2025 (3) TMI 947 - AT - Income Tax

Taxability in India - Taxation of short-term capital gains on sale of rights entitlement - Whether capital gain earned from sale of rights entitlement can be claimed as exempt under Article 13(6) of India-Ireland DTAA which provides that gains from transfer / alienation of any property other than those mentioned in Articles 13(1) to 13(5) shall be taxable only in Ireland? - HELD THAT - As per view taken by the ld. DRP to hold that rights entitlement shares and the shares are closely related assets we are in agreement with the contention raised by the ld. Counsel that these are separate assets and it distinct of the shares of the Indian Government. Accordingly we hold that rights entitlements is not covered under Article 13(4) and Article 13(5) so as to be taxed in the country of source i.e. in India albeit it falls under Article 13(6) whereby gain on alienation of any property which are not covered in para 1 to 5 is taxable only in the resident state i.e. Ireland. Adjustment of short term capital gain arising on sale of rights entitlement - Capital loss incurred under the provisions of the Act r.w. Article 13(5) of India-Ireland DTAA cannot be set off against short term capital gain derived from sale of rights of entitlement because such case is not subjected to tax in India as per Article 13(6) of DTAA and therefore assessee has rightly excluded from the computation of total income accordingly this issue is decided in favour of the assessee. Error in the computation sheet appended with the order wherein AO has erred in considering that a sum is refunded to the assessee whereas the assessee has not received any such sum - As stated that though application u/s.154 has been filed but it has not been disposed of by the ld. AO. Accordingly we direct the ld. AO to consider the rectification application filed by the assessee and rectified the aforesaid mistake apparent from the record.

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is whether the short-term capital gains from the sale of 'rights entitlement' are taxable in India under Article 13(5) of the India-Ireland Double Taxation Avoidance Agreement (DTAA) or exempt under Article 13(6), which would make them taxable only in Ireland.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The dispute revolves around the interpretation of Articles 13(5) and 13(6) of the India-Ireland DTAA. Article 13(5) allows for the taxation of gains from the alienation of shares in a company resident in a contracting state. Article 13(6) provides that gains from the alienation of any property other than those mentioned in Articles 13(1) to 13(5) are taxable only in the state of residence of the alienator. The judgment also references Section 62 of the Companies Act, 2013, and various SEBI and NSE circulars regarding rights entitlements.

Court's Interpretation and Reasoning:

The Tribunal considered whether rights entitlements are akin to shares and thus taxable under Article 13(5) or distinct from shares and therefore taxable only in Ireland under Article 13(6). The Tribunal noted that rights entitlements are a distinct asset from shares, as evidenced by their separate ISINs and treatment under SEBI and NSE regulations. The Tribunal also referenced the Supreme Court's decision in Navin Jindal v. Assistant Commissioner of Income Tax, which recognized rights entitlements as distinct, independent rights capable of being transferred independently of existing shareholdings.

Key Evidence and Findings:

The Tribunal examined the provisions of the Companies Act, SEBI circulars, and the OECD Model Tax Convention to determine the nature of rights entitlements. It found that rights entitlements are credited to the demat account of investors as separate assets from shares. The Tribunal also noted that rights entitlements are treated differently from shares in terms of securities transaction tax (STT) rates.

Application of Law to Facts:

The Tribunal applied the legal framework to conclude that rights entitlements do not fall within the ambit of Article 13(5) of the DTAA as they are not shares. Instead, they are distinct assets that should be taxed under Article 13(6), meaning they are taxable only in Ireland.

Treatment of Competing Arguments:

The Tribunal addressed the Revenue's argument that rights entitlements are closely related to shares and should be taxed in India. It rebutted this by emphasizing the distinct nature of rights entitlements as separate assets from shares, supported by legal definitions and interpretations.

Conclusions:

The Tribunal concluded that the short-term capital gains from the sale of rights entitlements are not taxable in India under Article 13(5) but are taxable only in Ireland under Article 13(6) of the DTAA.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning:

"The right to subscribe to additional offer of shares/debentures on right basis on the strength of existing shareholding in the company comes into existence when the company decides to come out with the rights offer. Prior to that, such right, though embedded in the original shareholding, yet remains inchoate. The same crystallizes only when the rights offer is announced by the company. The said right to subscribe to additional shares/debentures is a distinct, independent and separate right, capable of being transferred independently of the existing shareholding, on the strength of which such rights are offered."

Core Principles Established:

The Tribunal established that rights entitlements are distinct from shares and should be treated as separate assets under the DTAA. This distinction affects their tax treatment, exempting them from Indian taxation under Article 13(5) and making them taxable only in Ireland under Article 13(6).

Final Determinations on Each Issue:

The Tribunal determined that the rights entitlements are not taxable in India and that the assessee's claim for exemption under Article 13(6) is valid. Additionally, the Tribunal directed the Assessing Officer to rectify any computational errors related to refunds and dismissed other grounds as infructuous.

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