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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SANDEEP SINGH KARHAILSHRI GIRISH AGRAWAL
Date of Hearing – 08/05/2025 Date of Order - 22/05/2025
O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal against the impugned final assessment order dated 24/12/2024, passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 22/11/2024 issued by the learned Dispute Resolution Panel- 1, Mumbai, (“learned DRP”), for the assessment year 2022-23.
ITA No.1408/Mum/2025 (A.Y. 2022-23) 2
In this appeal, the assessee has raised the following grounds:
– “Re.: Erroneous classification of Rights Entitlement as akin to Right Shares and taxing it under Article 13(5) of the India-Saudi Arabia Double Taxation Avoidance Agreement ('DTAA"): 1.1. The learned ACIT, under the directions of the Hon'ble Dispute Resolution Panel ('DRP"), erred in classifying the Rights Entitlement (RE) as akin to right shares and thereby taxing them under Article 13(5) of the India-Saudi Arabia DTAA. 1.2 The learned ACIT erred in not recognizing that RE represents rights granted to existing shareholders to subscribe to new shares, and are not shares per se 1.3. The learned ACIT erred in rejecting the classification of RE as a separate security, distinct from the shares of the company. 1.4. The learned ACIT failed to consider that the sale of RE is covered under this Article 13(6) of the of India-Saudi Arabia DTAA and should be taxable only in Saudi Arabia and not India. 1.5. The Appellant respectfully submits that the learned ACIT be directed to treat capital gains arising from the renunciation of RE as taxable only in the country of residence of the Appellant i.e. Saudi-Arabia, in accordance with the provisions of Article 13(6) of the India- Saudi Arabia DTAA.
2. Re.: Erred in granting short credit of advance tax paid amounting to Rs.6,20,21,241/-: 2.1. The learned ACIT has erred in granting the Appellant short credit for advance tax paid by Rs. 6,20,21,241/-. 2.2. The Appellant submits that the learned ACIT be directed to grant full credit for the advance tax paid and to re-compute its tax liability accordingly.
3. Re: Erroneous levy of interest u/s.234C of the Income Tax Act, 1961: 3.1. The learned ACIT has erred in levying interest of Rs. 6,40,881/- u/s. 234C of the Income Tax Act, 1961 ('the Act"). 3.2. The Appellant submits that interest u/s 234C being consequential in nature, the learned ACIT be directed to delete the interest u/s 234C of the Act so levied and to re-compute its tax liability accordingly.
4. Re: Initiating penalty proceedings under section 270A of the Act. 4.1. The learned ACIT erred in initiating penalty under section 274 read with section 270A of the Act, alleging under reporting of income by the Appellant.
5. Re: General
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5.1 The Appellant craves leave to add, alter, amend substitute and / or otherwise modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”
3. The issue arising in ground no.1, raised in assessee’s appeal, pertains to the taxability of capital gains on the sale of rights entitlement under Article 13 of the India-Saudi Arabia Double Taxation Avoidance Agreement (“DTAA”).
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee was established in Saudi Arabia and is certified to be a resident in Saudi Arabia for the purpose of India-Saudi Arabia DTAA. For the year under consideration, the assessee filed its return of income on 31/03/2022, declaring a total income of INR 915,06,52,620, and claimed a refund of INR 86,54,560. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the year under consideration, the assessee, inter alia, claimed short-term capital gains amounting to INR 3,81,71,252 earned on the sale of rights entitlement as not taxable in India. It was observed that the said short-term capital gains were earned by the assessee on the sale of rights entitlement vis-à-vis the shares of Bharti Airtel Ltd held by it. However, the same were not offered for taxation by the assessee, claiming that the rights entitlement are not shares and the capital gains arising therefrom are not taxable in India in view of the provisions of Article 13 of the India-Saudi Arabia DTAA. Accordingly, during the assessment proceedings, the assessee was asked to show cause as to why the said capital gains should not be brought to tax in India under the head “Income from Capital Gains”. In response, the assessee submitted that as per (A.Y. 2022-23) 4 the Companies Act, 2013, “share” means a share in the share capital of a company and includes stock. The assessee further submitted that rights entitlement is the right issued to buy additional shares in a company and is made to the company’s existing shareholders, and the same is not shares per se. It is further submitted that such entitlement is allowed to be renounced to a third party for a consideration, and therefore, the rights entitlement is the right or any interest in a security. Thus, the assessee submitted that the rights entitlement is considered as a security separate from that of shares and cannot be construed to be the same as the shares of the company. By referring to the provisions of Article 13(6) of the India-Saudi Arabia DTAA, the assessee submitted that the sale of rights entitlement is taxable only in Saudi Arabia.
5. The Assessing Officer (“AO”), vide draft assessment order dated 23/03/2024 passed under section 144C(1) of the Act, disagreed with the submissions of the assessee and held that the value of rights is carved out of existing shares held by an entity and hence they should be treated as shares referred to in Article 13(4) of the India-Saudi Arabia DTAA. Accordingly, the AO included the capital gains earned by the assessee on the sale of rights entitlement in the capital gains on shares and accordingly, brought the same to tax under the head “short-term capital gains” and added to the total income of the assessee.
6. The assessee filed detailed objections against the addition made by the AO. Vide directions dated 22/11/2024, issued under section 144C(5) of the Act, the learned DRP, rejected the objections filed by the assessee observing as follows: –
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(i) Rights entitlement and shares are closely related assets. (ii) Rights entitlement is a temporary credit of shares in the DEMAT account of the existing shareholder, and thus, as compared to shares, the rights entitlement is a specific type of financial instrument that companies may issue to the existing shareholders when they need to raise additional capital. (iii) Shares represent ownership in a company, while rights entitlement offer rights to the existing shareholders to buy a certain number of new shares at a discounted price. (iv) Rights Entitlements are given to the existing shareholders in proportion to the current shareholding. Thus, by exercising their rights entitlement, shareholders can subscribe to the new shares and increase their ownership in the company. (v) Rights entitlement is a security and is like a bonus to the existing shareholders to buy additional company’s shares at a discounted price (vi) Therefore, rights entitlement and shares are financial instruments of the same class. (vii) Rights entitlements are linked to shares on origin and also in the final conversion upon exercise of the subscription. (viii) “Shares” as per paragraphs 4 and 5 of Article 13 of the India-Saudi Arabia DTAA can be given a broad interpretation to include similar or comparable interests. (ix) Thus, rights entitlements are shares and intrinsically and inextricably linked to shares. Therefore, the transfer of rights entitlement would not fall under Article 13(6) of the India-Saudi Arabia DTAA.
ITA No.1408/Mum/2025 (A.Y. 2022-23) 6
In conformity with the directions issued by the learned DRP, the AO vide impugned final assessment order dated 24/12/2024, assessed the total income of the assessee after including the capital gains earned by the assessee on the sale of rights entitlement. Being aggrieved, the assessee is in appeal before us.
8. During the hearing, the learned Authorised Representative (“learned AR”) submitted that rights entitlement may be inextricably linked to the shares held by the assessee in the company, but the same is not shares. Accordingly, it was submitted that gains accrued to the assessee from the sale of rights entitlement are only taxable in the resident country, i.e. Saudi Arabia.
9. On the other hand, the learned Departmental Representative (“learned DR”), by vehemently relying upon the order passed by the lower authorities, submitted that since rights entitlement is inextricably linked to the shares held in a company, they are akin to shares. Thus, the learned DR submitted that any gains arising to the assessee from the transfer of rights entitlement are taxable only in the country in which the company is resident. Therefore, it was submitted that as per the provisions of Article 13(4) and Article 13(5) of the India-Saudi Arabia DTAA, the gains accrued to the assessee from the sale of rights entitlement were correctly assessed to tax in India.
We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the fact that during the year under consideration, the assessee, being a resident of Saudi Arabia, earned short-term capital gains on the sale of rights (A.Y. 2022-23) 7 entitlement vis-à-vis its shares of Bharti Airtel Ltd., which is an Indian company. The Revenue authorities, on the basis that the rights entitlement derives its value from the existing shares held by the assessee, concluded that the rights entitlement should be treated as shares, and thus, any gain arising from the sale of the rights entitlement is taxable in India, i.e. in the source State, as per the provisions of Article 13(4) and Article 13(5) of the India-Saudi Arabia DTAA. On the contrary, it is the plea of the assessee that rights entitlement are not the shares, and therefore, any gains arising from the sale of rights entitlement are only taxable in Saudi Arabia, i.e. in the resident State, as per the provisions of Article 13(6) of the India-Saudi Arabia DTAA.
11. Before proceeding further, it is relevant to note the provisions of Article 13 of the India-Saudi Arabia DTAA, which deal with the capital gains, and the same reads as follows: – “ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other Contracting State. 3. Gains from the alienation of ships or aircraft operated in international traffic, or 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.
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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.
Gains from the alienation of shares other then those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State.
Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5, shall be taxable only in the Contracting State of which the alienator is a resident.”
12. From a plain reading of Article 13 of the India-Saudi Arabia DTAA, it is evident that the gains arising from the alienation of the following categories of assets fall within the ambit of this Article: – (a) Immovable property (Paragraph 1) (b) Movable property of a Permanent Establishment (Paragraph 2) (c) Ships or aircraft, or movable property pertaining to the operation of ships or aircraft (Paragraph 3) (d) Shares or interests based on immovable property (Paragraph 4) (e) Shares other than those mentioned in paragraph 4 (Paragraph 5) (f) Any property other than that referred to in paragraphs 1-5 (Paragraph 6)
13. Insofar as the issue under consideration before us is concerned, the first three categories of assets dealt with in Article 13 of the India-Saudi Arabia DTAA are not relevant. As per the provisions of Article 13(4) and Article 13(5) of the India-Saudi Arabia DTAA, the gains arising from the alienation of shares may be taxed in that contracting state, in which the company, whose shares are transferred, is resident. Accordingly, having placed reliance upon the aforesaid provisions, it is the plea of the Revenue that since rights entitlement are similar to shares, therefore the capital gains arising to the assessee from (A.Y. 2022-23) 9 the transfer of rights entitlement is taxable in India, as these rights entitlement were held by the assessee vis-à-vis the shares of an Indian company.
14. However, on the other hand, Article 13(6) of the India-Saudi Arabia DTAA provides that the gains arising from the alienation of any property other than that referred to in other paragraphs of this Article shall be taxable only in the contracting state of which the transferor is a resident. Thus, it is the plea of the assessee that since the rights entitlement are distinct from the shares, therefore the gains arising from the alienation of the same is covered under Article 13(6) of the India-Saudi Arabia DTAA, and thus, is taxable in Saudi Arabia, i.e. the resident country of the assessee.
Therefore, in the present case, in order to decide the issue whether the present case falls within the ambit of the provisions of Article 13(4)/Article 13(5) of the India-Saudi Arabia DTAA or Article 13(6) of the India-Saudi Arabia DTAA, it is firstly pertinent to decide whether the rights entitlement is akin to shares. In case the answer to the latter question is negative, then the present case would fall within the ambit of the provisions of Article 13(6) of the India- Saudi Arabia DTAA.
We find that the issue whether rights entitlement is similar to shares came up for consideration before the coordinate bench of the Tribunal in Vanguard Emerging Markets Stock Index Fund vs. ACIT, reported in [2025] 172 taxmann.com 515 (Mumbai - Trib.). While deciding that the rights entitlement to the shares is distinct from the shares, the coordinate bench (A.Y. 2022-23) 10 vide its order dated 18/03/2025 in the aforesaid decision, observed as follows:– “7. First of all, our attention was drawn to Section 62 of the Companies Act, 2013 which for the sake of ready reference is reproduced hereunder:- "62. Further issue of share capital (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares such shares shall be offered 1. (a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion. as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely (1) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days 1 for such lesser number of days as may be prescribed) and not exceeding thirty days from the date of the offer within which the offer if not accepted shall be deemed to have been declined, (ii) 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 favours of any other person, and the notice referred to in clause (1) shall contain a statement of this right; (ii) after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not disadvantageous to the shareholders and the company."
From the perusal of the aforesaid provisions, it could be deduced that "rights entitlement" are not equity shares because the Section provides shareholder in whose favour an "offer" to subscribe to shares is made, may either accept the offer or exercise the right to renounce the offer or transfer the right to any other person. Ergo, a shareholder obtains an exercisable right to subscribe to shares which is different from shares in the Indian Company.
SEBI has issued a Circular dated 22/01/2020 on "Streamlining the Process of Rights Issue (SEBI Circular). Relevant extract of the SEBI Circular is reproduced below:- "Introduction of dematerialized Rights Entitlements (REs) – 1.3.2. REs shall be credited to the demat account of eligible shareholders in dermaterialized form. 1.3.3. in REs process, the REs with a separate ISIN shall be credited to the demat account of the shareholders before the date of opening of the issue, against the shares held by them as on the record date."
10. Thus, what can be inferred is that, RE is credited to the demat account of the investor and it is an asset, which is different from shares of the company and therefore, a separate ISIN is given for rights entitlement. Even the National Stock Exchange of India Limited (NSE) had issued a similar Circular dated 19/02/2020 according to which trading in dematerialized rights entitlements on the stock exchanges shall be chargeable to Securities Transaction Tax (STT) at the rate specified in Finance (No.2) Act, 2004, in respect of "Sale of an option in securities (i.e. payable by the seller at the rate of 0.05% of the value at which such rights entitlements are traded). Thus, (A.Y. 2022-23) 11 rights entitlements have been treated differently from shares by the SEBI and NSE.
It has been further brought to our notice that as per the Finance Act, 2004 "option in securities" has been defined to have the same meaning assigned to it in clause (d) of section 2 of the Securities Contracts (Regulation) Act. 1956 (SCRA). Clause (d) of section 2 of the SCRA defines "option in securities to mean purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a taji mandi, a galli, a put, a call or a put and call in securities. Accordingly, it has been submitted that rights entitlement is an option to purchase a security (which could be shares of an Indian company) in the future. Further, the prescribed rate of STT on purchase of equity shares is different, which clearly evidences that rights, entitlement is not the same as shares.
In support of the contention that rights entitlement are different from the shares, Ld. Counsel for the assessee had strongly placed reliance on the judgment of the Hon'ble Supreme Court in the case of Navin Jindal v. Assistant Commissioner of Income-tax 187 Taxman 283 /320 ITR 708 (SC), wherein it was held as under:- "The right to subscribe to additional offer of shares/debentures on right basis on the strength of existing shareholding in the company comes into existence when the company decides to come out with the rights offer. Prior to that, such right, though embedded in the original shareholding, yet remains inchoate. The same crystallizes only when the rights offer is announced by the company. The said right to subscribe to additional shares/debentures is a distinct, independent and separate right, capable of being transferred independently of the existing shareholding, on the strength of which such rights are offered."
From the aforesaid observation of the Hon'ble Supreme Court, it is evident that when a company offers right to the shareholders, the shareholder obtains an exercisable right to subscribe to shares which is different from the shares in the Indian company. In our view this observation of the Hon'ble Supreme Court clearly clinches the issue that rights entitlement (REs) is distinct from the shares.
Further, under the Income Tax Act also, „rights entitlement' is considered distinctly as compared to the shares in the company itself, for instance- Section 2(42A) of the Act reckons holding period in respect of right to subscribe to any financial asset which is renounced in favour of any other person from the date of offer. Similarly, Section 55(2)(aa) of the Act deals with a scenario where the person becomes entitled to subscribe to additional financial asset and if such entitlement is in relation to any right to renounce the entitlement, the cost is taken to be NIL. From the above provisions, it is discernible that right to subscribe to any financial asset is distinct from financial asset or shares.”
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It is further pertinent to note that on page 19 of its directions, the learned DRP, though correctly noted that the existing shareholder of the company can subscribe to the new shares “only by exercising” their rights entitlement, however, somewhere lost sight of this significant aspect and arrived at the incorrect conclusion. Thus, in light of the decision of the Hon’ble Supreme Court in Navin Jindal vs. DCIT, [2010] 320 ITR 708 (SC), as noted in the aforesaid decision by the coordinate bench, it is clearly established that the rights entitlement though embedded in the original shareholding is separate and distinct right capable of being transferred independently of the existing shareholding. Therefore, respectfully following the aforesaid decision, we are of the considered view that the rights entitlement to the shares are distinct from the shares. Having held so, we are of the considered view that since in the present case the assessee earned short-term capital gains from the sale of rights entitlement, the same are only taxable in the resident State, i.e. Saudi Arabia, as per the provisions of Article 13(6) of the India-Saudi Arabia DTAA. Accordingly, the impugned addition made on account of capital gains arising from the sale of rights entitlement is deleted. As a result, ground no.1 raised in assessee’s appeal is allowed.
The issue arising in ground no. 2, raised in assessee’s appeal, pertains to the short credit of the advance tax paid by the assessee. During the hearing, the learned AR submitted that the assessee has also filed a rectification application before the AO on 05/05/2025 in this regard, which is still pending consideration. Accordingly, we deem it appropriate to restore this issue to the file of the AO with the direction to grant credit of advance tax (A.Y. 2022-23) 13 paid, in accordance with the law, after conducting the necessary verification. We order accordingly. As a result, ground no.2 raised in assessee’s appeal is allowed for statistical purposes.
The issue arising in ground no.3, raised in assessee’s appeal, pertains to the levy of interest under section 234C of the Act, which is consequential in nature. Therefore, the same needs no separate adjudication.
Ground no.4, raised in assessee’s appeal, pertains to the initiation of penalty under section 270A of the Act, which is premature in nature. Therefore, this ground is dismissed.
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 22/05/2025