A Mumbai-based woman who is a tax resident of Singapore, sold some of her debt and equity mutual fund investments in India and claimed tax exemption on capital gains under Article 13 of the India-Singapore Double Taxation Avoidance Agreement (DTAA). However, the tax department rejected her claim.
Thus she challenged the denial before the Dispute Resolution Panel (DRP) which also ruled against her. The taxpayer then approached the Income Tax Appellate Tribunal (ITAT) Mumbai, arguing that in a comparable case under the India- UAE (United Arab Emirates) DTAA, ITAT Cochin had granted capital gains relief to an Indian resident of UAE and the same priciple should also apply to her case.
Accepting her argument, ITAT Mumbai examined the India-Singapore DTAA in detail and ruled in her favour, granting the capital gains exemption. The taxpayer was represented before ITAT Mumbai by Dr. K Shivaram and Mr. Rahul Hakani.
Summary of the judgement
Chartered Accountant Suresh Surana, said to ET Wealth Online: “In the given case (No.174/MUM/2025, March 26, 2025), the assessee, an individual and a tax resident of Singapore, earned short-term capital gains during AY 2022-23 from the redemption/sale of Indian mutual fund units, comprising both equity-oriented and debt-oriented mutual funds. “
According to Surana, while filing the income tax return in India, the assessee claimed exemption from Indian tax on such capital gains by invoking Article 13 of the India–Singapore Double Taxation Avoidance Agreement (DTAA), contending that the gains were taxable only in Singapore.
Surana says that the Assessing Officer rejected the claim and held that the gains were taxable in India, on the premise that the mutual fund units derived substantial value from assets located in India. The Dispute Resolution Panel (DRP) upheld the Assessing Officer’s view, following which the assessee appealed before the Income Tax Appellate Tribunal (ITAT).
Surana says that the core issue before the ITAT was whether capital gains arising for a Singapore tax resident from the transfer or redemption of Indian mutual fund units could be taxed in India, or whether such gains were covered by the residuary clause of Article 13(5) of the India–Singapore DTAA and thus taxable only in the country of residence, i.e., Singapore.
Surana says that the Income Tax Appellate Tribunal (ITAT) Mumbai examined Article 13 of the India–Singapore DTAA, which governs taxation of capital gains.
Surana says: “ITAT Mumbai noted that Article 13(4) applies specifically to gains arising from the transfer of shares in a company, whereas Article 13(5) acts as a residuary provision covering gains from the alienation of property not specifically dealt with in the preceding paragraphs.”
According to Surana, the Tribunal emphasised that the mutual fund units are distinct from shares of a company.
Surana says: “Under Indian law, mutual funds are constituted as trusts under SEBI regulations and not as companies, and their units cannot be equated with shares in a company.”
According to Surana, ITAT Mumbai relied on settled judicial precedent, including earlier coordinate bench decisions under similarly worded treaties (such as India–Switzerland and India–UAE DTAAs), which consistently held that mutual fund units are not “shares” for treaty purposes.
Surana says that the ITAT Mumbai observed that Article 3(2) of the DTAA does not define the term “shares”, and thus it must take its meaning from Indian domestic law.
Surana says: “Under the Companies Act and securities law framework, shares and mutual fund units are recognised as separate and distinct instruments. Consequently, gains from mutual fund units do not fall within Article 13(4) but are squarely covered by Article 13(5).”
Surana says that the taxpayer succeeded because the Tribunal accepted that capital gains from mutual fund units are not gains from shares of an Indian company. Since such gains are not expressly covered by Articles 13(1) to 13(4), they fall under Article 13(5) of the India–Singapore DTAA.
According to Surana, Article 13(5) of the DTAA allocates exclusive taxing rights to the state of residence of the alienator. As the assessee was a tax resident of Singapore, India did not have the right to tax the gains. The Tribunal also reiterated the binding nature of earlier coordinate bench rulings on identical treaty language and held that the lower authorities erred in disregarding those precedents.
Surana says that in applying the India–Singapore DTAA, the Tribunal reaffirmed that treaty benefits override domestic law under Section 90(2) of the Income-tax Act, 1961, where they are more beneficial to the taxpayer.
Surana says: “Since the DTAA restricted India’s taxing rights in respect of capital gains from mutual fund units, the domestic provisions could not be invoked to tax such income. Accordingly, the Tribunal allowed the assessee’s appeal and held that the short-term capital gains from Indian mutual fund units were not taxable in India but only in Singapore.”
