Long-term Capital Gain from a Penny Stock with 3072% Profit Is Bogus and Sham Transaction: ITAT
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.”
 
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    Insider Trading in Hathway Cable and Den Network before the Reliance deal. Will SEBI Investigate?
    On 17th October, Reliance Industries Ltd (RIL) came out with its financial results for the second quarter (Q2) of FY18-19 results. However, more than the numbers, the buzz was created by its announcement of plan to acquire 66% stake in Den Networks and 51.30% stake in Hathway Cable, which will lead to consolidation in wired broadband space just like the telecom space.
     
    But what is interesting is some people may have known about this information and acted on it and pocketed huge gains. The price action of these two stocks before the announcement points to a clear-cut case of insider trading.
     
    From the end of August, the scrips of Hathway Cable and Den Networks have risen a whopping 57% and 53%, respectively. That too when the Nifty is down 11% and the Small Cap index is down 21%. 
     
    There have been no developments on these stocks whatsoever, to warrant such dramatic rise. And how is it that these two completely different stocks rose at the same time in a market hit by bear hammering? The only common element is what came out later, which is RIL buying a controlling stake in both these companies.
     
    It is clear that a small group had the inside information of these deals that has led to these stocks rising in so much in a market going through a huge turmoil, where almost all stocks are down.
     
     
    Insider trading is rampant in India. This is not the first time, we have pointed out in insider trading in listed companies. However, in almost all cases, the response from market regulator, SEBI, was not up to the mark. In fact, in many cases, entities behind insider trading got away either with miniscule fine or through consent.
     
    We wrote about insider trading in Infosys Ltd in 2013 before the return of NR Narayan Murthy at the helm, then in Ranbaxy Lab in 2014 before it was acquired by Sun Pharma and many more. 
     
    In case of Infosys, when the BSE Sensex was down 455 points on 31 May 2013, the company scrip was up 3.32%. That too when its peers like Tata Consultancy Services (TCS) and HCL Technologies were flat. Next day, i.e. on 1 June 2013, Infosys announced that its main founder Mr Murthy, who was on a retirement, would be returning to the company as executive chairman of the board and as an additional director for five years.
     
    As a matter of perspective, this was the highest percentage decline in the Sensex in 14 months and the highest rise for Infosys in one and half months, both happening on the same day! Clearly, someone knew that Mr Murthy was coming back and that many investors will see this as a positive development. There is a prima facie suspicion of insider trading. (Read: Someone knew Narayana Murthy is coming back and traded on it)  
     
    In 2014, Sudhir Valia, executive director of Sun Pharma bet big in the scrips of Ranbaxy Laboratories it was bought for $4 billion by Sun. Over six trading days, prior to the announcement of its acquisition by Sun Pharma, shares of Ranbaxy had rallied 34%.  
     
    According to information available on the BSE, Silverstreet Developers, a firm in which Mr Valia was one of the partners, were found buying stake in Ranbaxy since December quarter of 2013. Silverstreet Developers LLP's stake in Ranbaxy was 1.41% as on December 2013 end. The stake increased to 1.64% at the end of March 2014. And days after this, Sun Pharma announced the big takeover. (Read: Was Sun Pharma's Valia betting big on Ranbaxy? & Insider trading in Ranbaxy?)
     
    During the same year, there were massive volumes and a hefty price rise in ING Vysya scrip one month before the Kotak Mahindra Bank merger deal. At the beginning of October 2014, the 1,000 ING Vysya shares were worth just 586 shares of Kotak Mahindra. This value went up marginally, but soon dropped to 573 shares of Kotak Mahindra for 1,000 shares of ING Vysya. From then on, it started gaining momentum, and reached up to 704 shares of Kotak Mahindra, as per the closing price on 20 November 2014, the date of the announcement. And what was the merger ratio? 725! (Read: Insider trading in ING Vysya stock?)
     
    In July 2018, Moneylife wrote how directors and promoters of BK Birla group company Kesoram Industries may have allegedly indulged in large-scale insider trading in the process short-changing minority shareholders hundreds of crores.
     
    As of 31 March 2015, Kesoram held 27.46 lakh shares of Century Textiles. On 22 March 2016, Kesoram sold all these shares to Camden Industries for Rs141 crore in a bulk deal. In FY17-18, Kesoram invested another Rs400 crore in Cygnet Industries, its wholly owned subsidiary. Cygnet Industries used this amount to buyback 27.46 lakh shares of Century Textiles from Camden Industries in three transactions on 5th, 11th and 12 December 2017; for Rs355 crore. Thus, it is alleged that Camden Industries made a clean profit of Rs214 crore. 
     
    Then Cygnet Industries sold these 27.46 lakh shares of Century Textiles to Pilani Investments, a promoter entity of Kesoram, in two transactions on 7th and 14 June 2018, for Rs255 crore and in the process realised an allegedly loss of Rs100 crore. 
     
    In this entire round tripping, Camden Industries allegedly made a profit of Rs214 crore but Kesoram shareholders lost Rs100 crore through Cygnet Industries. Also during FY15-16, Kesoram had through a slump sale, sold its spun pipes and chemical business to Camden Industries for Rs400 crore. These businesses were again bought back by Kesoram in FY17-18 for Rs422 crore.
     
    Kesoram, however, had denied that Camden Industries is a related party in terms of provisions of the Companies Act 2013 and SEBI Regulations 2015. (Read: Did Directors of Kesoram Industries Indulge in Insider Trading and Short-change Minority Shareholders?)
     
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    COMMENTS

    RealEstateDealStreet

    1 year ago

    Corruption is not only in politics but in the Indian corporate sector too.

    Stock manipulation: Archit Organosys
    Archit Organosys, which manufactures chemicals, specialty derivatives and adhesives and sealants, claims to be of the leading chemicals companies in India. The surprising part is that, though the company’s website claims that it has maintained a steady growth and has ‘matured itself in capturing a major share in the market’ expanding  to the US, Europe, Middle East across 50 countries, nowhere in its annual report or website is there a mention of clients’ names. 
     
    Archit, which operated as Shri Chlochem Limited earlier, did not submit its shareholding pattern for the June 2011 quarter and did not appoint a whole-time secretary in 2003, according to www.watchoutinvestor.com. Shri Chlochem was suspended by the Bombay Stock Exchange in 2007 for not complying with its listing agreement. The suspension was later revoked. 
     
    The auditors, GK Choksi & Co gave a qualified opinion on the FY16-17 accounts, for non-provision of a liability of Rs1.5 crore that violated Accounting Standard 29 and also resulted in the understatement of current liabilities. 
     
    Sales fell 5% year-on-year (y-o-y), from Rs10.65 crore to Rs10.08 crore in the June 2017, and it made a loss of Rs1.94 crore compared to a profit of Rs0.46 crore. The average sales for the past 10 quarters have been Rs12.4 crore and the average net profit was Rs0.11 crore. Despite such poor results, the stock rose 478%, from Rs8.57 on 17 June '15 to Rs49.5 on 24 November '17. How the stock of a company with no growth and a qualified opinion on its financial statements shoot up so much? The regulators are not interested in finding out.
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    COMMENTS

    Gurupad S Parsi

    1 year ago

    Congrats to ML team for creating awareness about manipulated company so that investors are protected.Self-help is the best remedy for regulators red signal is normaly late.

    Raj Sharma

    2 years ago

    Feel bad when the respectable magazine covers a story citing a decade old issues. The reporter didn't even bother to look at the recent changes like the ongoing capex,
    management putting 25Cr of it's own capital through rights issue. I think your reporter need to do better job to justify his salary.

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