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PENNY STOCK IN GENERAL

RECENT DEVELOPMENTS IN TAXATION OF TRANSACTIONS OF PENNY STOCKS AND BOGUS PURCHASES CA. Mukund Bakshi 26.05.2018. PENNY STOCK IN GENERAL.

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PENNY STOCK IN GENERAL

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  1. RECENT DEVELOPMENTS IN TAXATION OF TRANSACTIONS OF PENNY STOCKS AND BOGUS PURCHASESCA. Mukund Bakshi26.05.2018

  2. PENNY STOCK IN GENERAL • 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. • There is difference between Penny Stock and Penny Business. Penny Stocks need not mean Penny Business.

  3. • Low market capitalization • No core underlying business / assets • No Core financials / business fundamentals • No institutional holdings • Poor Corporate governance / irregular filings • Illiquid and infrequently traded • Low prices but extremely high valuations CHARACTERISTICS OF PENNY STOCKS

  4. MODUS OPERANDI FOR GENERATING BOGUS LTCG AS PER THE REVENUE DEPARTMENT • Investigation carried out by the Investigation Wing of Income Tax, Mumbai. • Investigation carried out by the Investigation Wing of Income Tax, Kolkata. • Modus Operandi as reported by the Investigation Wing:

  5. ACTIONS OF SEBI • SEBI , from time to time investigates the affairs of brokers and companies and detect manipulation and price rigging by the market participants under PFUTP (Prohibition of Fraudulent and Unfair Trade Practices Regulations). • SEBI has, in the past, barred several entities where nexus between promoters, allottees of Equity Shares, exit providers and LTP (Last Traded Price) contributors is found. • News articles suggest that SEBI is contemplating action on various entities based on the report of the Investigation Wing of the Revenue Department suggesting manipulation the Stock Exchange market platform for evasion of tax by generating bogus LTCG.

  6. ACTIONS OF SEBI (Contd…) • Recent order of the Hon’ble Supreme Court in the case of SEBI Vs. Rakhi Trading Pvt. Ltd. & Ors. dated 08.02.2018 and observations therein. The Hon’ble SC, refrained from any observations and findings with regard to manipulation of the Stock Market for achieving motives of tax planning and tax evasion as the same was not the issue in adjudication proceedings. However, the Hon’ble SC in the context of another case of Viram Investment has kept it open.

  7. SEC. 10(38) - RECENT AMENDMENTS • Income arising from transfer of long term capital asset being Equity Shares in a Company or ……….. to be exempt where - i) Transaction of sale of Equity Shares is entered after the date on which provisions of levy of STT came into force (i.e. 1st October 2004), and ii) Such transaction is liable to STT.

  8. SEC. 10(38) - RECENT AMENDMENTS (contd..) • Vide Finance Act 2017, w.e.f. 01.04.2018, where transaction of acquisition of Equity Shares being long term capital asset entered into on or after 01.10.2004 which is not chargeable to STT (except the acquisition notified) shall not be regarded as transaction u/s. 10(38). • The acquisitions excepted are notified by Notification No. SO 1789(E), dated 05.06.2017.

  9. SEC. 10(38) - RECENT AMENDMENTS (contd..) • By the Finance Act, 2018, the exemption u/s. 10(38) is withdrawn and such transactions are to be taxed in accordance with Sec. 112A. (Circular dated 04.02.2018 in the form of FAQs). • Issue for consideration - Taxability of transactions of Long Term Equity Shares where the purchase and sale is completed before 31.03.2017.

  10. SECTION 115BBE • Inserted by the Finance Act 2012 w.e.f. 01.04.2013 providing for taxation of income under Sec. 68 to Sec. 69D @ 30% upto A.Y. 2016-17 and 60% from A.Y. 2017-18 whether offered in the return of income or assessed by the AO. • No deduction, expenditure or allowance to be allowed against such income as per the - - Finance Act 2016 from 01.04.2017 prohibits set off of any loss against income u/s. 68 to 69D in computing the income offered in the return furnished u/s. 139.

  11. SECTION 115BBE (contd…) - Finance Act 2018 has made further amendment w.r.e. from 01.04.2017 prohibiting the set off of loss also against the income assessed u/s. 68 to 69D. - Assessing Officers are applying the above provisions from the A.Y. 2013-14 itself and interpreting such provisions to be retrospective. - ACIT, Central Circle 2, Vs. Sanjay Bairathi Gems Ltd. 166 ITD 445 (Jaipur) holding the same to be prospective from 01.04.2017.

