The Income Tax Appellate Tribunal, Delhi, has clarified a critical principle under the India-UAE Double Taxation Avoidance Agreement: tax residency, not actual tax payment, determines eligibility for treaty benefits. This judgment resolves long-standing ambiguity regarding the meaning of 'liable to tax' in Article 4 of DTAA and affirms that treaty protections apply even when the residence country imposes no personal income tax.
Background & Facts
The Dispute
The appeals concern the taxability of capital gains arising from the sale of Indian debt mutual funds by two Non-Resident Indians (NRIs), Mandira Kanoi and Saket Kanoi, who are tax residents of the United Arab Emirates (UAE). The Assessing Officer (AO) added Rs. 78,83,464/- to their income for Assessment Year 2023-24, rejecting their claim for exemption under Article 13(5) of the India-UAE DTAA. The AO’s position was that since the UAE does not levy personal income tax on individuals, the assessee was not 'liable to tax' in the UAE and therefore could not claim treaty benefits.
Key Facts
- The assessee, Mandira Kanoi (PAN: AANPK6019N) and Saket Kanoi (PAN: AFTPK1512M), filed their income tax returns for A.Y. 2023-24 on 14.07.2023.
- They declared total income of Rs. 2,14,23,440/-, including capital gains of Rs. 78,83,464/- from the sale of Indian debt mutual funds.
- The capital gains were not offered to tax in India, with the assessee claiming exemption under Article 13(5) of the India-UAE DTAA.
- The AO, in his draft assessment order dated 27.02.2025, proposed to add the capital gains on the ground that the assessee was not a 'resident' under Article 4 of the DTAA because the UAE does not tax personal income.
- The Dispute Resolution Panel (DRP), in its order dated 15.09.2024, upheld the AO’s view, relying on its own earlier order for A.Y. 2021-22.
- The final assessment order under Section 143(3) read with Section 144C(13) was passed on 31.10.2025, assessing total income at Rs. 2,93,06,904/- after adding the capital gains.
- The assessee had previously succeeded in their own case for A.Y. 2021-22 before a coordinate bench of the ITAT, Delhi, in ITA No. 3243/Del/2023, where the same issue was decided in their favour.
Procedural History
- 14.07.2023: Assessee filed return for A.Y. 2023-24.
- 27.02.2025: AO issued draft assessment order proposing addition of Rs. 78,83,464/-.
- 15.09.2024: DRP confirmed the draft order, rejecting treaty benefit.
- 31.10.2025: Final assessment order passed under Section 143(3) r.w.s. 144C(13).
- 18.03.2026: Appeals filed before ITAT Delhi (ITA No. 71/DEL/2025 and ITA No. 72/DEL/2025) were heard and pronounced.
The Parties' Positions
The assessee contended that they are residents of the UAE under Article 4 of the DTAA by virtue of their domicile and place of residence, and that Article 13(5) assigns exclusive taxing rights to the UAE over capital gains from sale of mutual funds. They argued that 'liable to tax' does not require actual payment of tax, but refers to the legal jurisdiction to tax under domestic law.
The Revenue, through the DR, argued that since the UAE imposes no personal income tax, the assessee is not 'liable to tax' in the UAE, and therefore the treaty does not apply. The Revenue relied on the AO’s interpretation and the DRP’s prior order.
Relief Sought
The assessee sought deletion of the capital gains addition of Rs. 78,83,464/-, restoration of their original return, and confirmation of their entitlement to treaty benefits under Article 13(5) of the India-UAE DTAA.
The Legal Issue
Is an assessee eligible for exemption under Article 13(5) of the India-UAE DTAA on capital gains from sale of Indian debt mutual funds if they are a tax resident of the UAE, even though the UAE does not levy personal income tax on individuals?
