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2025 (5) TMI 1870 - AT - Income TaxTaxation of STCG on sale of rights entitlement - taxability in India or exempt under Article 13(6) of the India-Ireland DTAA - HELD THAT - As rights entitlement is not same as shares and therefore the gain on transfer of rights entitlement would fall within the purview of Article 13(6) and not under Article 13(5) of India-Ireland DTAA. Assessee has earned a STCG from the sale of rights entitlement and this fact is identical to the issue considered by the coordinate bench in the above case. Therefore we hold that the AO is not correct in denying the exemption under Article 13(6) of the India-Ireland DTAA to the assessee. The addition made in this regard is hereby deleted. Rejecting the set off of STCG of non-STT paid shares against the STCL of STT paid shares - as per section 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off - HELD THAT - Co-ordinate Bench in the case of one of the group companies of the assessee Vanguard Total International Stock Index Fund 2024 (12) TMI 1575 - ITAT MUMBAI as held there is no prohibition under the Act with regard to the hierarchy of set off of STCL arising out of STT paid shares against the STCG arising out of non-STT paid shares. In absence of any prohibition or any specific chronology for set off prescribed under the Act the assessee is entitled to choose the chronology of set off that is most beneficial to the assessee. In assessee s case the AO rejected the hierarchy of set off done by the assessee for the reason that as per section 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off. Therefore we hold that the AO is not correct in denying the benefit of set off of STCG arising out of non-STT paid shares to the assessee against the STCL of STT paid shared. Accordingly we direct the AO to delete the addition made in this regard. Short credit of TDS - AR submitted that a petition for rectification has been filed before the AO. We accordingly direct the AO to consider rectification petition filed by the assessee with regard to the TDS credit and allow the claim in accordance with law. Short grant of refund to the assessee and non-consideration of rectification application filed by the assessee - We direct the AO to consider the claim of the assessee by disposing of the rectification petition filed by the assessee in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in these appeals arising under the Income Tax Act, 1961 and the India-Ireland Double Taxation Avoidance Agreement (DTAA) for AY 2022-23 are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Short-Term Capital Gains on Sale of Rights Entitlement Relevant Legal Framework and Precedents: The India-Ireland DTAA's Article 13 governs taxation of capital gains. Article 13(5) taxes gains from alienation of shares in a company resident in the source state, while Article 13(6) provides that gains from alienation of any property other than those mentioned in paragraphs 1 to 5 are taxable only in the resident state. Section 62 of the Companies Act, 2013 deals with rights issue and rights entitlement. The Securities and Exchange Board of India (SEBI) and National Stock Exchange (NSE) have issued circulars recognizing rights entitlements as distinct dematerialized securities with separate International Securities Identification Numbers (ISINs). The Supreme Court judgment in Navin Jindal v. ACIT established that rights entitlement is a distinct, independent, and transferable right separate from shares. Court's Interpretation and Reasoning: The Court examined whether rights entitlement should be treated as shares under Article 13(5) or as a separate property under Article 13(6). It was noted that rights entitlement confer a right to subscribe to shares but are not shares themselves. The Companies Act explicitly distinguishes between shares and rights to subscribe to shares, allowing renunciation or transfer of such rights. SEBI and NSE treat rights entitlement as distinct securities with separate ISINs and subject to STT as options in securities, not as shares. The Supreme Court's ruling reinforced that rights entitlement is a separate asset distinct from shares. The Court further analyzed the OECD and UN Model Tax Conventions and the amendments introduced by the Multilateral Instrument (MLI) to the India-Ireland DTAA, noting that "comparable interests" were included only in Article 13(4) and not in Article 13(5), indicating a narrow scope for "shares" under Article 13(5). The Court also considered clarifications from the Government of India, which distinguished between shares and derivatives or other securities for taxation purposes under DTAA amendments. Applying Section 90(3) of the Act and Article 3(2) of the DTAA, the Court held that undefined terms in the treaty should be interpreted as per domestic law, which defines shares restrictively. Analogizing rights entitlement to derivatives, the Court concluded that rights entitlement falls outside the scope of "shares" under Article 13(5) and is covered under Article 13(6), making gains taxable only in the resident state, Ireland. Key Evidence and Findings: The Court relied on statutory