  12. SECTION 115BBE (contd…) • CIT Vs. Shilpa Dyeing 39 taxmann.com 3 (Guj.) – On principle holds the set off of current year’s losses against income assessed u/s. 69. • TruptibenBakulbhai Patel 87 taxmann.com 41 (Guj.) denying set off of loss against income assessed u/s. 68 on the ground that such loss was not claimed in the return of income nor the bank account in which such transaction is undertaken is disclosed. Such claim was also not raised in appellate proceedings.

  13. PENALTY U/S. 271AAC (Inserted from A.Y. 2017-18) • Where income determined includes income referred to in Sec. 68 to 69D, the penalty payable shall be 10% of the tax payable u/s. 115BBE. • No penalty shall be levied where such income is included in the return furnished u/s. 139 and the tax in accordance with provisions of clause 115BBE(1)(i) is paid on or before the relevant previous year.

  14. PENALTY U/S. 271AAC [Inserted from A.Y. 2017-18] (contd…) • Issues for Consideration: - For subjecting the income to tax u/s. 115BBE and penalty u/s. 271AAC, would it be necessary that the income is to be specifically assessed by applying the provisions of Sec. 68 to 69D? - In a case where the AO discusses in the order the taxability of the amount as income from unexplained sources, however, assesses the same as income from other sources, would the position be different?

  15. PENALTY U/S. 271AAC [Inserted from A.Y. 2017-18] (contd…) - In a case where the income is from a source other than assessable u/s. 68 to 69D, can such income still be subjected to tax u/s. 115BBE and consequential penalty u/s. 271AAC?

  16. HEAD OF INCOME • In majority of the cases, it is seen that income is assessed u/s. 68 and in very few cases u/s. 69A. • In some cases, the income is also assessed as business income considering it as in the nature of adventure or trade. • Relevance of the Head of income from the perspective of rate of tax, set off of losses, etc.

  17. SOME RECENT DECISIONS • In favour of the Revenue: a) Sanjay Bimalchand Jain Vs. Pr. CIT – 89 taxmann.com 196 (Bombay) dated 10.04.2017 • Purchase of shares of 2 Penny Stock Companies • Both Companies merged with another Company • Sale of shares at much higher amount • Assessee was unaware of the investment in 2 unknown Companies, shares of which were sold at a much higher price and no reason for such increase furnished. • Broker did not respond to AO’s letter seeking names and addresses of the purchasers.

  18. SOME RECENT DECISIONS (contd..) • In favour of the Revenue (contd……): • Transactions were held to be dubious transaction to account for undisclosed income in garb of LTCG and hence benefit of Sec. 10(38) is denied. • The transaction of purchase and sale of shares of penny stock companies was an adventure in nature of trade which was to be taxed as business income. • CIT Vs. ShamimBharwani 69 taxmann.com 65 (Mum.) • CIT Vs. SanghamitraBharali – 361 ITR 481 (Gauhati) The First Appellate Authorities, besides relying on the above judgements, are heavily relying on the judgments of Hon’ble Supreme Court in the cases of - • SumatiDayal Vs. CIT 80 taxman 89 • Durgaprasad More 82 ITR 540, and • McDowell and Company 154 ITR 148 in dismissing the claims of the Assessees.

  19. SOME RECENT DECISIONS (contd..) • In favour of Assessee a) CIT Vs. Kasturben H. Gada – IT Appeal No. 299 of 2013 dated 21.01.2015 (Bombay) - Addition made u/s. 68 being the amount of LTCG. Such addition was made relying on the statement of Shri MukeshChokshi. However, the name of the assessee was not mentioned in the statement. - The AO had not challenged the purchase and sale of shares and hence the addition is deleted.

  20. SOME RECENT DECISIONS (contd..) • In favour of assessee (contd……): b) CIT Vs. Pooja Agarwal – I.T. Appeal No. 385/2011 (Raj.) – Order dated 11.09.2017 • The assessee earned substantial amount as STCG. • A search in the case of B.C. Purohit Group of Jaipur where one Mr. PawanPurohit had stated that Shri P.K. Agrawal of Kolkata had provided accommodation entries. • In the course of survey in the assessee’s premises, she denied having carried out any share transactions. • The facts revealed that the assessee had carried out transactions of shares of various other companies also.

