2017 (10) TMI 1239 - AT - Income Tax

Treating the income on account of gain on foreign exchange transaction under the head income from capital gains as per Article 14(6) of the India Spain tax treaty - Held that - Loss accrued/arose on account of cancellation of foreign exchange forward contract is capital loss having direct nexus with the investment of the assessee and hence the assessee is entitled to set off the same. So far as the reference u/s. 115 AD is concerned, in our opinion, the said section decide the quantum of the tax payable by the FIIS on the income from securities or capital gains and it has nothing to do with the determination of the nature of gain or loss, whether same is on account of capital or revenue account. Accordingly, grounds taken by the assessee are allowed. Treating gain on sale of shares of companies, engaged in the real estate development, as eligible to benefit of exemption under Article 14 (6) of the India Spain treaty - Held that - We find that the assessee had invested in certain companies that were in the business of developing properties, that it was not holding any property directly or indirectly, that the provisions of Article 14(5)were applicable for the properties held by a Spanish Company. The FAA had given a categorical finding of fact that assessee was not holding any property in India. In our opinion, the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order, we decide the effective GOA against the AO.

Summary

Issues involved:
1. Taxation of gain on foreign exchange transaction under capital gains.
2. Tax treatment of gain on sale of shares of companies engaged in real estate development under India-Spain tax treaty.

Issue 1: Taxation of gain on foreign exchange transaction under capital gains:
The Appellate Tribunal ITAT Mumbai dealt with the challenge against the orders of the CIT(A)-11 regarding the assessment years. The Assessing Officer (AO) filed appeals for the mentioned assessment years. The appellant, a resident of Spain registered as a FII with SEBI, contested the treatment of income on account of gain on foreign exchange transaction under the head income from capital gains as per Article 14(6) of the India-Spain tax treaty. The AO directed the appellant to explain why the gain should not be taxed under the head income from other sources. The FAA held that the gain on forex transaction to hedge investments in securities was capital gains and not taxable in India. The tribunal, following precedent, decided the first ground of appeal against the AO, allowing the appellant's contentions.

Issue 2: Tax treatment of gain on sale of shares of companies engaged in real estate development under India-Spain tax treaty:
The second ground of appeal concerned the gain on the sale of shares of companies engaged in real estate development. The AO calculated the short-term capital gains at a specified amount. The FAA found that the value of shares of such companies was derived from market forces and demand and supply rules, not solely from the value of immovable property held by them. The FAA concluded that the appellant was entitled to the benefit of exemption under Article 14(6) of the treaty. The tribunal agreed with the FAA's findings, emphasizing that the appellant was not holding any property in India and confirming the decision against the AO.

In summary, the Appellate Tribunal ITAT Mumbai addressed the issues of taxation of gain on foreign exchange transactions under capital gains and the tax treatment of gains on the sale of shares of companies engaged in real estate development under the India-Spain tax treaty. The tribunal ruled in favor of the appellant in both issues, following legal precedents and factual findings to support the decisions.