Capital Gain on Sale of Rights Entitlement Exempt Under India-Ireland DTAA Article 13(6)

I. Capital Gain on Sale of Rights Entitlement Exempt Under India-Ireland DTAA Article 13(6), Not Taxable as Share Sale

Issue:

Whether Short Term Capital Gains (STCG) earned by an Irish company from the sale of rights entitlement of shares of an Indian company should be taxed as “sale of shares” under Article 13(5) of the India-Ireland Double Taxation Avoidance Agreement (DTAA), or if it is exempt under Article 13(6) of the same DTAA, which deals with capital gains not covered by other clauses.

Facts:

For the assessment year 2022-23, the assessee, a company incorporated in Ireland, earned Short Term Capital Gains (STCG) from the sale of rights entitlement of shares of an Indian company. The assessee claimed this STCG as exempt under Article 13(6) of the India-Ireland DTAA. The Assessing Officer (AO), however, held that STCG on the sale of rights entitlement was to be taxed as “sale of shares” under Article 13(5) of the India-Ireland DTAA, making an addition towards STCG as taxable in India.

Decision:

Yes, the court held that rights entitlement is distinct from shares. Therefore, gain on the transfer of rights entitlement would fall within the purview of Article 13(6) and not under Article 13(5) of the India-Ireland DTAA. Consequently, the Assessing Officer was not correct in denying the exemption under Article 13(6) of the India-Ireland DTAA to the assessee, and thus, the addition made in this regard was to be deleted.

Key Takeaways:

Distinction Between Shares and Rights Entitlement: The core of the decision lies in recognizing that “rights entitlement” (the right to subscribe to shares) is a distinct financial instrument or right from the “shares” themselves.
DTAA Interpretation: Tax treaties (DTAAs) are interpreted based on their specific wording.
- Article 13(5) (India-Ireland DTAA): Typically deals with gains from the alienation of shares, granting taxing rights to the source country (India) if the shares derive more than 50% of their value directly or indirectly from immovable property situated in that country. If not, the gains are taxable only in the country of residence.
- Article 13(6) (India-Ireland DTAA): This is a residual clause that states “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.”¹
Taxability in Residence Country: Since rights entitlement is not explicitly covered by the earlier specific clauses of Article 13 (including 13(5) for shares), it falls into the residual Article 13(6), meaning the gains are taxable only in the country of residence of the alienator (Ireland, in this case), and not in India.
Favor of Assessee: The decision is in favor of the assessee, confirming the exemption of STCG from the sale of rights entitlement in India.

II. Set-off of STCL from STT-Paid Shares Against STCG from Non-STT Paid Shares Permissible

Issue:

Whether an assessee is permitted to set off Short Term Capital Loss (STCL) arising from the sale of STT-paid shares against Short Term Capital Gain (STCG) arising from the sale of non-STT paid shares, particularly when the Assessing Officer argues that Section 70 allows set-off only if income and losses are arrived at under similar computation.

Facts:

For the assessment year 2022-23, the assessee, a company incorporated in Ireland, incurred Short Term Capital Loss (STCL) from the sale of STT (Securities Transaction Tax) paid shares. It also had Short Term Capital Gain (STCG) arising from the sale of non-STT paid shares. The assessee sought to set off the STCL from STT-paid shares against the STCG from non-STT paid shares. The Assessing Officer (AO) rejected this set-off, arguing that as per Section 70 of the Income-tax Act, 1961 (which deals with set-off of loss from one source against income from another source under the same head of income), only those incomes and losses arrived at under “similar computation” should be allowed to be set off.

Decision:

Yes, the court held that there is no prohibition under the Act with regard to the hierarchy of set-off of STCL arising out of STT-paid shares against STCG arising out of non-STT paid shares. In the absence of any prohibition or any specific chronology for set-off prescribed under the Act, the assessee was entitled to choose the chronology of set-off that was most beneficial to the assessee. Therefore, the Assessing Officer was not correct in denying the benefit of set-off of STCG arising out of non-STT paid shares against STCL of STT-paid shares.

