Sale in course of Import vis-a-vis Works Contract


Whether sale in course of import is permissible when the transaction is for execution of works contract?


Under VAT era one of the important Constitutional exemptions was for sale in course of import. A sale transaction taking place in course of import could not be taxed as per Article 286 of the Constitution of India. The transaction in course of import was defined in section 5(2) of CST Act, 1956, which reads as under:

“S.5. When is a sale or purchase of goods said to take place in the course of import or export –

(1) —-

(2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India……..”

It can be seen that two limbs were covered by above section. One, sale occasioning import and second, sale by transfer of documents of title to goods before goods cross Customs frontiers of India. Many a time dispute arises about first limb, as to what is its scope.

There were disputes as to whether such claim of sale in course of import is eligible when the transaction is for execution of works contract. There are number of pronouncements. However, the recent one decided by Hon. MST Tribunal in case of Larsen and Toubro Ltd. – Scomi Engineering, BHD (VAT App. No. 353 of 2015 dated 30-10-2017) can be analysed to see the scope of said exemption.

In this case the facts were that M/s. Larsen and Toubro Ltd. – Scomi Engineering, Berhad (“LTSEB” for the sake of brevity), Consortium was a registered dealer under the Maharashtra Value Added Tax Act, 2002 and under the Central Sales Tax Act, 1956. The Mumbai Metropolitan Regional Development Authority invited pre-qualification applications from entities interested for the design, development, construction, commissioning, operation and maintenance of Monorail System on turnkey basis in Mumbai Metropolitan Region. Since the project involved civil work as well as manufacture of goods of rolling stock, designing etc., and since Larsen and Toubro Ltd. was having expertise in civil work and Scomy Engineering, Berhad (based in Malaysia) has expertise in manufacture of goods, designing, installing etc., both of them jointly submitted an application for qualifying to bid in response to the said request of MMRDA. Thereafter, MMRDA issued a request for proposal inviting bids for the design, development, construction and maintenance of Monorail System. Accordingly, the consortium of Larsen and Toubro Ltd. and SEB submitted its response and submitted a proposal for manufacture and import amongst others of rolling stock from Malaysia. The joint bid was accepted by MMRDA by a letter of acceptance dated 7-11-2008. Accordingly, a contract was executed between MMRDA on one part and consortium of Larsen and Toubro Ltd., and SEB on the other part on 9-1-2009. By this contract, MMRDA awarded to LTSEB a contract for planning, designing, development, construction, manufacture, supply of Monorail System from Sant Gadge Maharaj Chowk to Wadala and from Wadala to Chembur Station. Larsen and Toubro and SEB thereafter divided their respective scope of work in accordance with the bid submitted by them and a contract was executed between two members of the consortium LTSE and SEB on 29-3-2010. In this contract, the portion of the work related to SEB was recorded for the design and supply of certain goods i.e., rolling stock, signaling equipment, switch equipment and deco equipment from outside India. These goods were manufactured by SEB in Malaysia in terms of the bid submitted by MMRDA. The appellant LTSE – SEB filed an application for determination of disputed question to the Commissioner of Sales Tax. By this application, the following question was referred to the Commissioner for determination – “Whether the rolling stocks imported pursuant to the contract with MMRDA and supplied in the course of execution of Monorail Project constitutes a transaction in the course of import u/s. 5(2) of the CST Act, 1956 and not liable to tax u/s. 8(1) of the MVAT Act, 2002?”

The Commissioner of Sales Tax rejected the claim of exemption under section 5(2) of CST Act. Hence this appeal was filed before Tribunal.

The main submission on behalf of appellant was that the transaction of import was integrated with local works contract transaction.

For throwing light on same various factors of transaction were explained like, specifications for manufacture, imported goods not usable elsewhere and meant only for given contract with MMRDA and other clauses in contract about inspection/testing etc., were pointed out.

Based on above facts it was submitted that either it is one direct import transaction between appellant and MMRDA or even if they are considered to be two sales one between Scomy Engineering, Berhad (based in Malaysia) and Consortium and other between consortium and MMRDA, still the second transaction is exempt as it is the sale which has occasioned import and hence exempt.

Reliance was place on Hon. Supreme Court judgment in case of K. G. Khosala (17 STC 473)(SC) and ABB Ltd. (55 VST 1)(Delhi).

Sales Tax Department argued that no privity of contract has been made out. There are two sales and the local sale cannot fall under section 5(2). Reliance was placed in case of K. Gopinathan Nair and Others v. State of Kerala (97 STC 189)(SC). The manufacturing as per specification was disputed on ground that only requirements were stated by MMRDA and specification are given subsequently, which cannot satisfy condition of inextricable link.

