2019 (11) TMI 1738 - AT - Income Tax

Income accrued in India - Nature of gain - gains arising to the Assessee on the transfer of Compulsorily Convertible Debentures ( CCDs ) - capital gain or interest income - dispute in the present case arises only because it has been held that the transaction between the petitioner and the Vatika is a sham transaction and. is essentially a transaction of loan to Vatika which has been camouflaged as an investment in shares and CCDs of the JV Company - HELD THAT - As decided by HC 2014 (8) TMI 9 - DELHI HIGH COURT in terms of the policy of the Government, the petitioner could invest in a project of the requisite size/ nature and an investment into CCDs would be reckoned as equity. The policy with regard to external commercial borrowings had. other conditions and it. is apparent that the petitioner found, the investment in CCDs as the most appropriate route for making its investment in real estate, in accordance with the policy of the Government of India. In these circumstances, it ought not to be readily inferred, that the entire structure of the transaction was designed solely for the purposes of a avoiding tax - Decided against revenue.

Summary

Issues:
1. Nature of gains arising from the transfer of Compulsorily Convertible Debentures (CCDs) to M/s Vatika Ltd.
2. Taxability of gains under the Double Taxation Avoidance Agreement between India and Mauritius.
3. Acceptance of the decision of the Hon'ble High Court by the CIT(A) despite the department's appeal.

Nature of gains arising from the transfer of CCDs:
The appeal by Revenue challenged the CIT(A)'s order, arguing that gains from the transfer of CCDs should be treated as interest income, not capital gains. The CIT(A) based the decision on the High Court's ruling that the transaction was a genuine commercial venture, not a loan, and thus the gains were rightly treated as capital gains. The High Court clarified that gains from transferring a debenture, a capital asset, to a third party constitute capital gains. The transaction was considered an investment in equity, aligned with the government's policy, and not solely for tax avoidance purposes. Consequently, the CIT(A) upheld the appellant's appeal, considering the transaction as capital gains.

Taxability under the Double Taxation Avoidance Agreement:
The Revenue also contested the CIT(A)'s decision that the gains from transferring CCDs were not taxable in India under the Double Taxation Avoidance Agreement with Mauritius. The CIT(A) relied on the High Court's judgment, which determined the gains as capital gains, leading to the conclusion that the gains were not taxable under the agreement. The Tribunal concurred with the CIT(A) and dismissed the Revenue's appeal, citing that the issue was covered by the High Court's judgment and no flaws were identified in the CIT(A)'s order.

Acceptance of High Court's decision despite department's appeal:
The Revenue further argued that the CIT(A) erred in following the High Court's decision, which the department had not accepted, and an SLP was filed in the Supreme Court. However, the Tribunal upheld the CIT(A)'s decision, stating that the issue was settled by the High Court's judgment in favor of the appellant. The Tribunal dismissed the Revenue's appeal, emphasizing that the CIT(A) correctly applied the High Court's ruling to the case.

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