9911796707
TMI Blog2025 (3) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains of Rs.1, 60, 24, 148/-, which assessee has 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. The case of the Assessing Officer that assessee has not set off the same against short term capital loss of Rs.31, 38, 280/- which has been carried forward to the next year. He held that as per the provision of Section 70 / 71 of the Act the current year capital losses are to be set off against current year capital gains as per the manner specified therein and as per the provision of Section 74 of the Act, the brought forward losses have to be set off against the current year capital gain as per the manner specified therein. He held that before giving any relief as per Section 90 read with Articles of DTAA, the income of the assessee is to be computed first as per the normal provisions of the Act. Thus, in the draft assessment order he has set out the short term capital gain against the short term capital loss holding that short term capital gain on sale of rights entitlement is taxable and has changed the claim of exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. For the sake of ready reference, the relevant Article 13 of India-Ireland DTAA prior to modification by the MLI which deals with the capital gains reads as under:- 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 offer Contracting State may also 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 permanent establishment (alone or with the whole enterprise) or of such fired base, may also be taxed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays 1 for such lesser number of days as may be prescribed) and not exceeding thirty days from the date of the offer within which the offer if not accepted shall be deemed to have been declined, (ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favours of any other person, and the notice referred to in clause (1) shall contain a statement of this right; (ii) after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not disadvantageous to the shareholders and the company." 9. From the perusal of the aforesaid provisions, it could be deduced that "rights entitlement" are not equity shares because the Section provides shareholder in whose favour an "offer" to subscribe to shares is made, may either accept the offer or exercise the right to renounce the offer or transfer the right to any other person. Ergo, a shareholder obtains an exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8223;ble Supreme Court in the case of Navin Jindal v. Assistant Commissioner of Income Tax[187 Taxmann 283 [2010], wherein it was held as under:- "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." 14. Accordingly, it was submitted that from the said observation of the Hon‟ble Supreme Court, it is evident that when a company offers right to the shareholders, the shareholder obtains an exercisable right to subscribe to shares which is different from the shares in the Indian company. In our view this observation of the Hon‟ble Supreme Court clearly clinches the issue that rights entitlement (REs) is distinct fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troduction of MLI and post introduction of MLI is as under:- Before amendment in 2019. 13(4). Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State. 13(5). Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting State. After amendment in 2019: 13(4). Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property (real property) situated in that other Contracting State. 13(5) Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting State. 19. Thus, the two contracting states eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is in India. The right to taxation is in the country where an immovable asset is located. So, if an immovable asset is located in India, we have the taxation right. With regard to other instruments, "the right to tax is always in that country. There cannot be a change that is the position all over the world". "It is their country's decision The right to tax is with that country with the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has a Double Taxation Avoidance Agreement), It is for that country to decide whether it wants to tax at 10, 20, or zero per cent (And) Just because some country has made it zero, I can't say I will tax, he further clarified" 21. Accordingly, it has been argued before us that even the stand of Government of India (through its Secretary in press) is that "shares would cover "shares of Indian Company" and not derivatives & other securities. Accordingly, gain on alienation of securities other than shares would continue to be taxed in the resident country and not in India. The aforesaid clarification, clarifying the stand of the Government of India, if we look from the perspective of the distinction between the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sake of ready reference is reproduced herein below:- Sr. No. Revenue‟s Arguments Appellant‟s rebuttal 1 Rights entitlement and shares are closely related assets. It has been alleged that shares and rights entitlement pertain to share capital on the basis that the rights entitlements are securities that gives existing shareholders the right to buy additional company shares and increase their ownership in the company and therefore, a rights entitlement is a security that gives existing shareholders the right to buy additional company shares at a discounted price which is bonus for shareholders. The lower authorities have failed to appreciate that Section 62 of the Companies Act, 2013 provides that "unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person." It is evident that a shareholder obtains an exercisable right to subscribe to shares which is different from shares in the Indian company. In terms of section 62 of the Companies Act, 2013, a shareholder obtains an exercisable right to subscri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from shares of an Indian company, notwithstanding that the rights entitlement stems from shareholding of an Indian company. The allegation of the learned AO that rights entitlement is not an asset 'other than' a share is without merit. Reliance is also placed on the Commentary on Article 13 of the Model Tax Convention on Income and on Capital 2017, issued by the OECD. Relevant extract is provided below: "Paragraph 5 29. As regards gains from the alienation of any property other than referred to in paragraphs 1, 2, 3, and 4, paragraph 5 provides that they are only taxable in the State in which the alienator is resident. History Amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. Until the adoption of the 1977 Model Convention, paragraph 5 read as follows: "5. The Article does not give a detailed definition of capital gains. This is not necessary for the reasons mentioned above. The words "alienation of property" are used to cover in particular capital gains resulting from the sale or exchange of property and also from partial alienation, the expropriation, the transfer to a company in exchange for stock, the sale of a right, the aliena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is credited to the demat account of the investor is an asset, being rights entitlement, which is different from shares of the company. Further, the learned AO has not taken cognizance of the NSE circular referred by the Appellant which specifically clarifies that trading in dematerialized rights entitlements on the stock exchanges shall be chargeable to STT at the rate specified in Finance (No.2) Act, 2004, in respect of 'Sale of an option in securities' (i.e. payable by the seller at the rate of 0.05% of the value at which such rights entitlements are traded). Further, the prescribed rate of STT on purchase of equity shares is different, which clearly evidences that rights entitlement is not the same as shares and is instead, an 'option in securities'. 25. The aforesaid explanation given by the ld. Counsel and the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question of including the same under the total income and determining the taxability on the same will not arise and the contention of revenue that the total income as per Act is to be calculated to determine the tax liability and thereafter, the benefit is to be given cannot upheld. Accordingly, it is held that the tosses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year in Question for the reason that once the assessee has chosen the benefit of DTAA. then the capital gain is not at all taxable in India and therefore, there is no Question of setting off of loss from the earlier years. 26. Thus, this principle has been followed in catena of other judgments by this Tribunal. Accordingly, we hold that the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
