Income Tax tribunal after getting sufficient authentic information from the Securities and Exchange Board of India has declared that the transactions or investment in penny stocks or those outside the Stock Exchange cannot be considered as bogus or sham.
Investment in penny stocks- Transactions outside Stock exchange are not Bogus
Factors that played a role in the decision of Income Tax Tribunal
There have been a number of cases in this regard due to which the Income tax tribunal has engaged in overlooking into the matter of trading/investment in the shares and securities through any broker as a mediator person or with any listed company, whatsoever. The Income Tax tribunal carried on investigation regarding investment in penny stocks by conducting search and enquiry u/s 133(6) of the Income Tax Act, 1961. Furthermore, it has gathered relevant information from SEBI as well, which is the main governing body that takes care of the trading/investment in shares and stocks.
SEBI conducts sufficient enquiry in order to understand the alleged hands of brokers or listed companies in the exploitation of the shares and stocks and subsequently, imposes monetary penalty or other punishment, whichever is applicable in this regard.
After the completion of this whole process, SEBI shares information with other bodies like the I-T tribunal. The latter then does research on own based on the information received and after ample analysis, declares the same to be bogus u/s 68 as cash credit. Nevertheless, there are number of cases in various courts of India that have declared that investment in penny stocks is not always bogus.
Mere fact that some investors are earning capital gains without involvement of brokers does not mean that transaction is not genuine
The income tax officials are of late, probing into the matter of many such investors who are claiming benefit from long term capital gains from penny stocks. However, any off-market transactions cannot be considered as bogus or an unlawful activity and the investors can very well engage into transactions external to Stock Exchange as well without the involvement of brokers. This does not mean that the transaction is not genuine.
Claims of long term and short term capital gains not always invalid:
The Income Tax tribunal has participated in many ‘Shares Scam’ cases that has led to addition/deletion u/s 68/69 of the Income Tax Act, 1961 vide the short term and long term capital gains which are listed under:
(a) Smt. Hamida J. Rattonsey vs. DCIT
(b) ITO vs. Rasila N. Gada ITA No. 1442 & CO No. 209/Ahd/2013
(c) Smt. Durgadevi Mundra vs. ITO
(d) Sachin N. Morakhia vs. ITO
(e) Mukesh R. Marolia vs. ACIT((2006) 6 SOT 247)
(f) CIT vs. Mukesh R. Marolia (Bombay HC)
(g) ITO vs. Truptic Shah
(h) ACIT vs. ShriRavindrakumar Toshniwal
(I) ITO vs. Smt. Navneet Mehra
In fact, several propositions made by ITAT Ahmadabad and ITAT Mumbai in several cases in this regard have come to the conclusion that these transactions/investments held outside the floor of the Stock Exchange cannot be considered as unlawful activity that can be detailed as under:
“10.3 Purchase and sale of shares outside the floor of Stock Exchange is not an unlawful activity. Off-market transactions are not illegal. It is always possible for the parties to enter into transactions even without the help of brokers. Therefore, it is not possible to hold that the transactions reported by the assessee were quite sham on the legal proposition arrived at by the CIT(A) that off-market transactions are not permissible. The assessee has stated that the transactions were made with the help of professional mediators who are experts in off-market transactions.
When the transactions were off-market transactions, there is no relevance in seeking details of share transactions from Stock Exchanges. Such attempts would be futile. Stock Exchanges cannot give details of transactions entered into between the parties outside their floor. Therefore, the reliance placed by the assessing authority on the communications received from the Stock Exchanges that the particulars of share transactions entered into by the assessee were not available in their records, is out of place.
There is no evidential value for such reliance placed by the assessing authority. The assessee had made it very clear that the transactions were not concluded on the floor of the Stock Exchange. The matter being so, there is no probative value for the negative replies solicited by the assessing authority from the respective Stock Exchanges. We are of the considered view that the materials collected by the assessing authority from the Stock Exchanges are not valid to dispel or disbelieve the contentions of the assessee.”
Facts that payments were made through Crossed ac-payee cheques also strengthens the assessee’s case
In this matter, it can also be stated that as the names of the assessee are often not recorded in the floor of the Stock Exchange because transactions/investments are done outside the floor, therefore, it is unnecessary to indulge into getting information from the Stock Exchange as they will not be able to provide the same. Therefore, if professionals who are well acquainted with the trading and investment in market shares and stocks are involved, the scope of non-genuineness in such cases can be ruled out completely. Moreover, the same have been accepted by the I-T Department as the payments were made through a/c payee cheques or other electronic forms in the previous year by two assessments in the same year.
Final footnotes: After a thorough look into the various matters and cases and after detailed analysis, therefore, it can be stated that the gains from off-the-floor investing in penny stocks cannot be considered as bogus here.
The transactions/ investment in share or stock market, even though outside the floor of the Stock Exchange, if done as per valid contract and adhering strictly to the terms and conditions, cannot be regarded as illegal at all. In other words, investment in penny stocks is absolutely valid.
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