Penny stock investors on tax-man radar

9:12 AM
MUMBAI: Penny stock investment has become a contentious tax issue. Despite a ruling this year from the income tax (IT) tribunal that not all penny stock investments were bogus, the assessment officers are not convinced. The Mumbai IT has issued notices to assesses who showed income from penny stock investments as long-term capital gain and claimed tax exemption.

In June this year, the Mumbai IT tribunal had observed that "if payment is by cheque and delivery of shares is taken, then long-term capital gains tax cannot be treated as bogus."

The tribunal's ruling was on a case where the assessee had shown sale proceeds of shares in the scrip Ramkrishna Fincap as a long-term capital gain and claimed exemption. The assessee claimed to have purchased it at Rs 3.12 per share in 2003 and sold it for Rs 155.04 per share in 2005. Tax officials, however, found the scrip to be a penny stock and held capital gains only as 'accommodation entries.'

But the Tribunal said since payment was made by account payee cheque, delivery of shares was taken and contract of sale was complete as per the contract act, capital gains cannot be bogus just as the scrip was a penny stock and under regulatory scanner. The tribunal also observed that the assessee made investment in shares purchased on the floor of stock exchange and nowhere had the assessing officer alleged the transaction with the broker to be bogus.

“Presumption of fraud is not enough to say that penny stock investments were bogus and structured for tax exemption,” said Sandeep Parekh, former executive director, Sebi. “The IT officers will have to prove with particularity that transactions were bogus.”

“Tax notices cannot be issued to all and sundry for penny stock investments as trading or investing in penny stocks is legally allowed,” said Ram Upadhyay, senior advocate, who fought cases for the Mumbai income-tax department. Most tax officers are not concerned with actual tax collection but assessment demand raised as counts in their performance appraisals every year.”

An IT official told ET that they came across several assesses, mainly high net worth individuals, claiming long term benefit on investment in penny stocks that were being investigated by Sebi. The officer further that many even tried to adjust short term losses caused by trading in penny stocks with other business income. Offsetting other business loss or gain with short term capital gains or loss in stock markets is allowed. Penny stocks are mostly those which trade below their face-value.

Source: Economic TImes

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