C&AG raps I-T Dept for not turning its lens on assessees dealing in penny stocks and getting LTCG benefit

Our Bureau New Delhi | Updated on September 23, 2020

The 2018-19 Budget, had after a gap of 14 years, reintroduced 10 per cent tax on LTCG exceeding Rs 1 lakh from sale of shares.

Surprised over not 100% coverage under NPS

The Comptroller & Auditor General (C&AG) has observed that Income-Tax Department failed to scrutinise Income Tax Returns (ITRs) of those who traded in penny stocks and claimed tax benefit.

In a separate report, C&AG said even after 15 years of introduction of National Pension Scheme (NPS), rules on service conditions and retirements have yet to be finalised.

Direct taxes

In its report on Direct Taxes, C&AG highlighted the issue of assessees trading in penny stock and talking benefit of long-term capital gain (LTCG). Penny stocks are those that trade at a very low price, have very low market capitalisation and are mostly illiquid. Trading in these stocks are normally seen as highly speculative.

“We observed that the ITRs of the assessees who traded in the shares of penny stock companies were neither selected for scrutiny nor reopened for scrutiny despite the ITD having information of claiming LTCG, “ the report said while adding that the Income Tax Department failed to issue notices for filing ITRs, to the assessees who were involved in trading penny stocks, but have not filed their ITRs.

“Even Non-filers Monitoring System had not been utilised effectively to identify such non-filers,” it mentioned.

The auditor was highly critical stating that the Tax Department did not have any systemic approach to deal with cases of beneficiaries traded in penny stock as in some cases entire sales consideration was disallowed whereas in some cases only claimed LTCG was disallowed.

In order to remove these shortcomings, it has been advised that The ITD may design CASS (Computer Aided Scrutiny Selection) parameters in such a way that all the relevant information with the department, whether from ITR or other sources, may be used to select the cases for scrutiny.

Income tax refunds

C&AG highlighted the issue of delay in refund on account of wrong calculation. “The interest was wrongly computed by ITD, in 76.68 per cent of cases of the sample of 6,217 selected out of a population of 8,35,727 records, either due to systemic deficiencies or due to incorrect interventions by the AOs, (Assessing Officer),” it said.

It also mentioned that incorrect levy of interest (excess levy) by AOs using modification feature of AST led to blockade of refunds due to the assessees. “This was not only violation of provisions of law but also resulted in non-fulfilment of Citizen’s Charter. On the one hand the efficiency of the department was affected and on the other there was undue harassment to the assessees,” it mentioned.

Here it has been advised that the IT system for direct taxes needs to be designed in such a way that it should ensure zero or minimal physical interface between the assessee and the tax officers. The government may consider the IT System for direct taxes being placed at arms length from CBDT, with an independent governmental body or organization.

Nation Pension Scheme

NPS was introduced from January 1, 2004 for new entrants to Central Government service (except Armed Forces) replacing the old pension system. C&AG did the performance audit of the scheme to get an assurance that the system for NPS was established as envisaged; all eligible Government Sector employees had been covered under the NPS; and due contributions (subscribers’ and employers’) were timely deducted and remitted to Trustee Bank.

However, it found that even after 15 years from introduction of NPS, rules on service conditions/ retirement benefits were pending finalisation. There was no assurance that all Nodal Offices and 100 per cent of eligible employees were covered under NPS, even after 15 years of implementation.

Also, Out of 66-68 Ministries/Departments between 2012-13 and 2018-19, not all had constituted the Monitoring and Overseeing Committees comprising of Joint Secretary, Principal Chief Controller of Accounts/ Chief Controller of Accounts and Financial Advisers rendering the implementation weak, it said.

Published on September 23, 2020

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