DCIT(IT)-3(2)(1), MUMBAI, MUMBAI V. MERRILL LYNCH CAPITAL MARKETS ESPANA SA SV, MUMBAI

ITA 9195/MUM/2025

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The case involves appeals by the revenue against the orders of the Ld.CIT(A) for the assessment years 2016-17 and 2017-18, which pertained to the taxability of income from foreign exchange transactions and gains from the sale of shares of companies engaged in real estate development. The assessee, Merrill Lynch Capital Markets Espana SA SV, argued that as a resident of Spain and a foreign institutional investor, the gains from the sale of shares should be exempt from tax in India under the India-Spain DTAA. The revenue contended that these gains were taxable under Article 14(4) of the DTAA. The Tribunal, referencing previous decisions in the assessee's own case, agreed with the assessee's position, leading to the dismissal of the revenue's appeals.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 846148 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2026
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Mumbai
• Assessment Year: 2016-2017
• Appeal Filed On: 26-12-2025
• Other Referred Cases: ITA No. 2824/Mum/2012 & Ors., ITA No. 1831/Mum/2017
• Laws Referred To: Indo-Spanish Tax Treaty, Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KRISHNA KUMAR
• Assessee Lawyers: NITESH JOSHI; AR
• Keywords: Capital Gains; Double taxation relief; Permanent establishment
• Section: 143(3)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER) & SHRI BIJAYANANDA PRUSETH (ACCOUNTANT MEMBER) I.T.A. No. 9195/Mum/2025 Assessment Year: 2016-17 I.T.A. No. 9196/Mum/2025 Assessment Year: 2017-18 DCIT(IT)-3(2)(1), Mumbai Vs. Merrill Lynch Capital Markets Espana SA SV. C/o M/s. G M Kapadia and Co. 1007, Raheja Chambers 213 Nariman Point Mumbai - 400021 [PAN: AACCM7105R] (Appellant) (Respondent) Assessee by Shri Nitesh Joshi, A/R Revenue by Shri Krishna Kumar, Sr. DR Date of Hearing 16.03.2026 Date of Pronouncement 26.03.2026 ORDER Per Smt. Beena Pillai, JM: Present appeals filed by the revenue arise out of orders dated 15/10/2025 and 14/102/2025 passed by Learned Commissioner of Income-tax (Appeals) – 57, Mumbai [hereinafter “Ld.CIT(A)”], for Assessment years 2016-17 and 2017-18 respectively, on the following identaical grounds of appeal:- “i. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in treating taxability of income on account of gain on foreign exchange transaction under the provisions of Article 7 or Article 14 of the Indo-Spanish Tax Treaty, without appreciating the fact that the assessee, being a foreign institutional investor is refrained from undertaking any other business activity and accordingly the receipt on account of foreign exchange fluctuation will be in the nature of income from other sources or other income taxable in India as per article 23(3) of DAA between India and Spain?\" ii. \"On the facts and circumstances of the case and in law, the Ld.CIT(A) was justified in treating the gain on sale of shares of companies engaged in Printed from counselvise.com 2 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 real estate development activities classified under BSE realty index as eligible for benefit for exemption under article 14(6) of the India Spain DTAA and not treating the same as taxable in India as per Article 14(4) of DTAA? iii. \"On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating that fact that UN model treaty on capital gain and India Spain treaty are not the same and have different provisions and carve- outs for capital gains and thus commentary of UN model cannot be applied to explain. India-Spain treaty?\" iv. \"The Appellant craves leave of the CIT(A) to add, amend, alter or delete any of the aforesaid grounds herein if required?\" 2. Brief facts of the case are as under:- Assessee is a regulated company based in Madrid, Spain, and is licensed to purchase and sell securities in India as a Foreign Institutional Investor (FII), registered with the Securities and Exchange Board of India (SEBI). During A.Y. 2016-17, the assessee filed its return of income declaring total income at Rs. 2,90,130/-. For A.Y. 2017-18, the assessee declared total income at Rs. 3,33,69,280/-. It was submitted that during the previous year relevant to A.Y. 2016-17, the assessee had invested in shares and securities in the Indian stock market and had suffered a net short- term capital loss amounting to Rs. 1,16,11,28,479/- on sale of shares of companies engaged in real estate development activities classified under BSE Realty Index, which was claimed as exempt under Article 14(6) of the Double Taxation Avoidance Agreement (DTAA) between India and Spain. For A.Y. 2017-18, the assessee had earned short- term capital gain amounting to Rs.15,48,51,437/-, which was also claimed as exempt under Article 14(6) of the DTAA. Printed from counselvise.com 3 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 2.1. The Ld. AO, while completing the assessment u/s 143(3) r.w.s. 144C(3) of the Act, held that the short-term capital loss as well as the short-term capital gain earned by the assessee during the relevant assessment years are taxable in India under Article 14(4) of the DTAA between India and Spain on the ground that the shares of the companies that were sold were engaged in real estate development activities classified under BSE Realty Index, and the value of such shares is derived from immovable properties owned by them. Aggrieved by the order passed by the Ld. AO, the assessee preferred an appeal before the Ld.CIT(A). 