What
are penny stocks?
Penny
stocks is not defined under the Income-tax Act or for that matter in any of the
statute books. The term penny stock as defined in Black’s Law Dictionary – ‘An
equity security that is not traded in established markets, represents no
tangible assets, or has average revenues less than required for trading on an
exchange. Typically, penny stock is highly speculative and can be purchased for
less than $ 5 a share
Penny
stocks are stocks, listed on stock exchange that trade at a very low price,
have very low market capitalization, are mostly illiquid. These stocks are very
speculative in nature and are considered highly risky because of lack of
liquidity, smaller number of shareholders and limited disclosure of
information.
Word ‘Penny’ is derived
from U.S. Currency and is generally used for Stocks which trade at low prices
and have extremely low market capitalization. Shares priced below
Rs. 10 are commonly known as Penny Stocks.
The
words “penny stocks” come with a lot of connotations. However, it is a common
term that simply refers to stocks that trade at low prices per share off of
major national exchanges. Penny stocks are defined by the US Securities and
Exchange Commission (SEC) as a security that trades for less than $5 per share,
is not listed on a national exchange, and fails to meet other specific
criteria. In the UK, they are called penny shares, and they are categorised in
a similar way (although the stock price limit is £1). Other countries call them
cent stocks.
§
Trade
at a very low price,
§
Small
market capitalization
§
Mostly
illiquid
§
Usually
listed on a smaller exchange.
§
Speculative
in nature
§
Highly
risky
§
In
Indian stock market, they can have prices below Rs. 10
Types of penny stock companies
Broadly
speaking there are two types of companies.
§ An old already listed
company,
the entire shareholding of which is bought by the syndicate to provide LTCG
entries. These are generally dormant companies with no business and with accumulated
losses. (Market transaction route)
§ A new company which is floated just
for the purpose of giving LTCG entries. Such new companies are often floated
after the initial booking is complete and the capital base is decided keeping
in mind the entries to be provided. (Preferential Allotment route)
Background
A
Search & Seizure action was conducted by the Directorate of Income Tax
(Investigation), Kolkata on 02.07.2013. As a result of the said search &
seizure action, it was gathered that certain persons had been involved in
manipulation of the market price of shares of some companies listed on the BSE
in order to provide entries of bogus Long Term Capital Gains to the interested
persons hereinafter referred to as‘beneficiaries’. After then, the Directorate
of Investigation, Kolkata, has undertaken the accommodation entry of Long Term
Capital Gain (LTCG) investigation on a larger scale and identify a large number
of beneficiaries who have together taken a huge amount bogus entries of LTCG. A
detailed investigation report named “Project bogus LTCG/ STCL through BSE
listed penny stocks” was made. On the basis of statements recorded and findings
of the investigations huge amount of beneficiaries were detected and reported
to Assessment wings. As per report, estimated, 64811 beneficiaries were
involved in bogus LTCG of nearly 38,000 crores.
Results
of Kolkata Investigations [Investigation Report of the Directorate of Income
Tax (Investigation) Kolkata, in case of Project Bogus LTCG through BSE Listed
Penny Stocks]
§ Total 84 BSE listed
Companies have been identified as penny stocks.
§ A Total of more than 60
thousand PAN numbers of the beneficiaries were identified which is
§ being reported to
assessment wings through the DGIT,s.
§ The report further
covered more than 5000 paper/shell companies, also known as “Jamakharchi”
companies, which are involved in providing bogus accommodation of various
kinds.
§ Statements for most of
the directors of companies had been recorded under oath.
§ The department also
prepared cash trail of Rs. 1570 Crore. The case trail reflected how unaccounted/undisclosed cash of
beneficiaries was being routed through this modus to convert black money into
LTCG.
§ The investigating team
had followed the money trail from the point it is being deposited to the
undisclosed proprietorship bank accounts, to the accounts of share brokers.
Then they recorded statements of share brokers where they have accepted that
cash has been used for providing accommodation entry of bogus LTCG.
SEBI
Investigation and ban
§ SEBI in its part investigated
various companies and passed order to ban 1,500 entities who manipulated the
stock prices of 12 listed companies (2017). These interim orders were exparte
and without hearing the party. They banned the parties to trade in stock market
till investigations were over.
§ However SEBI was not
able to prove any manipulation of price on majority of the cases and the
interim orders had to be withdrawn or were set aside by SAT. In a very few
cases where direct evidence was found persons were punished.
§ It was felt that SEBI
could not investigate the tax evasion angle and hence the matter was send to
the tax department with their findings. SEBI was also not entitled to attach
the proceeds of such rigging as per law
§
1. Conventional method
(a) Purchase
of share by the beneficiary
In
this the beneficiary is sold a fixed number of shares at a nominal rate. The
price and the number of shares to be purchased are decided on the basis of the
booking taken and the value up to which price would be rigged. This leg of the
transaction mostly is offline. This is done to save on STT using the loophole
in Section 10(38) of the Income Tax Act which places restriction of trading by
payment of STT on sale of shares and not on purchase.
(b) Price
rigging
After
the shares have been purchased by the beneficiaries, the syndicate members
start rigging the price gradually through the brokers. In these transactions
the volume is almost negligible. Two fixed brokers, who are in league with the
Syndicate, buy shares at a fixed time and at a fixed price. These low volume
transactions are managed through paper companies of entry operators.
(c) Final sale
by the beneficiary
This
is done after the beneficiary has already held the shares for one year. The
period of holding may be a little more to match the amount of booking with the
final rate. The beneficiary is contacted either by the Syndicate member or the
Broker (Middle man) through whom the initial booking was done. The beneficiary
provides the required amount of cash which is routed through some of the paper
companies of the entry operator and is finally parked in one company which will
buy the shares from the beneficiary. The paper company issues cheque to the
beneficiary.
2. Merger method
• Form a Private Limited Company
• Issue shares at par to Beneficiary
Individuals
• This company is then amalgamated / merged
with a listed penny stock company by a High Court order.
· Depending
on the capital of the amalgamating and amalgamated companies, the investors are
allotted stock of the listed companies in the same proportion.
· The
capital of the Penny stock listed company and the private limited company are
so arranged that the beneficiaries post-merger, get shares of listed company in
the ratio 1:1, thus the investor gets equal number stocks of the listed
company.
· The
promoters of the listed penny stock companies run the syndicate, the brokers
and the entry-operators through whose paper/shell company’s cash are routed are
merely commission agents.
· The
penny stock listed company is such that though its capital base is small its
market capitalisation is many times its capital base. This is managed again
through small volume predetermined transaction amongst members of the
syndicate. The prices of shares are thus manipulated at 20 to 25 times the face
value.
For
example the quoted price of such a company would be around Rs. 250 with minor
fluctuations synchronised with rise and fall in the market to avoid regulatory
glare. One such company is quoted on CSE. The investors hold these shares in
the penny stock listed company which it got as a result of merger for one year
(statutory lock-in period for exemption under Income Tax Act) and then sell it
to one of the shell private limited companies of the operator. The investor
thus makes a LTCG of 25 times its original investment. The purchase
consideration is again provided in cash by the investor which is laundered to
the buyers account through a maze of shell companies as mentioned in the
previous method.
Though
LTCG is booked while the share price is going up, the downward journey is used
by the operators for booking bogus losses. People who have huge profit take the
Short Term Capital loss (STCL) to set-off their profit. The methodology used is
the same. The beneficiary who wants loss buys the share at a high rate from the
beneficiary who is taking LTCG. The loss taking beneficiary pays cheque to the
LTCG taking beneficiary and the cash provided by the LTCG beneficiary is
returned to the Loss taking beneficiary. The operator deducts his commission
before payment by cash. As prices crash the loss taking beneficiary sells these
shares bought at high value for small value resulting in artificial loss.
Modus operandi as
per Investigation report
As per report of the
Investigation wing of Income Tax Department, the business of providing entries
of bogus LTCG over the years has become much more organised and with economy of
scale in full operation the stakes involved had become huge. Before the actual
transaction starts taking place, there were brokers in different towns who
contact prospective clients and took paper booking for entries. The commission
to be paid to the operators was decided at this stage however, no money was
paid. Once the booking is complete, the operators have a reasonably good idea
of how much LTCG is to be provided along with the break-up of individual
beneficiaries. This data is essential to decide which penny stock or companies
to use for the job and which beneficiary to buy how many shares. Entire modus
Operandi can be summarized through following chart :
Beneficiary B desirous
of bogus LTCG
v Approaches Scrip
Operator
Ø either directly or
through counsel/other entry operator
Ø controls huge number of
bogus entities
Ø controls shares of some
listed scrip
v arranges B to buy some
shares of listed scrip controlled by him.
[investment is returned back to B
in cash after keeping some margin]
Ø either by telling
specific date, lot, rate and time
Ø or by directing him to
known borker
Ø arranging purchase of
share of some Private Limited company which latere get merged with listed
company
Ø Prefrential allotment at
par or book value, esp when prices are already up
Ø off market transaction
back
v Operator starts price
rigging through its controlled bogus entities, volume remain extremly thin.
Ø name of company, address
changes
Ø splitting of shares,
issue of bonus shares to avoid rise visible
v Cash is received from B,
O deposit it in propritorship accounts, launder it through layers and made
available to its controlled entities in bank account
v Beneficiary C desirous
of STCL approaches O, O ask him to purchase specfic scrip and number
v Shares sold by B online,
which in turn purchased by entities controlled by O or by beneficiary C
desiorus of STCL.
v B get LTCG and money in
its account, laundered and tax free
v Operator starts downward
price rigging again by thin volume by its controlled entities
v C, desirous of STCL sell
its shares on being asked by O, purchased by entities controlled by O
v
C
gets its money back in cash and have STCL in its books to setoff its already
crystalised profits.
On the basis of above,
the entities involved in this scheme of price manipulation of shares and entry
of bogus LTCG and bogus STCL are as follows:
(a)
The
operator of the Scrip known as “O”.
(b)
Directors/promoters
of the listed stock (Penny Stock Companies) whose price are manipulated,
which many a time many be Operator or its associate.
(c)
The
beneficiaries of LTCG “B”.
(d)
The
beneficiaries of STCL “C”.
(e)
Bogus/paper
entities maintained by the operator which are involved in price manipulation
and in providing exit to the beneficiaries from the exchange.
(f)
The
share brokers who provide the access of stock market to these bogus/paper
entities, in lieu of high brokerage and cash commissions.
Entities involved in the transactions
There are three categories of
individuals who are involved in the transactions:
(a) Syndicate Members
They are the promoters
of the Penny Stock companies who own the initial shareholding mostly in the
name of paper companies either in a fresh IPO or purchased from the
shareholders of a dormant company. They are usually a group of 4-5 individuals
who are also referred to as Syndicate Members and are sometimes also referred
to as Operators. Their nominees are directors of the Penny Stock companies
which are indirectly controlled by them through such dummy directors. The whole
operation is managed by them. They get the net commission income from the transactions.
Their names however, seldom appear in the actual transactions.
(b) Brokers
These are registered
brokers through whom shares are traded both online and offline. They are fully
aware of the nature of transactions and get paid a commission over and above
their normal brokerage. Some of the big broking houses are also indulging in
such transactions mostly through sub-brokers. Even Calcutta Stock Exchange has
registered itself as a broker with BSE and has given a large number of
terminals to sub-brokers who are dealing into this type of transactions. In the
said investigation, some of the sub-brokers of big broking houses like Anand
Rathi, Religare Securities, SMC etc. were also uncovered. As a standard modus
operandi, the brokers often compromise on KMC norms of the clients to help
the Syndicate Members.
(c) Entry Operators
As per the DIT (investigation) report, an
entry operator is the person who is in the business of giving accommodation
entries in lieu of cash/cheque of equal amount after charging certain
percentage of commission in cash]
These are individuals who control a
large number of paper/shell companies which are used for routing cash for the
transactions as well as buying and selling shares during the process of price
rigging. They work for commission to be paid by the Syndicate Members. To cut
cost sometimes in smaller operations, the same group perform more than one function.
(d) Beneficiary
Person
who is in possession of unaccounted money and wants to bring this into his
books without paying any tax whatsoever
NOTE
Accommodation entry : As
per the DIT (investigation) report, Accommodation entry is a financial
transaction between the two parties where one party enters the financial
transaction in its books to accommodate the other party in lieu of cash of
equal amount and commission charged over and above at certain fixed percentage.
These accommodation entries are taken by various beneficiaries for introducing
their unaccounted cash into their books of accounts without paying the due
taxes.
Bogus capital gains from Penny stocks
The fact that the
appreciation in the value of the shares is high does not justify the
transactions being treated as fictitious and the capital gains being assessed
as undisclosed income if—
(a) the shares are traded on the
Stock Exchange,
(b) the payments and receipts are
routed through the bank,
(c) there is no evidence to
indicate it is a closely held company and
(d) the trading on the Stock
Exchange was manipulated in any manner
Assessee
needs to maintain and produce following documents/evidence to prove the
genuineness of the share transaction
The
assessee needs to maintain and produce following documents/ evidence in order
to prove the genuineness of the share transaction. To conclude assessee need to
maintain the following documents in order to prove genuineness of the
investments:—
Basic
Documents
(i)
Source of the investments made.
(ii)
Business activity of the investor.
(iii)
Contract note for purchase of investment made and sale of investment.
(iv)
Bank statement reflecting payment and receipt of sale of investments.
(v)
Demat statement to prove delivery of shares.
(vi)
Ledger copy of share broker a/c.
(vii)
Copy of ledger a/c of source of investment.
(viii)
Additional Documents/information which can even help during investigation
(ix)
To prepare the justification/ reason to buy shares of that company?
(x)
Name and address of the person who has recommended the purchase of shares.
(xi)
Analysis of financial performance before purchase of share. Copy of share
purchase agreement, if any.
(xii)
Reason for selling the shares. Business of the investor/company investing the
shares?
(xiii)
The frequency of analysis of performance of the investee company and kinds of
analysis assessee did.
(xiv)
How did assessee place the purchase orders with broker? To whom did he
speak/instruct for placing the orders?
(xv)
How was the payment made/received to/from broker? What is the status of that
demat account?
(xvi)
Justification in case of delay in dematerialization of shares, since it is one
of the main ingredients to prove backdated purchase of shares.
Action
Point for Assessing Officer :
What
need to be proved in cases of LTCG/LTCL/STCL:
Based
on understanding of issue in brief, we can summarize the issues in hand to be
proved by Assessing Officer
(i)
Assessee
purchased shares of a company/scrip which is devoid of any basic fundamentals.
(ii)
Listed
company does not have any business as seen from its last many P&L accounts
and donot have any fixed assets or plant and machinery (most of assets are
either investment or loans and advances, it is best to prove that these
investments/loans/advances are also in bogus entities).
(iii)
In
some cases listed company may have some business and some fixed assets too, in
those cases it has to be proved that same were insufficient for justifying
investment by assessee and price movement, by taking comparable cases from
known big group companies in that line of business.
(iv)
The
price movement of Scrip is Bell shaped, that means huge rise and price over a
short span of time and then sharp decline in price of share. And not matching
with overall movement of share market in general and movement of other scrips
in same line of business.
(v)
Price
movement of scrip upward and down word done mainly through thin volume and
all/most entities involved in the same are related in some way and are mainly
operated by some entry operator and are bogus.
(vi)
Transactions
of assessee in particular both purchase and sell are on other hand are effected
by bogus entities controlled by some entry operator.
(vii)
Brokers
have failed to maintain the stringent KYC norms and background check in case of
entities involved in price movement.
(viii)
Statement
of entities involved in price movement, entities on other hand of purchase/sale
transaction of assessee, scrip operator, promoters of listed company and
broker; either accepting their role in giving bogus entries or pushing them at
the edge wherein it can be said that these statements are not acceptable.
(ix)
Statement
of assessee, either accepting the entry or pushing to edge that transactions
cannot be termed to be carried out in sound financial way.
(x)
A
backward probe in bank account of entities at other end of assessee’s purchase
and sale to reveal either cash deposit or cash withdrawal.
(xi)
Any
order from SEBI/BSE/NSE regarding the scrip wherein genuiness of price movement
is doubted.
(xii)
Any
other reference case where any other person accepted similar transactions as
bogus.
Gathering the
information available in public domain:
In
today’s word so much information is available online, if used effectively gives
great insight to Assessing Officer and also held in making a better case.
A.
Type
the name of scrip in google, u would get many sites. Please go on site of
BSE/CSE/NSE on which trade in specific case has took place.
B.
Search
for historic price movement curve and data vis-à-vis BSE/CSE/NSE for specific
period. This bell shape curve in contrast with normal movement of BSE/CSE/NSE
is a great indicator of bogus LTCG.
C.
Download
the financial results of company for year under consideration last few years.
D.
Check
data of day to day trade in that period. This data also have details of daily
volume, which helps in proving that upward & downward movement in scrip is
based on very thin volume, many a times, even single trade per day. This data
can also be get from website like moneycontrol.com, and other financial
trekking website.
E.
If
assessee has done any purchase or sale offline, what was price of the shares on
that day.
F.
Search
in important announcement and note whether any such announcement is there in
these websites.
G.
Search
for shareholding pattern, list of promoters, persons holding more than 1%
shares, list of holding 5% shareholding etc.
H.
Check
for any history of blocking from trade by SEBI/BSE/NSE.
I.
Most
of these information in cases where information from wing is received or cases
are selected on basis of ITD information or AIMS information, is already given
in report in soft copy.
J.
If
website of listed company is available most of these information can also be
get from there.
Information to be collected from
assessee:
A.
Copy
of Demat account.
B.
History
of assessee in share transaction in earlier years.
C.
In
case of LTCL/STCL check about crystallization of extra ordinary income and try
to match the same with purchase of shares resulted in LTCL/STCL.
D.
Normal
business of assessee, or family, firm/company in which assessee is major stock
holders to trace the source of unaccounted cash in case of LTCG or use of
accounted cash generated from LTCL/STCL.
E.
Statement
of assessee which can be taken at this stage too, by pointing out his
in-efficiency for dealing in shares, and questioning his wisdom about
investment in penny stocks, as companies are devoid of any financial worth.
F.
Source
of purported initial investment shown, whether in cash or cheque, and date of
transfer of money from bank account of assessee.
This leg is important in
ascertaining that whether assessee has done any back dating, that is typical
case when purchases are shown offline.
Information to be gathered from
other sources:
A.
Copy
of contract notes, how the order was placed, trading account ledgers for all
share transaction from broker of assessee.
B.
Copy
of Demat account, and documents given for KYC, Copy of contract notes, trading
account ledgers for Demat account holder.
C.
If
shares has not been purchased by assessee online, and dematerialized lateron,
ask information from Demat authority about documents on basis of which shares
had been dematerialized.
D.
Asking
information from stock exchange BSE/NSE about all the trades done of specific
scrips, for all purchase/sell including broker detail, purchase and sale party.
These details are extremely important.
E.
Checking
for any punitive actions on any of such brokers by SEBI by checking SEBI
website and google with their names by putting name of brokers/party and action
by SEBI.
F.
Check
the data available in form of various reports from various investigation wings
about brokers/and parties involved in trading, in this regard Kolkata
investigatioin wing had already given summaried data with hyperlink to various
statements.
G.
Check
from data available that whether the exit providers (bogus entity who purchases
shares when sold by assessee) statement is available in database provided by
wing.
H.
Ask
the details of KYC submitted and result of any background check done by broker,
details of bank accounts, how the transactions has been ordered in respect of
by purchase/seller parties as recd from stock exchange in reply to D from their
brokers again recd in reply to D.
I.
If
shares had been purchased by preferential allotment of shares/or by merger, it
is better to get the details of all preferential allotments, same is available
at moneycontrol.com & BSE website, or Roc website, and trying analyse the
trend of all such allotee, as all of these persons are beneficiary for bogus
LTCG, an analysis of sale by all these parties in respect of gain from data
recd in reply to D, along with all exit providers, is an excellent way to prove
that entire thing is just a scam. Similarly, where shares issued to assessee of
a pvt ltd company, which get merged with that listed company, it is better to
get details of all persons whom shares have been issued by merged company on
the same date as to the assessee, and then collate the same as in case of
preferential allotment. For these purpose, information may be collected either
from those parties, ROC, or even from bank statement of that party.
J.
A
backward probe in bank account of entities by asking information from banks at
other end of assessee’s purchase and sale to reveal either cash deposit/cash
withdrawal, detail regarding which is recd from brokers of those parties (as
mentioned in H). For this purpose, it is better to either go personally in bank
or through Income Tax Inspector, as many a times many layers accounts are
maintained in same bank. For this purpose sample letter is attached as
Annexure-D. while writing letters to bank, Assessing Officer should refrain to
write letters to original branch, as same wd not be in surat, writing letters
to any branch, special regional branch in Surat should be suffice as all bank
accounts are centralized as of now. This part is extremely important reaching to
cash through layers is nearly proving cash beyond doubt.
K.
Collecting
information from assessing officers in respect of all entities recd as reply to
D and all layers as found in J. for this purpose, ITR may also be get from
Investigation wing, as they have password where they can see return all India
basis.
L.
Incase
needed, commission may be issued to investigation wing to get the verification
of parties entities and broker both involved in trade of that scrip (as recd in
reply of D) if same is not already available, by giving the outline of case and
investigation done so far.
M.
Send
the information collected so far to SEBI asking for details of any probe
against scrip promoters/brokers/entities and if not done so, same may be
requested to initiated in view of all the facts. In this letter, bell shaped
curve, low volume and limited entities during price rise/fall, huge increase
devoid of financial strength, bogus entities, not following of KYC norms and
background check by brokers should be given.
Collect all the informations and
summoning the Assessee
On the basis of above information,
which broadly can be collated in five category Assessee must be issued summon
second time section 131 of Income Tax Act, a detailed statements should be
recorded including:
§
wherein
his knowledge about share market in general,
§
his
knowledge about scrip specific
§
why
and how investment was made.
§
How
brokers were instructed
§
How
well he knows the broker, its office, its employees
§
How
his decision to purchase shares of scrip specific is devoid of financial
wisdom,
§
Statements
of entities specific if any.
§
Lying
all the facts before him, which proves that transaction is not normal.
Providing detailed show cause to
assessee giving all the facts as a matter of natural justice with sufficient
opportunity to reply.
This show cause should include all
the matters. Drafting of final order after considering reply of assessee and
facts gathered. Which should inter alia include:
i.
Financial
strength of scrip & price & volume trend, and other information from
BSE website.
ii.
Data
regarding all players involved in movement of scrip, from stock exchange.
iii.
Statements
of exit providers and broker.
iv.
History
of SEBI action from internet & SEBI.
v.
Backward
probe in bank accounts of exit provider to find the cash trail. (It is also
important to mention that most information related to first four points is
given by investigation wing in CD format, in the folders named as Invesigation
report, LTCG Database, LTCG Trade ledgers, and SEBI orders, please check and
analyse the same before calling from respective authorities.)
NOTE
It is being clarified the above
guidelines are not exhaustive or exclusive; the Assessing Officer may delve
deeper and also investigate from any other angle which the Assessing Officer
any consider necessary and appropriate.
Specimen of Summons under Section
131
Office of the
No. Dated:
To
Name & Address of the Bank
Summons
under Section 131 of the Income-Tax Act, 1961
Whereas your attendance
is required in connection with the proceedings under the
Income-tax Act, 1961 in the case of
___________________, you are hereby required personally
to attend my office at Room No.___,
Aayakar Bhavan, on _______________ at _______ to give
evidence and/or to produce
personally the books of account or other documents specified
hereunder and not to depart until
you receive my permission to do so.
(i) Copy of account opening form from the Bank
account (to be asked only if letter is to
investor’s Bank)
(ii) Copy of the instrument (cheque, DD, RTGS
slip, NEIT instruction) both sides for the
identified transaction, same has been
highlighted in the Bank A/c. placed as annexure.
(iii) Name, address, Bank A/c. No., Bank details
of the person from whom the transaction has
been made.
(iv) If the transferor is also having account
with your Bank, please submit –
(a) copy of account
opening form along with the documents submitted for the same.
(b) copy of Bank
statement for entire F.Y……...
(c) narration of all
entries 10 days before and 10 days after the transaction date in names and
addresses of the transferor and transferees and their Bank account details.
(v)
Please also give details of all bank accounts who are linked with same
Mobile No. and
email id as provided by these persons.
(vi) If any of transferor and transferee mentioned
in (iv)(c) has Bank A/c. in your Bank, then
all details asked in (iv) & (v) in
respect of same and soon.
2. Without prejudice to the
provisions of any other law for the time being in force, if you
intentionally omit to so attend and
given evidence or to produce the books of accounts and / or
documents a penalty for a sum,
which shall be to the extent of Rs. 10,000/- Rupees ten thousand) for each such
default or failure shall be imposed upon you under section 272A(1)(c) of the
Income-tax Act, 1961.
Name of the Officer
Modes
of purchase of penny stocks and other related aspects
(i)
Purchase
on the stock exchanges
(ii)
Off-market
purchase
(iii) Purchase through
preferential allotment
Lock
in period of 1 year as per Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009
Other aspects
(iv) Purchase could be out of
cash-in-hand or cheque or derivatives profit
(v)
Amalgamation
or merger 6) Split and bonus to increase the volume
Tax Rates [As per
Section 115BBE]
• Section 115BBE was inserted by the Finance
Act 2012 with effect from 01.04.2013.
• Income chargeable under sections 68, 69,
69A, 69B, 69C or 69D, the income would be
chargeable @ 60%. Surcharge will also be
paid @ 25%.
• No deduction shall be allowed to the
assessee in respect of any expenditure or allowance or set off of any loss
under any provision of the Act in computing the income under section 68, 69,
69A, 69B, 69C or 69D whether the same has been disclosed in the return of
income or not.
• Earlier i.e. before 01.04.2017, the rate of
tax payable on such income was 30%.
• The purpose of
amendment is to strict the regime of tax & penalty and to reduce the tax
evasion
• To Ensure that the no tax evaders
are left out on procedural and technical grounds, the department has prepared
Standard operating procedures (SOPs) to be adopted by the Assessing officers
while framing assessment orders in penny stock cases.
• Not only the procedures are
standardized, but the specific formats were given for the following;
➢
Draft questions for statement to be recorded under section 131
➢
Draft Show cause notices
➢
Draft assessment orders
➢
Draft of reasons recorded under section 148
• Further a draft order noting is
given in following situations
➢
If a request is made for cross examination
➢
If deponent files affidavit retracting statements, etc.
Steps taken by the Government
Section 10(38) of the Income-tax
Act, 1961 exempts long term capital gains (LTCG) arising from transfer of
listed equity shares, where transfer of shares is on or after 01.10.2004 and
the transaction of sale is chargeable to Securities Transaction Tax (STT).
(a)
Amendment
in section 10(38)
Earlier Clause (38) of section 10,
inter alia, provides for exemption from tax on the income arising from the
transfer of a long-term capital asset, being an equity share acquired or on
after 1st day of October, 2004 subject to certain conditions specified in
the said clause. The said clause was amended by the Finance Act, 2018 with
effect from 01.04.2019 so as to provide that the provisions of said clause
shall not apply to any income arising from the transfer of long-term capital
asset, being an equity share in a company or a unit of an equity oriented fund
or a unit of a business trust, made on or after the 1st day of April, 2018.
(b)
New
section 112A was inserted
Further, a new section was inserted
i.e. section 112A which provides: “tax payable by the assessee on capital gain
on transfer of long term capital asset being equity shares of a company or a
unit of an equity oriented fund or a unit of a business trust, where STT has
been paid subject to the conditions specified under the section, exceeding Rs.
1,00,000 at the rate of 10%.
CBDT
Office Memorandum F. No. 279/MISC./M-93/2018-ITJ(PT.), Dated 16.09.2019
Subject : Section 268A
of the Income-tax Act, 1961 - Filing of appeals or application for reference by
income-tax authority - Special order of board exempting cases involving bogus
Long Term Capital Gains (LTCG)/Short Term Capital Loss (STCL) through penny
stocks from monetary limits specified in any circular issued under section 268A
CBDT
Office Memorandum F. No. 279/MISC./M-93/2018-ITJ(PT.), Dated 16.09.2019
The
undersigned is directed to refer to Circular No. 23 of 2019 dated 6th
September, 2019 and to say that by virtue of powers of the Central Board of
Direct Taxes under section 268A of Income-tax Act, 1961, the monetary limits
fixed for filing appeals before ITAT/HC and SLPs/appeals before Supreme Court
shall not apply in case of assessees claiming bogus LTCG/STCL through penny
stocks and appeals/SLPs in such cases shall be filed on merits.
CBDT Circular No. 23 of 2019, dated 06.09.2019
Subject: Exception to
monetary limits for filing appeals specified in any Circular issued under
section 268A of the Income-tax Act, 1961-reg.
Reference
is invited to the Circulars issued from time to time by Central Board of Direct
Taxes (the Board) under section 268A of the Income-tax Act, 1961( the Act), for
laying down monetary limits and other conditions for filing of departmental
appeals before Income-tax Appellate Tribunal (ITAT), High Courts and
SLPs/appeals before Supreme Court.
2.
Several references have been received by the Board that in large number of
cases where organised tax evasion scam is noticed through bogus Long Term
CapitalGain (LTCG)/Short Term Capital Loss (STCL) on pennystocks and department
is unable to pursue the cases in higher judicial fora on account of enhanced
monetary limits. It has been reported that in large number of cases, ITATs and
High Court have recognized the unique modus operandi involved in such scam and
have passed judgements in favour of the revenue. However, in cases where some
appellate fora have not given due considerations to position of law or facts
investigated by the department there is no remedy available with the department
for filing further appeal in view of the prescribed monetary limits.
3.
In this context, Board has decided that notwithstanding anything contained in
any circular issued u/s 268A specifying monetary limits for filing of
departmental appeals before Income-tax Appellate Tribunal (ITAT), High Courts
and SLPs/appeals before Supreme Court, appeals may be filed on merits as an
exception to said circular, where Board, by way of special order direct filing
of appeal on merit in cases involved in organised tax evasion activity.
Assessee purchased stocks and had proved genuineness of transactions and established on online trading platforms that it had no control whatsoever on share prices and thus, incurred losses in shares, addition made by Assessing Officer on account of disallowance of losses booked in pennystocks was to be deleted
Assessee was engaged in trading pennystocks, specifically shares of AIGL
and KPL, during relevant period. Assessing Officer alleged that purchases were
made at artificially high prices and sold at significantly lower rates to
create business losses, possibly to offset profits from commodities
transactions. Despite transactions occurring on recognized stock exchanges,
Assessing Officer disallowed claimed losses. However, both Commissioner
(Appeals) and Tribunal overturned Assessing Officer’s decision, concluding that
assessee had demonstrated authenticity of transactions. They found evidence on
online trading platforms indicating that assessee had no control over share
prices and had genuinely incurred losses, particularly with AIGL shares where
only a portion were sold, and rest were held into subsequent assessment year. Regarding
shares of KPL, Tribunal reasoned that market rate being lower justified
business loss, even though shares were not sold. In view of above concurrent
findings of fact, no questions of law much less any substantial question of law
would arise and accordingly, appeal, being devoid of any merits, was to be
dismissed. [In favour of assessee] (Related Assessment year : 2015-16) –[PCIT(Central)
v. Affluence Commodities (P) Ltd. (2024) 161 taxmann.com 476 (Guj.)]
SLP dismissed against High
Court order that where during assessment proceedings assessee-company had
furnished material related to alleged purchase and sale of shares and capital
gain/loss made therein and Assessing Officer after considering said details had
conclusively taken a view on same, reassessment proceedings initiated under
section 147 based on reconsideration of same material that was available at
time of original proceedings would tantamount to change of opinion and thus
would be liable to be set aside
Assessee-company filed its return of income and assessment was completed for same. Assessing Officer issued a notice under section 147 after expiry of four years on basis of beneficiaries information received in case of a penny stock company that assessee was indulged in bogus purchase and sale of penny stocks. High Court by impugned order held that since during assessment proceedings assessee-company had furnished material related to alleged bogus investment in form of date of purchase and sale of shares and capital gain/loss made therein and Assessing Officer after considering said details had conclusively taken a view on same, reopening of assessment on reconsideration of same material would tantamount to change of opinion and, thus, would be liable to be set aside. It further held that information received regarding assessee indulging in illegitimate activity on scrip of penny stock company would not by itself constitute any fresh material for reopening. Special leave petition (SLP) filed by revenue against impugned order of High Court was to be dismissed. [In favour of assessee] (Related Assessment year : 2012-13) – [ACIT v. Infinity.com Financial Securities Ltd. (2023) 290 Taxman 126 :(2022) 145 taxmann.com 212 (SC)
Assessee claimed exemption under section 10(38) for
long-term capital gain from sale of equity shares of NCL Research and Financial
Services Limited, since sale of equity shares from said listed companies, were
found to be pennystock companies, Assessing Officer rightly treated claim of
long-term capital gain as bogus and not eligible for exemption under section
10(38)
Assessee, claimed exemption under section 10(38)
for long-term capital gain from sale of equity shares of NCL Research and
Financial Services Limited. Assessing Officer called for details of financial
statements of said company. These financial statements indicated poor results
that were not commensurate with steep increase in price of equity shares. Company’s
name also appeared in list of 84 penny stock companies listed with Bombay Stock
Exchange, which were found to be managed by unscrupulous brokers, entry
operators, and money launderers involved in providing bogus accommodation
entries of long-term capital gain and short-term capital loss. Based on these
findings, Assessing Officer treated claim of long-term capital gain as bogus
and not eligible for exemption under section 10(38) and made addition under
section 68. Since income under section 10(38) in respect of long-term capital
gain arising from sale of equity shares from listed companies, were found to be
penny stock companies and long-term capital gain so claimed found to be bogus
in nature, lower authorities were justified in treating assessee's claim of
long-term capital gain claim as bogus, and making additions. [In favour of
revenue] (Related Assessment years : 2013-14 and 2014-15) – [Saroj Baid v. ITO
(2023) 203 ITD 521 : 155 taxmann.com 630 (ITAT Kolkata)]
SLP dismissed against order of High Court that
where Assessing Officer disallowed exemption claimed by assessee under section
10(38) and made additions, alleging involvement in penny stock which were being
misused for providing bogus accomodation of LTCG, however, there was lack of
adverse comments from stock exchange and officials of company involved in these
transactions and no material relating to assessee was found in investigation
wing report, additions made by Assessing Officer had rightly been deleted
Assessing Officer disallowed exemption claimed by
assessee under section 10(38) and made additions to income of assessee on
ground that assessee was involved in penny stock which were being misused for
providing bogus accommodation of LTCG. On appeal, Commissioner (Appeals)
deleted addition. Tribunal dismissed appeal of revenue.
High Court by impugned order held that where
Assessing Officer disallowed exemption claimed by assessee under section 10(38)
and made additions, alleging involvement in penny stock which were being
misused for providing bogus accomodation of LTCG, however, there was lack of
adverse comments from stock exchange and officials of company involved in these
transactions and no material relating to assessee was found in investigation
wing report, additions made by Assessing Officer had rightly been deleted. SLP
filed by revenue against said impugned order was to be dismissed. [In favour of
assessee] (Related Assessment year : 2014-15) – [PCIT v. Renu
Aggarwal (2023) 153 taxmann.com 579 (SC)]
Absent cogent material, LTCG not bogus despite
drastic spike in share price
During Assessment year 2015-16, Assessee declared
LTCG of Rs. 51.41 Lac arising on sale of shares of CCL International Ltd.
(company) and claimed it as exempt under Section 10(38); During assessment,
Revenue issued show cause notice alleging that LTCG claimed as exempt income is
only an accommodation entry to which Assessee responded and stated that 10,000
shares were purchased from M/s Sai Securities (broker) at a purchase cost of
Rs. 4 Lac which were subsequently transferred to demat account and sold in the
year 2015 against which it received consideration of Rs. 51.06 Lac through
banking channels. Revenue rejected Assessee’s contention and relied on
investigation report issued by Directorate of Investigation, Kolkata to held
that modus operandi of the Assessee involves rigging the prices of penny stocks
through involvement of multiple intermediaries and consequently taking
advantage of tax by claiming exemption under Section 10(38), thus, invoked
Section 69A and treated LTCG of Rs. 51.41 Lac arising from sale of CCL shares
to be unaccounted income and Rs. 1.02 Lac as unaccounted expenditure under
Section 69C. CIT(A) allowed Assessee’s appeal.
Delhi ITAT deletes addition under Section 69A made on account of bogus long term capital gain (LTCG) claimed as exempt under Section 10(38) merely on the assumption and surmises that modus operandi pertained to a penny stock; Holds that purchase and sale of CCL Ltd. giving rise to LTCG claimed as exempt under Section 10(38) is fully corroborated by documentary evidences since shares were credited in bank account and the transaction was made through banking channels; Opines that prima facie bona fides of existence of transaction executed cannot be doubted; Relies on jurisdictional High Court judgment in PCIT v. Karuna Garg [ITA no. 477/2022 judgment dated 23.11.2022 as well as PCIT v. Krishna Devi (2021) 431 ITR 361 : 319 CTR 168 : 279 TAXMAN 148 : 198 DTR 177 : [TS-5023-HC-2021 (Del.)] and observes that astronomical increase in the share prices is not a justifiable ground to deny the claim of LTCG holding it to be accommodation entry; Accepts Assessee’s contention that capital gains arising on sale of sales cannot be regarded as sham profit since Revenue failed to provide anything on record to substantiate modus operandi on astronomical increase share price of the company. [In favour of assessee] (Related Assessment year : 2015-16) – [Sarika Bindal v. ITO [TS-829-ITAT-2023(DEL)] – Date of Judgement : 13.12.2023 (Del.)
Paperwork futile where outcome transcends human
probabilities; Upholds penny stock LTCG addition
Hyderabad ITAT confirms disallowance
of long term capital gains exemption under Section 10(38) derived
from sale of penny stock at disproportionately high profits by holding
such transaction to be a bogus transaction; Relies on Calcutta High Court
ruling in PCIT v. SwatiBajaj (2022) 139 taxmann.com
352 (Cal.) wherein it was held that in case where the shares were purchased for Rs.
1 lakh and was sold for Rs. 29 lakhs when investments became eligible for
long term capital gains, the Revenue was justified in treating the
sale consideration as unaccounted income; Takes note that the High Court
further observed that it is for the assessee to establish the creditworthiness
of the investee company and genuineness of the increased share price within a
short period of time; Rejects Assessee’s contention that all the transactions
were done through the stock exchange and banking channels whereby the
genuineness of the same is established and holds that the meticulous
paper work is not the be all and end all for establishing the genuineness
of the transaction; Relies on Delhi High Court bench rulings in Sanat Kumar v. ACIT in ITA No. 1881/Del./2018 and Anandtex international (P) Ltd. v. ACIT in ITA No. 2476/Del/2018, wherein it was held that the
meticulous paper work of routing the transaction through banking channel is
futile when the results are altogether beyond human probabilities; Opines that,
“what is apparent is not real and what is real is not made to appear.
Investment in unknown stock by the assessee is not real and all the paper work
and routing money through banking channels is only to make it real or legal,
but when examined, the whole transaction of sale and purchase of the stock with
huge windfall to the assessee is only a part of the larger picture”; Assessee-Individual,
for Assessment year 2015-16, purchased 1,50,000 shares of a company, Life
Line Drugs & Pharma Ltd., at Rs. 6 per share and sold the same at Rs. 283
per share, deriving profits of Rs. 2.60 Cr within a span of 19 months and
claimed the exemption under Section 10(38) towards the same as long term
capital gains from sale of equity shares; Revenue, took note of investigations
undertaken by the Income Tax Department and SEBI, whereby a huge syndicate of
entry operators, share brokers and money launderers involved in providing bogus
accommodation of long-term capital gains and short term capital loss was
unearthed; Revenue also considered the statement of a third party admitting to
provision of accommodation entries of long term capital gains with respect to
certain companies including, Life Line Drugs & Pharma Ltd., the shares of
which were purchased and sold by the Assessee; Thus, Revenue held the
transaction to be bogus and disallowed the exemption under Section 10(38)
and made addition of the entire sale consideration as income from unexplained
source; CIT(A) confirmed the addition on the ground that the Assessee did not
submit any details of STT payments and failed to establish as to how the
abnormal profits were made on sale of shares within a span of 19
months; ITAT notes that the Assessee is not a professional in dealing in
shares and he neither in the past nor in the subsequent years engaged into any
such investment to have a huge windfall; Finds that the Revenue considered SEBI
conducting enquiries and identifying some of the issues of the manipulations of
share market with the inputs given by their own surveillance system and also by
the Income Tax Department; Notes Revenue’s view that the unpredictably high
rising of price supported the presumption that all is not fair and there is
manipulation of this price; Concurs with Revenue’s contention
that if the Assessee has been so informative about the nuances of the
share market, he would have certainly undertaken such adventurous activities at
least in future by making such investment in the unknown stock, but the
Assessee never again entered into any such transaction; Further observes that
the Assessee has meticulously completed the paperwork by routing his entire
investment through banking channel, but the results thereof are altogether
beyond the pale of common course of natural events, human conduct and public
and private business; Observes that Assessee never revealed the source of his
information about particulars of Life Line Drugs & Pharma Ltd., or its
prospects; Thus dismisses Assessee’s appeal holding the same to be devoid of
any merits and upholds CIT(A) order. [In favour of revenue] (Related Assessment year : 2015-16) - [Anirudh Venkata Ragi
v. ITO [TS-699-ITAT-2023(HYD)] – Date of
Judgement : 21.11.2023 (ITAT Hyderabad)]
Dissects penny stock
transactions, reiterates ITAT’s role as final fact finding authority - Shares with
increased value of about 2823% - Genuineness of price hike to be
established-Onus on the assessee - Order of Tribunal is reversed- Addition as
cash credit is affirmed-Revision is held to be valid
The assessee had
purchased 50,000 shares of the Surabhi Chemicals and Investment Ltd for
Rs.1,00,000/- on 16.03.2012 and 14.08.2012. Soon after the expiry of the period
to become eligible for long term capital gains, the assessee sold those shares
for Rs. 29,23,500/- Sales were effected during the period from 04.12.2013 to
07.12.2013 and the long term capital gains (LTCG) was computed for Rs.
28,23,500/-. The assessee claimed the capital gains as exempt u/s. 10(38) of
the Act. The Assessing officer held that within a short span to time of 17 to
21 months, the Assessee managed to sell the shares with increased value of
about 2823% that to when the general market trend was recessive. Relying on the
report of investigation wing the Assessing Officer denied the exemption and
assessed the receipt u/s. 68 of the Act. The CIT(A) dismissed the appeal of the
Assessee. On appeal the Income-tax Appellate Tribunal passed a common order in
90 appeals pertaining to penny stocks favouring the assessees. Revenue has filed
appeals before the High Court .Honourable High Court held that the onus is on
the assessee to establish the genuineness of the price hike. Merely
demonstrating the financials of the company, volume of trade, transactions
through banking channels, inter alia, will not suffice. The Assessee has to
prove that the price of the share was not manipulated. Honourable High Court
also held that the Tribunal committed a serious error in setting aside the
orders of the CIT(A) who had affirmed the orders of the Assessing Officer and
equally the Tribunal committed a serious error both on law and fact in
interfering with the assumption of jurisdiction by the Commissioner under
Section 263 of the Act.
[In favour of revenue] (Related Assessment year : 2014-15) – [PCIT v. Swati Bajaj
(2022) 446 ITR 56 : 288 Taxman 403 : 139 taxmann.com 352 : [TS-471-HC-2022(CAL)]
(Cal.)]
Section 68 additions valid if assessee failed to justify rise in price of penny stock when market trend was recessive
Assessee filed return of income on 28.07.2014
reporting total income at Rs. 18,58,860/-. During the year, the assessee had
earned Long-term Capital Gain of Rs. 52,22,879/- and claimed it as exempt. The
assessee had purchased 1,00,000 equity shares of Surabhi Chemicals &
Investments Ltd. for Rs. 2,00,000/- on 16.03.2012, 14.08.2012 and 13.04.2013,
which were sold for Rs. 54,22,879/- between the period 27.09.2012 to 04.12.2013
resulting into an increase of almost 2611% in a short span of 16 to 18 months.
Assessing Officer received report from Investigation Wing wherein modus
operandi of rigging prices of penny stock and generation of capital
gain/trading loss was studied. Assessing Officer opined that LTCG earned by
assessee were fabricated and sale of shares which fell under category of penny
stocks was to be treated as bogus. The ld. Assessing Officer treated this
long-term capital gain as income from undisclosed sources denying the claim of
exemption under section 10(38) of the Act. The ld. Assessing Officer also made
an addition of Rs. 26,114/- towards commission charged by the Operators by
holding it as unexplained expenditure.
It was noted that said issue was squarely covered
by PCIT v. Swati Bajaj (2022) 446 ITR 56 : 288 Taxman 403 : 139 taxmann.com
352 (Cal.) wherein it was held that since assessee failed to establish
genuineness of rise of price of shares within a short period of time that too
when general market trend was recessive, additions made under section 68 were
justified. Thus, following aforesaid view additions made under section 68 were
justified. [In favour of revenue] (Related Assessment year : 2014-15) – [Shyam Sunder Bajaj v. Income-tax
Officer (2022) 145 taxmann.com 315 (ITAT Kolkata)]
Investment in penny stock can not be termed as bogus investment if shares were held for more than 10 years
Assessing Officer noticed that
assessee had indulged into script of shell company and had claimed long-term
capital gain on sale of shares and made addition of Rs. 2,10,474/- under
section 68 holding that entire transaction was bogus. It was found that assessee
produced copy of transaction statement for period from 01.06.2001 to 01.10.2010
to show that investment was made in year 2000-01 and shares were retained for
more than ten years and were sold after such long time, suggesting that
investment was not bogus or investment made in penny stock. Since investment
was longstanding and genuine and was not penny stock on basis of which capital
gain was wrongly claimed, addition made under section 68 was to be deleted. [In
favour of assessee] (Related Assessment year : 2011-12) – [PCIT v. Jagat
Pravinbhai Sarabhai (2022) 142 taxmann.com 247 (Guj.)]
Assessing Officer failed to bring evidences to support
his finding that assessee was involved in rigging price of shares held by it so
as to get an undue benefit of exemption under section 10(38), transactions of
sale and purchase of such shares by assessee through recognized stock exchange
could not be treated as bogus so as to make additions under section 68
Assessee
purchased shares of company, namely, TTL and further sold them and claimed that
long-term capital gains (LTCG) that arose on same were exempt under section
10(38). Assessing Officer observed that although share price of said company
was escalated in stock market but increase in share price of company was not
supported by financials, thus, assessee was part of an organized racket of
rigging price of shares so as to get an undue benefit of exemption under
section 10(38). Accordingly, entire consideration received from sale of shares
was treated as unexplained cash credit and added to income of assessee under
section 68. It was noted that there was no corroborative evidence brought on
record by Assessing Officer to show that assessee was part of any organized
racket of rigging price of shares in market and was beneficiary of bogus LTCG. Assessee
had filed relevant documents including contract note issued by stockbroker
which showed that purchase and sale of shares were through recognized stock
exchange and consideration for sale of shares was received by assessee by
cheque. On facts, impugned transactions of sale and purchase of shares could
not be treated as bogus. Therefore, impugned addition made under section 68
treating consideration received by assessee from sale of shares as unexplained
cash credit was unjustified. [In favour of assessee] (Related Assessment years :
2012-13 and 2013-14) – [Mrs. Neeta Bothra v. ITO (2022) 137 taxmann.com 463
: (2021) 92 ITR(T) 450 (ITAT Chennai)]
Monetary limit for filing of appeal applicable if sale of penny stock was shown as Profit and gains from business or profession income rather than capital gains
Circular No. 23 of 2019 dated
06.09.2019 read with Office Memorandum dated 16.09.2019, shall apply when
assessee has earned/claimed bogus LTCG/STCL through penny stocks, however,
where assessee has shown sale and purchase of such alleged penny stocks as ‘income
from business or profession’ in its return of income, said Circular read with
Memorandum would not be applicable
Section 268A - Circular No. 23 of 2019 dated 06.09.2019 read with Office Memorandum dated 16.09.2019, shall apply when assessee has earned/claimed bogus LTCG/STCL through penny stocks. However, there is nothing to suggest that Circular read with Memorandum would apply with equal force even if assessee had shown sale and purchase of such alleged penny stocks as ‘income from business or profession’ in its return of income. Therefore, where assessee had filed return of income declaring income from sale of shares under head ‘income from business or profession’ and had not declared any income/loss under head ‘capital gains’ and total tax effect from assessment framed during year was below prescribed limit for filing appeals before Tribunal, case of assessee did not fall within exceptions as provided by CBDT Circular No. 23 of 2019 dated 06.09.2019 read with Office Memorandum dated 16.09.2019 and therefore, impugned appeal filed by revenue deserved to be treated as withdrawn on account of low tax effect. [In favour of assessee] (Related Assessment year : 2011-12) – [ITO v. Palak Chinubhai Patel (2022) 137 taxmann.com 194 (ITAT Ahmedabad)]
Absent incriminating material, deletes Section 68 addition over alleged penny stock transactions
Mumbai ITAT upholds deletion
of additions made under Section 68 and 69C in unabated as
well as abated assessments, conducted pursuant to a search
operation; As regards abated assessments for Assessment years 2014-15
and 2015-16, ITAT holds that Revenue was unjustified in making additions based
on unsubstantiated and irrelevant statements of entry operators / exit
providers, particularly when “SEBI has specifically exonerated the assessee
of any wrong-doing or manipulation of shares prices of these companies on the
BSE.”; For unabated assessments of Assessment years 2012-13 and
2013-14, ITAT holds that the additions to be unsustainable in absence of any
incriminating material or information gathered during the course of search in
relation to the alleged accommodation entries and share
transactions; Pursuant to search operations conducted on
Assessee-Individual, Revenue relied on SEBI's interim order
passed in the Assessee’s case relating to his transactions
in shares of 7 scrips (Radford Global, Global Infratech, Shree Shaleen
Textiles, Dhenu Buildcon Infra, Rander Corporation, Unisys Software &
Holding and Wagend Infra), held the transactions to be bogus
and taxed the sale proceeds for such shares as unexplained cash
credits under Section 68 and also estimated and added unexplained expenditure
by way of commission paid for such trades under Section 69C; CIT(A), although
dismissed Assessee’s plea that the additions were made in absence of any
incriminating material found during search, the additions made under
Sections 68 and 69C were deleted on merits; ITAT elucidates on
‘incriminating’ evidence, observes that additions made by Revenue relying
on following ‘information’ cannot be held to be incriminating,
thus, additions based thereon were not sustainable in law: (i)
statement of Assessee’s brother, (ii) statement of other entry operators and
(iii) SEBI interim report suspecting Assessee to be involved in manipulation of
share-price; Referring to observations of Revenue in the assessment
order; ITAT notes that there was no reference of any document found or
seized during the search to justify the additions made, thus remarks that “it
is clearly discernible that the additions were not based on any
document/material/detail/asset found or unearthed in the course of search.”;
Likewise for additions made in unabated Assessment years, opines that “the
assessee had discharged his initial burden to prove the genuineness of the
long-term capital gain derived on sale of shares. Thereafter the ‘onus’ shift
to Assessing Officer, who has to verify the veracity of these documents and
bring on record any infirmities if any found regarding the same”, however
noting that Revenue did not find any defects in the documents produced by the
Assessee to substantiate the LTCG claimed to the Assessee, upholds CIT(A) order
deleting the additions. [In favour of assessee] – [Dilip
B. Jiwrajka [TS-997-ITAT-2022(Mum)]
– Date of Judgement : 29.11.2022 (ITAT Mumbai)]
Absent cogent material, LTCG not bogus despite drastic spike in share-price
Ahmedabad ITAT dismisses Revenue’s appeal against deletion of
addition made on account of bogus long term capital gain (LTCG) claimed under
Section 10(38) merely on assumption and surmises that modus operandi
pertained to a penny stock; Remarks that “mere modus of operandi
cannot the basis of making the addition or treating the capital gain as bogus
until and unless it is supported by the material documents”;
Assessee-Individual, for Assessment year 2013-14 filed return of income
declaring income of Rs. 5,86,980/-
and claimed long term capital gain of Rs. 39,37,423/-
from sale of shares of Shree Nath Commercial & Finance Ltd. as exempt under
Section 10(38); Revenue treated LTCG as bogus on the premise that the share
price of the investment company increased drastically in one year without
having financial base and the sole intention of the Assessee was to keep the
shares for one year to claim exemption under Section 10(38) and the entire flow
of transaction is similar to modus operandi of penny stock which Assessee
failed to explain and accordingly, treated it as income from other sources;
CIT(A) allowed Assessee’s appeal and held that the shares were purchased
through broker on recognized stock exchange and the payment was made through
banking channels which was supported by documentary evidence which Revenue
failed to consider while treating long term capital gain as bogus; ITAT
observes that the Revenue failed to discharge its onus by not bringing any iota
of evidence to substantiate the allegations of penny stock which is also
evident from the fact that no such allegation was even made against the broker
through whom shares were traded;
We also note that there was no dispute raised by the Revenue with respect to the following facts:
(i)
Shares were purchased
through broker on recognized stock exchange.
(ii)
Purchase consideration
of share was made through cheque.
(iii)
Share was duly
dematerialized in D-mat account.
(iv)
Shares were sold through
stock exchange after the payment of STT. The transactions have been confirmed
by brokers.
(v)
The payments were
received through ECS in the D-mat account.
(vi)
Inflow of shares are
reflected in D-mat account. Shares are transferred through D-mat account and
buyer are not known to the assessee.
(vii)
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.
(vii)
Observes that contrary view was taken by Revenue by
considering the purchase of those shares as genuine while treating the sale of
those shares as bogus which is contrary to well establish principle that once
purchases are admitted as genuine, corresponding sales cannot be doubted
without any adverse material; Relies on Delhi High Court ruling in PCIT
v. Smt. Krishna Devi (2021) 431 ITR 361 : 279 Taxman 148 : 126 taxmann.com
80 (Del.) and observes that in absence of any specific finding,
Assessee cannot be held to be guilty or linked to the wrong acts merely on the
basis of surmises and assumptions; Accordingly, observes that sudden rise in
prices of the investment company cannot be a sole criteria to conclude that
bogus long term capital gain was generated which is exempted under Section
10(38); [In favour of assessee] (Related Assessment year :
2013-14) – [ITO, Ahmedabad. v. Mamta Rajivkumar Agarwal [TS-886-ITAT-2022(Ahd)] – Date of Judgement : 11.11.2022 (ITAT Ahmedabad)]
Penny stock: Addition not sustainable, in absence of adverse finding against Assessee
The sole/main grievance of the assessee is against the action of the Ld. CIT(A) confirming the order of the Assessing Officer making the addition on account of Long Term Capital Gains (LTCG) of Rs.77,78,476/- which the assessee derived from sale of scrip known as M/s. GCM Securities Ltd. The Assessing Officer further noted that during the relevant assessment year the assessee had traded the scrip by the name of GCM Securities Ltd. which according to him was a ‘penny stock’, which has been used for generating bogus LTCG. According to Assessing Officer, the unaccounted cash of beneficiaries (like assessee) is utilized to purchase shares at a low price and thereafter, in collusion the price of the scrips are artificially inflated and sold it is shown as LTCG and according to the Assessing Officer, the scrip GCM Securities Ltd. is also a penny stock and, therefore, the Assessing Officer was pleased to add under section 68 of the Act Rs. 77,78,476/- as unexplained cash credit. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed it. Aggrieved, the assessee is in appeal before us, the Hon’ble Supreme Court in the case of CIT v. Odeon Builders (P) Ltd (2019) 418 ITR 315 : 311 CTR 258 : 266 Taxman 463 : 183 DTR 25 (SC) wherein the Hon’ble Court upheld the deletion of the disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the Assessing Officer.
Similarly in the Hon’ble Supreme Court in the case of PCIT, Surat v. Teju Rohit Kumar Kapadia (2018) 256 Taxman 213 : 94 taxmann.com 325 (SC) upheld the following proposition of law laid down by the Hon’ble Gujrat High Court as under: “ It can thus be seen that the appellate authority as well as the Tribunal came to concurrent conclusion that the purchases already made by the assessee from Raj Impex were duly supported by bills and payments were made by Account Payee cheque. Raj Impacts also confirmed the transactions. There was no evidence to show that the amount was recycled back to the assessee. Particularly, when it was found that the assessee the trader had also shown sales out of purchases made from Raj Impex which were also accepted by the Revenue, no question of law arises.”
In the present case we find that the entire addition is on the basis of some investigation report, the relevant portions of which is also not cited in the show cause or the assessment order, there is nothing against the assessee and no inquiry whatsoever has been done by the Assessing Officer or the Ld CIT (A). In such circumstances the assessee having discharged her onus and nothing adverse being found against her, the addition cannot be sustained. For the reasons set out in the foregoing therefore we hold that both the lower authorities were not justified in not allowing the appellant’s claim for exemption under section 10(38) amounting to ₹ 77,78,476 in respect of the profit derived by the appellant on sale of 120,000 shares of M/s GCM Securities Limited. We accordingly set aside the order of Ld. CIT(A) and direct the Assessing Officer not to treat the long term capital gain as bogus and delete the consequential addition and the Assessing Officer is directed to allow the exemption under section 10(38) of the Act as claimed by the assessee. (Related Assessment year : 2015-16) – [Smt. Rachna Agarwal v. ITO - Date of Judgement : 08.04.2022 (ITAT Kolkata)]
Upholds addition of gain from penny stock under section 68; Finds strong evidence, massive multi-layered scam
Delhi ITAT dismisses
Assessee’s appeal and upholds CIT(A) order confirming addition under section 68
made by the Revenue in respect of LTCG arising from sale of penny stocks;
Factually distinguishes jurisdictional High Court ruling in assessee’s own case
for Assessment year 2015-16 by observing that the High Court did not lay down
any principle albeit confirmed the finding of the coordinate bench; On standard
of proof, ITAT observes, “prima facie, it may appear to be a case made on
preponderance of probabilities but not beyond reasonable doubt. However, in
this case a deeper examination of the facts reveal that in a scam of such
massive scale many players and layers involved hence the judgments of Hon’ble
Apex Court that the standards of proof required to prove such fraudulent
conduct would necessarily be less stringent is squarely applicable and in the
instant case the evidences cannot be said to be even less stringent rather they
more strong”; Assessee-Individual, for Assessment year 2014-15, was subjected to
reassessment based on the report of Investigation Wing and independent inquiry
carried out by the Revenue in respect of LTCG from sale of penny stock (M/s
Esteem Bio Organic Food Processing Ltd, ‘EBFL’) involving jump in stock price
of nearly 1500% in within 13 months, thus, addition of Rs. 24.69 Lacs was made
u/s 68 r.w. Section 115BBE; ITAT notes that SEBI had passed restraining orders
for trade of EBFL's share and also observes that SEBI had imposed a total
penalty of Rs. 40 lakh on five entities and three individuals for indulging in
fraudulent trading in the scrip of EBFL; ITAT notes that as per SEBI report, a
set of connected entities were pushing up the price of the scrip through
unusual trades in such a manner so as to make a positive contribution to the
Last Traded Price (LTP) and establishing New High Price (NHP), opines “The
observations and finding of fact arrived by the SEBI clearly proves that the
scrips of M/s Esteem Bio Organic Food Processing Ltd. where manipulated in
stock exchange and fraudulent scheme was deployed by the said company right
from year January 2013 during the period which the assessee had entered into
the transaction.”; Rejects Assessee’s contention that the SEBI report,
Investigation Wing's report and Revenue's enquiries are all much later than the
date of purchase/sale of the shares by Assessee, remarks “Any enquiry in a scam
is initiated only after the scam erupts in public and taken due cognizance.
Hence, it cannot be said that since the transactions have been taken before the
enquiries such transactions remain un-coloured or simple, straight and
genuine”; Opines that it is immaterial that order of the SEBI came in 2018
because the SEBI has analysed the entire trading of shares from year 2013 and
found that not only the prices of the scrips of the said company were rigged
but also were involved in fraudulent activities, which led to completely
debarred its trading in the stock exchange; Also states that the assessee
cannot take shelter for the sole reason representing that the transactions have
been taken place on the stock exchange platform when there is an enormous
evidence in the position of the revenue that the transactions have been
undertaken in collusion with the brokers and promoter entities, further
exclaims that the mere fact that payments have been received through cheque
cannot give any credence so as to genuineness of the transactions; Remarks that
“the transactions in the present appeal are yet another example of the constant
use of the deception of stock market transaction to bring unaccounted money
into banking channels. This device of stock transactions of unworthy stocks
with no profits continues to plague the legitimate economy of our country…..
the transactions herein clearly do not inspire confidence as being genuine and
are shrouded in mystery, as to why the so-called transactions lead to
exorbitant returns which are made tax free”; ITAT finds that while Revenue did
a holistic examination with reference to enquiries and the entire operation of
the stocks, method of investment, regularity of the investments, enquiries
conducted by SEBI, etc., the only evidence submitted by the assessee was that
the amounts have been received by cheque, accordingly states that the claim of
the assessee that she is a passive beneficiary of the entire operation without
her involvement or role cannot be accepted; On Assessee’s objection regarding
validity of reopening of assessment, ITAT holds that the Assessing Officer had
diligently gone through the contents of information from investigation wing
with respect to trade of shares of EBFL, the modus operandi resulting in a
startling spike of over 1500% in share value within a short span of 13 months,
financials of the said stock, etc., opines that “the Assessing Officer has not merely
swayed by the information received but take a conscious decision to examine the
capital gains declared by the assessee in detail so as to tax or exempt the
same.”, and accordingly upholds the validity of reassessment proceedings. [In favour of revenue]
– [Krishna
Devi v. ITO [TS-11-ITAT-2022(DEL)] – Date of Judgement : 04.01.2022 (ITAT
Delhi)]
SLP
dismissed against impugned order of High Court holding that where
assessee-individual engaged in trading of shares had discharged his onus of
establishing long term capital gains arising out of sale of different shares as
fair and transparent by submitting records of purchase bills, sale bills, demat
statement etc., same not being earned from bogus companies was eligible for
exemption under section 10(38)
Assessee-individual
engaged in business of trading in shares claimed long term capital gains
arising out of sale of shares as exemption under section 10(38). Assessing
officer denied claim and made certain additions into assessee’s income on
grounds that said gains were earned through bogus pennystock transactions
and companies to whom sold shares belonged were bogus in nature. Tribunal
observing that assessee by submitting records of purchase bills, sale bills,
demat statement, etc., had discharged his onus of establishing said
transactions to be fair and transparent, same not being earned from bogus
companies was eligible for exemption under section 10(38). High court by
impugned order held that no substantial question of law arose from Tribunal's
order. SLP against said impugned order was to be dismissed. [In favour of
assessee] (Related
Assessment
year : 2014-15) – [PCIT v. Parasben kasturchand Kochar (2021) 282
Taxman 301 : 130 taxmann.com 177 (SC)]
CBDT Circular No. 23/2019 dated 06.09.2019 and Office
Memorandum No. 279 dated 16.009.2019 issued by CBDT both providing that cases
involving organized tax evasion scam through bogus long term capitalgain/short
term capital loss on pennystocks were not subjected to monetary limits prescribed
for filing appeals, would apply prospectively to appeals filed on or after
16.09.2019
CBDT
Circular No. 23/2019 dated 06.09.2019 and Office Memorandum No. 279 dated
16.009.2019 issued by CBDT both providing that cases involving organized tax
evasion scam through bogus long term capitalgain/short term capital loss on
pennystocks were not subjected to monetary limits prescribed for filing
appeals, would apply prospectively to appeals filed on or after 16.09.2019 and
same would not apply retrospectively to pending appeals. [In favour of revenue]
– [PCIT(C) v. Anand Natwarlal Sharda (2021) 281 Taxman 300 : 128 taxmann.com
376 (Guj.)]
Assessee company sold
30,000 shares of company TTL and earned Long Term CapitalGain (LTCG) of certain
amount and claimed same as exempt under section 10(38). Return was processed
under section 143(1) and an assessment order was passed allowing claim of assessee.
Subsequently, an information was received from AIMS module that shares sold by
assessee were of pennystock. On basis of same, Assessing Officer issued a
reopening notice against assessee. It was noted that said information was
specific with regard to transactions of pennystock entered into by assessee. On
basis of information received, Assessing Officer made independent enquiries and
applied his mind to such information and upon due satisfaction and materials
gathered during enquiries, finally formed a belief that income had escaped
assessment. On facts, impugned reopening notice issued against assessee after
four years was justified and same was to be upheld. [In favour of revenue]
(Related Assessment year : 2012-13) -[Kaushaliya Sampatlal Dudani v. ITO (2021) 129
taxmann.com 48 (Guj.)]
Holds LTCG earned through transaction in Kappac Pharma’s shares as bogus, finds colourable device
Delhi ITAT allows Revenue’s appeal, holds Assessee’s
claim of LTCG from sale of shares of Kappac Pharma to be bogus and driven by a
colourable device; Assessee-Individual, for Assessment year 2014-15 claimed Rs.
2.72 Cr. as capital gains exempt under section 10(38) earned from the sale of
40,000 shares of Kappac Pharma Ltd. which were privately purchased
for Rs. 4.52 Lacs in cash that was subsequently declared under Income-tax
Disclosure Scheme-2016 (IDS) and the shares were dematerialised a few months
before the sale; Assessee’s case is in the backdrop of the country-wide
investigation conducted to unearth the organized racket of generating bogus
LTCG under which numerous cases were unearthed and
individuals were identified who were beneficiaries of such bogus
entries of LTCG amounting to several crores from 2010 to 2014; Revenue recorded
the statement of Chairman & Managing Director and other Directors of
Kappac Pharma Ltd. on oath saying that they provided bogus LTCG; Revenue
concluded that the entire funds were received by the Assessee from
the sale of penny stock and the actual source of credit was unaccounted cash
and thus, treated the credit in the bank account of the Assessee as unexplained
income under section 68; CIT(A) allowed Assessee’s appeal and thus, Revenue
preferred an appeal before ITAT whereby ITAT observes that SEBI temporarily
suspended dealings in the shares of Kappac Pharma Ltd. shares and took action
against its promoters and stock brokers; ITAT referred to coordinate bench
ruling in Pooja Ajmani v. ITO in ITA
No.5714/Del/2018 order dated 25.04.2019 where it was held that Kappac Pharma Ltd. is one of
such company whose scrips were manipulated to provide bogus LTCG and
also referred to another coordinate bench ruling in Udit Kalra v. ITO
(2019) 308 CTR 50 : 176 DTR 249 (Del.) rendered in the similar
context; ITAT distinguishes Delhi High Court ruling in Krishna Devi on
the basis that in the present case “from the very outset colourable
device has been put into operation by the assessee by purchasing shares with
unaccounted cash from unknown person, evidently anti-dated, then got the
unaccounted money legalized by making declaration under IDS, 2016 scheme, then
getting the same dematerialized and claimed the bogus capital gains by selling
the shares of a consistently loss making company at the whopping sale
consideration of Rs. 2,77,37,500/- purchased a year before for Rs. 4,52,000/-.”; Rejects
Assessee’s submission that all the documents viz. DEMAT account, bank
statements, etc. were furnished during the assessment proceedings from which no
adverse inference can be drawn and genuineness of the transactions cannot be
doubted, by holding it not tenable because meticulous paper work by the
Assessee in making investment in an unknown stock and then selling the same as
per convenience by rigging prices at astronomical rates shows that the entire
transaction is a colourable device to evade the taxes; Relies on Supreme Court
ruling in CIT v. Durga Prasad More (1971) 82
ITR 540 (SC) wherein it was held
that Revenue should look into the surrounding circumstances to find out
the reality of the transactions; Also holds that that the transaction failed to
satisfy the test of human probabilities laid down by Supreme Court in Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) as no
man of ordinary prudence would invest in a consistently loss making company
being a novice in the stock market; Holds that the Assessee failed to dispel
all the suspicion raised Revenue to establish the genuineness of the
transaction in question and rather suppressed the correct facts and withheld
the name of real seller of shares while making the statement under section 131
and upholds the addition. [In favour of revenue] (Related Assessment year
: 2014-15) – [ACIT v. Arihant Kumar Jain [TS-1014-ITAT-2021(DEL)] – Date of Judgement : 27.10.2021 (ITAT Delhi)]
Third-party statements, general findings of investigation inadequate for concluding stock-price manipulation; Deletes addition under section 68
Mumbai ITAT deletes
additions made under section 68 and rejects
disallowance of exemption under section 10(38) of long term capital gains on
sale of shares, further also deletes estimated addition on alleged commission
expenses at 5% against these transactions; Assessee-HUF, during the course of
assessment was denied exemption under section 10(38) of long term capital gains
(LTCG) on sale of shares of an entity Moryo Industries Limited (MIL), which
were added to its income as unexplained cash credit under section 68, along
with addition of commission @5% of the transaction value; Revenue alleged that
MIL was a penny stock scrip used to provide undue benefit to beneficiaries, and
contended that share prices were artificially hiked to create non-genuine LTCG
and that SEBI in its order had named Assessee as one of the beneficiary;
Revenue also relied upon statements of third parties on whom Survey operations
were carried out under section 133A; Assessee contended that it was a regular
investor in shares and further demanded cross examination of third parties
whose statements were relied upon by the Revenue; Also submitted that the
shareholding pattern of MIL depicted that there were number of non-promoters
shareholders in the said entity and its price would totally depend on market
perception in which Assessee had no role to play; ITAT finds that payment for
purchase of shares was made through banking channels, and such shares have been
sold through online mechanism of stock exchange, and the transactions are
subjected to STT, further remarks that Assessee had furnished all requisite
documentary evidence to substantiate the transaction, and thus discharged the
primary onus to establish genuineness of the gains earned; ITAT notes that
except general findings of investigation and third-party statements there was
no material with the Revenue to prove Assessee’s involvement in manipulating
prices, no cash exchange between Assessee and exit providers was proved; As far
as SEBI order was concerned ITAT notes that upon completion of investigation by
SEBI, no adverse evidence was found against the entities named therein including
MIL, and all interim orders were revoked; Thus holds that additions made by
Revenue are not sustainable in law, and deletes the additions. [In favour of
assessee] (Related Assessment year : 2014-15) – [Jagdish B. Prajapati v.
ACIT [TS-532-ITAT-2021(Mum)] – Date of Judgement : 17.06.2021 (ITAT Mumbai)]
Deletes addition under section 68 based on SEBI’s interim order, made without independent inquiry
Delhi ITAT deletes addition under section 68 for Assessment
year 2014-15 on LTCG from sale of shares, based on interim order of SEBI
restraining assessee from accessing securities market, holds no independent
enquiry was conducted by Assessing Officer; Assessee sold 7.5 lakh shares
against the purchase of 1.5 lakh shares resulting in LTCG
of Rs. 5.76 Cr. and claimed exemption under section 10(38); Assessing
Officer disallowed assessee’s claim by stating that assessee accepts bogus
LTCG entries through stock brokers trading in circular and penny
stocks and taxed the gains under section 68 as unexplained cash
credit; Additionally amount of 3% on total value of sales was added as
unexplainable expenditure under section 69C on
account of commission; Assessing Officer relied on interim report of SEBI
restraining 108 persons including the assessee from accessing securities market
citing reasons of market manipulation and artificially increasing volume and
price of the scrip for making illegal gains; CIT(A) declined to accept the
evidence put forth by assessee since the Investigation Wing had established
that brokers through whom the assessee had purchased shares were involved in
the business of providing accommodating entries and shares purchased
by the assesee were in nature of penny stocks and dismissed the
appeal; ITAT observes that Assessing Officer
and CIT(A) relied on interim SEBI orders which were subsequently revoked
in respect of 82 entities including assesee by a final order; ITAT relies on
Delhi ITAT ruling in Shri Brij Bhushan Singhal, where it was held
that reliance placed by the Revenue on interim order of SEBI was
misplaced as clean chit was given to the assessee and his family; Holds, “when
a person has been absolved by SEBI and Revenue has not placed any material to
prove involvement of assesse, there remains no justification to hold amount as
unexplained credit under section 68”; Relies on Delhi ITAT ruling in Karuna Garg where
it was held that Assessing Officer got carried away by report of Investigation
Wing and no independent enquiry was conducted and Delhi High Court ruling
in Krishna Devi, where it was held that mere reliance on
report of investigation wing sans further corroboration is no justification for
treating the transaction as a sham; ITAT holds that it was evident that the Assessing
Officer reproduced the modus operandi of the entry providers who booked bogus
long term capital gains through penny stock companies without further
investigation; Further holds that there was no evidence of involvement of
assesse who was a habitual investor and details of all investment and
disinvestments were made available. [In favour of assessee] (Related Assessment year : 2014-15) – [Mukesh Mittal v. ITO [TS-271-ITAT-2021(DEL)] – Date of Judgement :
26.03.2021
(ITAT Delhi)]
Assessing Officer made addition under section 68 in respect of sale proceeds of shares of a company received by assessee and as been manipulated, since assessee had submitted evidence to prove identity, source and nature of said transaction and Assessing Officer had not pointed out any deficiency in said documents, section 68 addition could not be sustained
Assessee
had earned long term capital gain (LTCG) on sale of shares of a company and
claimed same as exempt under section 10(38). Assessing Officer observed that as
per interim order of SEBI in case of said company, shares of said company had
been manipulated and thereafter had been sold by beneficiaries to avail
accommodation entry and he held that claim under section 10(38) made by
assessee could not be allowed and sale proceed of shares was required to be
added back under section 68. It was found that SEBI's final order did not find
any adverse evidence against assessee. Assessee had explained and submitted
evidences to prove identity, nature and source of cash credit and also
furnished all evidences comprising of contract notes, brokers and banking details
in support of genuineness of transactions.
Further, Assessing Officer did not produce any evidence to prove
allegation that unaccounted money changed hands between assessee and broker or
any other person including alleged entry provider. On facts, addition under
section 68 could not be sustained. [In favour of assessee] (Related Assessment
years : 2012-13 to 2015-16) – [Vijayrattan Balkrishan Mittal v. DCIT (2020)
121 taxmann.com 100 (ITAT Mumbai)]
Bogus Capital Gains from Penny Stocks - The documents
demonstrate that the assessee had purchased shares through Brokers for which
the payment was made through banking channels. The assessee had sold shares
through an authorized stock broker and payment was received through baking
channels after deduction of STT. The Assessing Officer has not doubted any of
the documents. The only objection raised is that the script from which the
assessee had earned Long Term Capital Gain has been held by the Investigation
Wing of the Revenue to be a paper entity and that this scrip was being used for
creating artificial capital gain. The objection is not acceptable (Udit Kalra v. ITO (2019) 308 CTR 50 : 176 DTR 249 (Del.) distinguished)
Documents
clearly demonstrate that assessee had purchased shares through Brokers for
which the payment was made through banking channels. The assessee had sold
shares through authorized stock broker and payment was received through banking
channels after deduction of STT. On Page 16 which is a copy of Bank account of
assessee there is evidence of payments to Suktara Trade link amounting to
Rs.8,25,000/- for purchase of 25000 equity shares of CCL Ltd. The bill of
broker of Suktara Trade Link is at Page 17. The evidence of sale of such shares
through Edelwise Financial Advisors Ltd showing deduction of service tax and
securities transaction tax is placed at P.B. 18 to 23. Paper book pages 32
shows that shares of CCL International Ltd. were in the demat account of
assessee and the fact of these shares having been transferred to the account of
brokers M/s Edelwise Financial Advisors on account of sale is also apparent
from this paper. The transaction statement placed in paper book also proves
that assessee was holding a number of scrips. All the documents clearly
demonstrate that assessee did earn long-term capital gain and moreover the
Assessing Officer has not doubted any of the above documents. The only
objection raised by the authorities below is that the script from which the
assessee had earned Long Term Capital Gain has been held by the Investigation
Wing of the Revenue to be a paper entity and which has further held that this
scrip was being used for creating artificial capital gain. We find that Hon’ble
Tribunal in the case of Reeshu Goel has examined this aspect and after
recording detailed findings has held this script to be a genuine script and has
held that the scrip is not a paper entity.
The
entire premise of the Assessing Officer for treating the entire transaction to
be a bogus Long Term Capital Gain and making addition under section 68 is that,
firstly, M/s. CCL International Ltd. did not have much financial worth to
justify such a price rise; secondly, the SEBI had suspended the trade of the
share for a brief period; thirdly, he has pointed out the history of price rise
between 06.02.2010 and 25.11.2014 and then has drawn adverse inference that
price of these shares was manipulated and rigged in the stock exchange which
was solely to provide accommodation entries to the various parties; and lastly,
he has also referred to certain inquiry report of Investigation Wing Kolkata
during the course of which certain brokers have admitted that they had provided
accommodation entries in the scrip of M/s. CCL International. But nowhere in
the entire assessment order, there is any reference to any material or evidence
that assessee or assessee’s broker have been found to be indulged in any kind
of accommodation entry in this scrip. No inquiry whatsoever has been made from
the broker of the assessee. Further, during the period in which assessee had
purchased the shares and had sold them whether the SEBI had suspended the
trading has not been mentioned, in fact, Assessing Officer himself mentioned
that there was brief suspension in the year 2010, whereas the assessee had
purchased shares in the year 2011 and sold them in the year 2012. Coming to the
financials, as culled out from the records, the revenue from the operation of
M/s. CCL International Ltd. from March, 2010 to March, 2012 was between Rs.
55.25 crore and Rs. 79 crore. Thus, it cannot be held that it was mere a paper
entity. From a bare perusal of the history of listing and trading of shares and
the quote of Bombay Stock Exchange as quoted in the assessment order, it
clearly reflects that as on 06.02.2010, the closing price was Rs. 50 and there
was a steady increase and within the period of 4 years the price had reached up
to Rs. 609 on 25.11.2014. Nowhere, it has been pointed out that the rise was
beyond the cap laid down by the SEBI, because the price of the scrip cannot
rise beyond the cap prescribed by the SEBI. If the shares have been purchased
and sold from the stock exchange on a quoted price with proper contract number,
trade time and after paying STT, then it is very difficult to assume that the
sale proceeds received from sale of such shares is bogus, especialy when
purchase of shares are not in dispute. This inter alia means assessee
was in possession of shares which were also dematerialised. To prove that such
a transaction was in the nature of bogus or colourable transaction, there has
to be some inquiry or material to nail the assessee that she was some kind of a
beneficiary in some accommodation entry operation. No defect has been pointed
out in the documents submitted by the assessee nor has the broker of the
assessee been inquired upon. Simply relying upon the general modus operandi and
statement of some brokers recorded by the Kolkata Investigation Wing does not
mean that all the transactions undertaken of the scrip M/s. CCL International
Ltd. through the country by millions of subscribers are bogus. Thus, in absence
of any material or evidence against the assessee, we do not find any reason as
to why the claim of Long Term Capital Gain from sale of such share should be
denied. Consequently, the addition on account of commission is also
deleted.(Related Assessment Year : 2015-16) – [Achal Gupta v. ITO - Date of
Judgement : 16.12.2020 (ITAT Lucknow)]
Bogus Capital Gains from Penny Stocks: The Assessing
Officer has not discharged the onus of controverting the documentary evidences furnished
by the assessee and by bringing on record any cogent material to sustain the
addition. The allegation of price rigging/manipulation has been levied without
establishing the vital link between the assessee and other entities. The whole
basis of making additions is third party statement and no opportunity of
cross-examination has been provided to the assessee to confront the said party.
As against this, the assessee’s position that that the transactions were
genuine and duly supported by various documentary evidences, could not be
disturbed by the revenue
As
against the assessee’s position, the primary material to make additions in the
hands of assessee is the statement of Shri Vipul Bhat and the outcome of search
proceedings on his associated entities including M/s SAL. However, there is
nothing on record to establish vital link between the assessee group and Shri
Vipul Bhat or any of his group entities. The assessee, all along, denied having
known Shri Vipul Bhat or any of his group entities. However, nothing has been
brought on record to controvert the same and establish the link between Shri
Vipul Bhat and the assessee. The opportunity to cross-examine Shri Vipul Bhat
was never provided to the assessee which is contrary to the decision of Hon’ble
Supreme Court in M/s Andaman Timber Industries v. CCE (CA No.4228 of
2006) wherein it was held that not allowing the assessee to cross-examine the
witnesses by the adjudicating authority though the statement of those witnesses
were made the basis of the impugned order is a serious flaw which makes the
order nullity inasmuch as it amounts to violation of principles of natural
justice because of which the assessee was adversely affected. (Related
Assessment Year : 2014-15) – [Dipesh Ramesh Vardhan v. DCIT – Date of
Judgement : 11.08.2020 (ITAT Mumbai)]
Bogus capital gains from penny stocks: As the detailed
explanation of the assessee does not sufficiently discharge the onus on proving
the source of impugned deposits, the impugned addition should be restricted to
30% only with a rider that same shall not be treated as a precedent in any
other assessment year
It
emerges that from a perusal of these case files that although the assessee has
produced her documentary evidence before the lower authorities about the
impugned sums to be in the nature of income derived from the sales of shares,
the fact remains that her detailed explanation tendered in the course of assessment
till date does not sufficiently discharg her onus on proving the source of
impugned deposits. I, therefore deem it appropriate in these peculiar facts and
circumstances that the impugned addition(s) of Rs. 17,88,666/- and Rs.
16,53,772/- deserved to be restricted to that @ 30% only with a rider that same
shall not be treated as a precedent in any other assessment year. The assessee
gets part relief accordingly. Necessary computation to follow as per law.
(Related Assessment Year : 2015-16) - [Neha Chowdhary v. ITO – Date of Judgement
: 14.02.2020 (ITAT Kolkata)]
Dismisses assessee’s SLP against LTCG exemption denial on 'penny stock' sale - High Court upheld Tribunal’s order holding that assessee’s claim for exemption under section 10(38) could not be allowed because share transactions were bogus as company ‘C’ whose shares were allegedly purchased was a pennystock
For
relevant year, assessee filed her return claiming exemption of Rs.
73,77,806/- under section 10(38) in respect of capital gain arising from
sale of shares. Assessing Officer took a view that share transactions were
bogus because company ‘C' whose shares were allegedly purchased, was a penny
stock. He thus rejected assessee’s claim. Tribunal upheld order passed by
Assessing Officer. High Court also took a view that finding arrived by Tribunal
was based on material on record and, thus, same did not require any
interference.
Held
: In this case, it is an uncontroverted fact that the assessee has failed to
prove the genuineness of the transaction. The Assessing Officer has worked out
the glaring facts, which cannot be ignored and which are clear indicative of
the non-genuine nature of the transactions. The assessee could not
satisfactorily explain how the investments in the absence of any evidence as to
the financials, growth and operations of the company could earn profit of 4910%
over a short period of 5 months from the date of allotment of shares
(21.02.2013-date of allotment and 18.07.2013 to 12.09.2013 -date of sale) of
Cressanda Solutions Ltd. against the purchase of 15,000 shares of M/s
Smartchamps IT and Infra Ltd. (which was later merged with M/s Cressanda
Solutions Ltd.) on 22.09.2011. Most importantly, in spite of earning so much of
profit, the assessee has never embarked upon any transactions for investments
with the broker or in any other dealing of shares. The revenue from operations
of Cressanda Solutions Ltd. for the year March 2012 was Rs.00 and, for the year
March 2013 is Rs. 0.99 Cr. The financials of the company proving that the
entity is a penny stock company
Thus, the Tribunal has
in depth analyzed the balance sheets and the profit and loss accounts of
Cressanda Solutions Ltd. which shows that the astronomical increase in the
share price of the said company which led to returns of 491% for the Appellant,
was completely unjustified. Pertinently, the EPS of the said company was Rs.
0.01/- as in March 2016, it was Rs. - 0.01/- as in March 2015 and -0.48/- as in
March 2014. Similarly, the other financials parameters of the said company
cannot justify the price in excess of Rs. 500/- at which the Appellant claims
to have sold the said shares to obtain the Long Terms Capital Gains. It is not
explained as to why anyone would purchase the said shares at such high
price.
All
these facts give credence to the unreliability of the entire transaction of
shares giving rise to such capital gains. The ratio laid down by the Hon'ble
Supreme Court in the case of Sumati Dayal v. CIT, (1995) 214 ITR 801 (SC)
is squarely applicable to the case
From
the above extract, it would be seen that the Cressanda Solutions Ltd. was in
fact identified by the Bombay Stock Exchange as a penny stock being used for
obtaining bogus Long Term Capital Gain. NO evidence of actual sale except the
contract notes issued by the share broker were produced by the assessee. No
question of law, therefore arises in the present case and the consistent
finding of fact returned against the Appellant are based on evidence on record.
On facts, SLP filed against order of High Court was to be dismissed. [In favour of revenue] (Related Assessment year : 2014 -15) - [Suman
Poddar v. ITO (2020) 268 Taxman 320 : (2019) 112 taxmann.com 330 : [TS-726-SC-2019]
(SC)
Holds sale of penny stock transaction as sham; Denies exemption under section 10(38)
Chennai ITAT upholds denial of exemption under section 10(38)
to assessee-individual, holds long term capital gains of Rs. 39.77 Lakhs earned
on sale of shares of M/s Turbotech Engineering Ltd. (company) as bogus/sham
gains; During Assessment year 2014-15, assessee sold 7900 shares of the company
(purchased in November 2011 at Rs. 15,800) for Rs. 40.23 lakhs; ITAT
notes that the share price of the company fluctuated from Rs. 19.65 to Rs. 518
within the very impugned year and gave an astronomical profits of 12500% within
a period of mere 2 years and further, that SEBI has debarred the company from
trading/dealings of its shares in stock exchanges effective from 07.01.2015;
Further, persuses the financials of the company and infers that the company is
a shell company having no income/revenues and expenses with negligible/nil
profits (losses) for last five years since 2012-2016 and remarks that such a
huge price variation of such a company is beyond the 'preponderance of human
probabilities'; Further considers Assessing Officer’s inquiry result that
certain Kolkatta based companies having little or no means have bought entire
shares of the company and who acting in concert with entry operators and share
brokers rigged/manipulated share price; Also notes that in coming to his
conclusion, the Assessing Officer relied upon investigations carried by other
government and enforcement agencies and also conducted independent inquiries
with BSE which revealed that the share prices of the company were rigged /
manipulated with a malafide intent to defraud revenue; Also notes that
assessee got the shares dematerialised after one and half years of purchase,
opines that the above facts ...clearly points to one and only irresistible
conclusion that these gains earned by assessee were bogus and sham
transactions to convert her unaccounted money into legitimate money
through circuitous route of sale and purchase of listed shares of M/s
Turbotech Engineering Ltd. which is a penny stock and the assessee is
trying to take advantage of exemption provision as enshrined under section
10(38)”. [In favour of revenue] (Related Assessment
year : 2014-15) – [Smt. Sudha Eashwar v. ITO [TS-4-ITAT-2020(CHNY)]
– Date of Judgement : 02.01.2020
(ITAT Chennai)]
Penny Stocks – It is intriguing that the company had meagre resources and reported consistent losses – The astronomical growth of the value of company’s shares naturally excited the suspicions of the Revenue – The company was even directed to be delisted from the stock exchange – The assessee’s argument that he was denied the right to cross-examine the individuals whose statements led to the inquiry and ultimate disallowance of the long-term capital gain claim is not relevant in the wake of findings of fact
The
assessee acquired shares at Rs. 12 per share and within 19 months sold at Rs.
720 per share and reported capital gain of Rs. 13,33,956. All authorities held
that when the company suffered heavy losses how there could be astronomical
growth in value of the shares and the company was directed to be delisted from
the stock exchange. Accordingly, exemption from capital gain was denied. In
Appeal by the assessee it was contended that he was denied the right of
cross-examination of the two individuals whose statements led to the inquiry
and ultimate disallowance of the long-term capital gain. Dismissing the appeal
the Court held that Assessing Officer, CIT(A) and the ITAT have all
consistently rendered adverse findings. Court also observed that, what is intriguing
is that the company (M/s. Kappac Pharma Ltd.) had meager resources and in fact
reported consistent losses. In these circumstances, the astronomical growth of
the value of company’s shares naturally excited the suspicions of the Revenue.
The company was even directed to be delisted from the stock exchange. Having
regard to these circumstances and principally on the ground that the findings
are entirely of fact, this court held that no substantial question of law
arises. (Related Assessment year 2014-15)—[Udit Kalra v. ITO ( 2019) 308 CTR
50 : 176 DTR 249 (Del)]
Assessee declared long term capital gain on sale of shares but Assessing Officer made section 68 addition in hands of assessee on basis of investigation wing report that assessee was beneficiary of accommodation entries, without conducting separate and independent enquiry, since shares were dematerialized and sales had been routed from de-mat account and consideration had been received through banking channels, assessee had successfully discharged onus cast upon him by provisions of section 68
Assessee-individual
purchased shares of two companies (Esteem and Randers) online through two
brokers, namely, ISF and SMC in years 2012 and 2013 and sold said shares in
year 2014 and assessee had shown long-term capital gain from sale of shares and
had claimed same as exempt under section 10(38). Assessing Officer received investigation
report of DIT (Investigation) regarding list of companies providing bogus
long-term capital gain. He opined that assessee was beneficiary in said list
and concluded that assessee had entered into colourable device for avoidance of
tax and receipt was nothing but unexplained cash credit under section 68. It
was found that shares of two companies were purchased online, payments had been
made through banking channel, and shares were dematerialized and sales had been
routed from de-mat account and consideration had been received through banking
channels. Neither Assessing Officer conducted any enquiry nor had brought any
clinching evidence to disprove evidences produced by assessee. Since Assessing
Officer had not conducted a separate and independent enquiry to verify
investigation report and these transactions took place much before report of
Investigation Wing, assessee had successfully discharged onus cast upon him by
provisions of section 68. [In favour of assessee] (Related Assessment years : 2014-15 and
2015-16) – [Smt. Karuna Garg v. ITO (2019) 178 ITD 823 : 109 taxmann.com 403
(ITAT Delhi)]
Assessing
Officer made addition to assessee’s income under section 69A in respect of
capital gain arising from sale of shares of ‘K’ Ltd. on basis of information
received from Investigation Wing that said company was engaged in providing
bogus entries of capital gain or sale of shares, since assessee had failed to
discharge her burden of proof that long-term capital gain arising from sale of
shares was genuine, impugned additions was to be confirmed
For relevant year,
assessee filed her return wherein long term capital gain arising from sale of
shares of ‘K’ Ltd. was claimed as exempt under section 10(38). Assessing
Officer received information from Investigation Wing that number of pennystock
companies were providing bogus entries of long-term capital gain on sale of
their shares and, ‘K’ Ltd. was one of those companies. Assessing Officer on
basis of aforesaid information, carried out detailed investigation and found
that assessee's transactions of sale of shares of ‘K’ Ltd. were sham. He thus
added amount of long-term capital gain to assessee's income under section 69A.
It was noted that assessee had failed to discharge her burden of proof that
long-term capital gain arising from sale of shares was genuine. On other hand,
enquiry conducted by SEBI was further corroborated by investigation carried out
by Directorate of Investigation that ‘K’ Ltd. was one of such companies whose
scrips had been manipulated to provide bogus long-term capital gains. In view
of aforesaid, impugned addition made by Assessing Officer was to be confirmed. [In
favour of revenue] (Related Assessment year : 2014-15) – [Pooja Ajmani v.
ITO (2019)
177 ITD 127 : 106 taxmann.com 65 (ITAT Delhi)]
Bogus accommodation entries – Penny stock – Sale of shares – Purchase by account payee cheque– Transaction was credited in DMAT account— Opportunity of cross-examination was not given – Sale transaction cannot be treated as bogus merely on the basis of suspicions or surmises – Addition was deleted – Estimation of commission was also deleted
On
the basis of information from Investigation Wing the Assessing Officer added
amount of long-term capital gain as cash credits and also estimated commission.
CIT(A) affirmed the order of the Assessing Officer. On appeal by the assessee,
allowing the claim of the assessee the Tribunal held that the shares were
purchased by account payee cheque, transaction was credited in DMAT account,
opportunity of cross-examination was not given. Accordingly, the sale
transaction cannot be treated as bogus merely on the basis of suspicions or
surmises. Estimation of commission was also deleted. (Related Assessment years
2013-14, 2015-16)—[Meghraj Singh Shekhawat v. DCIT (2019) 175 ITD 693 (ITAT
Jaipur)]
Penny
stocks - If the holding of shares is D-mat account cannot be disputed then the
transaction cannot be held as bogus
The
Assessing Officer has also not disputed the sale of shares from the Dmat account
of the assessee and the sale consideration was directly credited to the bank
account of the assessee. Once the assessee produced all relevant evidence to
substantiate the transaction of purchase, dematerialization and sale of shares
then, in the absence of any contrary material brought on record the same cannot
be held as bogus transaction merely on the basis of statement of one Anil
Agrawal recorded by the Investigation Wing, Kolkata wherein there is a general
statement of providing bogus long-term capital gain transaction to the clients
without stating anything about the transaction of allotment of shares by the
company to the assessee.
It
was held that, the assessee has produced record of allotment of 3,50,000 equity
shares of M/s Rutron International Ltd. under preferential issue at par of face
value of Rs. 10/- each vide allotment letter dated 08.03.2012. The Assessing
Officer has not disputed the genuineness of the letter of allotment issued by
the company to the assessee wherein it has been communicated that the assessee
has been allotted 3,50,000 equity shares vide allotment letter dated 08.03.2012
against the application of the assessee at par of face value of Rs. 10/- each
without any premium. The assessee has also produced the bank statement showing
the payment of consideration of the acquisition of shares on 29.02.2012. It
appears that the said payment was made by the assessee at the time of applying
for allotment of shares and subsequently the shares were allotted by the
company on 01.03.2012. Thus, it is clear that the shares acquired by the
assessee is not a trading transaction but these were allotted directly by the
company under the preferential issue and hence, the role of intermediate is ruled
out. Once, the shares were directly allotted by the company M/s Rutron International
Ltd. against the consideration paid by the assessee through cheque. Then the
role of any intermediately particularly of Shri Anil Agarwal is said allotment
does not appear from any of the record. Even as per the statement as reproduced
by the Assessing Officer in the assessment order Shri Anil Agrawal has stated
that he is having business nexus with the companies including M/s Rutron
International Ltd. The department put a question about the association with as
many as 13 companies and in response to that he has accepted that he is having
business nexus with these companies including M/s Rutron International Ltd. The
nature of service was also explained by Shri Anil Agrawal as the consultancy
services. Deleting the addition the Tribunal held that; if the holding of
shares is D-mat account cannot be disputed then the transaction cannot be held
as bogus. The Assessing Officer has also not disputed the sale of shares from
the D-mat account of the assessee and the sale consideration was directly
credited to the bank account of the assessee. Once the assessee produced all
relevant evidence to substantiate the transaction of purchase,
dematerialization and sale of shares then, in the absence of any contrary
material brought on record the same cannot be held as bogus transaction merely
on the basis of statement of one Anil Agrawal recorded by the Investigation
Wing, Kolkata wherein there is a general statement of providing bogus long-term
capital gain transaction to the clients without stating anything about the
transaction of allotment of shares by the company to the assessee. (Related
Assessment years : 2013-14, 2014-15)—[Ramprasad Agarwal v. ITO (2019) 174
ITD 286 : (2018) 100 taxmann.com 172 (ITAT Mumbai)]
Assessee’s ‘penny stock’ investment, a device to launder black-money; Denies LTCG exemption
Pune ITAT rejects
assessee-individual’s LTCG [long term capital gains] exemption claim on sale of
penny stock of a pharma co. (Lifeline Drugs & Pharma Limited - LD&PL)
during Assessment year 2015-16, supports Revenue's view that ..it is a predetermined
action with a specific intention to derive Long Term Capital Gain by dubious
method.”; Assessing Officer had disallowed the LTCG claim holding the
transaction as not genuine after conducting a detailed enquiry by visiting the
website of LD&PL, pattern followed by the assessee in purchasing and sale
of shares, financials of LD&PL, investigation wing report throwing light on
its modus operandi; Observes that in spite of having no revenue from
operations, having no major corporate announcements, the assessee made huge
investment of Rs. 15 lakhs in LD&PL and remarks that ..this could only be
possible that suspected entities and its promoters such as assessee the
beneficiary, paper company like LD&PL, exit provider DTPL, the brokers were
hand in glove with each other ... is a predetermined intention designed and
devised to deceive the authorities by laundering black money and raking in tax
free profits.”; Further, takes note of the investigation report, wherein the
stock broker categorically admitted to have artificially raised or lowered
rates of scrips through manipulative transactions of 40 companies including
LD&PL, opines that ..the modus operandi between the beneficiary, exist
provider and stock brokers clearly visible to book long term capital gain/loss
with specific intention to launder the black money in order to evade tax
through this jamakharchi companies .. is clearly proved to support the finding
of both authorities below”; Also notes that the BSE had imposed suspension on
trading of LD&PL’s share which was still in force, remarks that when there
was no business operation of LD&PL during the period of purchase and sale
of shares and astronomical increase of share price of LD&PL which led to
returns at 350%, in our opinion, is unjustified.”
[In favour of revenue] (Related Assessment year : 2015-16) – [Narendra
Shrikishan Agrawal v. ACIT, Jalna [TS-670-ITAT-2019(PUN)] – Date of Judgement :
05.11.2019 (ITAT Pune)]
Though appreciation of
value of share sold by assessee was very high, in view of fact that same was
traded in NSE and receipts of sales routed through bank and company whose
shares were sold was not a closely held company, no addition could be made as
undisclosed income
The
assessee purchased shares of a company during the assessment year 2006-2007 at
Rs. 11 and sold the same in the assessment year 2008-09 at Rs. 400 per share.
In the above case, namely, the PCIT v. Hitesh Gandhi (ITA-18-2017)
(attached) also the assessee had purchased and sold the shares in the same
assessment years. The Assessing Officer in both the cases added the
appreciation to the assessees’ income on the suspicion that these were
fictitious transactions and that the appreciation actually represented the
assessees’ income from undisclosed sources. In ITA-18-2017 also the CIT
(Appeals) and the Tribunal held that the Assessing Officer had not produced any
evidence whatsoever in support of the suspicion. On the other hand, although
the appreciation is very high, the shares were traded on the National Stock
Exchange and the payments and receipts were routed through the bank. There was
no evidence to indicate for instance that this was a closely held company and
that the trading on the National Stock Exchange was manipulated in any manner.
In these circumstances, following the judgement in PCIT v. Hitesh Gandhi,
ITA-18-2017, (attached) it must be held that there is no substantial
question of law in the present appeal. [In favour of assessee] [Related
Assessment year 2008-09] - [PCIT(C), Ludhiana v. Prem Pal Gandhi - (2018) 401 ITR
253 : 94 taxmann.com 156 (P&H)]
Assessee claimed
exemption under section 10(38) in respect of capitalgain arising from sale of
shares, in view of fact that financial worth of said company was meagre and,
moreover, there was abnormal rise in price of shares, it could be concluded
that assessee introduced her own unaccounted money in garb of long term
capitalgain and, thus, claim raised by her was to be rejected
Assessee earned
capitalgain on sale of shares of a company ‘MIRL’. She filed return claiming
exemption under section 10(38). Assessing Officer opined that act of assessee
in purchasing pennystocks and shares fell within ambit of adventure in nature
of trade. He thus rejected assessee’s claim. It was apparent from records that
financial worth of ‘MIRL’ was meagre and it was not worthwhile to invest in
said company. Moreover, there was
abnormal rise in price of shares of said company during period when shares mere
held by assessee. On facts, it could be concluded that assessee introduced her
own unaccounted money in books of account in garb of long term capital again. Therefore,
assessee’s claim was rightly rejected. [In favour of revenue] (Related
Assessment year : 2015-16) - [Smt. M.K. Rajeshwari v. ITO, Raichur (2018) 99
taxmann.com 339 (ITAT Bangalore)]
Identity and genuineness
of transaction is established merely because, the investigation department has
alleged
that there is a modus operandi of bogus Long Term Capital Gains scheme
is not relevant if the same is not substantiated
In financial year
2009-10, assessee purchased 45,000 shares of company Unisys amounting Rs.
9,38,600 at a premium of Rs. 20.85 per share in physical form - In financial
year 2013-14, out of aforesaid 45000 shares, assessee sold of 8000 shares,
i.e., 17.77 per cent only as at that time price was best. Major part of shares,
i.e., 82.33 per cent was still in hand of assessee. All transaction were made
through account payee cheque/banking channel. Assessee submitted various
documentary evidences to prove genuineness of transaction of sale and purchase
of shares. However, lower authorities had not considered aforesaid documents
and rejected all claims made by assessee by relying on report of Investigation
Wing and thereby made addition. Without bringing any material on record and
proving that assessee was directly involved in so called bogus transaction.
Assessing Officer failed to substantiate how assessee fell in purview of bogus
LTCG scheme. Since source identity and genuineness of transaction was established
by documentary evidences, there was no case for making
addition under section 68. [In favour of assessee] (Related Assessment year
: 2014-15) –
[Meenu
Goel v. ITO (2018) 94 taxmann.com 158 (ITAT Delhi)]
Assessee
had purchased shares of penny stocks companies at lesser amount and within a
year sold such shares at much higher amount and assessee had not tendered
cogent evidence to explain as to how shares in an unknown company had jumped to
such higher amount in no time and also failed to provide details of person who
purchased said shares, said transactions were attempt to hedge undisclosed
income as Long term Capital gain
The assessee had
purchased shares of two penny stock Kolkata based companies i.e., 8000 shares
at the rate of Rs.5.50 per share on 08.08.2003 and 4000 shares at the rate of
Rs.4/-per share on 05.08.2003 from Syncom Marketing Pvt. Ltd. and of Skyzoom
Distributors Pvt. Ltd. the payments were made by the assessee in cash for
acquisition of shares of both the companies.
The Assessing Officer
did not accept the claim of assessee of exemption under section 10(38). He held
that the aforesaid transactions of purchase of two penny stock shares for
Rs.60,000/-, the merger of the companies with a new company and the sale of the
shares for Rs.11,58,930/- fell within the ambit of adventure in the nature of
trade and the assessee had profited by Rs. 13,98,930/-. The assessing officer,
therefore, brought the aforesaid amount to tax under the head ‘business
income’. On appeal, the Commissioner (Appeals) as well as the Tribunal also
upheld the findings of the Assessing Officer. On assessee's appeal to the High
Court.
The authorities found
that the assessee had made investment in two unknown companies of which the
details were not known to her, transaction of sale and purchase of shares of
two penny stock companies, the merger of the two companies with another company, viz KL
did not qualify an investment and rather it was an adventure in the nature of
trade. It was held by all the authorities that the motive of the investment
made by the assessee was not to derive income but to earn profit. Both the
brokers, i.e. the broker through whom the assessee purchased
the shares and the broker through whom the shares were sold, were located at
Kolkata and the assessee did not have an inkling as to what was going on in the
whole transaction except paying a sum of certain amount in cash for the
purchase of shares of the two penny stock companies. The authorities found that
though the shares were purchased by the assessee at much lesser amount from the
two companies in the year 2003, the assessee was able to sell the shares just within
a years time at much higher amount. The broker through whom the shares were
sold by the assessee did not respond to the Assessing Officer's letter seeking
the names, addresses and the bank accounts of the persons that had purchased
the shares sold by the assessee. The authorities have recorded a clear finding
of fact that the assessee had indulged in a dubious share transaction meant to
account for the undisclosed income in the garb of long term capital gain. While
so observing, the authorities held that the assessee had not tendered cogent
evidence to explain as to how the shares in an unknown company worth such less
value had jumped to much higher amount in no time. The Income Tax Appellate
Tribunal held that the fantastic sale price was not at all possible as there
was no economic or financial basis as to how a share of a little known company
would jump from lesser amount to higher amount. The findings recorded by the
authorities are pure findings of facts based on a proper appreciation of the
material on record. The findings do not give rise to any substantial question
of law. On facts, assessee had indulged in a dubious share transaction meant to
account for undisclosed income in garb of long term capital gain, thus,
exemption under section 10(38) could not be granted to assessee. Transaction of
sale and purchase of shares of penny stock companies was an adventure in nature
of trade, thus, same was to be taxed as business income. [In favour of revenue]
- [Sanjay Bimalchand Jain v. PCIT, Nagpur (2018) 89 taxmann.com 196 (Bom.)]
Mere investments in ‘penny
stocks’ cannot result in LTCG exemption denial
Chennai ITAT sets aside Assessing
Officer’s order rejecting assessee-individual's claim of long term capital
gains ('LTCG') exemption upon sale of 'penny stocks' during Assessment year
2014-15; Based on the information from the investigation wing, Assessing
Officer had found that the company (whose shares were transacted by assessee)
is a penny stock company and its share price was inflated abnormally,
accordingly Assessing Officer had denied assessee’s LTCG exemption claim under
section 10(38); ITAT observes that Assessing Officer did not bring anything on
record to establish assessee's role in promoting the company or in inflating
its share price; ITAT rules that If the assessees are innocent investors, then
they cannot be found fault merely because the investments were made in a penny
stock company.”; ITAT restores matter back to Assessing Officer to enquire as
to - how a penny stock company was allowed to continue as a registered company,
who are the promoters of the penny stock company, whether the Income Tax
Department’s finding was brought to the notice of Ministry of Company Affairs
and the action taken thereupon, directs Assessing Officer to furnish the copy
of investigation report to assessee and decide the issue afresh after giving a
reasonable opportunity to assessee.
(Related Assessment year : 2014-15) – [Vandana Sankhala v. ACIT [TS-647-ITAT-2018(CHNY)] – Date of Judgement : 24.10.2018 (ITAT Chennai)]
Bogus Capital Gains from Penny Stocks: 31000% increase
in value of shares over 2 years is highly suspicious but cannot take the place
of evidence. The addition cannot be made based on generalizations. Evidence collected
from third parties cannot be used against the assessee without giving him a
copy and an opportunity to rebut the same
The
Assessing Officer further relies on the shop increase of 31000% of the value of
shares over the period of 2 years. Though this is highly suspicious, it cannot
take the place of evidence. The Hon’ble Supreme Court has stated that suspicion
however strong cannot be the basis for making an addition. The evidence
produced by the assessee listed above proves his case and the Assessing Officer
could not controvert the same by bringing on record any evidence. The evidence
said to have been collected by the DIT (INV.), Kolkata and the report is not
produced before this Bench. (Related Assessment Year : 2014-15)—[Prakash
Chand Bhutoria v. ITO - Date of Judgement : 27.06.2018 (ITAT Kolkata)]
During survey conducted
at the business premises of a firm of which assessee was 50 per cent partner,
various incriminating documents were found and impounded wherein several
unaccounted share transactions were recorded. The assessee contended that the share
transactions were genuine and the ‘short-term capital gain’ of Rs. 98,56,872/-
had been earned from the purchases and sales of shares.
After considering the entire factual matrix the Assessing Officer held that the assessee had arranged
the said accommodation entries obtained from entry
providers for converting its undisclosed money into white money and thus the
amount of Rs. 98,56,872/- was treated as undisclosed income of the assessee
under
section 69. The addition made was deleted by the Tribunal observing as
under:—
“Contention of the AR is
considered. One of the main reasons for not accepting the genuineness of the
transactions declared by the appellant that at the time of survey the appellant
in his statement denied having made any transactions in shares. However,
subsequently the facts came on record that the appellant had transacted not
only in the shares which are disputed but shares of various other companies
like Satyam Computers, HCL, IPCL, BPCL and Tata Tea etc. Regarding the
transactions in question various details like copy of contract note regarding
purchase and sale of shares of Limtex and Konark Commerce & Ind. Ltd.,
assessee's account with P.K. Agarwal & co. share broker, company's master
details from registrar of companies, Kolkata were filed. Copy of depository a/c
or demat account with Alankrit Assignment Ltd., a subsidiary of NSDL was also
filed which shows that the transactions were made through demat a/c. When the
relevant documents are available the fact of transactions entered into cannot
be denied simply on the ground that in his statement the appellant denied
having made any transactions in shares. The payments and receipts are made
through a/c payee cheques and the transactions are routed through Kolkata Stock
Exchange. There is no evidence that the cash has gone back in appellants's
account. Prima facie the transaction which are supported by documents appear to
be genuine transactions. The Assessing Officer has discussed modus operandi in
some sham transactions which were detected in the search case of B.C. Purohit
Group. The Assessing Officer has also stated in the assessment order itself
while discussing the modus operandi that accommodation entries of long term
capital gain were purchased as long term capital gain either was exempted from
tax or was taxable at a lower rate. As the appellant's case is of short term
capital gain, it does not exactly fall under that category of accommodation
transactions. Further as per the report of DCIT(C), Sh. P.K. Agarwal was found
to be an entry provider as stated by Sh. Pawan Purohit of B.C. Purihit and Co.
group. The AR made submission before the Assessing Officer that the fact was
not correct as in the statement of Sh. Pawan Purohit there is no mention of Sh.
P. K. Agarwal. It was also submitted that there was no mention of Sh. P. K.
Agarwal in the order of Settlement Commission in the case of Sh. Sushil Kumar
Purohit. Copy of the order of settlement commission was submitted. The
Assessing Officer has failed to counter the objections raised by the appellant
during the assessment proceedings. Simply mentioning that these findings are in
the appraisal report and appraisal report is made by the Investing Wing after
considering all the material facts available on record does not help much. The
Assessing Officer has failed to prove through any independent inquiry or
relying on some material that the transactions made by the appellant through
share broker P.K. Agarwal were non-genuine or there was any adverse mention
about the transaction in question in statement of Sh. Pawan Purohi. Simply
because in the sham transactions bank a/c were opened with HDFC bank and the
appellant has also received short term capital gain in his account with HDFC
bank does not establish that the transaction made by the appellant were non
genuine. Considering all these facts the share transactions made through Shri
P.K. Agarwal cannot be held as non-genuine. Consequently denying the claim of
short term capital gain made by the appellant before the Assessing Officer is
not approved. The Assessing Officer is therefore, directed to accept claim of
short term capital gain as shown by the appellant.” The same was confirmed by CIT appeal, in view
of this we are of the opinion that the view taken by the Tribunal as well as
CIT is correct. [In favour of assessee] - [CIT v. Pooja Agarwal (2017) 299 CTR 524 : (2018) 99 taxmann.com
451 (Raj.)
The
assessee had disclosed long-term capital gains exempt under section 10(38) of the
Act in its return of income. The Assessing Officer alleged that the said
long-term capital gains was merely a fall out of an accommodation entry taken
by the assessee from the share broker for converting unaccounted funds into
accounted funds and therefore treated the long-term capital gains as income
from unexplained and undisclosed sources under section 68 which he assessed
under the head ‘Income from Other Sources’. The Tribunal noting that the
assessee had submitted documentary evidence reporting the entire chain of
events of purchase and sale which was not rebutted by the Assessing Officer on
the basis of any concrete evidence held that the assessee had discharged its
onus. Accordingly, it held that the adverse inferences drawn by the lower
authorities could not be accepted to dislodge the genuineness of the transaction
and therefore deleted the addition made by the Assessing Officer. - [Kamala
Devi Doshi v. ITO (2017) 50 CCH 53 (ITAT Mumbai)]
Taxpayer’s share
transaction, not bogus merely because SEBI initiated investigation against
broker
Mumbai ITAT allows
assessee-HUF’s long term capital gains claim on sale of shares for Assessment
year 2005-06, deletes unexplained cash credit addition under section 68,
follows co-ordinate bench ruling in Indravadan Jain HUF; Assessing Officer had
held that the scrips were penny stock and capital gains declared represented
accommodation entries only, further Assessing Officer had treated the share
transaction as bogus on the ground that SEBI has initiated investigation
against the broker; Relies on Bombay High Court ruling in CIT v. Shyam R.
Pawar (2015) 54 taxmann.com 108 (Bom.), wherein it was held that if DMAT
account and contract note showed details of share transaction, and Assessing
Officer had not proved said transaction as bogus, capital gain earned on said
transaction could not be treated as unaccounted income under section 68; Also
relies on Jharkhand High Court ruling in CIT v. Arun Kumar Agarwal (HUF)
(2012) 26 taxmann.com 113 (Jharkhand) wherein it was held that, where
assessee's broker share transaction was bonafide in all respects, it cannot be
considered as bogus merely because the share broker was tainted and found
to be violating SEBI regulations. [In favour of assessee] Assessment year: 2005-06- [ITO
v. Arvind Kumar Jain HUF [TS-545-ITAT-2017(Mum)] - Date of Judgement :
18.09.2017 (ITAT Mumbai)]
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