Capital Gains from Spanish Investor's Real Estate Shares Not Taxable in India

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that capital gains from the sale of shares of real estate companies by a Spanish investor are not taxable in India under the India-Spain Double Taxation Avoidance Agreement (DTAA). This decision is significant for foreign investors and has implications for the taxation of capital gains in India.

Merrill Lynch Capital Markets España SA, the assessee, is a Spanish company registered as a Foreign Institutional Investor (FII) with the Securities and Exchange Board of India (SEBI). For the Assessment Years 2016-17 and 2017-18, the assessee invested in shares of Indian companies, including real estate firms. It incurred a short-term capital loss in one year and earned short-term capital gains in another year. The assessee claimed that these gains were not taxable in India under Article 14(6) of the India-Spain DTAA.

The Assessing Officer, however, completed the assessment by holding that the gains and losses from the sale of shares of real estate companies are taxable in India under Article 14(4) of the DTAA. The rationale was that the value of these shares is derived from immovable property situated in India. Dissatisfied with this decision, the assessee appealed to the Commissioner of Income Tax (Appeals), who allowed the claim and ruled that the gains were not taxable in India.

Aggrieved by this decision, the Revenue filed appeals before the Tribunal. The revenue's counsel argued that since the shares sold were of companies engaged in real estate development, the gains fall under Article 14(4) and are taxable in India. It was also contended that the Commissioner (Appeals) erred in granting relief and in relying on earlier decisions.

The assessee’s counsel countered that the assessee is a tax resident of Spain and entitled to the benefits under the DTAA. They argued that the assessee’s shareholding in the real estate companies was minimal and did not confer any rights over the immovable properties held by those companies. Additionally, they pointed out that the issue had already been decided in favor of the assessee by earlier Tribunal decisions.

The two-member bench, comprising Beena Pillai (Judicial Member) and Bijayananda Pruseth (Accountant Member), observed that Article 14 of the India-Spain DTAA provides specific categories where capital gains can be taxed in the source country. The residuary clause under Article 14(6) applies to cases not covered under the earlier clauses. The tribunal noted that for Article 14(4) to apply, the gains must, in substance, arise from immovable property situated in India.

The tribunal further observed that the assessee’s shareholding in the real estate companies was minuscule and did not provide any right of control or enjoyment over the immovable properties held by those companies. They explained that merely because the companies are engaged in real estate business, the gains from the sale of their shares cannot automatically be treated as gains from immovable property.

The tribunal also noted that the issue had already been decided in favor of the assessee in earlier years, with no change in facts or law. It concluded that the gains would fall under Article 14(6) and would be taxable only in the country of residence of the assessee.

The tribunal upheld the order of the Commissioner (Appeals) and dismissed the appeals filed by the Revenue. This decision reinforces the principle that capital gains from the sale of shares of real estate companies by foreign investors are not taxable in India under the India-Spain DTAA if the shares do not confer significant rights over immovable property.