2.2. Before the Ld.CIT(A), the assessee contended that it is a resident of Spain in accordance with Article 4(1) of the DTAA between India and Spain and accordingly, opted to be governed by the provisions of DTAA in respect of its source of income in India. It was submitted that, as per Article 14(6) of the DTAA, capital on alienation of any property other than those referred to any paragraphs 1, 2, 3, 4 & 5 of Article 14 is taxable only in Spain and not liable to be taxed in India. It was thus submitted by assessee that as per Article 14(6) of the DTAA, the entire gains/loss arising on sale of securities has to be treated as exempt as the same is taxable based on the residency of the assessee (alienator). 2.3. The assessee also referred to the U.N. Model of 1980 which is identical to Article 14 of the DTAA between India and Spain. The Ld.CIT(A), after considering the submissions of assessee deleted the disallowance made by Ld.AO by observing as under:- Printed from counselvise.com 4 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 “7.14 Decision: There being no material difference in facts involved in the assessment year under appeal, respectfully following the decision of the Hon’ble Tribunal rendered in the appellant’s own case for earlier AYs, it is held that the capital gain of Rs. 15,48,51,437/- on sale of equity shares of real estate development companies is not chargeable to tax under Article 14(4) of the DTAA between India-Spain and the AO is accordingly, directed to delete the addition made by invoking Article 14(6) of the DTAA between India-Spain. Ground no.3 is accordingly, treated as Allowed. 8. Ground No.4: Without prejudice to the claim of the appellant that the aforesaid addition of a sum of Rs.15,48,51,437/- is not liable to tax in India as per Article 14(6) of the India Spain Treaty, the appellant submits that the Assessing Officer erred in not setting off the short term capital gain amounting to Rs.15,48,51,437/- against carried forward short term capital loss on sale of shares of real estate companies of the earlier assessment years. 8.1 The appellant vide his letter dated 11.10.2021 submitted as under: This ground is without prejudice to ground no. 3 above and assuming but not accepting that gains is taxable under domestic laws pursuant to Article 14(4) of the DTAA between India and Spain, the appellant submits that the disallowance of carry forward of short term capital loss is contrary to provisions of the Act. (a) Without prejudice to the claim of the assessee that the aforesaid proposed addition of Rs.15,48,51,437/- is not liable to tax in India as per Article 14(6) of the Treaty, the appellant submits that the Assessing Officer erred in not setting off the short term capital gain amounting to Rs.15,48,51,437/- against carry forward of short term capital loss on sale of shares of real estate companies of the earlier assessment years. (b) The appellant had suffered a short term capital loss on sale of equity shares of companies engaged in real estate development business during earlier years as under:- Sr. No. Assessment Year Amount of Carried forward loss 1 2009-10 Rs.2,19,81,48,332/- 2 2011-12 Rs.1,21,50,69,146/- 3 2012-13 Rs.11,92,46,217/- 4 2014-15 Rs.71,00,01,126/- 5 2015-16 Rs.72,68,31,880/- 6 2016-17 Rs.1,15,32,92,743/- Printed from counselvise.com 5 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 The Assessing Officer held that loss is subject to applicability of Article 14(4) of the Treaty and therefore not exempt from tax in India. Consequently, as a logical sequitur the said loss has to be dealt with in accordance with the provisions of the Act and as per the domestic tax laws in India. During the year under appeal, while passing the assessment order the Assessing Officer has held that the short term capital gain on the sale of shares of realty companies is liable to tax in India under Article 14(4) of the Treaty as per the tax laws in India. (c) In view of the above, since the gain is to be computed as per the domestic tax provisions, as per the provisions of section 74 of the Act, short term carried forward loss of the earlier years of assessment year 2009-10, 2011-12, 2012-13, 2014-15, 2015-16 and 2016-17 ought to be set off against the short term capital gain made during the year under consideration i.e. assessment year 2017-18. The appellant submits that once the loss is set off against the aforesaid gain, there would not be any taxable short term capital gain liable to tax under Article 14(4) of the Treaty. (d) The appellant, therefore, submits that the Assessing Officer be directed to set off the loss made of earlier years against the short term capital gain made on sale of shares of realty companies in India during the assessment year under appeal. 8.2 Ground no.4 was an alternative claim and in view of Ground No.3 decided in favour of the appellant, Ground no.4 does not survive for adjudication. Accordingly, Ground No.4 having become infructuous is Dismissed. Aggrieved by the order of Ld.CIT(A), the revenue is in appeal before this Tribunal for both the years under consideration 3. The Ld.AR at the outset submitted that, Ground No. 1 raised by the revenue in both these appeals do not arise out of the orders passed by Ld.CIT(A)/Ld.AO. 3.1. Upon confronting, the Ld.DR agreed to the submissions made by Ld.AR. Considering the admitted positions, Ground No. 1 raised by revenue in both these appeals stand dismissed. 