While deleting the addition under section 68 of the Income Tax Act, 1961, the Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) held that scrip cannot be called penny stock when shares are retained for more than 10 years.
Elara India Opportunities Fund Limited, the appellant assessee is a portfolio investor registered with the Securities and Exchange Board of India ( SEBI ) and is a tax resident of Mauritius. The assessee had filed its return of income, declaring total income.
The assessee’s case was selected for scrutiny for the reason that the Assessing Officer (AO) observed that the assessee has shown long-term capital gain by trading in the stock of M/s. International Conveyors Ltd. ( ICL ), where the assessee had sold 22,41,929 shares for a sale consideration and had claimed Rs. 79,37,345 as ‘exempt income’ as per the DTAA between India and Mauritius.
The AO held it to be a penny stock script, had made an addition to the amount, and had determined the total income. The A.O. had passed the draft assessment order, and after that, the assessee had filed its objection before the DRP, which was then disposed of, and under the direction of the DRP, the AO passed the final assessment order.
The assessee argued that he is a tax resident of Mauritius and was exempt from capital gain income as per Indo-Mauritius DTAA, substantiating that the assessee did not need to get into the bogus transaction. The assessee relied on the audited financials and the shareholding pattern of ICL and stated that the scrip is not a penny stock, as alleged by the department.
On the other hand, the department contended that the transactions were not genuine and were merely to route unaccounted money as exempt LTCG through money laundering. The increase in the price is unrealistic and has not been factually substantiated by the assessee.
The tribunal noted that the shares were retained for more than 10 years and sold after a long time, which infers that the investment was not bogus and the scrip was held to not be a penny stock. It was also held that such investments are not merely to earn exempt income but are genuine transactions.
The two-member bench of Kavitha Rajagopal ( Judicial Member ) and Amarjit Singh ( Accountant Member ) has observed that the assessee, being a SEBI-registered FPI, is engaged in investment in various companies out of which the assessee earns income and is also the only source of income for the assessee. The AO has failed to substantiate how the assessee is involved with Naresh Jain, alleged to be an accommodation entry provider who has even otherwise not specifically mentioned the assessee as the beneficiary of accommodation entry and the scrip of International Conveyors Ltd. (ICL) as a penny stock.
While allowing the appeal, the ITAT directed the A.O. to delete the addition made under Section 68 of the Income Tax Act.
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