Key Takeaways:

Section 70 (Set-off of Losses under Same Head): Section 70 permits set-off of loss from one source against income from another source falling under the same head of income. Here, both STCL and STCG fall under the head “Capital Gains.”
No Prohibition for Set-off (STT vs. Non-STT): The crucial point is that the Income-tax Act does not explicitly prohibit the set-off of STCL from STT-paid shares against STCG from non-STT paid shares. The fact that one type of share is subject to STT and the other is not pertains to their taxation treatment (e.g., Section 111A for STT-paid STCG), but it doesn’t create a barrier to set-off within the same head of capital gains.
Assessee’s Right to Beneficial Set-off: In the absence of a specific statutory hierarchy or prohibition, an assessee is generally entitled to arrange the set-off of losses in a manner most beneficial to them.
Section 111A (STT-Paid STCG): Section 111A provides for a concessional tax rate (15%) on STCG from the sale of equity shares/units of equity-oriented funds where STT is paid. While this section dictates the rate of tax, it does not alter the fundamental nature of the income as “Short Term Capital Gain” for set-off purposes under Section 70.
Favor of Assessee: This decision is beneficial to the assessee, allowing them to optimize their tax liability by setting off losses against the STCG that might otherwise be taxed at a higher rate (if it were non-STT paid income).

IN THE ITAT MUMBAI BENCH ‘I’

Vanguard Emerging Markets Stock Index Fund a Series of VISPLC

ACIT (International Taxation)

Rahul Chaudhary, Judicial Member
and Ms. Padmavathy S., Accountant Member

[IT Appeal Nos. 1277 to 1283 (Mum.) of 2025]
[Assessment year 2022-23]

MAY 23, 2025

Pranay Gandhi and Lekh Mehta, ARs for the Appellant. Sridhar G. Menon, Sr. DR for the Respondent.

ORDER

1. These appeals by different assessee are against the separate final order of assessment passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) by the Assistant Commissioner of Income Tax (International) Circle-4(3)(1), Mumbai (In short ‘the AO) for AY 2022-23. The issues contended by these assessees through various grounds are tabulated as under:

ITA No. 1277/Mum/2025

2. The assessee is a company incorporated in Ireland and is registered with Securities & Exchange Board of India (SEBI) as a Foreign Portfolio Investor (FTI). The assessee filed the return of income for AY 2022-23 on 21.10.2022 declaring a total income of Rs. 1,38,36,63,719/-. The return was selected for scrutiny and the statutory notices were duly served on the assessee. During the year under consideration the assessee has earned a Short Term Capital Gain (STCG) amounting to Rs. 5,88,31,056/- from the sale of rights entitlement of shares of Bharti Airtel Limited (BIL). The assessee has claimed the same as exempt under Article 13(6) of the India-Ireland DTAA. The Assessing Officer (AO) did not accept the exemption claimed by the assessee and held that the STCG on sale of rights entitlement is to be taxed as sale of shares under Article 13(5) of the India-Ireland DTAA. Accordingly, the AO made an addition towards the STCG as taxable in India.

3. The assessee during the year under consideration adjusted the STCG and STCL as tabulated below –

Particulars	Amount (INR)
Short term capital gain on transaction subject to STT (15%)	13,14,57,337
Short term capital gain on transaction not subject to STT(30%)	27,833
Less: Short term capital loss on transaction subject to STT (15%)	(3,69,58,992)
Net Short-term Capital gain	9,45,26,178
Less: Brought forward short term capital loss	(9,45,26,178)
Total Short term capital gains chargeable to tax	0
Short term capital loss carried forward	(33,50,27,576)

4. The AO held that the STCG of non-STT paid shares (taxable at 30%) cannot be set of against the STCL of STT paid shares (taxable at 30%) and accordingly brought to tax the STCG of Rs. 27,833/- to tax. The DRP upheld the addition made by the AO towards a transfer of rights entitlement and also the STCG of non-STT paid shares. The assessee is in appeal against the final order of assessment passed by the AO as per the directions of the DRP.

5. Ground No.1 is general. Ground No.2 is with regard to taxation of STCG on sale of rights entitlement. The ld. AR at the outset submitted that the issue of taxability of rights entitlement in BIL has been considered by the Co-ordinate Bench in assessee’s own case for AY 2021-22 Vanguard Emerging Markets Stock Index Fund v. Assistant Commissioner of Income-tax (International Taxation) (Mumbai – Trib.)/(ITA No. 4657/Mum/2023 dated 18.03.2025) where it has been held that the rights entitlement are different from shares and accordingly the gain on transfer of rights entitlement is exempt under Article 13(6) of India-Ireland DTAA. The ld. AR brought to our attention that the facts pertaining to the impugned issue for the year under consideration is identical and therefore the ratio laid down by the Co-ordinate Bench is applicable for the year under consideration also.

6. The ld. DR on the other hand supported the order of the AO and the directions of the DRP.

7. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in assessee’s own case has considered the similar issue where it has been held that

“2. The only issue which has been argued before us is with respect to ground No.5, i.e., taxation of short term capital gain on sale of „rights entitlement”. For the sake of ready reference ground of appeal No.5 is reproduced hereunder:-

“5. The learned ACIT erred in treating the short-term capital gains on sale of rights entitlement of INR 65,328,217, as falling within the purview of Article 13(5) of the Double Taxation Avoidance Agreement (DTAA) between India and Ireland (Treaty) and thereby chargeable to tax in India under the provisions of the Act, instead of the same being exempt under Article 13(6) of the Treaty, by virtue of being taxable only in Ireland.”

3. The brief facts qua the issue involved are that the assessee (in short VFEME) is a fund organized as a company in Ireland and is a tax resident of Ireland. It is registered with Securities and Exchange Board of India as a Foreign Portfolio Investor (FPI). VFEME invests in Indian capital markets in accordance with the SEBI resolutions and during the relevant Financial Year it has earned income from capital gain, dividend and interest. The ld. AO in his draft assessment order has noted that assessee has claimed short term capital gains of Rs.6,53,28,217/-, which assessee has claimed as exempt under Article 13(6) of India Ireland DTAA which provides that gains from transfer/alienation of any property other than those mentioned in Articles 13(1) to 13(5) shall be taxable only in Ireland. The case of the Assessing Officer that assessee has not set off the same against short term capital loss of Rs. (42,95,53,754)/- which has been carried forward to the next year. He held that as per the provision of Section 70 / 71 of the Act the current year capital losses are to be set off against current year capital gains as per the manner specified therein and as per the provision of Section 74 of the Act, the brought forward losses have to be set off against the current year capital gain as per the manner specified therein. He held that before giving any relief as per Section 90 read with Articles of DTAA, the income of the assessee is to be computed first as per the normal provisions of the Act. Thus, in the draft assessment order he has set off the short term capital gain against the short term capital loss holding that short term capital gain on sale of rights entitlement is taxable and has changed the claim of exempt under Article 13(6) by the assessee.

4. However, the ld. DRP held that rights entitlement (RE) and shares (equity) are closely related assets. In sum and substance, the directions and the observations / finding of the ld. DRP can be summarized in the following manner:-

•

Rights entitlement are a discount on equity shares;

•

Shares represent ownership in the company whilst right entitlements are the rights given to existing shareholders to buy new shares in a right issue. By exercising their right entitlements, shareholders can subscribe to the new shares and increase their ownership in the company.

•

Right entitlement are like bonus for existing shareholders;

•

The assessee has the option to buy the equity shares at a^ discounted price or sell the rights entitlement:

•

Rights entitlement by virtue of it being able to be used to ‘purchase shares at a discount, is a part equity share. Further, rights entitlement can only be used to buy the company’s shares at a discounted price and hence, source and application are for shares only.

•

Merely because the holder of rights entitlement is not entitled to receive dividend does not have any bearing on its nature being that of a share since the dividend entitlement is available only when shares are fully subscribed. Shares and rights entitlements are exactly similar assets and the rights embedded therein may be slightly different.

•

Shares as per Article 13(5) can be given a broad interpretation to include similar or comparable interest in light of Article 13(4) as amended by the MLI since rights entitlement are linked to shares in origin and also in final conversion upon exercise of subscription.

•

Shareholder’s eligibility to apply for the rights issue are closer to ‘shares’ under a broad interpretation of Article 13(5) than other property as per Article 13(6) – Shares have broader connotation and meaning than ‘equity’ and stand for tradable securities related to the underlying company:

•

Differentiation between separate International Securities Identification Number (ISIN’) assigned to rights entitlement is necessary because their base price is significantly different from the current market price of the equity shares.

We have heard both the parties at length and also perused the relevant finding given in the impugned order. The moot question before us is, whether capital gain earned from sale of rights entitlement” can be claimed as exempt under Article 13(6) of India-Ireland DTAA which provides that gains from transfer / alienation of any property other than those mentioned in Articles 13(1) to 13(5) shall be taxable only in Ireland. For the sake of ready reference, the relevant Article 13 of IndiaIreland DTAA prior to modification by the MLI which deals with the capital gains reads as under:-

Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the offer Contracting State may also be taxed in that other State

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 permanent establishment (alone or with the whole enterprise) or of such fired base, may also be taxed in that other State.

Gains derived by an enterprise of a Contracting State 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 that State

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 than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting 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.”

6. Para 5 of Article 13 provides that taxability of gains from alienation of shares in a company which is resident of that contracting state may be taxed in that contracting state. For example, if a resident of Ireland State sells shares of a Company in India then it may be taxed in India, that is, the source state. Article 13(6) on the contrary is applicable to the gains from the alienation of any property other than those referred to in para 1 to para 5 of the Article 13, which is taxable only in the resident state. The issue before is, whether rights entitlement is akin to shares and whether shares and rights entitlements are exactly similar assets? And if they are not in nature of shares then whether can it be taxed in source state, that is, India. It has been argued before us on behalf of the assessee that there is a distinction between shares and rights entitlement under the companies and SEBI law.

