2024 (7) TMI 124 - AT - Income Tax

Addition made u/s. 68 - sale of shares to be an unexplained source of investment made by the assessee Foreign company - assessee is said to have sold shares of International Conveyors Ltd. thereby offering a capital gain which has been claimed as exempt as per the DTAA between India and Mauritius - HELD THAT - Assessee being a tax resident of Mauritius has acquired the shares and has been holding the same for almost 10 years from the date of acquisition which was during the year under consideration was purchased by M/s. Team India Managers Ltd. The contention of the ld. A.O. that the movement of the price of shares is abrupt and unrealistic, is not acceptable for the reason that the price per share was Rs. 11.90 at the time of acquisition and has increased to Rs. 29.66 over a period of 10 years, is according to us a reasonable increase in the price of the share unlike in most of the penny stock cases where the price of the shares sky rockets manifolds within a short span of time. We also have noticed that the assessee has substantiated the financials of M/s. ICL where it is inferred that the said company is merely not a bogus entity having dummy directors. Pertinently, the ld. A.O. has merely relied on the fact that inspite of increase in the debt, the sales of the said company has not increased proportionately. The assessee being a SEBI registered FPI is engaged in the investment in various companies out of which the assessee earns income and is also the only source of income for the assessee. A.O. has failed to substantiate how the assessee is involved with Shri Naresh Jain alleged to be an accommodation entry provider who has even otherwise not specifically mentioned the assessee to be the beneficiary of accommodation entry and the scrip of ICL to be a penny stock. High Court of Gujarat in the case of Pr. CIT vs. Jagat Pravinbhai Sarabhai 2023 (1) TMI 44 - GUJARAT HIGH COURT where it has been held that the shares were retained for more than 10 years and sold after a long time which infer that the investment was not bogus and the scrip was held to be not a penny stock. It was also held that such investments are not merely for the purpose of earning exempt income but is a genuine transaction. We deem it fit to allow the grounds of appeal filed by the assessee by holding that the transaction made by the assessee in the scrip of ICL is a genuine transaction and, therefore, direct the ld. A.O. to delete the addition made u/s. 68 of the Act rw.s 115BB of the Act. Decided in favour of assessee.

Summary

Issues:
Challenge to final assessment order dated 05.07.2023 under A.Y. 2020-21 regarding addition made u/s. 68 of the Act on the sale of shares of M/s. International Conveyors Ltd. as an 'unexplained source of investment'.

Detailed Analysis:
1. The assessee, a portfolio investor, challenged the final assessment order due to the addition made under section 68 of the Act on the sale of shares of M/s. International Conveyors Ltd. The Assessing Officer (A.O.) observed the sale of 22,41,929 shares for Rs. 6,64,96,351/-, claiming exempt income under the India-Mauritius DTAA. The A.O. deemed the transaction as an accommodation entry for bogus long-term gain.

2. The assessee, a tax resident of Mauritius, argued that the shares were held for over 10 years, sold for Rs. 6,64,96,351/-, constituting only 2.27% of total sales. The Departmental Representative alleged money laundering, citing unrealistic price increase. The A.O. held the shares as penny stock, making an addition under section 68 of the Act.

3. The Tribunal found the price increase from Rs. 11.90 to Rs. 29.66 over 10 years reasonable, unlike penny stocks. The assessee provided financial details of M/s. International Conveyors Ltd., showing it as a genuine entity. The A.O.'s reliance on debt increase without proportional sales growth was challenged.

4. The Hon'ble DRP upheld the applicability of section 68 to non-residents, citing taxability under India-Mauritius DTAA. However, the Tribunal disagreed, considering the genuine nature of the transaction and directing deletion of the addition under section 68 of the Act.

5. Relying on precedents, the Tribunal concluded the transaction as genuine, dismissing the revenue's appeal. The Tribunal held that the A.O. acted on misconceived assumptions, confirming the deletion of the addition under section 68 of the Act.

6. Consequently, the Tribunal allowed the appeal filed by the assessee, directing the A.O. to delete the addition made under section 68 of the Act. The decision was pronounced in open court on 13.06.2024.