Mutual Fund Gains Not ‘Alienation of Shares’ Under India-Mauritius DTAA | ITAT

Case Details: Emerging India Focus Funds, Apex Financial Services (Mauritius) Ltd. vs. ACIT, Int. Tax - [2025] 175 taxmann.com 1013 (Delhi-Trib.)

Judiciary and Counsel Details

• Anubhav Sharma, Judicial Member & Manish Agarwal, Accountant Member
• Ajay Vohra, Sr. Adv., Krishan Malhotra, Gaurav Sachdeva, Advs. & Ms Aditi Garg, CA for the Appellant.
• Abhishek Sharma, CIT-DR for the Respondent.

Facts of the Case

“Whether, under the DTAA, investment in equity-oriented mutual funds should be treated as investment in shares and, accordingly, whether the resulting income qualifies as ‘gains from the alienation of shares’ under Article 13(3A) of the DTAA?”

ITAT Held

The Delhi Tribunal held that all aspects of share issuance, types, shareholder rights and liabilities, dividend rights, and transferability are governed by the Companies Act, 2013. In contrast, mutual funds in India are established as trusts under the Indian Trusts Act, 1882, and are regulated by the SEBI (Mutual Funds) Regulations, 1996. A mutual fund pools investors’ money to invest in equities, bonds, or other securities as per its investment objective.

Professional fund managers manage these funds, and income/gains are distributed to investors based on the scheme’s NAV, after deducting expenses and charges. Section 30 of the SEBI Act, 1992, empowers SEBI (with Central Government approval) to frame regulations covering mutual fund formation, documents, advertising, returns assurance, minimum corpus, and investment valuation.

In mutual funds, dividends arise from booked profits on portfolio sales and differ from stock dividends, which reflect company profits. Mutual fund dividends don’t indicate scheme profitability; NAV falls by the dividend amount.

Selling shares carries risks of price rigging and capital gain siphoning, unlike mutual funds, where such rigging isn’t possible. Under Indian law, shares and mutual funds are distinct securities with different rights, regulations, and tax treatments for investors.

While equity mutual funds may get similar tax benefits under section 10(38) or 112, gains from their sale aren’t ‘gains from alienation of shares’ under the DTAA. DTAA provisions must be strictly interpreted; unless a security is specifically mentioned, it can’t be equated to another by purposive interpretation. Accordingly, capital gains earned on the sale of equity-oriented mutual funds cannot be said to be out of alienation of shares under Article 13(3A) of the DTAA.

List of Cases Reviewed

• Apollo Tyres Ltd v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC)
• CIT v. Hertz Chemicals Ltd [2016] 69 taxmann.com 338/239 Taxman 431/386 ITR 39 (Bombay)
• Vanguard Emerging Markets Stock Markets Stock India Fund v. ACIT [2025] 172 taxmann.com 515 (Mumbai – Trib.)
• ITO v. Satish Beharilal Raheja [2013] 37 taxmann.com 296/145 ITD 29 (Mumbai)
• CIT (International taxation) v. K. E. Faizal [2019] 108 taxmann.com 545/178 ITD 383 (Cochin – Trib.) (para 19) followed

List of Cases Referred to

• Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC) (para 7)
• Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC) (para 18)
• CIT v. Hertz Chemicals Ltd. [2016] 69 taxmann.com 338/239 Taxman 431/386 ITR 39 (Bombay) (para 18)
• Vanguard Emerging Markets Stock Index Fund v. Asstt. CIT (International Taxation) [2025] 172 taxmann.com 515 (Mumbai – Trib.) (para 18)
• ITO (IT) v. Satish Beharilal Raheja [2013] 37 taxmann.com 296/145 ITD 29 (Mumbai) (para 18)
• Dy. CIT (International Taxation) v. K.E. Faizal [2019] 108 taxmann.com 545/178 ITD 383 (Cochin – Trib.) (para 18).