  21. SOME RECENT DECISIONS (contd..) • In favour of Assessee (contd…) • The assessee has claimed STCG which does not exactly fall under the category of accommodation entries. • Statement of Shri PawanPurohit actually do not mention the name of Shri P.K. Agarwal • Since all documents such as DMAT Account, Bank Statement, Contract Note etc. submitted, transactions cannot be held as non-genuine c) Pr. CIT Vs. Prem Pal Gandhi – I.T. Appeal No. 95/2017 dated 18.01.2018 (P&H) • Shares purchased of Rs. 11 lakhs in cash paid just before its dematerialization. • Worth of the Company not proved.

  22. SOME RECENT DECISIONS (contd..) • In favour of assessee (contd……): • The sale of shares for a consideration of Rs. 4.23 Crores suggests non-genuineness of the transactions. • The income reported is from undisclosed sources. • The Hon’ble Court held – • The shares were traded on NSE, the payments are made from explained sources and receipts are routed through bank. • The assessee had even received dividend on such shares. • No evidence to link any manipulation in any manner. • The addition being made on suspicion could not be sustained.

  23. SOME RECENT DECISIONS (contd..) • In favour of assessee (contd……): d) Pr. CIT Vs. Ramniwas Ramjivan Kasat 82 taxmann.com 458 (Guj) Order dated 05.06.2017 - The AO noted that purchase of shares itself was bogus and, therefore, sale proceeds were added as unexplained cash credit. - The findings of the Tribunal that purchase of shares was in the previous assessment year which is accepted as genuine in the assessment for that year. Hence the sale and income therefrom could not be treated as unexplained.

  24. SOME RECENT DECISIONS (contd..) • In favour of assessee (contd……): e) CIT Vs. Shaym R. Pawar 54 taxmann.com 108 (Bombay) dated 10.12.2014 • Where 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

  25. BOGUS PURCHASES • Only bill providers / bogus purchases. • Parties bogus but purchases not bogus.

  26. BOGUS PURCHASES (contd…) • Consequences under Direct Taxes: • Disallowance of entire expenses represented by such invoices / bills. • Disallowance u/s. 40A(3) • Addition of the profit embedded in such transactions. • Addition u/s. 68 or 69C • Addition of the peak amount • Consequences of additions in 80IA, 80IB cases

  27. BOGUS PURCHASES (contd…) • Prima facie onus to prove genuineness is on the Assessee • Evidences: a) Direct Evidences • Delivery Challans, Gate Pass • Transport / Lorry Receipt • Purchase Invoices, Stock Register, Payment details • Excise Register • Weight Note, Lab Report

  28. BOGUS PURCHASES (contd…) b) Indirect Evidence: • Comparison of GP/NP Rate • Comparable cases • Input / Output norms • Valuation Reports / Architect’s Certificate in the case of Builder-Developers

  29. BOGUS PURCHASES (contd…) • Where purchases are found to be genuine and suppliers not responding / available. Assessee submits all evidences in support of genuineness mainly quantitative details, Excise records, payment particulars by cheques, no addition. • Adinath Industries 252 ITR 476 (Guj.) • CIT Vs. Nikunj Exim Enterprises Pvt. Ltd. 372 ITR 615 (Bom.) • CIT Vs. M. K. Bros 163 ITR 249 (Guj.) • ITO V. B. Totaram B. Sharma - T.A. No. 1344 of 2008 dated 09.02.2010 (Guj.)

  30. BOGUS PURCHASES (contd…) • Where purchases found to be genuine and supplier parties found to be bogus / non-existing, only profit embedded out of such amount could be taxed. • CIT Vs. Bholanath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj.) • CIT Vs. Simit P. Sheth 356 ITR 451 (Guj.) • Vijay Trading Co. Vs. ITO 388 ITR 377 (Guj.)

  31. BOGUS PURCHASES (contd…) • Impact of the judgment in the case of N.K. Industries Ltd. Vs. Dy. CIT 72 taxmann.com 289 (Guj.) wherein the amount of the entire bogus purchase is added to the income. SLP dismissed in 84 taxmann.com 195 (SC). Considered and distinguished on facts: • Jayprakash Lakhani – ITA No. 924/M/2017 dated 18.04.2018 (Mum.) • NavinShantilal Mehta 90 taxmann.com 16 (Mum.)

