DCIT, Circle- 3(1)(1), International Taxation, New Delhi V. Zaheer Mauritius, Noida

ITA 414/DEL/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 6458 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2013-2014
• Appeal Filed On: 15-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJOG KAPOOR
• Keywords: Advance ruling; Question of law; Set aside; Capital Gains
• Section: 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO. 414/DEL/2018 : ASSTT. YEAR : 2013-14 DCIT, CIRCLE-3(1)(1), INTERNATIONAL TAXATION, NEW DELHI VS ZAHEER MAURITIUS, C/O SRBC & ASSOCIATES LLP, 4 TH & 5 TH FLOOR, PLOT NO. 2B, TOWER-2, SECTOR-126, NOIDA, U.P.-201304 (APPELLANT) (RESPONDENT) PAN NO. AA ACW7187P ASSESSEE BY : MS. ANANYA KAPOOR, ADV. REVENUE BY : SH. SANJOG KAPOOR, SR. DR DATE OF HEAR ING: 01 . 0 9 .20 2 1 DATE OF PRONOUNCEMENT: 08 .0 9 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER OF LD. CIT (A)-43, NEW DELHI DATED 30.10. 2017. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENU E: (I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN HOLDING THAT THE GAINS ARISING TO THE ASSESSEE ON T HE TRANSFER OF COMPULSORILY CONVERTIBLE DEBENTURES (CCDS) TO M/S VATIKA LTD. IS IN THE NATURE OF CAPIT AL GAIN AND NOT IN THE NATURE OF INTEREST INCOME AS HE LD BY THE ASSESSING OFFICER ON THE BASIS OF ADVANCE3 RULING DATED 21.03.2012 IN AAR NO. 1048 OF 2011 PRONOUNCED BY THE HONBLE AUTHORITY FOR ADVANCE RULING. ITA NO. 414/DEL/2018 ZAHEER MAURITIUS 2 (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN HOLDING THAT THE GAINS ARISING TO THE ASSESSEE ON T HE TRANSFER OF COMPULSORILY CONVERTIBLE DEBENTURES (CCDS) TO M/S VATIKA LTD. IS IN THE NATURE OF CAPIT AL GAINS AND SHALL NOT BE TAXABLE IN INDIA UNDER ARTIC LE 11 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND MAURITIUS. (III) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE AND IN LAW, THE CIT (A) HAS ERRED IN FOLLOWING THE DECISION OF THE HONBLE HIGH COURT DATED 30.07.2014 IN W.P. (C) 1648/2013 WHEN THE DECISION OF THE HONBLE HIGH COURT HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE SLP FILED BY THE DEPARTMENT HAS BEEN ADMITTED BY THE HONBLE SUPREME COURT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FI LED ITS RETURN OF INCOME ON 27.09.2013 DECLARING TOTAL TAXABLE INC OME AT NIL. THE ASSESSEE COMPANY IS INCORPORATED UNDER THE LAWS OF MAURITIUS AND IS A TAX RESIDENT OF MAURITIUS. THE A SSESSEE HAS INVESTED INTO SECURITIES OF AN INDIAN COMPANY, SH T ECH PARK DEVELOPERS PVT. LTD. WHICH WAS ENGAGED IN DEVELOPME NT AND CONSTRUCTION OF PROJECTS IN INDIA ALONG WITH ANOTHE R INDIAN COMPANY, VATIKA LTD. IN THE RATIO OF 35:65. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO S HOW CAUSE AS TO WHY THE GAIN FROM SALE OF CCDS & EQUITY SHAR ES SHOULD NOT BE TAXED AS INTEREST INCOME INSTEAD OF CAPITAL GAINS WITHIN THE MEANING SECTION 2(28A) OF THE ACT. 4. THE ISSUE HAS BEEN DEALT BY THE HONBLE AUTHORIT Y OF ADVANCE RULING (AAR) WHILE DEALING WITH ARTICLE 11 AND ARTICLE 13. THE HONBLE AAR WITH REGARD TO SECTION 2(28A) A ND ARTICLE 11 OF THE DTAC HELD AS UNDER: ITA NO. 414/DEL/2018 ZAHEER MAURITIUS 3 19. IN CONCLUSION, ARTICLE 11 DEALS WITH THE TRE ATMENT OF INCOME FROM DEBT-CLAIMS OF EVERY KIND, WHEREAS, ART