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.”

8. 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.

9. 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, rights entitlements have been treated differently from shares by the SEBI and NSE.

11. 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.

12. 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 “b/e Supreme Court in the case of Navin Jindal v. Assistant Commissioner of Income Tax

“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.”

13. 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.

14. 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.

15. Our attention was also drawn to para 30 of OECD Model Tax Convention on Income & on Capital, 2017 wherein, it has been brought that gains from alienation of capital assets not covered elsewhere are taxable in the country of residence. The relevant extract of para 30 reads as under:-

“30. The Article does not contain special rules for gains from the alienation of shares in a company (other than shares of a company dealt with in paragraph 4) or of securities bonds debentures and the like. Such gains are therefore taxable only in the State of which the alienator is a resident.”

Similarly, para 17 of UN Model Double Taxation Convention, 2017 had reiterated the same OECD commentary in the following manner:-

17. This paragraph reproduces Article 13, paragraph 5, of the OECD Model Convention with a drafting adjustment replacing the words “in paragraphs 1 2 3 and 4” with “in paragraphs 1 2 3, 4 and 5 The Commentary on Article 13, paragraph 5 of the 2010 OECD Model Convention is therefore relevant mutatis mutandis, to paragraph 6.”

18. However, it is seen that Article 13(4) & 13(5) of UN Model convention were amended in 2017 to expand their scope to include ‘other comparable interests’ apart from shares. However, Article 13(5) of India-Ireland DTAA does not contain the mention of ‘other comparable interest’ either in para 4 or para 5 of Article 13.

19. Now pursuant to introduction of MLI, India-Ireland DTAA was amended in the year 2019 and reference to “comparable interest” was included in Article 13(4) and not in Article 13(5). For the sake of ready reference Article 13(4) and Article 13(5) before the introduction of MLI and post introduction of MLI is as under:-

Before amendment in 2019.

13(4). 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.

13(5). Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting State.

After amendment in 2019:

13(4). Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property (real property) situated in that other Contracting State.

13(5) Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting State.

20. Thus, the two contracting states even while making the amendment post introduction of MLI have not included “comparable interest” in Article 13(5) which clearly indicate that Article 13(5) of India-Ireland DTAA only reference to share of a company and even Article 13(4) specifically defined “comparable interest” to include interest in partnership or trust. Thus, the rights entitlements are not included in Article 13(5) even after its amendment in 2019 post MLI. Accordingly, we are in tandem with the arguments of the ld. Counsel that rights entitlement does not fall within the ambit of alienation of shares.

21. To buttress this point of distinction, ld. Counsel for the assessee referred to clarification issued by the then Economic Affairs Secretary in respect of amendment to the India-Mauritius DTAA. In 2016, the India-Mauritius DTAA was amended which re-allocated the taxation rights in respect of sale of shares between India and Mauritius. Pursuant to the amendment, India gained rights to tax gains arising on sale of share of Indian companies. At the time some ambiguity was perceived with regards to applicability of the amended provisions to gains arising on sale of other capital assets. The Government’s stand was clarified by then Economic Affairs Secretary Mr. Shaktikanta Das to ‘Business Standard’ news paper which has been quoted verbatim in an news article dated 21 August 2015, reproduced as under:-

“Derivatives and other forms of securities, such as compulsory convertible debentures (CCDs) and optionally convertible debentures (OCDs) will continue to be governed by the existing provision of being taxed in Mauritius, said economic affairs secretary Shaktikanla Das. He said India had gained a sourcebased taxation right only for shares (equity) under the treaty Residence-based taxation will continue for derivatives under the Mauritius pact Meaning nonequity securities would be taxed in Mauritius if routed through there. But Mauritius does not have a short-term capital gains tax which would mean that investors using these instruments would continue to escape paying taxes in both countries. “There are three categories of instruments which arise between two countries-shares, immovable assets, and other instruments, including derivatives,” he explained. “Insofar as shares are concerned, they are covered by the new agreement. As regards immovable property, all along the right to taxation is in India. The right to taxation is in the country where an immovable asset is located. So, if an immovable asset is located in India, we have the taxation right. With regard to other instruments, “the right to tax is always in that country. There cannot be a change that is the position all over the world”. “It is their country’s decision The right to tax is with that country with the US, the UK, Germany, Japan, Mauritius, all the countries (with which India has a Double Taxation Avoidance Agreement), It is for that country to decide whether it wants to tax at 10, 20, or zero per cent (And) Just because some country has made it zero, I can’t say I will tax, he further clarified”

22. Accordingly, it has been argued before us that even the stand of Government of India (through its Secretary in press) is that shares would cover “shares of Indian Company” and not derivatives & other securities. Accordingly, gain on alienation of securities other than shares would continue to be taxed in the resident country and not in India. The aforesaid clarification, clarifying the stand of the Government of India, if we look from the perspective of the distinction between the shares and other securities, then for the purpose of the present case, the rights entitlement which is distinct from shares can be taken as a guidance to see the intention of the Government while negotiating or amending the Articles of DTAA.

23. It is also a well settled proposition of law if any term has not been defined under the Act or treaty; the same is to be understood as per the domestic legislation in view of Section 90(3) of the Act as well as Article 3(2) of India-Ireland DTAA. It states that where the term has not been defined under the treaty, the meaning under the domestic tax legislation is to be adopted. Further, where the term has not been defined in domestic tax legislation also it is a general meaning is to be adopted. We find that the definition of shares even in Section 2(84) of the Companies Act, 2013 provides a restrictive definition of shares to mean a share in the share capital of a company and includes stock. Otherwise also an asset, which may come into existence or derive its value from another underlying asset, cannot be regarded as being same as the original asset. An analogy may be drawn to a ‘derivative’, which may derive its value from the underlying equity but it is a well-established principle that the derivative contract is a distinct and separate asset. Under the India-Ireland DTAA a derivative deriving its value from underlying equity would not be subject to tax in India under Article 13(6). Likewise rights entitlement which is granted on account of shareholding cannot be regarded as being the same as shares especially since the rights shares are allotted, only on subscription. The rights entitlement, being a distinct asset, may be sold lapsed or subscribed and thus, akin to derivatives, ought to be not subject to tax under Article 13(6) of the India-Ireland DTAA. Similarly, the investor can either sell the rights entitlement option or exercise the option to get shares or decline the offer for shares.

24. Hence, in our opinion, rights entitlement would also be covered under the provisions of Article 13(6) of India Ireland DTAA and in that case it would not be subjected to tax in India but it shall be taxable in the resident state i.e. Ireland.

25. In so far as various observations of the ld.DRP to hold that rights entitlement is share only, point-wise rebuttal has been given by the ld. Counsel before us which for the sake of ready reference is reproduced herein below:-

