By TIOL News Service
BANGALORE, OCT 26, 2018: THE ISSUE IS - Whether when the AO's findings clearly establish the circuitous route adopted by the assessee to manipulate the artificially-inflated price of penny stocks, exemption u/s 10(38) claimed for capital gains is to be denied and such receipt is to be taxed as business income. YES is the answer.
The court also noted that such exemption can be denied where the AO carried out a thorough investigation based on materials sourced from the BSE & SEBI and then uncovered a scam of routing unaccounted money through LTCG & where the assessee failed to contest such findings.
Facts of the case
The assessee, who is the proprietrix of a company, filed returns for the relevant AY, showing income of about Rs 13.46 lakhs. On assessment, the AO opined that the assessee had dealt in shares and so issued notice u/s 143(2). Thereupon, the AO noted that the assessee's primary source of income was from milling charges arising from the proprietory concern, as well as from interest received from the family business concerns. The AO further noted that the assessee had earned Long Term Capital Gains (LTCG) of about Rs 42.4 lakhs on sale of shares of the scrip of another entity but had claimed exemption u/s 10(38). The AO also noticed that though the scrips had been listed on the stock market, the assessee did not purchase them from there, but had instead purchased the scripts through an intermediary. The AO investigated into the quantum of such LTCG and relied on information available on various websites and other findings from the BSE & SEBI. Thereupon, the AO opined that the assessee's financial worth was too small to attract any investment & that it had no fixed assets or sale/purchase to operate. Thus the AO denied exemption u/s 10(38) on grounds that the assessee had dealt in 'Penny Stocks', the sale of which classified as 'trade'. Thus the AO proposed to tax the amount of Rs 42.4 lakhs as 'Business Income'. On appeal, such findings were upheld by the CIT(A).
On appeal, the Tribunal held that,
++ the AO observed in its order that there is a sharp rise in the price of the scrips which was not supported by its fundamentals or any other general factor. The AO carefully examined the findings of the investigation wing who has investigated the scam of penny stock and the dubious schemes through which unaccounted money of the beneficiaries moves into the books of accounts in the garb of long term capital gain. This entry of long term capital gain is taken by selling the shares on the exchange and registering the proceeds arising out of sale of shares into books as long term capital gain (LTCG). For implementing this scheme, shares of penny stock companies were used. The same modus is adopted for providing accommodation entries of being bogus logs. It was further observed that in this scheme, shares of penny stock exchange are acquired by the beneficiaries of the LTCG at very low price through the root of preferential allotment (private placement) and off market transactions. These shares have a lock-in-period of one year as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Another route to acquire the shares is through Amalgamation or merger. In this route, the beneficiaries of LTCG are allotted shares of a private limited company which is subsequently amalgamated with a listed penny stock and the beneficiaries receive shares of the listed penny stock in exchange of the shares of private limited company. The modus operandi of conversion of unaccounted money in long term capital gain was examined by the AO before coming to the conclusion;
++ the AO has also examined the SEBI's findings about the accommodation entry providers obtained on the basis of various investigations and has brought out sufficient material on record to demonstrate that the transactions are not genuine and he accordingly concluded that the long term capital gain booked by the assessee in the books were pre-arranged method to evade taxes and laundered money. The findings and observations of the AO were not controverted by the assessee by placing any evidence. Since the assessee has placed the contract note, payment through cheques identifying the company whose shares were transacted, the genuineness of claim of long term capital gain should not have been doubted. There is no merit in these contentions of the assessee in the light of the facts that there is prevalent practice in the country through which unaccounted money is converted into long term capital gain by circuitous means. While dealing with the issue of long term capital gain accrued to the assessee in short span, one has to examine the financials of the company whose shares were inflated within a short period and after the sharp rise in the price of shares it again comes down. In the instant case, financials were examined & it is seen that the financial worth of the company is meagre and not at all worth to be invested therein. With such financials, it is difficult to understand how there can be manifold increase in the shares. In the light of the duration of transactions and the financials of the company whose shares were transacted, it is seen that the Revenue has brought sufficient material on record to demonstrate that unaccounted money was introduced in the books of accounts through long term capital gain by adopting such method. Whatever judicial pronouncements are relied on, these are in those cases where the transactions are genuine. Under these circumstances, the Revenue authorities have rightly adjudicated the issue and no interference is called for in the order of the CIT(A).
(See 2018-TIOL-1943-ITAT-BANG)
