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TMI Blog2019 (10) TMI 1593X X X X Extracts X X X X X X X X Extracts X X X X ..... 14; his case is that these gains, admittedly outside the scope of article 7 and 14, are covered by article 23 as such. The question thus remains as to what is the scope of taxation in the source jurisdiction under article 23- an aspect which has not left intact by the judicial precedents relied upon and which, in fact, is the foundational issue raised in this appeal. Our decision is based on our analysis of these aspects, and our conclusion is that, under the Indo Spanish tax treaty, the assessee does not have any tax liability in respect of the transactions in question. Capital loss on sale of shares of companies engaged in real estate development activities classified under BSE Realty Index as exempt under Article 14(6) of the India-Spain DTAA - As decided in own case [ 2019 (10) TMI 1163 - ITAT MUMBAI] the assessment year 2013-14 in the present case, while the assessee has sold no more than 2% shares in any of the six realty companies, There is no question of holding any controlling interest or even significant interest in these companies. These holdings therefore cannot give, or be even part of an effort to get, controlling right or any other right to occupy the property. It ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Commissioner of Income Tax (Appeals) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2014-15. 2. In ground no. 1, the appellant Assessing Officer has raised the following grievance: 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating receipt of income on account of gain on foreign exchange transaction amounting to Rs. 492,92,52,900/- in the nature of income from capital gains as per Article 14(6) of India Spain Treaty and not taxable in India without appreciating the fact that the Assessee being a Foreign Institutional Investor is refrained from undertaking any other business activity and accordingly the receipt on account of foreign exchange transaction will be in the nature of income from other source or other income taxable in India as per Article 23(3) of the DTAA between India and Spain. 3. Learned representative have fairly agreed that whatever we had decided in ITA No. 6109/Mum/2018, which deals with identical grievance of the Assessing Officer for the Assessment Year 2013-14 and which was heard along with this appeal, will apply mutatis mutandis this year as well. 4. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upplied by us) 6. A plain reading of the above treaty provision shows that Article 23 comes into play only when an item of income of a resident of a contracting state is such that it is not expressly dealt with in the preceding articles (i.e. article 6 to 22) of the tax treaty. What is important to note is that it is not the fact of taxability in the other treaty provisions, but the fact that the income is of such a nature that it is not expressly dealt with in the treaty provisions, that triggers the application of article 23 and the resultant taxability of such an income in the source jurisdiction. 7. As a corollary to this proposition, it would seem only elementary that an income cannot be brought within the ambit of source taxation under article 23 just because its taxability has failed, on account of not fulfilling the conditions precedents to its source taxability in the relevant treaty provisions, in the source jurisdiction. 8. To put it in simple words, therefore, it is not the fact of non-taxability under article 6-22 which leads to taxability under article 23, but the fact of income of that nature being covered by article 6-22 which can lead to taxability under article 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses, research and development expenses, interest and other similar expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (Regulation) Act, 1952, could be set off against the income of the assessee. It was in this context that Their Lordships observed that If the business is illegal neither the profits earned nor the losses incurred would be enforceable in law, but that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as profits under section 10(1) of the Act of 1922 (which is pari materia with Section 28 of the Income Tax Act, 1961) . In other words, even profits of illegal business were held to be taxable as 'business profits'. In CIT Vs Piara Singh [(1980) 124 ITR 40 (SC)], the same position was reiterated. Of course, there are subsequent legislative developments with respect to admissibility, or rather inadmissibility, of deduction for any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law but that aspect of the matter is not relevant for the present purposes . 14. In our considered view, therefore, it can be safely concluded that whether legal or illegal, and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which these gains are covered. We have also carefully perused these clauses and we do not find that any of the exception clauses could be invoked on the facts of this case. Therefore, we find that while taxability of such gains, i.e. capital gains, is covered by article 14, the gains are not taxable in the source jurisdiction, as the conditions precedents to the taxability in source jurisdiction, i.e. coverage by article 14(1) to 14(5), are not satisfied. 20. In the event, however, one is to come to the conclusion that these gains are in the revenue field, these gains are in the nature of business profits, governed by article 7, which cannot be taxed in the source jurisdiction as the assessee does not have any permanent establishment in India. 