Sr. No.	Revenue’s Arguments	Appellant’s rebuttal
1	Rights entitlement and shares are closely related assets.	It has been alleged that shares and rights entitlement pertain to share capital on the basis that the rights entitlements are securities that gives existing shareholders the right to buy additional company shares and increase their ownership in the company and therefore, a rights entitlement is a security that gives existing shareholders the right to buy additional company shares at a discounted price which is bonus for shareholders. The lower authorities have failed to appreciate that Section 62 of the Companies Act, 2013 provides that “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 favour of any other person.” It is evident that a shareholder obtains an exercisable right to subscribe to shares which is different from shares in the Indian company. In terms of section 62 of the Companies Act, 2013, a shareholder obtains an exercisable right to subscribe to shares which is different from shares in the Indian company.
2	Shares as per Paragraph 5 of Article 13 can be given a broad interpretation to include similar or ‘comparable interests’ [in light of Article 13(4)]. Rights entitlements are linked to shares in origin and also in final conversion upon exercise of subscription.	Article 13(6) of the India-Ireland DTAA between India and Ireland refers to property ‘any property other than that referred to in paragraphs 1, 2, 3, 4 and 5’. We submit that clauses (1) to (5) of Article 13 is not applicable: 13(1) – Not applicable as it deals with alienation of immoveable property. 13(2) – Not applicable as it deals with alienation of movable property forming part of the business property of a permanent establishment. 13(3) – Not applicable as it deals with alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft. 13(4) – Not applicable as it deals with alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property 13(5)- Not applicable as it deals with alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State (i.e., India). The AO has sought to allege that rights entitlement is similar to shares of an Indian company and therefore should fall within the purview of Article 13(5). In this regard, reliance is placed on decision of the Hon’ble Supreme Court of India in the case of Navin Jindal v. Assistant Commissioner of Income Tax [2010], wherein it was held that” 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.” Based on the above decision, it is clear that rights entitlement is an asset distinct from shares of an Indian company, notwithstanding that the rights entitlement stems from shareholding of an Indian company. The allegation of the learned AO that rights entitlement is not an asset ‘other than’ a share is without merit. Reliance is also placed on the Commentary on Article 13 of the Model Tax Convention on Income and on Capital 2017, issued by the OECD. Relevant extract is provided below: “Paragraph 5 29. As regards gains from the alienation of any property other than referred to in paragraphs 1, 2, 3, and 4, paragraph 5 provides that they are only taxable in the State in which the alienator is resident. History Amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. Until the adoption of the 1977 Model Convention, paragraph 5 read as follows: “5. The Article does not give a detailed definition of capital gains. This is not necessary for the reasons mentioned above. The words “alienation of property” are used to cover in particular capital gains resulting from the sale or exchange of property and also from partial alienation, the expropriation, the transfer to a company in exchange for stock, the sale of a right, the alienation free of charge and even the passing of property on death.” OECD Model Tax Convention on Income & on Capital, 2017-Paragraph 30: “30. The Article does not contain special rules for gains from the alienation of shares in a company (other than shares of a company dealt with in paragraph 4) or of securities, bonds, debentures and the like. Such gains are, therefore, taxable only in the State of which the alienator is a resident.” Further, in 2017, it was decided to adopt the updated provision from the OECD Model Tax Convention, as the concept of a “comparable interests” is broadly equivalent to what was previously covered by paragraph 4 of the United Nations Model Tax Convention. Accordingly, the relevant changes made to the OECD Model Convention made it more aligned with the UN Model Convention. Thereafter the India- Ireland DTAA was amended in 2019 and the reference to comparable interest was only given at Article 13(4) and not at Article 13(5) in the IndiaIreland DTAA. Thus, is clear that no reference to comparable interest was made in Article 13(5) of the IndiaIreland DTAA, evidencing that it only refers to share of a company.
3.	‘Shares’ have broader connotation and meaning than ‘equity’ capital’ and stand for tradable securities related to the underlying company. Further, separate ISIN is assigned to rights entitlements to distinguish it from the normal equity shares traded in the market.	In terms of section 2(84) of the Companies Act, 2013, ‘share’ means a share in the share capital of a company and includes stock. Further, in terms of section 43 of the Companies Act, 2013, equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital. Accordingly, it can be appreciated that shares are the means through which equity capital is obtained, so shares cannot be broader than equity capital. Equity capital refers to the total amount invested in the company through the issuance of shares, while shares are the units of ownership that represent this investment. Further, the lower authorities have failed to appreciate that the SEBI Circular provides that “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”. Thus, it is clear that what is credited to the demat account of the investor is an asset, being rights entitlement, which is different from shares of the company. Further, the learned AO has not taken cognizance of the NSE circular referred by the Appellant which specifically clarifies that trading in dematerialized rights entitlements on the stock exchanges shall be chargeable to 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). 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 and is instead, an ‘option in securities’.

26. The aforesaid explanation given by the ld. Counsel and the view taken by the ld. DRP to hold that rights entitlement shares and the shares are closely related assets; we are in agreement with the contention raised by the ld. Counsel that these are separate assets and it distinct of the shares of the Indian Government. Accordingly, we hold that rights entitlements is not covered under Article 13(4) and Article 13(5) so as to be taxed in the country of source i.e. in India, albeit, it falls under Article 13(6) whereby, gain on alienation of any property which are not covered in para 1 to 5 is taxable only in the resident state i.e. Ireland.

27. In so far as adjustment of short term capital gain arising on sale of rights entitlement from which the assessee had claimed benefit of Article 13(6) of India Ireland DTAA against the short term capital loss arising on sale of shares which is taxable in India in terms of Article 13(5) of the DTAA, it has been submitted that this issue stands covered by the decision of this Tribunal in the case of J.P. Morgan India Investment Company Mauritius Ltd. reported inwherein it has been held as under:-

“Thus, the application of a treaty can result in the entire (gross) income being not subject to tax in India in a year where a taxpayer claims treaty benefits. Therefore, in a year in which a taxpayer claims benefit of article 13(4) of the India-Mauritius tax treaty, the entire gains he earns will not be taxable at all as India has given up its taxing rights in respect thereof. Thus, the entire amount of gains for the year (before setoff of brought forward losses) will go out of the taxing provisions if assessee has chosen to be assessed as per treaty.

Thus, it is for an assessee to examine whether or not, in the light of the applicable legal provisions and in the light of the precise factual position, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation avoidance agreement. Thus, these losses were therefore computed under the provisions of the Act, as in those earlier years, the assessee chose not to be governed by provisions of the treaty for those years but by the provisions of the Act. These provisions included the provisions of section 74 which deal with carry forward and set-off of these losses.

