Foreign company's LTCG on listed shares with STT exempt u/s 10(38) as s.115JB inapplicable per Explanation 4 if no PE; CIT revision u/s 263 invalid without twin conditions of error and prejudice after AO scrutiny.

आदेश/ORDER 

PER VIKAS AWASTHY, JM:

This appeal by the assessee is directed against the order of Commissioner of Income Tax-(IT), Delhi-3 (hereinafter referred to as ‘the CIT’) dated 24.03.2022 passed u/s.263 of the Income Tax Act, 1963 (hereinafter referred to as ‘the Act’), for AY 2017-18.

2. The assessee has assailed the order of CIT by raising following grounds in appeal:-

“1. The impugned order dated 24.03.2022 u/s 263 of the Income Tax Act, 1961 (‘the Act’) passed by the Ld. Commissioner of Income Tax (International Tax) - 3, Delhi ("the Ld. CIT) is bad in law and Void ab Initio, being without any jurisdiction.

2. In the facts and circumstances of the case and in law, the Ld. CIT grossly erred in holding that the assessment order u/s 143(3) dated 02.12.2019 passed by the assessing officer is erroneous in so far as it is prejudicial to the interest of revenue.

3. In the facts and circumstances of the case and in law, the Ld. CIT grossly erred in holding that the appellant is not entitled to the benefit of India-Mauritius Double Taxation Avoidance Agreement (India-Mauritius DTAA).

4. In the facts and circumstances of the case and in law, the Ld. CIT grossly erred in holding that the long-term capital gains of INR149,37,42,732 earned by the appellant on sale of listed securities (on which securities transaction tax has been paid) is taxable in India u/s 115JB of the Act.”

3. Shri Porus F Kaka, Senior Advocate appearing on behalf of the assessee narrating facts of the case submitted that the assessee is a tax resident of Mauritius and is engaged in activity of holding investments in equity shares. The Tax Residency Certificate (TRC) issued by Mauritius Revenue Authority for FY 2016-17 is at page 45 of the paper book. During the course of scrutiny assessment proceedings, the assessee had furnished TRC to the Assessing Officer (AO) which was duly accepted. The assessee has no Permanent Establishment (PE) in India. During the period relevant to assessment year under appeal, the assessee sold shares of Bharat Financials Exclusions Ltd. (formerly known as SKS Microfinance Ltd.) through stock market and paid Security Transaction Tax (STT) on such sale. The Long-Term Capital Gain (LTCG) on transfer of aforesaid shares i.e. Rs.149,37,42,732/- was claimed as exempt under Article 13(4) of India-Mauritius Double Tax Avoidance Agreement (DTAA). The assessee filed its return of income for AY 2017-18 on 16.10.2017 declaring NIL Income. The computation of income is at page 26 of the paper book. Dehors the fact that capital gains on sale of said shares was claimed as exempt under Article 13(4) of India-Mauritius DTAA, the said capital gain is even otherwise exempt in the hands of the assessee u/s.10(38) of the Act. The AO in assessment proceedings examined all these facts. The ld. Counsel referred to the notice dated 08.11.2019 issued u/s.142(1) of the Act at pages 15 to 20 of the paper book. The ld. Counsel submitted that a detailed questionnaire was sent by the Assessing Officer inter alia asking the assessee to furnish details of exemption/deduction claimed, the list of AEs in India, report u/s.115JB of the Act, etc. The assessee vide its reply dated 25.11.2019 (at pages no. 22 and 23 of the paper book) explained that the provisions of section 115JB of the Act are not applicable and that the assessee does not have any PE in India. The assessee furnished copy of TRC and details of shareholding and the name and address of the Directors. It was further explained that no