21. We thus find that while taxation of business profits is expressly dealt with by article, these business profits cannot be taxed in the source jurisdiction for want of satisfying the fundamental condition precedent for its taxability, i.e. existence of a permanent establishment (PE) in the source jurisdiction. Whichever way one looks at the gains in question, the taxability of these gains is very well expressly dealt with by the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d exchange contracts being in the nature of contracts to hedge investment currency risk. That aspect anyway remains unsubstantiated as no one to one nexus of the forward foreign exchange contracts with the investment currency risk exposure was demonstrated before us nor, despite our specific question on this issue, was it explained as to how, in a situation in which rupee value was constantly going down, these forward contracts settlements have resulted in gains rather than losses. 24. Be that as it may, we see no need to examine, or to follow, the approach adopted in these judicial precedents, as, in our considered view and from our perspective, that aspect of the matter is not really material given the undisputed facts of the present case. We are dealing with a treaty situation. To put a question to ourselves, would it really matter if these were not hedging contracts and the assessee was infact making money out of dealing in forward exchange contracts simplicitor? In view of our detailed analysis earlier and in our humble understanding, that fact, by itself, cannot make the gains taxable under article 7 when the assessee does not have a PE in India, or under article 14 when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntary on Article 13(4) of the UN model when the Article 14(4) of the DTAA is very clear in itself and the commentary on any Article comes in picture only when there is any ambiguity on the issue. 5. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not appreciating the fact that UN Model treaty on capital gains and India-Spain treaty are not same and have different provisions and carve outs for capital gains and thus Commentary of UN Model cannot be applied to explain India-Spain treaty . 6. Whether on the facts and in circumstances of the case and in law, the ld. CIT(A) erred in not appreciating the Assessing Officer's decision in this case that the transfer of shares of realty based companies attracts Article 14(4) of the India-Spain DTAA which is very clear on this issue. 8. Learned representative have fairly agreed that whatever we had decided in ITA No. 6109/Mum/2018, which deals with identical grievance of the Assessing Officer for the Assessment Year 2013-14 and which was heard along with this appeal, will apply mutatis mutandis this year as well. 9. Vide our order of even date, we have dismissed similar ground of appeal, raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of shares owning these properties. He then referred and relied upon decisions of his predecessor, upholding the plea of the assessee, which stand approved by coordinate benches of this Tribunal. It was noted that while the assessee has invested in the shares of real estate companies but the holding of immovable property developed by them remaining unsold is in the nature of stock in trade and that the value of these shares in the stock market is based not just on the extent of the immovable property held by them as stock in trade but on several other factors such as capital adequacy, projects in the pipeline, current profits and future prospects . It was noted that the assessee's shareholding in these companies was well under 7% and with such miniscule shareholding, the assessee cannot be treated as having acquired any right in stock in trade of those companies and the assessee had no effective right to occupy the immovable properties of those companies . It was also noted that a purposive construction of the provision of Article 14(4) would show that it was meant to cover the cases in which indirect transfer of immovable properties, by way of transfer of shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... begin with reproducing article 14, the interpretation of which is at the core of controversy requiring our adjudication. This provision is as follows: ARTICLE 14- CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic or of movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. 4. Gains from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the residence jurisdiction adopted in this tax treaty, and, it is, therefore, on the source jurisdiction to demonstrate that these conditions are satisfied. It is only elementary that no one can be expected to prove a negative, and, therefore, the onus cannot be on the assessee to demonstrate that these conditions are not satisfied. As observed by Hon'ble Supreme Court, in the case of K P Varghese Vs ITO [(1981) 131 ITR 597 (SC)], to throw the burden of ...(proving a negative)..... would be to cast an almost impossible burden . The onus is thus clearly on the Assessing Officer to prove that the conditions of article 14(4) are satisfied was thus on the Assessing Officer. 36. No material is brought on record to discharge the onus, so cast on the Assessing Officer, before taxation under article 14(4) is invoked. There is not even whisper of a suggestion that the Indian companies in which the assessee had invested the monies, as share capital, were principally holding the immovable properties. All that the Assessing Officer has pointed out is that these companies were listed on BSE realty index, and proceeded on the assumption, an unrealistic and incorrect assumption by any standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies must be taxed in the source jurisdiction, that article 14(4) has come into existence. That is what is borne out of the unmissable ground realties as also of literature on international tax treaty policy development. 39. With this backdrop in mind, we have to attempt to interpret the scope of Article 14(4). Let us, however, take note of certain ground rules of the principles of interpretation of treaties. 