provisions (Companies Act, SEBI and NSE circulars), judicial precedent (Navin Jindal), international model conventions, treaty amendments, and government clarifications. The distinct treatment of rights entitlement as an option or separate security, and the absence of "comparable interests" in Article 13(5) post-MLI amendment, were critical findings. Application of Law to Facts: The assessee, being a resident of Ireland, earned STCG from sale of rights entitlement of shares of an Indian company. The AO taxed this gain under Article 13(5), treating rights entitlement as shares. The Court rejected this view, applying the above analysis to hold that rights entitlement gains are exempt from Indian tax under Article 13(6) and taxable only in Ireland. Treatment of Competing Arguments: The Revenue argued that rights entitlement are closely related to shares and should be taxed under Article 13(5). The Court considered and rejected this, emphasizing statutory and regulatory distinctions and authoritative judicial pronouncements. The Revenue's reliance on the DRP's observations was rebutted point-wise by the assessee, with the Court siding with the assessee's interpretation. Conclusion: Rights entitlement is a distinct asset from shares and gains arising from its alienation are exempt from Indian tax under Article 13(6) of the India-Ireland DTAA. Issue 2: Set-Off of Short-Term Capital Gains and Losses Arising from STT and Non-STT Paid Shares Relevant Legal Framework and Precedents: Section 70 of the Income Tax Act permits set-off of losses against income computed under the same head. The Act provides different tax rates for STCG arising from shares on which STT is paid (15%) and those on which STT is not paid (30%). The Hon'ble Calcutta High Court in a 2008 decision held that there is no statutory prohibition on set-off of STCL arising from STT paid shares against STCG arising from non-STT paid shares. The Tribunal in several coordinate bench decisions (including J.P. Morgan India Investment Company Mauritius Ltd. and others) has followed this principle. Court's Interpretation and Reasoning: The Court observed that the AO's denial of set-off was based on a misinterpretation of section 70, incorrectly requiring "similar computation" for set-off. The Court held that the Act does not prescribe any specific order or restriction on the set-off of capital gains and losses arising from STT and non-STT paid shares. The assessee is entitled to choose the order of set-off most beneficial to it. The Court relied on the Calcutta High Court's ruling and subsequent Tribunal decisions affirming this principle. Key Evidence and Findings: The Court examined the factual computation of STCG and STCL by the assessee, the AO's rejection, and the judicial precedents supporting the assessee's position. Application of Law to Facts: The assessee had set off STCG arising from non-STT paid shares against STCL arising from STT paid shares. The AO disallowed this set-off. Applying the legal principles, the Court directed the AO to accept the assessee's computation and allow the set-off. Treatment of Competing Arguments: The Revenue contended that different tax rates and STT applicability preclude such set-off. The Court rejected this, emphasizing the absence of any statutory prohibition and the beneficial option available to the assessee. Conclusion: The set-off of STCG from non-STT paid shares against STCL from STT paid shares is permissible under the Act, and the AO's disallowance is unsustainable. Issue 3: Other Ancillary Issues The assessee raised grounds regarding short credit of TDS, levy of interest under sections 234A to 234B, levy of penalty, and short grant of refund including non-consideration of rectification applications. The Court directed the AO to consider rectification petitions and claims in accordance with law, granting the assessee reasonable opportunity of hearing. The legal ground relating to issuance of notice by NFAC was held to be academic in light of the merits decision and left open. 3. SIGNIFICANT HOLDINGS "Rights entitlement would also be covered under the provisions of Article 13(6) of India Ireland DTAA and in that case it would not be subjected to tax in India but it shall be taxable in the resident state i.e. Ireland." "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." "The right to subscribe to additional offer of shares/debentures on right basis on the strength of existing shareholding in the company... is a distinct, independent and separate right, capable of being transferred independently of the existing shareholding." "There is no prohibition nor the Act compels the assessee to first set off short term capital gain with STT against short term capital loss with STT and then allows set off against short term capital gain without STT. In absence of any specific mode of set off provided in the Act and in absence of any prohibition and in absence of any specific chronology for set off prescribed in the Act, the assessee was entitled to exercise his option with regard to the chronology of set off which was most beneficial to the assessee." Final determinations:
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