India: ITAT: Equity Oriented MF Units, Not ‘Shares'; STCG Not Taxable Under India-UAE Treaty

Background

The Income Tax Appellate Tribunal, Cochin (ITAT) ruled that Short Term Capital Gains (STCG) earned by Sri K.E. Faizal (assessee) through alienation of units of 'equity oriented mutual funds' are not taxable in India in view of the provisions of Article 13(5) of the India-UAE tax treaty (tax treaty). It noted that the transaction is not be covered by Article 13(4) of the tax treaty as 'shares' and 'units of mutual funds' are two different types of securities.

Brief facts and contentions

The income derived by the assessee as STCG from alienation of units of 'equity oriented mutual funds' was treated as taxable in India by the Assessing Officer (AO) on the premise that unit of equity oriented mutual fund is akin to a 'share' and hence as per the provisions laid down in Article 13(4) of the tax treaty, the respective STCG shall be taxable in India

The assessee, pleading the income as exempt from tax in India by virtue of Article 13(5) of the tax treaty, filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)] and matter was decided in his favor

Aggrieved by the above decision, the revenue filed an appeal to the ITAT

ITAT'S Judgement

The ITAT ruled that STCG derived by assessee from alienation of units of 'equity oriented mutual funds' shall not be liable to tax in India on the basis of the following:

Article 13(4) can be invoked only when the property so transferred comprises of a 'share' and not any other property. Hence, the property in the present case, in order to be taxed in India must be a 'share'

Since the term "share" is not defined under the tax treaty or under the Act, thus, the ITAT relied on the meaning provided under Section 2(84) of the Companies Act and the Securities Contract (Regulation) Act, 1956, in accordance with Article 3(2) of the Tax Treaty.

Based on the definition of 'securities' stipulated by the laws prevailing in the country, the ITAT opined that 'shares' and 'units of mutual fund' are two different securities.

Resultantly, the ITAT held that the gains arising from transfer of units of 'equity oriented mutual funds' shall be governed by provisions of article 13(5) of the tax treaty and not article 13(4) and therefore, such gains shall be taxable in UAE and not in India.

Nangia's Take

The ruling is a lucid demonstration of a less litigated matter relating to taxation of capital gains wherein the distinction inscribed between 'shares' and 'units of mutual funds' excludes the income from being taxed in India. The ITAT has gone into the depth of the matter and has given a transparent and taxpayer-friendly judgement based on the treaty, as well as other legitimate provisions of the Indian Laws

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