ELARA INDIA OPPORTUNITIES FUND LIMITED,MAURITIUS vs. DEPUTY COMMISSIONER OF THE INCOME TAX (INTERNATIONAL TAXATION) - 2(2)(1), MUMBAI

Without prejudice to the above, the learned DCIT failed to appreciate that the Appellant was not party to the alleged price rigging/ manipulation and the Appellant sold the shares of International Conveyors Limited in the usual and ordinary course of its operations as a Foreign Portfolio Investor (FPI). The Appellant, being an unsuspecting investor, cannot be denied the exemption of long term capital gains. Hence, the sale made by the Appellant cannot be treated as non-genuine. Ground No. IV- Transaction of the Appellant was genuine 4. The learned DCIT failed to appreciate that the Appellant is a reputed FPI and held the shares of International Conveyors Limited since the year 2009 in dematerialized form. The transactions of purchase and sale of shares was supported by documentary evidence, and no adverse action had been taken by the Securities and Exchange Board of India against International Conveyors Limited and/or the Appellant and/ or the broker through whom the shares were sold on the stock exchange. There is no material to show any wrongdoing in the scrip of International Conveyors Limited. Hence, the sale made by the Appellant cannot be treated as accommodation entries. Ground No .V- Violation of principles of natural justice 5. The learned DCIT erred in relying on an extract of an alleged statement of unconnected persons who did not name International Conveyors Limited and/or the Appellant and/or the broker through whom the shares were sold on the stock exchange as having done anything wrong in the scrip of International Conveyors Limited. The learned DCIT further erred in not providing a complete copy of the said alleged statement which would have shown that the said statement was not in relation to the scrip of International Conveyors Limited. Ground No. VI- The reassessment proceedings are without jurisdiction and bad in law 6. The notice dated 31.03.2023 issued u/s 148 as well as the notice dated 14.03.2023 u/s 148A(b) & the order dated 31.03.2023 u/s 148A(d), having been issued by the jurisdictional assessing officer and not the faceless assessing officer, are non-est, without jurisdiction and bad in law. Therefore, the whole proceedings are void and the assessment order dated 31.07.2025 is liable to be quashed and set aside. Ground No. VII -The assessment order dated 31.07.2025 is time-barred 7 The assessment order dated 31.07.2025 is time barred in view of provision of section 153 of the Act. The Assessment order is liable to be quashed and set aside. Ground No. VIII Erroneous levy of consequential interest under section 234B 8. The learned DCIT has erred in levying consequential interest under section 234B of the Act, amounting to INR 3,16,98,080.”

As per the facts of the present case, the assessee is a Foreign Portfolio Investor (FPI) registered with the Securities and Exchange Board of India (SEBI) and is a tax resident of Mauritius. The assessee had acquired and held 65,00,000 shares of M/s. International Conveyors Limited (ICL) since the year 2008/2009. Thus, after holding the shares for approximately 10 years, the assessee sold around 17,77,035 shares during the year under consideration, for an amount of Rs. 5,08,38,848.28/- i.e. on an average price of Rs. 28.61 per share.

The Revenue Authorities treated the said sale consideration from the sale of shares of ICL as bogus transaction and held the scrip of ICL as “penny stock”

Aggrieved by the said additions the Assessee had preferred the present Appeal before us on the grounds mentioned herein above.

First of all, we take up ground Nos. 6 & 7, in this regard, ld. AR appearing on behalf of the Assessee submitted at bar that he did not want to press these grounds and consequently made the endorsement on the court file. Considering the same, these grounds stands dismissed.

