiss tax treaty and argued that the capital gain is not taxable in India under the provisions of Article 13(6) of the Indo-Swiss tax treaty. The said Article has been reproduced in para 3 of this order, which deals with taxability of capital gain arising on transfer of different types of assets Article 13(4) and 13(5) deal with gain arising from alienation of shares. As per Article 13(5) gain arising from alienation of share in a company which resident of India can be taxed in India. The AO had treated the units of mutual fund as shares of Indian company and has held that gain is taxable under Article 5 (b). The case of the assessee is that units of mutual funds are different from shares of Indian companies and have been given different treatment in the Income Tax Act. Reliance has been placed on the judgment of Hon ble Supreme Court in case of Apollo Tyres (Supra) in which it has been held that units of UTI are not shares of companies. We have carefully perused the said judgment. In that case the revenue authorities had noted that u/s 32 (3) of UTI Act, trust had been deemed to be a company and any distribution received by unit holder from the trust had been deemed to be income by way of dividend. The revenue, therefore, argued that unit of UTI will have to be considered as shares and accordingly the provisions of Explanation to section 73 shall apply and the business of shares has to be considered as speculation business. Hon ble Supreme Court observed that even though the section 32(3) had created the fiction to make the UTI a deemed company and distribution of income received by the unit holder a - 5 -

6 deemed dividend, the deeming provision had to be applied for the purpose for which it had been specifically created. It was confined only to deeming UTI a company and deeming the income from units as dividend. There were no specific provisions for deeming the units as shares. Hon ble Supreme Court, therefore, upheld the view that units of UTI are not shares of companies. Though the said judgment had been rendered in the context of Explanation to section 73, therefore is also applicable to the present situation which involves the interpretation as to whether units can be considered as shares. In our view in the absence of any specific provision under the Act to deem the unit as shares, it could not be considered as shares of companies and, therefore, the provisions of Article 13 (5) (b) can not be applied in case of units. We agree with the findings of CIT(A) that provisions of Article 13(6) are applicable in case of units as per which the capital gain cannot be taxed in India. The order of CIT(A) is accordingly upheld. 8. In the result appeal of the revenue is dismissed.. Order pronounced on Sd/- (Vivek Varma) Judicial Member Sd/- (Rajendra Singh) Accountant Member SKS Sr. P.S, Mumbai dated Copy to: 1. The Appellant 2. The Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. The DR, L Bench, ITAT, Mumbai By Order Assistant Registrar Income Tax Appellate Tribunal, Mumbai Benches, MUMBAI - 6 -

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vk;dj vihyh; vf/kdj.k **bz^^ U;k;ihB eqacbz esaa IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI Jh th +,l + iuuw] ys[kk lnl;,oa Jh vfer kqdyk] U;kf;d lnl; ds le{ka BEFORE SHRI G.S. PANNU, ACCOUNTANT