Also read: Dubai-based taxpayer gets I-T notice for unexplained investment in Rs 2 crore Mumbai property; he fights back and gets relief from ITAT Mumbai
Background of her ITR
On June 27, 2022, she had filed her ITR in India declaring income of Rs 4.5 lakh however, her ITR was selected for scrutiny. In the ITR she had shown income from short-term capital gain on debt funds of Rs 88 lakh and short-term capital gain on equity funds of Rs 46 lakh in respect of which deduction was claimed under the Double Taxation Avoidance Agreement (DTAA) of India-Singapore. The tax assessing officer denied her claims and proposed to tax on the entire amount in the draft assessment.
ITAT Cochin judgement extract which helped this case
Surana says that based on information available in public domain, there is no consequent High Court ruling indicating that the tax authorities have filed or succeeded in an appeal against the ITAT Mumbai decision in case no. No.174/MUM/2025 as on date. Thus, the decision continues to be cited and discussed as an Income Tax Appellate Tribunal ruling, without any corresponding High Court affirmation, reversal, or stay being reported in the public domain. However, the status of tax department (if any) before high court needs to be reconfirmed.
Surana says that similarly, in other comparable cases dealing with the taxability of capital gains on transfer of mutual fund units under treaties containing residuary capital gains clauses such as ITO v. Satish Beharilal Raheja (Mumbai ITAT) and DCIT v. K.E. Faizal (Cochin ITAT), there is no publicly available information of these rulings having been overturned or reversed by any High Court and these decisions continue to be relied upon by coordinate benches of the Tribunal.
It is pertinent to note that the absence of a reported High Court decision does not conclusively establish that no appeal has been filed by the Income Tax Department. Practically, income tax departmental appeals may be pending or unresolved without being reflected/ reported publicly and therefore status of appeal (if any) is subject to revalidation.
ITAT Mumbai in the present case reproduced (an extract) the ITAT Cochin judgement in the K. E. Faizal (India-UAE DTAA) case:
- “As per Article 13(5) of the Tax Treaty, income arising to a resident of UAE from transfer of property other than shares in an Indian company, are liable to tax only in UAE. On the other hand, Article 13(4) of the Tax Treaty provides that income arising to a resident of UAE from transfer of shares in an Indian company other than those specifically covered within the ambit of provisions of other paragraph of Article 13 may be taxed in India.
- Article 13(4) of the Tax Treaty covers within its purview capital gains arising from transfer of shares’ and not any of the property. Therefore, Article 13(4) of the Tax Treaty cannot be applied in the instant case unless the units of the mutual funds transferred by the assessee qualify as shares for the purpose of Tax Treaty.
- The term ‘share’ is not defined under the Tax Treaty. As per Article 3(2) of the Tax Treaty, any term not defined under the Tax Treaty shall, unless the context otherwise requires, have the meaning which it has under the laws of the country whose tax is being applied.
- Therefore, the term ‘share’ would carry the meaning ascribed to it under the Act, and if no meaning is provided under the Act, then the meaning that the term carries under the other allied Indian laws would need to be applied.
- The Act does not define the term ‘share’. However, section 2(84) of the Indian Companies Act, 2013 defines the term ‘share’ to mean ‘a share in the share capital of a company and includes stock’. Further, the term ‘company’ has been defined to mean a ‘company incorporated under the Companies Act, 2013 or under any previous company law’.
- Under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1995, mutual funds, in India can be established only in the form of ‘trusts’, and not ‘companies’.
- Therefore, the units issued by Indian mutual funds will not qualify as ‘shares’ for the purpose of the Companies Act, 2013. Further, under the Securities Contract (Regulation) Act, 1956, a security is defined to include inter alia shares, scrips, stocks, bonds, debentures, debenture stock or other body corporate and units or any other such instrument issued to the investors under any mutual fund scheme. From the above definition of ‘securities’, it is clear that ‘shares’ and ‘units of a mutual fund are two separate types of securities.
- Applying the above meaning to the provisions of the Tax Treaty, the gains arising from the transfer of units of mutual funds should not get covered within the ambit of Article 13(4) of the Tax Treaty, and should consequently be covered under Article 13(5) of the Tax Treaty.
- Therefore, the assessee, who is a resident of UAE for the purposes of the Tax Treaty, STCG arising from sale of units of equity oriented mutual funds and debt oriented mutual funds should not be liable to tax in India in accordance with the provisions of Article 13(5) of the Tax Treaty.”
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