Arguments Presented
For the Appellant/Petitioner
The assessee relied on the binding precedent of a coordinate bench of the ITAT, Delhi, in ITA No. 3243/Del/2023 for A.Y. 2021-22, which had held that 'liable to tax' under Article 4 of the DTAA refers to fiscal domicile and legal jurisdiction to tax, not actual payment. They cited the Supreme Court’s judgment in Union of India v. Azadi Bachao Andolan [2023] 263 ITR 706 (SC), which clarified that tax treaties are designed to prevent both actual and potential double taxation, and that the right to tax under a treaty is exclusive even if not exercised. They further cited Addl. DIT v. Frate Line, Dubai and ADIT v. Green Emirate Shipping and Travels to reinforce that treaty benefits are available based on residence, not tax payment.
For the Respondent/State
The Revenue did not dispute the factual parity with the earlier case but argued that the absence of personal income tax in the UAE meant the assessee was not 'liable to tax' there. They contended that the treaty’s benefit is conditional on the existence of a tax liability in the residence country, and that the DRP’s interpretation was consistent with domestic tax policy.
The Court's Analysis
The Tribunal emphasized that the interpretation of 'liable to tax' must be read in context with the full phrase in Article 4: 'liable to tax in the Contracting State by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature'. The Court held that this language clearly indicates that the focus is on the existence of a legal connection - fiscal domicile - not on whether tax is actually paid.
"In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part."
The Tribunal relied extensively on the Supreme Court’s analysis in Azadi Bachao Andolan, which quoted Klaus Vogel’s commentary to affirm that tax treaties operate on the principle of 'distributive rule' - allocating taxing rights between states, irrespective of whether the assigned state exercises that right. The Court further cited the Canadian Federal Court decision in John N. Gladden v. Her Majesty the Queen, which held that if a country abolishes capital gains tax, its residents remain entitled to treaty exemptions in the other country.
The Tribunal rejected the Revenue’s argument that the absence of personal income tax in the UAE negates treaty eligibility. It held that the UAE’s legal framework grants it exclusive taxing rights over its residents’ global income, even if it chooses not to exercise that right. The assessee’s UAE residency, established through domicile and physical presence, was sufficient to trigger Article 4 and Article 13(5) protections.
The Court also noted that the Revenue had not raised the 'liable to tax' objection before the AO or the CIT(A), making it an afterthought. The principle of consistency and judicial comity required the Tribunal to follow its own coordinate bench’s decision in the assessee’s favour for A.Y. 2021-22.
The Verdict
The appeals are allowed. The capital gains addition of Rs. 78,83,464/- is deleted. The assessee is entitled to the benefit of Article 13(5) of the India-UAE DTAA, and the capital gains from sale of Indian debt mutual funds are not taxable in India. The assessment order dated 31.10.2025 is set aside, and the return as filed is restored. The order applies mutatis mutandis to both appeals.
What This Means For Similar Cases
Tax Residency Trumps Actual Tax Payment
- Practitioners must now argue that 'liable to tax' under any DTAA refers to fiscal domicile and legal jurisdiction, not actual tax liability.
- NRIs from zero-tax jurisdictions (UAE, Qatar, Monaco, etc.) can claim treaty benefits if they meet residence criteria under Article 4.
- Revenue authorities cannot deny treaty relief merely because the residence country does not levy income tax.
Precedent Binding Even Without Formal Citation
- Coordinate bench decisions on identical facts are binding unless overruled by a larger bench.
- Assessees should proactively cite their own prior favourable orders to invoke the principle of consistency.
- The Tribunal’s reliance on Azadi Bachao Andolan reinforces that treaty interpretation must be purposive, not literal.
Capital Gains on Mutual Funds Are Treaty-Protected
- Capital gains from sale of Indian debt mutual funds by UAE residents are exempt in India under Article 13(5), provided residency is established.
- This applies regardless of whether the mutual fund is listed or unlisted, or whether the gain is short-term or long-term.
- Tax planning for NRIs should now explicitly factor in DTAA eligibility for mutual fund redemptions.