4. Ground Nos. 2-3 raised by revenue are against the taxability of capital gains/loss arising out of the sale of shares of assessee in Printed from counselvise.com 6 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 India. The Ld.AR submitted that, this issue stands squarely covered by various decisions of this Tribunal in assessee’s own case for preceding assessment years, following which, the assessee was granted relief by the Ld.CIT(A). 4.1. The Ld.AR also submitted that, shareholding of the assessee in BSE Real-estate companies is miniscule and does not give any right to assessee to enjoy the immovable properties held by real-estate development companies. The Ld.AR relied on the following table giving details of the maximum number of equity shares that it held in the BSE Real-estate companies during the relevant assessment years:- Assessment Year 2016-17 Sr. No. Name of the Company Paid up Equity share Capital of the Company - March 2015 Paid up Equity share Capital of the Company - March 2016 Total holding as on 31/03/2016 % to total subscribed capital 1 DLF Ltd. 1,78,19,27,367 1,78,37,16,082 9,66,962 0.05% 2 Indiabulls Real Estate Ltd. 42,49,77,739 46,16,77,739 1,03,70,305 2.25% 3 Unitech Ltd. 2,61,63,01,047 2,61,63,01,047 2,16,605 0.01% Assessment Year 2017-18 Sr. No. Name of the Company Paid up Equity share Capital of the Company - March 2017 Paid up Equity share Capital of the Company - March 2016 Gross Total No. of shares held by Assessee % to total subscribed capital 1 Anant Raj Limited 29,50,96,335 29,50,96,335 18,07,900 0.61% 2 DLF Ltd. 1,78,40,03,090 1,78,37,16,082 58,38,654 0.33% 3 Indiabulls Real Estate Ltd. 47,84,14,500 46,16,77,500 1,25,35,305 2.62% 4 Phoenix Mills 15,30,66,907 15,29,88,852 8,75,425 0.57% 5 Unitech Ltd. 2,61,63,01,047 2,61,63,01,047 2,59,866 0.01% Printed from counselvise.com 7 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 4.2. The Ld.AR thus submitted that the shareholding of the assessee ranges from 0.01% to 2.62% which cannot be given any right to enjoy the immovable properties held by the Real-estate companies. He thus submitted that, above companies are engaged in real-estate development business and the assets were acquired by them and held as stock-in-trade used by these companies towards development activity. The Ld.AR thus submitted that, there was no question that assessee could have got any right in the immovable properties held by these companies. The Ld.AR thus placed reliance on the order passed by Ld.CIT(A). 4.3. On the contrary, the Ld.DR relied on the orders passed by Ld.AO. We have perused the submissions advanced by both sides in light of the record placed before us. 5. In the present case, the controversy is confined to whether the gains arising to the assessee from sale of shares of Indian real estate companies are covered by Article 14(4), i.e., gains from alienation of shares of a company whose property consists directly or indirectly principally of immovable property situated in India, or whether such gains fall in the residuary clause under Article 14(6). In order to appreciate the controversy, it is necessary to refer to Article 14 of the India–Spain DTAA, which is reproduced hereunder. Article 14 – Capital gains 1. Gains derived by a resident of a 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. Printed from counselvise.com 8 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 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 fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the Contracting State of which the enterprise alienating such ships, aircraft or movable property is a resident. 4. 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 a Contracting State may be taxed in that State. 5. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State. 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 alienator is a resident. 5.1. On a plain reading of Article 14 of the India–Spain DTAA, paragraphs (1) to (5) carve out specific categories of capital gains which may be taxed in the source State, whereas paragraph (6) is the residuary provision allocating exclusive taxing rights to the State of residence in respect of gains arising from the alienation of any property not falling within the preceding clauses. For Article 14(4) to apply, it is not sufficient that the company whose shares are transferred is engaged in the real estate business or that immovable property constitutes an important component of its assets; what is required is that the gains arising from the alienation of shares Printed from counselvise.com 9 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 should, in substance, partake of the character of gains derived from immovable property situated in the source State. 5.2. In the facts of the present case, the assessee’s holding is admittedly minuscule and does not confer upon it any right of enjoyment, control or disposal over the immovable properties held by such companies, particularly when such properties constitute business assets / stock-in-trade of the companies themselves. Such gains, therefore, cannot be brought within the ambit of Article 14(4), but would fall for consideration under Article 14(6), and would accordingly be taxable only in the State of which the assessee is a resident. 