SHRI PRABHUKUMAR AIYAPPA KULLATIRA ,BANGALORE vs. INCOME TAX OFFICER WARD-4(3)(4), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the order of CIT(A) dated 29.1.2018. The assessee has raised following grounds of appeal:- 1) “The Id. CIT (A) erred in passing the order in the manner which he did. 2) On the facts and in the circumstances of the case the learned CIT(A) ought to have accepted the income declared in the revised return and refrained from including the capital gains arising out of sale of shares in the Dubai company. 3) The learned CIT (A) ought to have appreciated that the conditions provided in DTAA had been fully satisfied and thusthe appellant was entitled to the

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Page 2 of 12 exemption in respect of capital gains arising on the sale of shares of the UAE company. 4) The learned CIT (A) erred in surmising that the management control of the company was not in Dubai and further surmised that the appellant was managing the company from India to justify the denial of exemption. 5) The learned CIT(A) ought to have appreciated that the company was being managed by the shareholders who were residents of Dubai though they-were of Sudanese Nationality and thus all the``'- conditions provided under DTAA had been satisfied and the appellant was entitled to the relief as claimed. 6) Without prejudice ,the confirming the additions are excessive, arbitrary and unreasonable and ought to be deleted. 7) The learned CIT (A) erred in charging the interest u/s.234A of the Act. 8) For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed.”

"16. It is also relevant to note that in the present context assessee has not proved residential status of the company, whose shares assessee has sold and claimed exemption. No certificate issued by tax authority of UAE with regard to the company is submitted. However, fiar tax purposes. ,tax residency certificate is one of the conclusive proofs ..fbr establishing tax residency. Assessee was specifically requisitioned to prove tax residency of UAE in accordance with the provisions of

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Page 3 of 12 India-UAE treaty vide this office letter dated 12.12.2017. however, the assessee has failed to prove tax residency of UAE conclusively.

1 7. In view of above, it is evident that the assessee has: i. failed to prove that the company is wholly managed in UAE. ii. failed to prove that the company is wholly controlled in UAE. iii. failed to prove that the company is tax resident of UAE.

Hence, the provisions of Article 13(4) of Double Taxation Agreement 18. — Agreement for avoidance of double taxation and prevention of fiscal evasion with foreign countries-UAE are not applicable in the assessee's case. The provisions of Article 13(5) are applicable to the )acts and circumstances of the assessee. As per the Article 13(5) of Double Taxation Agreement — Agreement for avoidance of double taxation and prevention of fiscal with foreign countries-UAE, Gains from alienation of any property other than that referred to in paragraphs 1,2.3 and 4 of Article 13 shall be taxable only in the contacting state of which the alienator is a resident. In the assessee's case, it is undisputed fact that the assessee is a resident of India. Therefore, capital gains from shares are taxable in India .for the .1Y: 2015-16.

Further. the Section 5(1) of I.T. Act, 1961 provides for as under: 19.

5(1) subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever sources derived which- a) Is received or is deemed to be received in India in such year hr or on behalf of. such person; or b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or c) Accrues or arises to him outside India during such year.

Additionally. it is noted from the written submissions of the assessee, 20. that Capital Gains are not taxable in UAE / Free Trade Zone. Further, Hon 'ble Advance Ruling Authorities has held in certain cases that when the income arising to any person is exempted in any of the two states which are parties to DTAA, then it would become taxable in other state. Since, the Capital Gains is not taxable in UAE. the same automatically become. taxable in India in view of the aforementioned observations or the Advance Ruling Authorities. Therefore, the Gains so arose are taxable in India.

Further, Section 5(1) of the I. T. Act, 1961 says that "a person who is 21. resident of India will be taxable in India of his earnings whether received in India or outside India. While charging tax on an Indian resident, it is charge on The total income of that person regardless of whatever source it is

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Page 4 of 12 derived .from. So if a person is living in India who is earning front the shares owned by him in a.foreign country will pay tax in India."

Accordingly, the claim of exemption of Capital Gains under Article 23. 13(40 of India-LAE treaty is hereby denied and Capital Gains is computed as under alter considering the indexed the cost of acquisition as adopted by the assessee:”

4.1 The Assessee was employed in Muscat till 2011 for a period of about 20 years. The assessee during his stay outside India had made investment to the tune of 1,62,000 Dirhams in the shares of the company OCSHI Solutions and Services FZ-LLC, Dubai. The said company was incorporated on 21.10.2003 in Dubai. The assessee was one of the promoters of the company. The assessee had subscribed for 37 shares at the time of incorporation at the face value of AED 1000. On 15.11.2009, the assessee had purchased 25 shares for an aggregate value of AED 54,545. Further, the assessee purchased 25 shares on 14.06.2011 for a consideration of AED 75,000. Thus, in all the assessee had 87 shares of the said company. The above shares were transferred by the assessee to the other existing shareholders vide agreement dated 14.12.2014 for a consideration of AED 2,86,53,531. The assessee claimed capital gains on sale of shares amounting to AED 2,48,23,211 as exempt

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Page 5 of 12 from taxation by virtue of DTAA between India and UAE. The AO declined to accept the claim of the assessee on the ground that the assessee though provided proof for incorporation of the company in Dubai, he was admittedly a resident of India during the previous year related to the assessment year 2015-16 and managing and directing the day to day and regular operations from India and there were no documents provided during the course of assessment to conclusively substantiate the facts that the business operations were managed from UAE. Further, it was observed that the assessee had not established as to whether the other directors and promoters of the company viz., Mr.Magid H Ahmed, Mr.Mutaz Ali and Mr.Wael Khalil were actually residents of UAE. Further, it was not established according to the AO that though the company was located in Dubai Free Trade Zone, the company was wholly controlled from UAE. Accordingly, he was of the opinion that the company was not proved to be wholly managed and controlled in UAE and consequently the clauses in the DTAA would not apply and that the assessee being a resident, his global income is liable to be taxed in India and consequently the capital gain was to be taxed in India.

4.2 It was also observed that the capital gain not being taxable in UAE, the same was liable to be taxed in India for which Advance Ruling Authorities' Findings have been referred to without citing any judgment.

4.3 On appeal, the learned CIT(A) held that the assessee had not been in a position to negate or refute the findings of the AO with regard to the management and control of the company and the residency proof of the assessee as well as the promoters/shareholders of the UAE company in question.

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Page 6 of 12 Accordingly, he had upheld the addition. Hence, the assessee filed appeal before this Tribunal against the order of Ld. CIT(A)

4.4 The assessee vide his written submission before the Ld. CIT(A) had extracted clauses 3 & 4 of the DTAA and submitted that the assessee though resident of India, he is not liable to tax in respect of the capital gains arising out of sale of shares of the UAE company to the buyers outside India. Section 90(1) of the IT Act was also referred to submit that the DTAA would prevail over the provisions of the Act and the exemption given under the DTAA from taxation in India is required to be followed, even otherwise the amount was not taxable under the Act in India. Further, the assessee has established that UAE company is located and managed in UAE. From the agreement of sale of shares dated 14.12.2014, it would establish that the company was managed in Dubai by the transferees of shares who were also located in UAE and from the address of buyers of shares they were in UAE and especially Mr.Magid Hassan Ahmed Idris was located in Dubai who was one of the promoters. The other purchaser is the other promoter and accordingly they were managing the company and thus the management and control was by the shareholder located in Dubai and it is well established that the condition required has been satisfied under the DTAA. In fact, the assessee is only a minority shareholder having 17.5% shares of the company, which is referred to in the recitals in Share Sale 86 Purchase Agreement and it is specifically referred to in clause E of the said agreement. The purchase price and payment terms have also been recorded in the agreement. The other shareholder Mr.Wael Mahmoud Khalil was also a resident of Dubai. The 3 shareholders have been identified as continuing shareholders who continued to carry on the business of the company, which is Schedule 1 to the Shareholders Agreement. Thus, the company in Dubai is controlled

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Page 7 of 12 and managed by the continuing shareholders, out of which 2 of them were in Dubai and the conditions as provided in DTAA have been fully satisfied. In the circumstances, the observations of the AO that the assessee was a resident of India and was operating, managing, directing the day to day and the regular operations from India was without evidence and have no substance. 0n the other hand, the assessee was only a minority shareholder having 17.5% of shareholding and whereas the other 2 shareholders who were the residents of Dubai managing the affairs of the company and out of two shareholders, one of them was a shareholder along with the other person who is a resident of UAE. In other words, except the assessee, all the other persons were either in Dubai or in UAE and in the circumstances considering the assessee is controlling the company is without any substance and merits. On the other hand, the other 3 persons were not controlling the company out of which 2 of them were in Dubai itself and the residence of the company has also been fully established by the above facts. In the circumstances, the provisions of DTAA would squarely apply and the assessee is exempt from taxation in respect of the capital gains in respect of the shares held in Dubai. The shareholding of the assessee in the company has also been brought to the notice of the AO and the mere fact that he was attending some of the Board Meetings of the company would not suggest that he was having control and operating the company's affairs. Though the assessee was appointed as Vice Chairman, he has no control and he was not a whole time director and he was not even paid any remuneration to discharge the functions of Vice Chairman of the company and this has been brought to the notice of the AO by the assessee. Further, it was also brought out that Board Meetings have always been conducted in Dubai and he was only attending the meetings and he was no way involved in the day to day

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Page 8 of 12 functions of the company. It was also brought out that he was not a signatory to the cheques of the company and thus cannot be said to have control over the financial operations of the company. All these submissions have been made before the AO which were not controverted by him. In the circumstances, the assessee was not liable to be assessed in respect of capital gains and the exemption as prayed for should have been given.

4.5 Accordingly, Ld. A.R. prayed that the impugned addition, of Rs.2,48,23,210/- may be deleted.

5 Ld. D.R. relied on the order of Ld. CIT(A), who decided this issue as under:- “The assessee has not rebutted the AO's finding that. there is no substantial proof available to show that the company (whose shares are transferred) was effectively controlled / operated only in UAE. It is not disputed by the Assessee that the appellant continued to remain a resident of India, during the assessment- period and therefore controlled the company from India itself. The assessee has also not refuted or confronted the AO's findings, that there was absence of valid proof with regard to UAE-residency of other Directors / Promoters, as extracted in the above paras. It is therefore not conclusively proved or substantiated by the appellant that, the company (whose shares were transferred) was exclusively functioning from UAE under the direct operating control of Directors / Promoters, who were also not found to be effectively based in UAE during the period under consideration. In background of the above detailed discussion and facts & circumstances of the case, I do not see sufficient contrary evidence to deviate from the AO's stand.”

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Page 9 of 12 LLC, Dubai for a consideration of AED 2,86,53,531 and earned capital gain of AED 2,48,23,211 claimed as exempted from taxation by virtue of DTAA between India and UAE. However, the same has been brought to tax by lower authorities. The contention of the Ld. A.R. is that the company whose share was sold was controlled and managed in Dubai and the condition as provided in DTAA have been fully satisfied and as such the assessee is not liable for any capital gain tax in India. For this purpose, the assessee drew our attention to the Article 13 of DTAA between India and UAE as per which the capital gain on sale of shares of the company located in Dubai is required to be taxed only in that country and not taxable in India. The relevant Article reads as under:- “Article 13 of the said DTAA deals with capital gains and clauses 3 and 4 read as under:

"3. 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. 4. Gains from the alienation of shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State may be taxed in that State." Accordingly, no capital gain is taxable in India even though he is a "resident" under the Act, and the capital gain is otherwise taxable under the Act. Since the DTAA prevails over the provisions of the IT Act, the Appellant gets the benefit of exemption from taxation.

The Advance Ruling Authorities in certain cases has observed that when the \ income arising to any person is exempted in any of the two States which are parties to the DTAA, then, it would become taxable in the other State. In the case of the Appellant, the Appellant is a "resident" of India. The income accrued to him was from various sources referred to hereinabove was in Dubai i.e., UAE. The income accrued in Dubai appeared to be exempt from taxation in Dubai. Accordingly, it may be said that the income which has accrued to the Appellant is liable to be assessed to tax in India. Consequently, even the capital gains and sitting fees may also have to be offered for taxation under the Act. However, on perusal of Section 90(1) of the Act which is produced herein below, the DTAA as prevailing would clearly establish that by virtue of Section 90(1) when the Central Government has entered into

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Page 10 of 12 DTAA with the other country, the DTAA would prevail and would be operative for all persons.

"90(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,--

(a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or" There is no specific qualification under the DTAA to suggest a person is taxable in the State where he resides when he is not taxable in the other Contracting State. On perusal of the DTAA between India and UAE, there is no exclusion clause to fix the liability on the Appellant under the Act. Section 90(1) provides for entering into agreement with a Government of any other country outside India and such agreement was to grant relief to the person earning income. The purpose of DTAA was for promoting mutual economic relations, trade and investment. Section 90(1) only refers to the purpose for which the agreement is executed and it is for giving relief. By exercising the powers conferred under Section 90(1), the Indian Government has entered into agreement with UAE and such agreement when it prevails is required to be applied to all the persons. When the DTAA prevails taxation should be done in accordance with the Articles of the DTAA. Thus, when an income is exempt from taxation in India in accordance with DTAA, then, the assessee can avail such benefit under the Act since the DTAA always prevails over all the Act.”

“Double taxation relief—Agreement between India and Malaysia—Business income and capital gains—As per art. IV of the DTAA, the person who is a resident in both the Contracting States is to be deemed to be a resident of that Contracting State with which his personal and economic relations are closer—Immovable property in question viz.,

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Page 11 of 12 rubber plantations, situated in Malaysia—Assessee had no permanent establishment in India in regard to carrying on the business of rubber plantations—Thus, business income arising out of said rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia—His residence in India is irrelevant—As regards capital gains, it is always treated as income arising out of immovable property and, therefore, the contention that capital gains is not income and is not covered by the Treaty cannot be accepted at all—Thus, capital gains derived from immovable property is income and, therefore, art. VI of the DTAA would be attracted, and property being situated in Malaysia, capital gains were not taxable in India—Provisions of DTAA will prevail over the provisions of the IT Act.”

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Order pronounced in the open court on 15th Jun, 2022

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 15th Jun, 2022. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.