If you’re trading in penny stocks you need not worry about income-tax hassles any more.

A recent ruling by the Mumbai Income Tax Appellate Tribunal (ITAT) directed I-T officials to not take penny-stock investors to task if a company they invested in or brokers they were dealing with are being probed by SEBI.

Listed companies having a market price less than their face value are often categorised as penny stocks.

Following ITAT’s recent observation, the Tax Department is likely to review several cases involving penny-stock investors, an income-tax official in Mumbai told BusinessLine .

SEBI, too, has started revoking its ban on several entities for trading in penny stocks and for tax evasion, as the latter was not a subject matter under its jurisdiction.

In September, the regulator revoked the trading ban imposed on 421 entities that had come under the scanner for alleged manipulation and misuse of stock markets for tax evasion.

Under the lens

There are hundreds of penny stocks available for trading but they are often looked at with suspicion by the market regulator and taxman as such stocks rank lower on fundamental parameters.

Also, volumes on these counters are comparatively low, while price swings are higher, inviting surveillance from SEBI and tax officials. At any point of time hundreds of penny stocks or brokers dealing in them are on the SEBI’s radar for suspicion of some or other deemed violation.

Greater clarity

ITAT has now ruled that these are not grounds for doubting an investor’s claim of return generated through penny stocks. Long-term capital gains (LTCG) arising out of stock market investments are exempt from tax.

But I-T officials disallowed such benefits on penny stocks under the pretext that either the security or the broker dealing in them were being probed by SEBI for manipulative practices.

In a ruling in September with regard to Ramkrishna Fincap, a penny stock, ITAT said that the assessing officer had nowhere alleged that transactions by an investor were not genuine trades but had still denied tax benefits citing a SEBI probe of the stock and the broker dealing in it.

“Merely because SEBI was probing the company and broker activity in it does not mean that assesee (investor) has entered into in-genuine transaction,” said Saktijit Dey and NK Pradhan, presiding over ITAT’s Mumbai bench.

The ruling set aside the tax department’s order disallowing the tax benefit on the penny stock. Ramkrishna had risen from around ₹3 to a high of ₹165 between 2003 and 2005 and one of its investors claimed LTCG benefit, which an I-T official assessed as bogus.

In the past few years, penny-stock investors have often found it difficult to claim tax benefits on penny stocks and were faced with intense scrutiny. But the ITAT ruling now clears the air and the stigma attached to penny stocks, a Mumbai-based broker said.

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