The capital gain as per the Indian Mauritius DTAA is taxable in the resident country and the source country has given up its rights to tax the income. The Question of computation in the source country does not therefore arise. Accordingly, the income from capital gains is not taxable in India as per article 13(4) DTAA and accordingly, the mode of computation income in India as the source country will not arise. If the particular income is not to be taxed at all, the question of including the same under the total income and determining the taxability on the same will not arise and the contention of revenue that the total income as per Act is to be calculated to determine the tax liability and thereafter, the benefit is to be given cannot upheld. Accordingly, it is held that the tosses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year in Question for the reason that once the assessee has chosen the benefit of DTAA. then the capital gain is not at all taxable in India and therefore, there is no Question of setting off of loss from the earlier years.

28. Thus, this principle has been followed in catena of other judgments by this Tribunal. Accordingly, we hold that the capital loss incurred under the provisions of the Act r.w. Article 13(5) of India-Ireland DTAA cannot be set off against short term capital gain derived from sale of rights of entitlement because such case is not subjected to tax in India as per Article 13(6) of DTAA and therefore, assessee has rightly excluded from the computation of total income, accordingly, this issue is decided in favour of the assessee.”

8. The ratio as laid down in the above decision is that the rights entitlement is not same as shares and therefore the gain on transfer of rights entitlement would fall within the purview of Article 13(6) and not under Article 13(5) of India-Ireland DTAA. For the year under consideration the assessee has earned a STCG from the sale of rights entitlement to the tune of Rs. 588,31,088/- and this fact is identical to the issue considered by the coordinate bench in the above case. Therefore in our considered view the ratio laid down by the Co-ordinate Bench is applicable for the year under consideration also. Accordingly we hold that the AO is not correct in denying the exemption under Article 13(6) of the India-Ireland DTAA to the assessee. The addition made in this regard is hereby deleted.

9. Ground No.3 to 6 is with regard to rejecting the set off of STCG of non-STT paid shares against the STCL of STT paid shares on the ground that as per section 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off. In this regard we notice that the Co-ordinate Bench in the case of one of the group companies of the assessee Vanguard Total International Stock Index Fund v. ACIT Vanguard Total International Stock Index Fund v. ACIT [IT Appeal No. 4656 (Mum.) of 2023, dated 13-12-2024] has considered a similar issue where it has been held that

“9. We have given a thoughtful consideration to the orders of the authorities below. It is true that different rates of taxes have been provided u/s 115AD and 111A of the Act in respect of gains on non STT paid shares and STT paid shares but it is also a fact that u/s 70 of the Act, no chronology has been mentioned in respect of set off of losses nor there is any provision in the Act that losses of non-STT paid shares cannot be set off against the gains on STT paid shares. The decision of the Hon’ble High Court of Calcutta, is on this issue in ITA No. 812 of 2008; judgment dated 19/12/2008, wherein the Hon’ble High Court held as under:-

“In Ground Nos.5 and 6 the assessee has objected to the mode of set off adopted by the Assessing Officer in assessing income from short term capital cases. During the year under consideration the assessee earned short term capital gain of Rs.7,29,584/- in transaction in shares where security transaction tax was not paid and income was subject to tax at normal rate. The assessee also earned short term capital gain of Rs.2,27,564/- in transaction in shares where security transaction tax was paid and income was eligible for concessional rate of tax under section 111A. The assessee also suffered short term capital loss of Rs.7,17,660/-in transactions in shares involving payment of security transaction tax. In the impugned order the A.O. computed the capital gain in the following manner without discussing any reasons for adopting such mode of computation.

Calculation of income/loss from capital gain Short term capital loss with STT Short term capital gain with STT Net Short Term capital loss with STT Short term capital gain without STT Net Short term capital gain Less Brokerage 5,914/- Taxable short term capital gain of normal rate	(-) 7.17,660/- 2,27,564/- (-) 4,90,096/- 7,29,584/- 2,39,488/- 2,33,574/-
Long term capital gain at 10% rate (as per computation)	1,49,431/-

I have perused the assessment order and have considered submissions of the A/R. In the impugned order the A.O. has not given any reasons for first sitting off short term capital gain with STT against short term capital STT and then allow ofset off of remaining loss of Rs.4,90,096/- against short term capital gain without STT. The mode ofset off adopted by the A.O. shown that be accepted in principle that short term capital loss with STT can be legally set off against short term capital gain without STT. According to the assessee, the chronology for the set off by the A.O. was contrary to chronology adopted by the assessee, only because the assessee’s mode resulted in concessional rate of the tax being applied to higher amount of short term capital gain which resulted more tax benefit to an assessee.