Tribunal Observations

Tribunal thereafter analysed the agreements. Tribunal found that the specifications are mentioned in contract with manufacturing place at Malaysia.

About nature of consortium existence and inextricable link, Tribunal observed as under:

“20. The issue as to whether a nexus appears in the contract between MMRDA and movement of goods from Scomi Engineering, Malaysia. One has to read the terms of the contract as a whole. It has been argued before us by the learned Senior Counsel Shri Sridharan that Larsen and Toubro and Scomi Engineering formed a consortium which is neither partnership firm nor a company and nor an association of persons. It is an unincorporated consortium. It can be seen that unincorporated consortium cannot be a legal entity in the eyes of law. Scomi Engineering, which is one of the members of the consortium is itself a manufacturer and supplier of rolling stock from Malaysia. This suggests that though consortium members are executing the contract jointly, they have separate existence. If the contract is perused, on page 140 of the compilation containing contract agreement, it is mentioned in para A.1.1 that Larsen and Toubro Ltd. is India’s largest engineering and construction conglomerate with additional interest in electrical, electronics etc. Whereas in the same para, it is also mentioned that Scomi Engineering, Berhad (SEB) is a public limited company listed on the Kuala Lumpur Stock Exchange. His business focus is in the energy and logistic engineering which comprises OCTG machine shops and transportation engineering such as monorail, buses and special purpose vehicle. It is further mentioned that wholly owned subsidiary Scomi Rail, Berhad is renowned for its monorail system. These recitals in the contract show that Larsen and Toubro and Scomi though formed a consortium, they were specialised in two separate fields and each had shared execution of that part of work in which each was specialised. On page 70 of the contract, work share apportionment between consortium members is demarcated. It shows that 30% of the project value of rolling stock will be shared exclusively by Scomi Engineering. Similarly, 8% of the project value of E & M work will be shared exclusively by Larsen and Toubro. It shows that rolling stock is the responsibility of SEB whereas automatic fare collection system is the responsibility of Larsen and Toubro. Thus, the contract shows that the consortium members will operate in two separate fields, one with engineering work and the other with manufacturing, designing and maintenance of rolling stock. In the present case, Scomi Engineering, Berhad Malaysia which supplied rolling stocks is one of the members of the consortium and therefore the question naturally arises as to whether the person can sell goods to himself. Moreover, the parties are covered by the contract between MMRDA and consortium and therefore we have to look into the terms and conditions of the said contract to examine as to whether the movement of goods from Malaysia was in pursuance of the contract between consortium and MMRDA. The terms clearly show that the contract was executed by MMRDA with full understanding that Scomi Engineering, Malaysia is one of the members of the consortium which is expert and skilled in designing and manufacturing of rolling stock and the rolling stock will be manufactured in Malaysia and will be supplied to MMRDA. Therefore, there is merit in the argument of Shri S. Sridharan that merely because rolling stocks are first sent to Nhava Sheva port and they are delivered to consortium and then consortium delivered the same to MMRDA, inextricable link is not broken down.”

Tribunal observed about various judgments cited before it. Tribunal also referred to various other documents filed before it. About application of judgment cited by Sales Tax Department, Tribunal observed as under:

“38. Since Shri Sonpal has argued that the principles laid down by the Hon’ble Supreme Court in the case of K. Gopinathan Nair are not fulfilled in the present case, we have perused the said authority. The main principles laid down in that case are that a sale or purchase can be treated to be in the course of import if there is a direct privity of contract between the Indian importer and the foreign exporter and the intermediary through which such import is effected merely acts as an agent or a contractor for and on behalf of the Indian importer. Thus, it is also laid down that there must be either a single sale which itself causes the import or is in the progress or process of import or though there may appear to be two sale transactions they are so integrally interconnected that they almost resemble one transaction. If these tests are considered and the present contract is seen, it must be seen from the documents filed by appellant that though there was no express condition in the covenant that rolling stock should be imported from Malaysia, such understanding between the parties can be inferred since Scomi Engineering, BHD is one of the members of the consortium and in the document of contract, it is mentioned that Scomi Engineering has all the manufacturing unit in Malaysia. Section 5(2) of the CST Act requires that movement of the goods from foreign country should be in pursuance of the contract. From the terms of the contract, it appears that the intended movement of goods from Malaysia was envisaged by terms of the contract and it was within the contemplation of the parties and therefore it can be reasonably presumed that such movement was to fulfil the terms of the contract. When it is so, it has to be said that the goods moved from Malaysia as a part of single transaction. Even if for the sake of argument, it is held that there are two transactions of sale between MMRDA and consortium and the other between Scomi Engineering, BHD Malaysia and consortium, then also the two transactions are so connected integrally that they are inseparable. Therefore, we are not inclined to accept the argument of Shri Sonpal that conditions laid down in K. Gopinathan Nair’s case are not satisfied in this case.”

