Scrip Can't Be Called Penny Stock When Shares Retained For More Than 10 Years; ITAT Deletes Addition

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT), while deleting the addition, held that scrip cannot be called penny stock when shares are retained for more than 10 years.

The 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 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 as the beneficiary of accommodation entry and the scrip of International Conveyors Ltd. (ICL) as a penny stock.

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 A.O. observed that the assessee has shown long-term capital gain by trading in stock of M/s. International Conveyors Ltd. (ICL for short), 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 of the amount, and had determined the total income. The A.O. had passed the draft assessment order, and subsequent to that, the assessee had filed its objection before the DRP, which was then disposed of, and pursuant to the direction of the DRP, the AO passed the final assessment order.

The assessee contended that, being a tax resident of Mauritius, the assessee was exempt from capital gain income as per Indo-Mauritius DTAA, substantiating that there was no necessity for the assessee to get into the bogus transaction. The assessee relied on the audited financials and the share holding pattern of ICL and stated that the scrip is not a penny stock, as alleged by the department.

The department contended that the transactions are not genuine and are 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 for the purpose of earning exempt income but are a genuine transaction.

The ITAT allowed the appeal filed by the assessee by holding that the transaction made by the assessee in the scrip of ICL is a genuine transaction. The tribunal directed the A.O. to delete the addition made under Section 68 of the Income Tax Act.

Counsel For Appellant: Rahul Sarda

Counsel For Respondent: Anil Sant

Case Title: M/s. Elara India Opportunities Fund Limited Versus Dy. CIT (International Taxation)- 2(2)(1)

Case No.: IT A No. 3261/Mum/2023

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