40. It is important to bear in mind one more aspect of the Hon'ble Supreme Court's landmark judgment, in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC)]. This was also the case in which Hon'ble Justice Bhagwati, in his inimitable manner, dealt with the principles governing interpretation of tax laws and observed that the task of interpretation is not a mechanical task and, Their Lordships' quoting with approval, Justice Hand's observation that it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning . Their Lordships observed as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same as those adopted in the interpretation of statutory legislation. Their Lordships quoted, with approval, a passage from the judgment of the Federal Court of Canada in the case of N. Gladden v. Her Majesty the Queen 85 DTC 5188, at page 5190 wherein the emphasis is on the 'true intentions' rather than 'literal meaning of the words employed'. This quote was Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular items under consideration are concerned . 42. As we deal with the principles of interpretation of tax treaties, it may also be appropriate to refer to some of the observations made by a coordinate bench, in the case of Hindalco Industries Ltd. Vs ACIT [(2005) 94 ITD 242 (Mum)] in the context of principles governing the interpretation of tax treaties. That was a case in which the coordinate bench, after an elaborate analysis of the related judicial precedents from even outside India and the relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgue about the precise grammatical sense. They must look to the purpose or intent......... Echoing these views and justifying his departure from the plain meaning of the words used in the treaty, Goulding J. in IRC v. Exxon Corpn. [1982] STC 356 at page 359, observed that In coming to the conclusion, I bear in mind that the words of the Convention are not those of a regular Parliamentary draughtsman but a text agreed on by negotiations between the two contracting Governments. Although I am thus constrained to do violence to the language of the Convention, I see no reasons to inflict a deeper wound than necessary. In other words, I prefer to depart from the plain meaning of language only in the second sentence of article XV and I accept the consequence (strange though it is) that similar words mean different things in the two sentences. 43. Article 31(1) of the Vienna Convention States that A treaty shall be interpreted in good faith in accordance with the ordinary meaning given to the terms of the treaty in their context and in the light of its object and purpose . In the light of the detailed discussions above, the mandate of article 31(1) has to be borne in India while interpreti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the aggregate value of asset. The expression principally was clearly defined, until the 2017 update, in the UN Model Convention itself as such. In the 2017 update, the UN Model Convention provided for a specific minimum threshold trigger to be decided between the contracting state, but then that's an event much later to not only the Indo Spanish tax treaty but also to the relevant financial period. This interpretation of the scope of principally must be understood in the context of the purpose of this treaty provision. 49. The UN Model Convention Commentary, as last updated, notes the historical background and justification for this treaty provision, by observing that Since it is often relatively easy to avoid taxes on such gains through the incorporation of a company to hold such property, it is necessary to tax the sale of shares in such a company. This is especially so where ownership of the shares carries the right to occupy the property . The OECD Convention commentary, as last updated, notes that by this provision, it is ensured that gains from the alienation of such shares or comparable interests and gains from the alienation of the underlying immovable property are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the understanding shared by the very multilateral institutions which have conceived and developed the said provision. 52. The wordings of UN and OECD Model Convention do differ from the provision in the treaty before us, and, but then, it is not, nor can it be, revenue's case that the intent and purpose for which article 14(4) was introduced was any different. 53. Even keeping the mandate of Article 31(1) of VCLT aside for a while, the guidance given by Hon'ble Supreme Court in the case of K P Varghese (supra) is worth bearing in mind when it comes to interpretation of tax laws. Hon'ble Supreme Court had, inter alia, quoting, with approval, Justice Hand that, it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning . Viewed thus, we cannot ignore the clear intent of the scheme of article 14(4) and interpret the meaning thereof in isolation with its unambiguous object and purpose, and we interpret this provision in the light of the purpose and object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immovable properties, in companies owning immovable property will become taxable in the source state. That position does not fit in the scheme of the treaty provisions under article 14, and is clearly an incongruous result. 55. In the present case, while the assessee has sold no more than 2% shares in any of the six realty companies, namely Anant Raj Limited, DLF Limited, Indiabulls Real Estate Limited, Mahindra Lifespace Developers Ltd., Shobha Developers Ltd. and Unitech Limited, as an investor. There is no question of holding any controlling interest or even significant interest in these companies. These holdings therefore cannot give, or be even part of an effort to get, controlling right or any other right to occupy the property. It has not even be the case of the Assessing Officer that the assessee had significant holdings in these companies. That apart, it is also important to note that all these companies are engaged in the business of real estate development rather than in the business of holding real estate as investments. The business model of realty companies is focussed on gains from real estate development rather than gains from holding the immovable properties. Viewe ..... 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