Facts of the Case

The case pertains to Assessment Years 2013–14 and 2014–15, where the Revenue challenged the orders of the Income Tax Appellate Tribunal (ITAT), which ruled in favor of the assessee, Zaheer Mauritius.

The assessee, along with Vatika Pvt. Ltd., had invested in Compulsorily Convertible Debentures (CCDs) issued by SH Tech Park Developers Pvt. Ltd. The CCDs were allotted in a ratio of 35:65 between the assessee and Vatika. Subsequently, the assessee transferred its CCDs to Vatika.

The assessee contended that the gains arising from such transfer were capital gains, not taxable in India due to the protection under Article 13 of the India–Mauritius Double Taxation Avoidance Agreement (DTAA).

However, the Assessing Officer treated the gains as interest income under Section 2(28A) of the Income Tax Act, 1961, read with Article 11 of the DTAA, relying on an earlier ruling of the Authority for Advance Rulings (AAR).

Notably, the AAR ruling dated 21.03.2012 had already been set aside by the Delhi High Court in W.P.(C) 1648/2013 (dated 30.07.2014).

Issues Involved

  1. Whether gains arising from the transfer of CCDs qualify as capital gains or interest income.
  2. Applicability of:
    • Section 2(28A) of the Income Tax Act, 1961
    • Article 11 vs Article 13 of the India–Mauritius DTAA
  3. Whether the Revenue can rely on an AAR ruling that has already been set aside.

Petitioner’s (Revenue’s) Arguments

  • The Revenue contended that:
    • The CCDs inherently carry characteristics of debt instruments.
    • Gains arising from their transfer should be treated as interest income.
    • Section 2(28A) defines interest broadly, covering such receipts.
    • Therefore, taxation should be governed by Article 11 (Interest) of the DTAA.

Respondent’s (Assessee’s) Arguments

  • The assessee argued that:
    • CCDs, upon transfer, result in capital gains, not interest income.
    • As a Mauritius-based entity, the gains are exempt under Article 13 of the DTAA.
    • The AAR ruling relied upon by the Revenue had already been quashed by the High Court.
    • The Tribunal correctly followed the binding precedent of the High Court.

Court Findings / Order

    • The ITAT had rightly relied on the earlier judgment of the High Court (dated 30.07.2014), which had set aside the AAR ruling.
    • Similar issues for AY 2011–12 had already been decided against the Revenue by a coordinate bench.
    • The matter is also pending before the Supreme Court (Civil Appeal No. 10299/2016).
  • Final Order:
    • The appeals filed by the Revenue were closed.
    • The parties agreed to be bound by the final outcome of the pending Supreme Court appeal.

Important Clarification

  • The Court did not re-adjudicate the substantive issue but relied on:
    • Existing binding precedent
    • Judicial consistency across assessment years
  • The final tax position remains subject to the Supreme Court’s decision in the pending civil appeal.

Sections & Legal Provisions Involved

  • Section 2(28A), Income Tax Act, 1961 – Definition of Interest
  • Article 11, India–Mauritius DTAA – Taxation of Interest
  • Article 13, India–Mauritius DTAA – Taxation of Capital Gains

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

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