ICLE 13 DEALS WITH GAINS FROM THE ALIENATION OF ANY PROPERT Y. ARTICLE 11 BEING A SPECIFIC PROVISION WILL BE APPLICABLE IN TH E PRESENT CASE WHERE VATIKA HAS PAID A FIXED PREDETERMINED RETURN TO THE APPLICANT HERE WE MAY NOTE THAT IN OUR OPINION, VAT IKA AND SHT ARE ONE AND THE SAME. HENCE THE AMOUNT PAID BY VATI KA IS CLEARLY TOWARDS THE DEBT THAT WAS TAKEN BY SHT FROM THE APPLICANT. HENCE THE APPRECIATION IN THE VALUE OF C CDS IS CLEARLY PAYMENT OF 'INTEREST' AND IS TAXABLE UNDER THE PROV ISION OF ARTICLE 11 OF THE DTAC. 20. WE, ACCORDINGLY, ANSWER THE QUESTION THAT THE E NTIRE GAINS ARISING TO THE APPLICANT ON THE SALE OF EQUITY SHAR ES AND CCDS ARE NOT EXEMPT FROM CAPITAL GAIN TAX IN INDIA UNDER DTAC WITH MAURITIUS. THE GAINS ARISING ON THE SALE OF CCDS BE ING INTEREST WITHIN THE MEANING OF SECTION 2(28A) OF THE ACT AND ARTICLE 11 OF THE DTAC AND ARE TAXABLE AS SUCH. 5. AGAINST THE ABOVE RULING OF AAR THE ASSESSEE FILED WRIT PETITION BEFORE HONBLE DELHI HIGH COURT WHO VIDE O RDER DT. 30.07.2014 IN W.P.(C) 1648/2013 & C.M. NO. 3105/201 3, HAS DECIDED THE ISSUE AGAINST THE FINDINGS OF THE AAR A ND HAS HELD THAT: IN THE PRESENT CASE, THERE 'IS SUFFICIENT COMMERCI AL PERSON FOR THE PETITIONER TO HAVE ROUTED ITS INVESTMENT IN THE REAL ESTATE PROJECT THROUGH EQUITY AND CCDS. THE PRE-MAT URE EXIT OPTIONS AS RECORDED IN THE SHA AND THE MINIMUM RETU RN ASSUMED BY VATIKA ON ITS INVESTMENT ARE CLEARLY COM MERCIAL AGREEMENTS BETWEEN THE PARTIES. THESE BY ITSELF DO NOT ITA NO. 414/DEL/2018 ZAHEER MAURITIUS 4 CHANGE THE LEGAL NATURE OF THE TRANSACTION ENTERED INTO BETWEEN THE PARTIES. THE TERMS OF THE ARRANGEMENTS BETWEEN VATIKA AND THE PETITIONER REVEAL THAT THE JV WAS A GENUINE COMMERCIAL VENTURE, IN WHICH BOTH PARTNERS HAD MANA GEMENT RIGHTS. THE CALL AND PUT OPTIONS WERE DEFINED COMME RCIAL OPTIONS CAPABLE OF BEING ELECTED BY THE PARTIES. IN OUR OPINION, THERE IS, THUS, NO REASON TO IGNORE THE LE GAL NATURE OF THE INSTRUMENT OF A COMPULSORILY CONVERTIBLE DEB ENTURE OR TO LIFT THE CORPORATE VEIL TO TREAT THE JV COMPANY AND VATIKA AS SINGLE ENTITY. IN VIEW OF THE ABOVE, THE WRIT PETITION IS ALLOWED AND THE IMPUGNED RULING IS SET ASIDE. 6. THE AO HELD THAT THE REVENUE HAS NOT ACCEPTED THE A BOVE ORDER OF HONBLE DELHI HIGH COURT AND HAS FILED SLP BEFORE HONBLE SUPREME COURT WHICH IS PENDING FOR ADJUDICA TION AND MADE ADDITION ON THE AMOUNT IN CONTRAVENTION TO THE EXISTING RULING OF THE HONBLE JURISDICTIONAL HIGH COURT. TH E LD. CIT (A) GAVE RELIEF FOLLOWING THE DECISION OF THE HONBLE H IGH COURT. 7. WE FIND FROM THE GROUNDS RAISED BY THE REVENUE T HAT THE APPEAL HAS BEEN FILED BEFORE THE TRIBUNAL SOLELY BA SED ON THE FOUNDATION THAT THE SLP FILED BY THE REVENUE HAS BE EN ADMITTED AND NOTICE HAS BEEN ISSUED IN THIS CASE. SINCE, AT THIS JUNCTURE THE ORDER OF THE HONBLE HIGH COURT PREVAILS ON THE SUBSTANTIVE QUESTION OF LAW WHICH STANDS ADJUDICATED IN FAVOUR OF THE ASSESSEE, WE HEREBY DISMISS THE APPEAL OF THE REVEN UE. ITA NO. 414/DEL/2018 ZAHEER MAURITIUS 5 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 08/09/2021. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER AC COUNTANT MEMBER DATED: 08/09/2021 *SUBODH KUMAR, SR. PS* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR