Tax department probes unlisted share transactions, tax evasion in OFS sales

I-T department's investigation wing has issued multiple notices to investors seeking details on how they determined the acquisition cost of unlisted shares and calculated capital gains

The Income Tax (I-T) Department has launched an investigation into transactions involving promoters, their associates, and anchor investors who purchased unlisted shares of companies and later offloaded them through offers for sale (OFS) when these companies went public, according to a report by The Economic Times.

 

In the past ten days, the department’s investigation wing has issued multiple notices to investors across several cities, seeking details on how they determined the acquisition cost of unlisted shares and calculated capital gains from their sale. Officials suspect that some investors may have inflated the purchase cost using a high fair market value (FMV) rather than the actual amount paid, in an attempt to reduce taxable capital gains.

 

 

Scope of I-T investigation

The probe covers a wide range of investors, including individuals, privately held firms, limited liability partnerships (LLPs), mutual fund schemes, banks, private equity and offshore funds, as well as Hindu Undivided Families (HUFs). Notices have been sent to investors who subscribed to unlisted shares before February 1, 2018, in companies that were listed between early 2018 and July 2024.

 

The investigation also examines whether some investors declared their acquisition cost based on FMV rather than the actual purchase price, potentially leading to lower tax liabilities. The tax department is particularly scrutinising cases where the FMV was determined using valuation methodologies that may have resulted in artificially high acquisition costs.

 

Company records under scrutiny

The tax department has also approached companies, requesting details of investors, subscription dates, and stock allotment dates. These details help authorities establish the holding period, which is crucial in determining applicable tax rates.

 

For the years under investigation, long-term capital gains were taxed at 10 per cent, while short-term gains were taxed at 15 per cent. These rates were later revised to 12.5 per cent and 20 per cent, respectively. The authorities are cross-verifying company records with data from the Ministry of Corporate Affairs (MCA) to identify discrepancies in share allotment dates.

 

Tax implications of investigation

The Finance Act (No. 2), 2024, introduced retrospective changes to the calculation of acquisition costs for shares sold through an OFS. Previously, there were four methods investors used to determine capital gains:

1. Actual cost of acquisition
2. Indexed cost of acquisition (adjusted for inflation)
3. Fair market value (FMV)
4. Undefined cost

 

The amendment has impacted the first, third, and fourth scenarios, enforcing a standardised acquisition cost for OFS transactions. The tax department is expected to examine these cases closely.

 

Concerns over ‘benami’ transactions

Beyond tax evasion, the Income Tax Department is also examining the legitimacy of the funds used in these transactions. Officials suspect that some cases may involve ‘benami’ (proxy ownership) arrangements, where the actual investor might not have had the financial capacity to buy the shares independently.

 

One of the key concerns is the possibility of cash against cheque deals, where an investor pays for shares through banking channels but later receives cash in return, effectively laundering undisclosed income.

 

The outcome of this investigation could have significant implications for future OFS transactions and the taxation of unlisted shares in India.