Long-term Capital Gain from a Penny Stock with 3072% Profit Is Bogus and Sham Transaction: ITAT
Moneylife Digital Team 14 May 2019
Coming down heavily on a taxpayer for what can be termed as ‘sham’ long-term capital gain (LTCG) transactions, the Delhi bench of income-tax appellate tribunal (ITAT) said the jump in the share price of a company of unknown credentials, cannot be an accident or windfall but is possible because of manipulations in a pre-planned manner by an interested broker and entry operators.
Stock manipulation in the Indian markets, to generate fake of long-term capital gains, (which was tax-free until last year), is rampant but the perpetrators have been getting away easily.
Moneylife has a whole section on “Stock Manipulation”. We have even written a cover story on this titled as “Black to White”. The Securities and Exchange Board of India (SEBI) does not have the resources and cannot prove manipulation and, without that proof, courts have been letting off manipulators. However, this case is turning out to be different.
"The assessee was not in India as per the passport details available as per the record. This, coupled with the fact that the transfer of money in cash from Ludhiana to Delhi and a person representing the broker operating at Kolkata has collected the money at Delhi cannot be accepted...The fact that in spite of earning 3072% of profits, the assessee never ventured to involve herself in any other transactions with the broker which gave her even lower profits during the period, which cannot be a mere coincidence or lack of interest or absence of advice from the financial institutions, as done earlier," the bench of HS Sidhu said in an order issued last month. 
The assessee, one Pooja Ajmani, had challenged an order passed by the commissioner of income-tax-appeals (CIT-A), which had added an income of Rs23.68 lakh, received from Kappac Pharma Ltd.
Ms Ajmani had filed her returns on 19 December 2014 declaring total income of Rs1.21 lakh, which was picked up by the assessing officer (AO) for scrutiny. In her returns, Ms Ajmani had claimed a LTCG of Rs23.22 lakh, earned from selling shares of Kappac Pharma.
The AO noted that on 13 September 2012, Ms Ajmani had bought 4,000 shares of Kappac Pharma from Corporate Stock Broking Pvt Ltd at Rs13.09 per share. She sold 3,500 shares through a broker Shri Parsaram Holding Pvt Ltd for Rs23.76 lakh on the BSE (Bombay Stock Exchange) and paid securities transaction tax (STT) of Rs2,377.
Meanwhile the AO received a report from the office of principal DIT for investigation at Kolkata, informing them that an organised racket of generating bogus entries of LTCG, which was exempt from tax, had been unearthed in which price of the shares of the penny stock companies were rigged and were raised through circular trading.
After a detailed analysis of the investigation report with the materials available on record in the case of the assessee and on further examination of the financials of Kappac Pharma, the AO concluded that the modus operandi adopted by Ms Ajmani followed the pattern discovered by the investigation wing during various search and survey operations. 
The AO also found that Ms Ajmani did not have a demat account at the time of buying the 4,000 shares of Kappac Pharma from Corporate Stock Broking in 2012. After checking records from the broker Shri Parasram Holdings, the AO found that Ms Ajmani had never made investment in the shares since the opening of her demat account and the only transactions done were the sale of the shares of Kappac Pharma.
On 15 January 2014, Ms Ajmani opened her demat account with Shri Parasram Holdings and dematerialised her 4,000 shares in Kappac Pharma. Immediately, as if having prior knowledge about price increase in Kappac Pharma shares, in February 2014, she sold her shares. 
When the AO sent a letter to Corporate Stock Broking, it was returned unserved and the company status, in the records of ministry of corporate affairs (MCA) was shows as 'strike off'. 
Even after making a windfall profit, Ms Ajmani had not made any further investment in any other stock, which, the AO felt, was against human probability in such cases. He then issued a show-cause notice to Ms Ajmani asking why the credit of Rs20.24 lakh plus Rs3.44 lakh amounting to Rs23.68 lakh by way of LTCG should not be treated as bogus and added to her income. The AO passed an assessment order at an income of Rs24.90 lakh, including the deemed to be income earned from the LTCG tax. 
Aggrieved by the assessment order, Ms Ajmani filed an appeal before the CIT-A, but on 23 July 2018, the appeal was dismissed. Ms Ajmani then approached the ITAT with her appeal.
Advocate KP Ganguli, representing Ms Ajmani, contented that the CIT-A had failed to appreciate that the AO made the addition without confronting the assessee or denying her an opportunity to cross examine SK Gupta, whose statement was used by the I-T authorities for denying the LTCG. Adv Ganguli also submitted one paper book with details of the transactions and others with copies of judgements in similar cases. 
Senior counsel SL Anuragi, representing the I-T department, however, stated “…documents submitted as evidence to prove the genuineness of the transaction are themselves found to serve as a smoke screen to cover up the true nature of the transactions in the facts and circumstances of the case as it is revealed that purchase and sale of shares are arranged transactions to create bogus profit in the garb of tax exempt LTCG by well-organised network of entry providers with the sole motive to sell such entries to enable the beneficiary to account for the undisclosed income for a consideration or commission.”
During the hearing, Ms Ajmani contented that she bought 4,000 shares of Koppac Pharma at Rs13.09 per share in physical form in 2012. Out of these shares, she claimed on 4 February 2014, she sold 3,000 shares at Rs677 per share and on 18 February 2014 sold 500 shares at Rs691 per share. 
After perusing the documents submitted by both the parties, the ITAT observed that the AO had done an analysis of balance sheet, profit and loss account and trade pattern of Koppac Pharma for March 2010 to March 2014 period and pointed out that share price of this company was neither affected by the movement of Sensex nor the financials of the company justified such extraordinary jump in the share price.
“The insistence of the Ms Ajmani that the transactions leading to LTCG are supported by documents such as sale and purchase invoices, and bank statements cannot be accepted in view of the fact and circumstances of the case brought on record by the AO after proper examination of the material facts and after taking into account the findings of SEBI and corroborating evidences gathered by the Directorate of Investigation, Kolkata against a network of brokers and operators engaged in manipulation of market price of shares of certain companies controlled and managed by such persons with a purpose to provide accommodation entries in the form of LTCG,” the Tribunal said.
Further rejecting Ms Ajmani’s claim of ‘tax planning’ for LTCG gains, the ITAT said, “Every person is entitled to so arrange his affairs as to avoid taxation but the arrangement must be real and genuine and not a sham or make believe. I further find that the share transactions leading to long-term capital gains by the assessee are sham transaction entered into for the purpose of evading tax.”
While dismissing the appeal of Ms Ajmani, Mr Sidhu of the ITAT bench, said, “The assessee has not raised any legal ground and argued only on merit for which the assessee has failed to substantiate her claim before the lower revenue authorities as well as before this Bench. In view of above discussions, I am of the considered opinion that the CIT(A) has rightly confirmed the addition in dispute, which does not need any interference on my part, therefore, I uphold the action of the CIT(A) on the issue in dispute and reject the grounds raised by the assessee.”
3 years ago
More such cases with penalty would make such fake ones disappear. Broker through whom it was done should also be given the punishment for organizing such transaction.
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