ITO (IT)-2(1), MUMBAI V. STISH BEHARILAL RAHEJA, MUMBAI

ITA 4627/MUM/2009

• Counselvise Citation: 462719914 RSA 2009
• Duration Of Justice: 4 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 08-08-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 07-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R S SRIVASTAVA IZRFKHZ DH LS
• Keywords: Residential status; Double taxation relief; Permanent establishment; Deemed dividend
• Section: 32

Judgement Text

SHRI SATISH BEHARILAL RAHEJA - 1 - VK;DJ VIHYH; VF/KDJ.K ,Y U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUM BAI JH JKTSUNZ FLAG YS[KK LNL; ,OA JH FOODS OEKZ U;KF;D LNL; D S LE{K BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO.4627/MUM/2009 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR:- 2004-05 ITO (IT) 2(1) SCINDIA HOUSE, ROOM NO. 14, GR. FLOOR, N.M. ROAD, BALLARD PIER MUMBAI CUKE@ VS. SHRI SATISH BEHARILAL RAHEJA C/O M/S. G.M. KAPADIA & CO., 1001, RAHEJA CHAMBERS, 213, NARIMAN POINT, MUMBAI - 21 PAN:- AGJR3622G VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY MR. R.S. SRIVASTAVA IZR;FKHZ DH VKSJ LS @ RESPONDENT BY MR. NITESH JOSHI VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 27.5.2009 OF CIT(A) FOR THE ASSESSMENT YEAR 2004-05 . THE ONLY DISPUTE RAISED BY THE REVENUE IN THIS APPEAL IS REGARDING T AXABILITY 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 M UTUAL 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/- LQUOKBZ DH RKJH[K@ DATE OF HEARING 08-08-2013 ?KKS'K.KK DH RKJH[K@ DATE OF PRONOUNCEMENT 14-8-2013 SHRI SATISH BEHARILAL RAHEJA - 2 - 3 THE ASSESSEE BEING A CITIZEN OF SWITZERLAND CLAIM ED BENEFIT OF DOUBLE TAX AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND SW ITZERLAND. THE ASSESSEE FILED TAX RESIDENCE CERTIFICATE FROM SWISS AUTHORITIES. IT WAS SUBMITTED THAT AS PER ARTICLE 13(6) OF THE TAX TREA TY BETWEEN INDIA AND SWITZERLAND, THE CAPITAL GAIN OF SALE OF UNITS OF M UTUAL FUNDS WAS TAXABLE ONLY IN SWITZERLAND AND NOT IN INDIA. THE SAID ARTI CLE IS REPRODUCED BELOW AS READY REFERENCE:- ARTICLE 13: CAPITAL GAINS 1. GAINS DERIVED BY A RESIDENT OF CONTRACTING STATE F ROM THE ALIENATION OF IMMOVABLE PROPERTY REFERRED TO IN ART ICLE 6 AND SITUATED IN THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OT HER STATE. 2. GAINS FROM THE ALIENATION OF MOVABLE PROPERTY F ORMING PART OF THE BUSINESS PROPERTY OF A PERMANENT ESTABLISHME NT WHICH AN ENTERPRISE OF A CONTRACTING STATE HAS IN THE OTHER CONTRACTING STATE OR OF MOVABLE PROPERTY PERTAINING TO A FIXED BASE AVAI LABLE TO A RESIDENT OF A CONTRACTING STATE IN THE OTHER CONTRACTING STA TE FOR THE PURPOSE OF PERFORMING INDEPENDENT PERSONAL SERVICES INCLUDING SUCH GAINS FROM THE ALIENATION OF SUCH A PERMANENT ESTABLISHMENT (A LONE OR WITH THE WHOLE ENTERPRISE) OR OF SUCH FIXED BASE, MAY ALSO B E TAXED IN THAT OTHER STATE 3. GAINS FROM THE ALIENATION OF SHIPS OR AIRCRAFT O PERATING IN INTERNATIONAL TRAFFIC, OR MOVABLE PROPERTY PERTAINI NG TO THE OPERATION OF SUCH SHIPS OR AIRCRAFT, SHALL BE TAXABLE ONLY IN TH E CONTRACTING STATE IN WHICH THE PLACE OF EFFECTIVE MANAGEMENT OF THE ENTE RPRISE IS SITUATED. 