Ground Nos. 1 to 5: These grounds raised

We have heard the rival submissions and perused the materials available on record. It is observed that the assessee during the year under consideration had entered into the transaction of sale of shares in the scrip of M/s. International Conveyors Ltd. aggregating to Rs.6,64,96,351/- which the Id. A.O. contends to be an accommodation entry for the purpose of availing bogus long term gain, the assessee being one of the beneficiary of such transaction. The Id. A.O. has held that the share price of the said script has been manipulated for the purpose of availing bogus profits and losses. The assessee is said to have sold 22,42,922 shares of International Conveyors Ltd. thereby offering a capital gain of Rs.79,37,345/- which has been claimed as 'exempt' as per the DTAA between India and Mauritius. The assessee in its reply to the Id. A.O. has stated that it had directly subscribed to 3,25,000 warrants of M/s. International Conveyors Ltd. at the issue price of Rs.238/- in the year 2008 directly from the company for which a total consideration of Rs.7.73,50,000/- was paid where the assessee had paid 10% of the said consideration amounting to Rs.77,35,000/- immediately and the balance was payable after the conversion of the warrants and had subsequently converted the same into shares in 2009 which was sold only during A.Y 2020-21 The assessee is said to have furnished the bank details of the said payment along with FIRC copy issued to M/s. International Conveyors Ltd. for receipt of funds against preferential allotment of warrants. The assessee further stated that the said script was listed on Bombay Stock Exchange (BSE) and also subsequently got listed on NSE also. The assessee contended that the assessee has invested/transacted in several other scrips during the year under consideration which aggregates to Rs.293,08,21,323/- in which only 2.27% of the total sale value is that of the alleged scrip which is held to be a penny stock by the lower authorities. The assessee has stated that it had provided the contract notes, the bank account details showing the purchase and sale consideration which was routed through the bank account in India and further to that the LTCG was claimed as 'exempt as per Article 13(3) of the India-Mauritius tax treaty. The assessee has also given the details of the financials of M/s. International Conveyors Ltd. which is said to be in the business of manufacture and marketing of PVC fire resistant antistatic conveyor bealting since 1978 having its factory at two locations with around 78 employees and the reserves and surplus being approximately 152 crores. The assessee has furnished the annual report of ICL for FY 18-19 and FY 19-20. The Id. A.O. have failed to consider the submission of the assessee for the reason that the company in whose share the assessee has invested has not given any return on net worth, the rate of growth on operating margin was not consistent, the debts during the financial year has increased by 56% whereas, the total sales was the same, the operating cash flow had increased substantially compared to the earlier years in spite of huge investments made by the company along with the various other factors. The Id. A.O. held the same to be a penny stock, thereby making an addition of the investment made by the assessee in the said script as 'unexplained source' u/s. 68 of the Act.

The assessee raised its objection before the Hon'ble DRP that section 68 of the Act could not be applicable to a non- resident where the assessee was benefited by IndoMauritius DTAA as per section 90 of the Act and the same was disposed of against the assessee by stating that section 115BBE of the Act or section 68 of the Act was applicable to the assessee in case where Mauritius had no such tax on deemed income. The Hon'ble DRP further stated that the unexplained income was very much taxable in India as per Article 22 of the protocol dated 10.12.2016 where the other income/residuary income is taxable in India. It further held that incase of irregularity/money laundering, section 68 would be applicable even to a non-resident and not the Articles of DTAA In the above factual matrix of the case, it is to be noted that the 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 Id. 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 Id. 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 eams income and is also the only source of income for the assessee. The Id. 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. The Id. AR has placed reliance on the decision of the Hon'ble High Court of Gujarat in the case of Pr. CIT v. Jogot Pravinbhai Sarabhai [2022] 142 taxmann.com 247/289 Taxman 298 (Gujarat) 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. The Id. AR also relied on the decision of Hon'ble High Court of Gujarat in the case of Sangeeta Ben Jagdish Shah (supra), wherein it was held that where the assessee had given the complete details of the transaction, the same cannot be held to be a bogus transaction, The Id. AR had also relied on the decision Hon'ble High Court of Gujarat in the case of Pr. CIT v. Mamta Rojivkumar Agarwal [2023] 155 taxmann.com 549/295 Taxman 512 (Gujarat) where on identical facts the Hon'ble High Court held that the transaction in particular scrip was not a penny stock. The relevant extract of the said decision is cited hereunder for ease of reference:

Purchase consideration of share was made through cheque.

Share was duly dematerialized in D-mat account.

Shares were sold through stock exchange after the payment of STT The transactions have been confirmed by brokers.

The payments were received through ECS in the D- mat account.

Inflow of shares are reflected in D-mat account. Shares are transferred through D-mat account and buyer are not known to the assessee.

There is no evidence that the assessee has paid cash to the buyer or the broker or any other entry provider for booking LTCG and share were purchased by the determined buyer.

Hence, the Tribunal held, and in our opinion rightly so that there was no evidence available on record suggesting that the assessee or his broker was involved in rigging up of the price of the script of Mis Shree Nath Commercial & Finance Ltd. The assessee had acted in good faith. The Tribunal, therefore, correctly held that the Assessing Officer had acted only on assumption which was misconceived. The CITA order dismissing the revenue's appeal was confirmed."

1n the above facts and circumstances of the case, 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 Id. A.O. to delete the addition made u/s. 68 of the Act r.w.s 115BB of the Act.

In the net result, the appeal filed by the assessee stands partly allowed with no order as to cost.