Penny stock entities under taxman’s lens

In a bid to crack down on bogus Long Term Capital Gains (LTCG), the Income Tax (IT) Department has initiated a fresh drive against penny stock companies. It has already initiated action against 95 entities and has now formulated an exhaustive Standard Operating Procedure (SOP) document to get more into the tax net.

Tax officers across the country have been asked to undertake a thorough investigation and send tax demand notices to all such companies where tax evasion is positively established by December 31. Although penny companies have been on the radar of the IT Department and the Finance Ministry for the last few years, only a small part of the illegal trade has been exposed so far.

A senior IT officer said tax evasion using penny stock companies started after the Finance Act (2004) came into force, when the Centre introduced Security Transaction Tax (STT) both at the time of purchase and sale of the shares. Consequently, STCG (Short Term Capital Gain) emanating from share transaction was revised from 30 per cent to 15 per cent. But the tax on LTCG was exempted.

“Later, the tax exemption become a major route for tax evasion, as operators acting in tandem with brokers and scrip promoters, came together and started to use this method for providing bogus long-term capital gains or losses,” the officer told BusinessLine .

The officer also pointed that IT officers have been asked to be especially vigilant about tax assessees purchasing shares of companies devoid of any fundamentals. Investment in a listed company without any major business, as seen from its earlier profit and loss accounts, and which do not have any fixed assets such as plant and machinery are sure shot bogus companies, the SOP states. The assessing officers have been told to look for price movement of scrips that is in a ‘bell shape’, which means a huge rise in price over a short span of time and then a sharp decline thereafter.

Modus operandi

Highlighting the modus operandi adopted by tax evaders, officials said the most important person in this entire process is the scrip operator — the central person who manages the overall scheme of the scam. This operator maintains a complex nexus of various bogus entities and is also in control of some companies whose shares are listed on the stock exchanges. He also maintains a close nexus with share brokers.

Any person desirous of becoming scrip operator needs to have control over various bogus entities including companies/firms/ proprietorship concerns popularly known as Jama-Kharchi entities. Thus the entry operators, dealing in providing the bogus share capital/loan/cheque discounting are naturally the person who becomes scrip operators, as they already have a plethora of Jama-Kharchi entities with them, the officer said.

Jama-Kharchi entities are held in the name of various persons, who are either the operators own employees or any other person, who is ready to give his name, signature, PAN card etc for ₹2,000-10,000.

Many a time, operators also managed to list their own bogus Jama Kharchi Company in some stock exchange by bringing out IPO, which is subscribed fully by their own controlled Jama-Kharchi entities. Sometimes, when a scrip operator is not able to purchase a listed company or unable to get its own company listed, because of a financial crunch.

They get in connivance with promoters of a penny stock company, having a small capital base and 100 per cent shares are in control of the promoter, it allows the operator to manage each and every share of their company for some brokerage. They also sometimes benefit from high share prices, which can be used for taking the loans from the banks, the officer said.

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