TMI Blog2019 (10) TMI 1163X 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. We approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. 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 - HELD THAT:- 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rfere in the matter. On this issue also, our reasoning is different than the reasoning adopted by the coordinate bench, but then our conclusions are the same. - ITA No.: 6109/Mum/2018 - - - Dated:- 11-10-2019 - Pramod Kumar (Vice-President And Saktijit Dey (Judicial Member) For the Appellant : Avaneesh Tiwari For the Respondent : Nitesh Joshi ORDER PER PRAMOD KUMAR VP: 1. This appeal is directed against the order dated 24th August 2018 passed by 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 2013-14. 2. In ground no. 1, the appellant Assessing Officer has raised his grievance, by way of a question required our adjudication, as follows: Whether, on the facts and circumstances of this case and in law, the learned CIT(A) erred in treating receipt of income, on account of gain on foreign exchange transaction amounting to ₹ 12,60,80,000 (correct figure is ₹ 12,60,01,800) in the nature of income from capital gain as per article 14(6) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be brought to tax in India, the Assessing Officer was of the view that as an investor, the assessee cannot carry out any business activity and accordingly, it is held that the receipt on account of foreign exchange transactions is in the nature of income from other sources, or other income, which is taxable in India as per article 23(3) of DTAA between India and Spain . As regards the judicial precedents cited by the assessee, the Assessing Officer declined to follow the same as the matter has not reached finality inasmuch as against appeals against these judicial precedents are still pending before the higher judicial forums. It was in this background that an addition of ₹ 12,60,01,800 was, inter alia , made to the income returned by the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) who, following the orders passed by his predecessors in assessee s own case, deleted this addition to income, and observed, inter alia, that the (then) CIT(A)relied upon the decisions of Mumbai Tribunal in the case of Citicorp Banking Corporation, Bahrain Vs Additional CIT (ITA No. 6525/Mum/2009- also reported as 2011 TII 40 ITAT MUM I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stified the same primarily on that basis and reiterating the reasoning adopted in these precedents. Learned Departmental Representative reiterated the same arguments as were advanced in the first hearing. We have heard the rival contentions, perused the material on record and duly considered the applicable legal position on the facts of the case. 5. In our humble understanding, irrespective of whether the gains in question are found to be in the capital filed or in the revenue field, the case of the revenue hinges on the applicability of Article 23 of Indo Spanish tax treaty to the gains in question. It is not even the case of the Assessing Officer that the gains can be taxed as business income in the hands of the assessee, in the absence of a PE in India, or as a Capital Gain as these are not specifically covered by any of the exemption clauses in the article 14 and the residuary taxation rights are with the residence jurisdiction. The short case of the revenue is that as the gains in question are neither covered by article 7 nor by article 14, its taxability must be examined under article 23 which gives residuary taxation rights to source jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, income from chance such as lottery or gambling, rent paid by resident of a contracting state for the use of an immovable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. 9. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and when income from gains on settlement of forward contracts is covered by Article 7 or Article 14 when conditions laid down therein are satisfied, article 23 would not have any application in the matter. Let us, in the light of this understanding about the scope of article 23, move ahead. 10. The stand of the assessee, as rightly noted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (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 other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, whether with regulatory approvals or without regulatory approvals, fruits of pursuits in the course of business are taxable as business profits nevertheless. 15. The situation under the tax treaties is no different either. 16. Article of 7 of the Indo Spanish tax treaty also refers to profits of an enterprise and does not even remotely suggest the compliance with all regulatory framework as a sine qua non for this treaty protection. 17. The stand of the Assessing Officer, on this aspect of the matter, i.e. taxation as non-business income, is thus wholly unsustainable in law. In any event, for the detailed reasons set out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of article 7 or article 14 of the Indo Spanish tax treaty. In the light of this analysis, in our considered view, article 23 has no application in the matter. 22. As we part with this ground of appeal, we may also deal with the judicial precedents cited before us. The common thread in all these precedents is the emphasis on the gains being in the nature of income from bonafide hedging contracts and reliance on Citicorp Banking Corporation s case (supra). It is interesting to note that in Citicorp Banking Corporation s case (supra) the issue req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne, 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 simplictor ? 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 gains are not covered by any of the exception clauses in article 14(1) to 14(5). It is not, in a way, even the case of the Assessing Officer that these gains of the assessee are taxable in India under article 7 or article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 28. In substance, these rather verbose grounds of appeal so raised by the appellant Assessing Officer are nothing but arguments in support of the appellant Assessing Officer s core grievance that the CIT(A) erred in holding that, on the facts and in the circumstances of the case, learned CIT(A) erred in deleting the addition of capital gain of ₹ 11,31,51,216 on sale of shares of companies engaged in the real estate development activities and in not holding that such capital gains are taxable in the source jurisdiction under article 14(4) of the Indo Spanish tax treaty. 