Penny Stock LTCG Scam: Calcutta HC Rules in Favour of I-T Dept; Rejects Common Order Passed by ITAT in 90 Cases
Moneylife Digital Team 18 June 2022
While stating that the income tax appellate tribunal (ITAT) at Kolkata had committed a serious error in setting aside the orders of the commissioner of I-T for appeals [CIT(A)], the Calcutta High Court (HC) ruled in favour of the tax department. The case is related to bogus claims of long-term capital gains (LTCG) using penny stocks. The HC also relied on a detailed report prepared by Dhruv P Singh, an officer from the Indian Revenue Services (IRS), which unearthed the bogus trading in penny stocks worth Rs38,000 crore.  
In its order, the bench of justice TS Sivagnanam and justice Hiranmay Bhattacharyya says, "We hold 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 (AO) 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 (I-T) Act."
I-T department had filed these appeals against a common order passed by the ITAT on 26 June 2019 in a batch of 90 appeals.
During the hearing, the assessees contended that the tax department did not file appeals within the period of limitation and, hence, their vested right to avail the benefit of the Vivad Se Viswas (VSV) Scheme was taken away. The HC, however, rejected the contention stating, "...merely because in certain cases, appeals were preferred within the relevant time enabling, those assessees to avail the benefit of the VSV Scheme can in no manner advance the case of the assessees before us."
The HC noted that there are three prominent people who are involved, the first is the entry operator, who is said to have managed the overall scam, as the entry operator controls several paper companies which have been utilised for routing the cash. "In certain cases before us, it has been established that the promoters or directors of the penny stock companies are also involved and they allowed the entry operators to manage the affairs of the company in return of a commission paid to them. The third set of persons involved are the share brokers."
Citing the report prepared by Mr Singh, who was with the I-T investigation wing at Mumbai then, the HC observed that the I-T department investigated the matter as a project primarily due to a huge syndicate of the entry operators, share brokers and money launderers. 
The report states that Kolkata is a very unique place among the cities of India, so far as the accommodation entry is concerned and action has been initiated against more than 30 sharebroking entities and more than 20 entry operators working in Kolkata. It added that almost everyone has accepted its activity, participating in providing accommodation entry of LTCG.
The investigation has also indicated as how the scheme of a merger is being misused. The HC noted, "Though the scheme of a merger is approved by the company court, in the event it is found that such merger was done or obtained by playing fraud, the company court is empowered to revoke the order and it appears that the I-Tax department has not taken any steps in this regard to approach the company court or the Tribunal with such a prayer."
"Thus, we have no hesitation to hold that the orders passed by the CIT(A) affirming the orders passed by the AOs as well as the orders passed by CIT under section 263 of the Act were proper and legal and the Tribunal committed a serious error in reversing such decisions," the HC says in its order.
In one such case, the HC observed that the assessee filed I-T return for a total income of Rs6,57,300 for assessment year (AY) 2015. On verification of the computation of income, the AO noted that the assessee had shown LTCG of Rs28.23 lakh and claimed it as exempt. 
However, after checking the details, the AO found that on 16 March 2012 and on 14 August 2012, the assessee bought 50,000 shares of Surabhi Chemicals for Rs1 lakh. Soon after the expiry of the period to become eligible for LTCG, the assessee sold those shares for Rs29.23 lakh. These sales were effected from 4th December to 7 December 2013 and LTCG was computed for Rs28.23 lakh. 
The AO noted that within a short span of 17 to 21 months, the assessee sold the shares with increased value of about 2823% when the general market trend was recessive. 
However, there were several such transactions which led to an investigation by the directorate of income tax investigation (DIT-I) at Kolkata. The investigation report dated 27 April 2015 narrates the modus operandi adopted for the purpose of claiming bogus LTCG.
The stocks, which were the subject matter of transaction, were penny stocks and the scrips were traded on the various stock exchanges. It is reported that the figure of the total transaction of the brokers is little more than Rs15,970 crore as against the total trade in the scrips which is more than Rs38,000 crore.
The report further states that the cash trail has been established from the cash deposit accounts to the beneficiary account for a sum of more than Rs1,575 crore. 
The modus operandi was set out in the report, which shows the types of penny stocks companies, the entities involved in the transactions, the different stages of the transactions, and the merger method that was adopted. It  also mentions about the large number of non-resident Indians (NRIs) 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 being sent out of the country (sale). 
Further, the detailed report prepared by Mr Singh, states that, while a little over Rs27.57 crore had gone out of the country, the amount which has come in is more than Rs114.97 crore. The report further states that, in the whole project, total 84 penny stocks listed on BSE have been identified, after which several search and survey operations were conducted in the office premises of more than 32 sharebroking entities who have accepted that they were actively involved in bogus long term capital loss (LTCL) or short term capital loss (STCL) scam.
In this penny stock LTCG fraud, the I-T department adopted a different approach. The investigation did not commence from the assessee but had initiated from the companies and the persons involved in the trading of the shares of these companies which are all classified as penny stocks companies. 
According to the HC, the assessees are lawfully bound to prove the huge LTCG claims to be genuine. It says, "...if there is information and data available of unreasonable rise in the price of the shares of these penny stock companies over a short period of little more than one year, the genuinity of such steep rise in the prices of shares needs to be  established and the onus is on the assessee to do so as mandated in Section 68 of the Act."
"Thus, the assessees cannot be permitted to contend that the assessments were based on surmises and conjectures or presumptions or assumptions. The assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently, they are entitled to claim LTCG on their transaction," the bench noted.
2 months ago
This could be tax planning by other means
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