On perusal of the provision of section 70, I find that there is no prohibition nor the Act compels the assessee to first set off short term capital gain with STT against short term capital loss with STT and then allows set off against short term capital gain without STT. In absence of any specific mode of set off provided in the Act and in absence of any prohibition and in absence of any specific chronology for set off prescribed in the Act, the assessee was entitled to exercise his option with regard to the chronology of set off which was most beneficial to the assessee. It is settled proposition of law that when a provision of the Act gives option to the assessee, such option should be exercised which will favour the assessee and not the revenue. The A/R for the assessee was well justified in relying on the decision of the Calcutta High Court and the Circular of the Board dated 7.7.1955 since the principles laid down therein appeared to be fully applicable.”

The Commissioner of Income Tax (Appeals) therefore came to the conclusion in favour of the asessee. He further came to the conclusion that the disallowance has been made on presumption.

In these circumstances, the order passed by the Commissioner of Income Tax and subsequent thereto, the Commissioner of Income Tax (Appeals) had already considered the case of the department and upheld the order passed by it. We have carefully considered the said question and in our considered opinion, there is no illegality or irregularity in respect of the order so passed by the learned Tribunal. We, accordingly, find that there is no reason to interfere with the order so passed by the learned Tribunal and further the order so passed by the learned Tribunal does not suffer from any illegality or irregularity and we find that no substantial question of law is involved in this appeal. Hence, we dismiss the appeal.

10. This view has been followed by the Co-ordinate Benches in JS Capital LLC in ITA No. 3396/Mum/2023, East Bridge capital Master Fund I Ltd. in ITA No. 2976/Mum/2023, DWS India Equity Fund in ITA No. 5055/Mum/2010, M/s. T. Rowe Price International Discovery Fund in ITA No. 7627/Mum/2011.

11. Considering the facts of the case in totality, in light of the decisions of the Hon’ble Calcutta High Court (supra), we do not find any merits in the computation done by the AO. We accordingly direct the AO to accept the computation of the assessee. Ground No. 5 is allowed.”

10. The ratio as laid down in the above decision is that there is no prohibition under the Act with regard to the hierarchy of set off of STCL arising out of STT paid shares against the STCG arising out of non-STT paid shares. In absence of any prohibition or any specific chronology for set off prescribed under the Act, the assessee is entitled to choose the chronology of set off that is most beneficial to the assessee. In assessee’s case, the AO rejected the hierarchy of set off done by the assessee for the reason that as per section 70 of the Act only those income and losses arrived at under similar computation only should be allowed to be set off. Therefore respectfully applying the ratio laid down by the coordinate bench we hold that the AO is not correct in denying the benefit of set off of STCG arising out of non-STT paid shares to the assessee against the STCL of STT paid shared. Accordingly, we direct the AO to delete the addition made in this regard.

11 Through ground no. 7 the assessee is contending the issue of granting of short credit of TDS. In this regard, the ld. AR submitted that a petition for rectification has been filed before the AO. We accordingly direct the AO to consider rectification petition filed by the assessee with regard to the TDS credit and allow the claim in accordance with law.

12. Ground No.8 is with regard to levy of interest under section 234A to 234B of the Act. Ground No.11 is with regard to levy of penalty. These grounds being consequential do not warrant separate adjudication.

13. Ground No. 9 & 10 the assessee is contending the issue of short grant of refund to the assessee and non-consideration of rectification application filed by the assessee in this regard. We direct the AO to consider the claim of the assessee by disposing of the rectification petition filed by the assessee in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

ITA No. 1278 to 1283/Mum/2025

14. The issues contended by the other assessees through various grounds are tabulated in the earlier part of this order. From the perusal of the said table, it is noticed that the issues contended are identical to the issues contended in the case of Vanguard Emerging Markets Stock Index Fund A Series of VISPLC in ITA No. 1277/Mum/2025. Therefore our decision in the case of the said assessee is mutatis mutandis applicable to the similar issues contended by the other assessees. Therefore we direct the AO to delete the additions made in the case of other assessees also. In ITA No. 1278/Mum/2025 and ITA No. 1282/Mum/2025 the respective assessee’s have raised legal ground (Ground No.1) with regard to issue of notice under section 143(2) by NFAC instead of jurisdictional AO. In view of our decision with regard to the issues contended on the basis of merits, the legal contention raised has become academic and left open accordingly. In ITA No. 1278/Mum/2025 the assessee has raised a ground (Ground No.7) with respect to calculation error and in this regard we direct the AO to examine the issue and decide in accordance with law.

15. In result, the appeals in ITA No. 1277 to 1283/Mum/2025 are allowed.