5.3. It is an undisputed position that the Assessing Officer, while holding that the assessee is liable to tax in India on capital gains arising from the sale of shares held in real estate companies under Article 14(4) of the India–Spain DTAA, has merely followed the assessment orders passed for assessment years 2007-08, 2008-09 and 2009-10 on the identical issue. However, it is equally a matter of record that, when the same issue arising in assessment years 2007- 08 to 2009-10 came up for consideration before this Tribunal in ITA No. 2824/Mum/2012 & Ors., vide order dated 11/09/2017, the Tribunal upheld the decision of the first appellate authority allowing the assessee’s claim of exemption on capital gains under Article 14(6) of the India–Spain DTAA. The same view was reiterated by the Tribunal while deciding the Department’s appeal in the assessee’s own case for assessment year 2012-13 in ITA No. 1831/Mum/2017, vide order dated 09/11/2018, as reproduced below: Printed from counselvise.com 10 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 “5. We have considered rival submissions and perused materials on record. At the outset, learned Authorised Representative submitted, the issue in dispute is now covered by the decision of the Tribunal in assessee’s own case for the assessment year 2007-08 to 2009-10. The learned Authorised Representative submitted, while deciding the issue the Tribunal has upheld the decision of the learned Commissioner (Appeals) that the assessee is entitled to avail exemption of capital gain under Article-14(6) of India-Spain DTAA. In this context, he drew our attention to the relevant observation of the Tribunal as contained in Para-7 of the order passed in ITA no.2824/Mum./2012 and Ors., dated 11th September 2017. The learned Departmental Representative submitted, assessee’s case is covered under Article-14(4) of the India-Spain tax treaty, therefore, capital gain / loss is taxable in India. He tried to distinguish the decision of the Tribunal in assessee’s own case for preceding assessment year by submitting that the Tribunal has decided the issue keeping in view the Article-14(5) of the India- Spain tax treaty. In rejoinder, the learned Authorised Representative submitted, reference to Article-14(5) of the India-Spain DTAA in the order of the Tribunal is a typographical error which has been wrongly mentioned in place of Article-14(4). To demonstrate such fact, the learned Authorised Representative drew our attention to the assessment order and first appeal order passed for assessment year 2009-10. 6. Having considered rival submissions we are of the view that the issue is covered by the decision of the Tribunal in assessee’s own case for assessment years 2007-08 to 2009-10. As could be seen, the issue in dispute between the parties is with regard to applicability of Article-14(4) of India-Spain tax treaty. The learned Commissioner (Appeals) while deciding the issue in preceding assessment years referring to Article-14(4) of India- Spain tax treaty qua Article-13(4) of U.N. Model Convention has held that capital gain arising out of sale of shares is not taxable in India. The aforesaid decision of the learned Commissioner (Appeals) in assessment year 2007-08 to 2009-10 has been upheld by the Tribunal in the decision referred to above. No doubt, in the impugned assessment year, the learned Commissioner (Appeals) has followed his orders passed for the earlier assessment years. Moreover, as could be seen from the facts on record, the assessee had incurred huge loss in assessment year 2009-10 as well as in the impugned assessment year. Admittedly, if the capital gain is held to be taxable in India, then the loss suffered by the assessee and carry forward of such loss is allowable to the assessee. However, no such benefit has been given to the assessee by the Assessing Officer on the reasoning that assessee has not claimed it in the return of income. Thus, the assessee has been put to double jeopardy which, in our view, is unjust and improper. In view of the aforesaid, we do not find any reason to interfere with the decision of the learned Commissioner (Appeals) on the issue. Grounds raised are dismissed.” Printed from counselvise.com 11 I.T.A. No. 9195/Mum/2025 I.T.A. No. 9196/Mum/2025 5.4. There being no material difference in facts involved in the impugned assessment year, respectfully following the orders of the coordinate benches of this Tribunal in the assessee’s own case for the earlier assessment years on the same issue, and there being no material change either in facts or in law brought to our notice, we uphold the order of the Ld. CIT(A) in holding that the gains in question are not chargeable to tax in India under Article 14(4) of the India–Spain DTAA, but fall within the ambit of Article 14(6). Accordingly, Ground Nos. 2-3 raised by revenue stand dismissed. In the result, appeals filed by revenue stands dismissed. Order pronounced in the open court on 26/03/2026 Sd/- Sd/- (BIJAYANANDA PRUSETH) (BEENA PILLAI) Accountant Member Judicial Member Mumbai Dated: 26/03/2026 SC Sr. P.S. Copy of the order forwarded to: (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order (Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "