Mumbai ITAT Upholds Exemption Granted On LTCG Upon Sale Of Equity Shares Of Indian Entity Holding Valid TRC

The Mumbai ITAT upheld the exemption of long-term capital gain granted to the Assessee, holding a valid Tax Residency Certificate (TRC), under Article 13 of India-Mauritius DTAA, on sale of equity shares of an Indian company, acquired prior to April 01, 2017.

The Division Bench comprising Prashant Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that “the assessment order passed by the learned Assessing Officer granting benefit of Article 13 to the assessee on shares acquired prior to 1st April 2017, is after making due enquires and further same is also made in accordance with the press release of Central Board of Direct Taxes, hence, cannot be considered to be erroneous insofar as it is prejudicial to the interest of the Revenue”. (Para 21)

As per the brief facts, the Assessee, a Mauritius-based Company, filed its return declaring Nil income and claiming refund of tax deduction at source. During scrutiny assessment, the AO noted that the Assessee sold equity shares of an Indian company and earned capital gain on same. The AO completed assessment accepting Assessee's claim for exemption of such capital gain under Article 13 of India-Mauritius DTAA. Subsequently, the CIT invoked the revisionary jurisdiction under Section 263 and opined that the AO accepted Assessee's claim of exemption of long-term capital gain under the India-Mauritius DTAA without conducting any enquiries regarding same. Thus, CIT passed revision order and set aside the assessment same directing the AO to make a fresh assessment.

The Bench observed that the amended India-Mauritius DTAA, limiting the benefit of profit or gains on sale of shares in the hands of the Mauritius entity, is applicable with effect from Apr 1, 2017 and the CBDT press release dated Aug 29, 2016, expressly provided for grandfathering of investment prior to Apr 1, 2017 and that the same shall not be subject to capital gain tax in India.

The Bench noted that the Assessee submitted all the details explaining the transaction along with all the necessary documents required by the AO, including copy of tax residency certificate, detail of acquisition of shares along with bank statement, copy of balance sheet as well as details of shares sold along with the bank statement etc., share transfer agreement, annual accounts of the buyer and valuation report of the company whose shares have been sold.

Referring to the CBDT Circular No.682 dated Mar 30, 1994, the Bench stated that the person resident of the Mauritius deriving capital gain on sale of shares of Indian companies will be taxable only in Mauritius and does not have liability for taxation in India.

The Bench found that although the assessment order was cryptic, a note in Assessee's annual accounts mentioning the provisions of Mauritius and India jurisdiction on income tax, a reconciliation between the accounting profits for tax purposes along with book profit was made.

Observing that it is not the AO's case that the Assessee does not hold a valid tax residency certificate or that it is a result of fraud or illegal activities, the ITAT held that the claim of exemption granted by the Revenue is clearly in accordance with the CBDT press release, and therefore, quashes the revisionary order under Section 263 and allowed Assessee's appeal.

Counsel for Appellant/ Taxpayer: K. Gopal

Counsel for Respondent/ Department: Manoj Kumar Sinha

Case Title: Comstar Mauritius Limited Verses CIT

Case Number: ITA No. 1529/Mum/2023

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