ITAT Delhi Quashes Section 263 Revision in Mauritius Fund’s ₹149 Crore Capital Gains Case

The “D” Bench of the Income Tax Appellate Tribunal, Delhi, delivered its order on 25 February 2026 in the case of Sandstone Investment Partners I for Assessment Year 2017–18. The Tribunal examined whether the Commissioner of Income Tax was justified in invoking revisional powers under Section 263 to tax long-term capital gains earned by a Mauritius-based investment entity.

CIT Alleged Treaty Shopping and Faulty Assessment

The assessee, a tax resident of Mauritius with no permanent establishment in India, had sold listed shares of Bharat Financial Inclusion Ltd. through stock exchanges and paid Securities Transaction Tax. The resulting long-term capital gains of about ₹149.37 crore were claimed as exempt under Article 13(4) of the India–Mauritius tax treaty and also under Section 10(38) of the Income-tax Act. The Assessing Officer had examined the transaction in scrutiny proceedings, called for detailed documents including tax residency certificate, demat statements, and exemption claims, and accepted the returned nil income. The Commissioner later invoked Section 263, alleging lack of proper enquiry, treaty shopping, absence of beneficial ownership, and applicability of minimum alternate tax under Section 115JB. The CIT held the assessment to be erroneous and prejudicial to revenue and sought to tax the capital gains in India.

Tribunal Restores Exemption and Limits Revisional Powers

The ITAT found that the Assessing Officer had conducted detailed verification and taken a conscious view after examining all relevant material. Mere disagreement with that view could not justify revision under Section 263. On merits, the Tribunal held that as a foreign company with no permanent establishment in India, the assessee was protected by Explanation 4 to Section 115JB, making minimum alternate tax inapplicable. Further, long-term capital gains on listed shares with STT paid were exempt under Section 10(38), irrespective of treaty benefit. The Tribunal also rejected allegations of treaty shopping, noting that valid tax residency in Mauritius entitled the assessee to treaty protection and that revenue authorities cannot question business structuring where legal requirements are satisfied.

Since neither error nor prejudice was established, the Section 263 order was set aside and the assessee’s appeal was allowed in full.