IT dept initiates major probe against penny stock traders

The Income Tax department has initiated a countrywide probe against hundreds of entities and individuals who are suspected to have evaded tax and generated black money by investing in 'penny stocks' at the stock exchange.
Officials said the taxman stumbled upon the cases after the department's Kolkata investigation wing, last year, acted against a "large number" of firms and entities dealing in penny stocks in their jurisdiction and few other inter- connected regions.
The probe found share prices of these stocks were "artificially" being raised on the exchanges in order to register "bogus" or fake claims of Long Term Capital Gains (LTCG) or Short Term Capital Loss (STCL).

While penny stock refers to shares of small public companies that trade at low prices per share, the earnings made from these are manipulated and shown as LTCG or STCL in order to evade full or partial tax on income made through this means.
LTCG or STCL carry tax exemption.
While a senior IT department official refused to give an exact amount of the tax evaded through this modus operandi, he said the figures could be "as much as Rs 500 crore".

These stocks are prone to manipulation and have been earlier reported by probe agencies and market regulator SEBI to have been used in converting black money into white.

IT department's Kolkata probe wing, official sources said, had last year conducted "extensive" investigations and launched raids against those indulging in penny stocks trade in the eastern part of the country.
Sources said after "hundreds of" such entities were probed, it was found many of the operatives have businesses across India and are assessed in different regions and hence the taxman has across the country have been asked to conduct a thorough probe against them.
They said while the department will raise tax demands against those who are found in contravention of IT laws, the cases will also be referred to the Securities and Exchange Board of India (SEBI) for action at their end.

Sebi, in a major clampdown on such entities recently, had debarred over 1,000 entities from the capital markets after they were found to be misusing stock exchange platforms for tax evasion to the tune of more than Rs 15,000 crore.
It had also suspended trading in shares of as many as 167 companies, while the regulator has written to the Income Tax department in nearly 100 cases where more than 1,800 entities are suspected to have traded in shares valued beyond their disclosed income.