29. This issue in appeal also lies in a rather narrow compass of undisputed material facts. During the course of scrutiny assessment proceedings, the Assessing Officer, inter alia , noted that the assessee had earned capital gains amounting to ₹ 11,31,51,216 on sale of shares in real estate companies which were included in BSE realty index. The Assessing Officer noted that these companies wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d show that it was meant to cover the cases in which indirect transfer of immovable properties, by way of transfer of shares in the companies holding such properties, and that it would not cover the cases in which commercial investments are made in the companies dealing in real estate as in the present case. The support for this approach was found in the UN Model Convention Commentary in respect of the similar provisions in the UN Model Convention. It was in this backdrop that, following the judicial precedents- including in assessee s own case, the CIT(A) concluded that the provisions of Article 14(4) would not apply to the facts of this case. The co-ordinate bench decision, relied upon by the learned CIT(A), was an exceptionally brief order which, in it s operative part, simply observed that .......the assessee was deriving income from immovable properties. The AR supported the order of the FAA. 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) [sic, it should have been 14(4)] were applicable for the properties held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ps 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 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. 5. Gains from the alienation of shares of the capital stock of a company forming part of a participation of at least 10 per cent in a company which is a resident of a Contracting State may be taxed in that Contracting State. 6. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident. 32. The short case of the Assessing Officer is that the gains of sale of shares in certain Indian companies, which find place in BSE realty index, are, by the virtue of article 14(), taxable in India 33. Article 14(4) of Indo Spanish tax treaty, as reproduced above, provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 standard, that every company listed on BSE realty index is a company the property of which principally consists of immovable properties. What it overlooks is that the companies listed in realty index, without any dispute or controversy, are the 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. There is no discussion whatsoever on the scope, and relevance, of the expression principally appearing in article 14(4) and once again the Assessing Officer apparently proceeds on rather bizarre assumption that every such company engaged in the property development must principally be having i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved 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 follows: ...The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity . We can do no better than repeat the famous words of judge Learned Hand when he said: ...it is true that the words used, even in their literal sense, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 related first principles, inter alia, observed that A tax treaty is to required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other , that the words employed in the tax treaties need not be examined in precise grammatical sense or in literal sense and even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty ut res magis valeat quam pereat . i.e., in such a manner as to make it workable rather than redundant . It was also observed that A literal or legalistic meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 interpreting article 14(4). What was the object and purpose of Article 14(4). The question that we must, therefore, ask ourselves is as to what was the purpose and object of article 14(4). 44. We find that the gains on alienation of immovable properties are taxable in source jurisdiction. That provision is contained in article 14(1). However, as we have also noted in our analysis earlier, rather than an assessee holding the immovable properties directly in the treaty partner jurisdiction, as a measure of convenience and expediency, many a times corporate structures are used fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 equally taxable in that State. 50. There cannot be any dispute that these model convention commentaries do not bind us, but even then these commentaries are in the nature of contemporanea expositio nevertheless inasmuch as the meaning and backdrop of expressions in the tax treaties can be inferred, to use the words of Lord Redcliffe, as in international tax language developed by these multilateral organizations. Hon ble Andhra Pradesh High Court, in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 it was to accomplish, the inevitable conclusion is that the taxability of gains on sale of shares in companies principally holding the immovable property can be taxed in the source jurisdiction when such an alienation of shares, directly or indirectly and on standalone basis or in conjunction with other transactions, results in the control and enjoyment, of the underlying property, changing hands too. 54. The manner in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate 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. Viewed in the context of the purpose for which article 14(4) finds place in the Indo Spanish tax treaty, and unambiguous thrust of such provisions in the tax treaty literature, article 14(4) is to be read alongwith and to supplement article 14(1), the gains on sale of such shares cannot indeed be taxed in the source state under article 14(4). 56. Secondly, while the expression prin ..... 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