4. GAINS FROM ALIENATION OF SHARES OF A COMPANY, TH E PROPERTY OF WHICH CONSISTS PRINCIPALLY OF IMMOVABLE PROPERTY SI TUATED IN A CONTRACTING STATE, MAY BE TAXED IN THAT STATE. SHRI SATISH BEHARILAL RAHEJA - 3 - 5. GAINS FROM THE ALIENATION OF SHARES OTHER THAN T HOSE MENTIONED IN PARAGRAPH 4, OF A COMPANY WHICH IS A RESIDENT OF A CONTRACTING STATE. (A) SHALL BE TAXABLE IN THE CONTRACTING STATE OF WH ICH THE ALIENATOR IS A RESIDENT (B) NOTWITHSTANDING THE PROVISION OF SUB-PARAGRAPH (A), INDIA MAY TAX GAINS FROM THE ALIENATION OF SHARES IN A CO MPANY 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 T AXABLE ONLY IN THE CONTRACTING STATE OF WHICH THE ALIENATION IS A RESI DENT. 4. THE AO HOWEVER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE CAPITAL GAINS SHOULD NOT BE TAXED IN INDIA UNDER THE PROVIS IONS 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 WHEREA S THE CAPITAL GAINS IN CASE OF THE ASSESSEE HAD ARISEN ON ACCOUNT OF SALE OF MU TUAL FUND UNITS. IT WAS ALSO SUBMITTED THAT TERMS COMPANY AND MUTUAL FUN DS HAVE BEEN DISTINCTLY DEFINED IN THE INCOME TAX ACT AND, THERE FORE, 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 CONTENTIO NS RAISED. IT WAS OBSERVED BY HIM THAT THE ASSESSEE WHO WAS A NON RES IDENT HAD BASICALLY INVESTED IN INDIAN CAPITAL MARKET AND IN INDIAN SHA RES THROUGH SELECTIVE INVESTMENT ROUTES KNOWN AS MUTUAL FUNDS. THE CAPITA L GAIN WAS BASICALLY ATTRIBUTABLE TO GAINS IN OF COMPANIES IN WHICH MUT UAL FUNDS HAD MADE INVESTMENTS. THEREFORE, EFFECTIVELY THE GAIN WERE F ROM 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 OCCURRENC E OF CAPITAL GAIN HAD PAID TAXES IN INDIA AND WAS NOW CLAIMING REFUND DURING T HE COURSE OF ASSESSMENT WHICH SHOWS THAT THE ASSESSEE HIMSELF WAS AWARE THA T THE CAPITAL GAIN WAS TAXABLE IN INDIA AND HE JUST TOOK A CHANCE IN THE A SSESSMENT TO SOMEHOW SHRI SATISH BEHARILAL RAHEJA - 4 - CLAIM THE REFUND. AO ALSO OBSERVED THAT THE JUDGMEN T OF HONBLE SUPREME COURT IN CASE OF APOLLO TYRES (SUPRA) WAS NOT APPLI CABLE AS THE SAME HAD BEEN RENDERED IN THE CONTEXT OF EXPLANATION TO SECT ION 73 OF THE INCOME TAX ACT. THE AO THUS HELD THE CAPITAL GAIN TAXABLE. 5. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUB MITTED BEFORE CIT(A) THAT THERE WAS CLEAR DISTINCTION BETWEEN SHARES ISS UED BY INDIAN COMPANIES AND UNITS ISSUED BY MUTUAL FUNDS. THE SHARES HELD B Y A SHARE HOLDER ENTITLES HIM FOR VOTING RIGHTS IN THE COMPANY WHERE AS 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 TREATME NT 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 P ROVISIONS UNDER THE ACT RELEVANT TO TAX ON DISTRIBUTED INCOME IN CASE OF SH ARES 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 COMP ANY WAS LIABLE TO PAY TAX AT SPECIFIC RATES. IT WAS THUS ARGUED THAT UNIT S OF MUTUAL FUNDS CANNOT BE TREATED AS SHARES OF COMPANIES. THEREFORE, IT WA S SUBMITTED THAT THE CAPITAL GAIN ARISING