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income tax: Penny stock probe: Kolkata HC rules in favour of the income tax department


In a major win for the income tax (IT) department, the Kolkata high court (HC) has allowed the department’s plea against a batch of 90 appeals filed by entities entities that had allegedly misused capital gains provisions to evade Rs 34,000 crore in taxes to the income tax (I-T) department.

The HC while passing the order Tuesday 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, the order said.

The court found that more than 90 appeals were allowed by the Tribunal in a single order and the facts of the 89 assessees were not noted by the Tribunal.

“…In the result, these appeals are allowed and the substantial questions of law framed/suggested are answered in favour of the revenue and against the assessee restoring the orders passed by the respective assessing orders,” added the order.

These appeals were filed by the IT department under section 260 (A) of the Act against the common order dated June 26 passed by the Income Tax appellate tribunal (single member bench), Kolkata in a batch of 90 appeals.

In the report prepared by IRS officer Dhruv Purari Singh, then with the Mumbai investigation wing unearthed various modus operandi adopted for the purpose of claiming bogus LTCG using penny stocks.

The probe found that the stocks which were the subject matter of transaction were referred to as “penny stocks” and the companies whose shares were traded in the various stocks exchanges and that the figure of total transaction of the brokers is little more than Rs. 15,970 crores as against the total trade in the scripts which is more than Rs. 38,000 crores, the probe had found. The report also stated that the cash trail was established from the cash deposit accounts to the account of the beneficiary for a sum of more than Rs. 1,575 crores.

Penny stock is a stock which trades at relatively low prices and market capitals.

The department had argued that there are three main person who are involved, the first of which is the entry operator who is said to have managed the overall scam as the entry operator controls several paper companies which have been utilized for routing the cash. The operator is also in control of some penny stock companies whose shares are listed on recognized stock exchanges.

“…These stocks are highly speculative and they are categorized as high-risk stocks largely due to lack of liquidity. Furthermore, the shares of the penny stock are closely held as the general public is not interested in these stocks due to the poor financials of the listed companies. It is for such reasons the entry operators are said to have chosen these penny stocks,” the department contested.

The report detailed out the types of penny stocks companies, the entities involved in the transactions, the different stages of the transactions, the merger method which was adopted and also mentioning about that large number of non-resident Indians and many well known foreign investors are buying or selling these penny stocks and it appears to be a case of black money cash stashed abroad coming back to India (purchase) or money be sent out of the country (sale).

Further the report stated that little over Rs. 27.57 crores has gone out of the country while the amount which has come in is more than Rs. 114.97 crores.

In certain cases the department also managed to establish that the promoters/directors of penny stock companies are also involved and they allow the entry operators to manage the affairs of the company in return for a commission paid to them. The third set of persons involved are the share brokers.

The report unearthed the Kolkata-link to the case where accommodation entries were carried out. Action was then initiated against more than thirty share broking entities and more than twenty entry operators working in Kolkata. The report states that almost everyone has accepted its activity, participation in providing accommodation entries for the LTCG.



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