  32. BOGUS PURCHASES (contd…) • Applicability of provisions of Sec. 40A(3): • where payments made by bearer cheques / crossed cheques, sec. 40A(3) applicable - Rajmoti Industries Vs. ACIT 367 ITR 392 (Guj.) [SLP admitted in 78 taxmann.com 200 (SC)] • Where sales and purchase transactions are unaccounted, payment for purchases made in cash would attract Sec. 40A(3) where payees are not identified and genuineness of payment is not established. - CIT Vs. Hynoup Foods & Oil Industries Pvt. Ltd. 290 ITR 702 (Guj.)

  33. BOGUS PURCHASES (contd…) • Applicability of provisions of Sec. 40A(3) [contd..) • Where parties are identified and genuineness is established, in such cases, the payment would be covered by exceptions provided in Rule 6DD(j) - Vijay Proteins Ltd. Vs. CIT – 58 taxmann.com 44 (Guj.) - AnupamTele Services Vs. ITO – 43 taxmann.com 199 (Guj.) - A. Daga Royal Arts – ITA No. 1065/JP/2016 dated 15.05.2018 (Jaipur Trib.)

  34. BOGUS PURCHASES (contd…) • Where income is assessed by rejection of books and assessment is made on estimation, no disallowance is to be made u/s. 40A(3) - Prashant Oil Mills Vs. ITO 72 taxmann.com 136 (Guj.) - CIT Vs. Dhiraj R. Rungta 40 taxmann.com 284 (Guj.)

  35. REASSESSMENT / REVISION • Reopening on the basis of the report of the Investigation Wing about receipt of loans / LTCG / bogus bills from Entry Providers held to be justified • Jayant Security & Finance Ltd. Vs. ACIT 91 taxmann.com 181 (Guj.) • Ankit AgrochemPvt. Ltd. Vs. JCIT 89 taxmann.com 45 (Raj.) • Pushpak Bullion Pvt. Ltd. Vs. DCIT 85 taxmann.com 84 (Guj.) • Aradhana Estates Pvt. Ltd. Vs. DCIT 91 taxmann.com 119 (Guj.)

  36. REASSESSMENT / REVISION (contd…) • Revision u/s. 263: Tendency on part of the Commissioners to revise the orders by resort to invoking the Explanation 2(a) inserted by Finance Act w.e.f. 01.06.2015. Explanation 2 (a): “Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,— a) the order is passed without making inquiries or verification which should have been made;”

  37. REASSESSMENT / REVISION (contd…) . Explanation 2 inserted from 01.06.2015 do not enlarge the scope of powers of revision. The Explanation cannot be said to have overriding effect to the law as interpreted by the various High Courts. • Amira Pure Foods Pvt. Ltd V/s PCIT – ITA No 3205/DEL/2017 dated 29.11.2017 • Narayan TatuRaneVs. ITO – 70 Taxmann.com 227

  38. APPLICABILITY OF BENAMI PROHIBITION ACT / PMLA • Whether the amount received as consideration on sale of Penny Stocks be regarded as Benami Property, if the person giving the consideration is not traceable and addition has been made under section 68 or 69 of the Act. • In a bogus purchase case, the allegation on the person procuring such bogus bill has made the payment by cheque and has received back the amount in cash. Can it be said that the person who has received the cheque is holding the amount on behalf of the person who has issued the cheque and, consequently, it is a case of benami transaction? In cases where the alleged suppliers are not traceable, can it be said that it is a case of benami transaction?

  39. APPLICABILITY OF BENAMI PROHIBITION ACT / PMLA (contd…) • Whether bogus transactions and sham transactions would come within the ambit of Benami transaction? • Where the source of proceeds / consideration in relation to alleged bogus transaction are not explained and additions made, can the provisions of PMLA be applied? - Rajmandir Estates Private Ltd. Vs. Pr. CIT 70 taxmann.com 124 (Cal.) – SLP dismissed – 77 taxmann.com 285 (SC) - Rohit Tandon Vs. Enforcement Directorate 145 SCL 1 (SC)

  40. THANKYOU

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