FROM MUTUAL FUNDS UNITS WAS CO VERED BY ARTICLE 13(6) OF DTAA AND WAS THUS NOT TAXABLE IN INDIA. CIT(A) AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT MUTUAL FU NDS WERE CLEARLY DISTINCT AND SEPARATE FROM SHARES OF INDIAN COMPANI ES. CIT(A) ALSO OBSERVED THAT JUDGMENT OF HONBLE SUPREME COURT IN CASE OF A POLLO TRYRES (SUPRA) THOUGH RENDERED IN THE CONTEXT OF SECTION 73 WAS CL EARLY 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. MERE LY BECAUSE THE BENEFITS OF DTAA HAD NOT BEEN CLAIMED BY THE ASSESSEE AT THE TI ME OF OBTAINING CERTIFICATE U/S 197 IS NO GROUND TO DENY THE BENEFI TS AVAILABLE UNDER THE LAW. CIT(A) ACCORDINGLY HELD THAT THE ASSESSEE WAS CORRE CT 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 DEC ISION OF CIT(A), THE REVENUE IS IN APPEAL BEFORE TRIBUNAL. SHRI SATISH BEHARILAL RAHEJA - 5 - 6. BEFORE US, THE LEARNED AR FOR THE ASSESSEE REITE RATED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES AND ARGUED THAT THE C ASE OF THE ASSESSEE WAS COVERED BY THE JUDGMENT OF HONBLE 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 R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TAXABILITY OF C APITAL GAIN ARISING ON ACCOUNT OF SALE OF MUTUAL FUND UNITS IN INDIA BY TH E ASSESSEE, WHO IS A NON RESIDENT BASED IN SWITZERLAND. THE ASSESSEE HAS CLA IMED THE BENEFIT OF INDO- SWISS TAX TREATY AND ARGUED THAT THE CAPITAL GAIN I S NOT TAXABLE IN INDIA UNDER THE PROVISIONS OF ARTICLE 13(6) OF THE INDO-S WISS 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 D IFFERENT TYPES OF ASSETS ARTICLE 13(4) AND 13(5) DEAL WITH GAIN ARISING FROM ALIENAT ION 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 HEL D THAT GAIN IS TAXABLE UNDER ARTICLE 5 (B). THE CASE OF THE ASSESSEE IS TH AT 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 HONBLE SUPREME COURT IN CASE OF APOLLO TYRES (S UPRA) IN WHICH IT HAS BEEN HELD THAT UNITS OF UTI ARE NOT SHARES OF COMPA NIES. 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 T O 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 ACCORDINGL Y THE PROVISIONS OF EXPLANATION TO SECTION 73 SHALL APPLY AND THE BUSIN ESS OF SHARES HAS TO BE CONSIDERED AS SPECULATION BUSINESS. HONBLE SUPREME COURT OBSERVED THAT EVEN THOUGH THE SECTION 32(3) HAD CREATED THE FICTI ON TO MAKE THE UTI A DEEMED COMPANY AND DISTRIBUTION OF INCOME RECEIVED BY THE UNIT HOLDER A SHRI SATISH BEHARILAL RAHEJA - 6 - DEEMED DIVIDEND, THE DEEMING PROVISION HAD TO BE AP PLIED 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 SHA RES. HONBLE SUPREME COURT, THEREFORE, UPHELD THE VIEW THAT UNITS OF UTI ARE NOT SHARES OF COMPANIES. THOUGH THE SAID JUDGMENT HAD BEEN RENDER ED IN THE CONTEXT OF EXPLANATION TO SECTION 73, THEREFORE IS ALSO APPLIC ABLE TO THE PRESENT SITUATION WHICH INVOLVES THE INTERPRETATION AS TO W HETHER 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 14-8-2013 SD/- SD/- (VIVEK VARMA) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 14.8.2013 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