Facts of the Case

  • The respondent/assessee, Zaheer Mauritius, along with Vatika Pvt. Ltd., invested in Compulsorily Convertible Debentures (CCDs) issued by SH Tech Park Developers Pvt. Ltd.
  • CCDs were issued in a 35:65 ratio between the assessee and Vatika.
  • The assessee subsequently transferred its CCDs to Vatika.
  • The assessee treated gains from transfer as capital gains, claiming exemption under Article 13 of the India-Mauritius DTAA.
  • The Assessing Officer (AO) treated the gains as interest income under Section 2(28A) and Article 11 of DTAA.
  • The assessment was based on an AAR ruling dated 21.03.2012, which was later set aside by the Delhi High Court on 30.07.2014.

Issues Involved

  1. Whether gains arising from transfer of CCDs are capital gains or interest income.
  2. Whether such gains are taxable in India under the India-Mauritius DTAA.
  3. Applicability of Section 2(28A) vis-à-vis DTAA provisions.

Petitioner’s (Revenue) Arguments

  • The Revenue argued that:
    • Gains from CCDs should be treated as interest income.
    • Reliance was placed on Section 2(28A) defining “interest.”
    • Article 11 of the DTAA (Interest) should apply, making the income taxable in India.

 

Respondent’s (Assessee) Arguments

    • CCDs are capital instruments, and their transfer results in capital gains.
    • Such gains are governed by Article 13 of the India-Mauritius DTAA, which exempts taxation in India.
    • The earlier AAR ruling had already been set aside by the High Court, making the Revenue’s reliance invalid.

 

Court’s Findings / Order

    • The AAR ruling (21.03.2012) forming the basis of assessment had already been quashed by the High Court (30.07.2014).
    • The ITAT rightly followed the High Court’s earlier decision and ruled in favour of the assessee.
    • Similar issues had already been decided against the Revenue in earlier assessment years.
  • Final Order:
    • Appeals filed by the Revenue were closed/dismissed.
    • Parties are bound by the outcome of the pending Civil Appeal before the Supreme Court (Civil Appeal No. 10299/2016).

Important Clarifications

  • CCDs treated as capital assets for taxation purposes in this context.
  • DTAA overrides domestic law where beneficial to the assessee.
  • Once an AAR ruling is set aside, it cannot be relied upon for assessment.
  • The matter remains subject to final adjudication by the Supreme Court.

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/RAS21122023ITA8042023_150809.pdf

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