Observing as above, Tribunal concurred with appellant that its sale is in course of import covered by section 5(2) of CST Act.

Thus, the legal position is that the exemption under section 5(2) of the CST Act is eligible even though the transaction is works contract. However, the inextricable link between import and local transaction is required to be brought on record.

When the transactions are regarding specifically made goods then to establish the link is comparatively smooth. However, when the goods are standard goods more detailed contracts are required. Thus, section 5(2) exemption can be claimed with proper supporting documents.

[Direct Taxes]

Query No. 1 : (Claim of TDS on interest income)

A tax consultant is maintaining accounts on cash basis.

During the F.Y. 2016-17 amount has been given on loan @ 15% p.a. interest. On March 31, 2017, the borrower deducted TDS @ 10% on interest income accrued and paid to Department which has been claimed by lender in his I.T. Return for Assessment Year 2017-18 but did not show interest income because books are maintained on cash basis.

Hence, the querist wishes to know –

1) Whether the Department can tax the interest income accrued and not received as TDS claimed.

2) Whether the Department can refuse to grant credit of TDS certificate as income accrued thereof is not shown taxable.


Section 198 reads as under:

“All sums deducted in accordance with the foregoing provisions of this chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received”.

Thus section 198 is an enabling provision treating the tax that is deducted at source as the income of the payee. This stands to reason because the assessee would get credit for the same from the Assessing Officer on his filing the return.

Merely because, tax deducted is treated as income, it does not mean that the receipt from which tax is deducted should always be taxable; i.e., where deductor may deduct tax on credit of interest in his books in favour of deductee, but deductee may be keeping his accounts on cash basis (like in present case), may be taxable only on receipt basis. So, it depends on method of accounting followed by the assessee-deductee.

The Mumbai Tribunal in ITO v. PHE Consultants [64 419] in para 8 of the decision states as under:

“It is pertinent to note that the provisions of section 198 though states that the tax deducted at source shall deemed to be income received, yet it does not specify the year in which the said deeming provision applies. However, section 198 states that the income is deemed to be income received” The provision of section 145 of the Act state that the income of an assessee chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Hence a combined reading of provisions of section 198 and section 145 of the Act, in our view makes it clear that the income deemed to have been received u/s. 198 has to be computed in accordance with the provisions of section 145 of the Act, meaning thereby the TDS amount per se cannot be considered as income of the assessee by disregarding the method of accounting followed by the assessee”.

So, in this case querist maintains his books of account on cash basis, hence, TDS deducted has to be shown as his income and same can be claimed as TDS. Thus Department cannot refuse to grant credit for TDS paid though interest income is not shown.

Query No. 2 : (Date of acquisition)

A flat booked in 2013 and paid the amount in installments since then. First payment and registration done in 2017. Possession given in 2017 on registration though almost full payment was given on allotment in 2013 and subsequent installments paid between 2013 & 2016. What will be the date of acquisition for taxation of capital gains & indexation of payment?


The Bombay High Court in CIT v. Mrs. Hill J. B. Wadia [216 ITR 376] has observed that “what we have to see is whether the assessee has acquired a right to a specific flat in such a building which is being constructed by the builders / society and whether he has made substantial investment within the prescribed period which will entitle him to obtain possession of the flat so constructed and in which he intends to reside. The material test in this connection is domain over the flat and investment in it”. So, on the basis of the fact that querist has invested substantial amount in 2013, though possession and registration was in 2017, the date of acquisition would be 2013 for taxation of capital gains.

Similarly the Punjab and Haryana High Court in Mrs. Madhu Kaul v. CIT [363 ITR 54] held that the flat was allotted to the assessee on June 7, 1986 by a letter conveyed to the assessee on June 30, 1986. The assessee paid the first installment on July 14, 1986 thereby confirming a right upon the assessee to hold a flat which was later identified and possession was delivered later did not detract from the fact that the allottee was conferred a right to hold on issuance of an allotment letter. The payment of the balance installments, identification of a particular flat and delivery of possession were consequential acts that related back to and arose from the right conferred by allotment letter. So indexation of payment would be from the year in which the querist was holding flat.

Query No. 3 : (Agricultural income of Co.)

A Co. has only agricultural income & income from sale of rural agricultural land (not capital assets). Can there be any liability under AMT?


From the fact, it is apparent that querist is a company and therefore no Alternate Minimum Tax (AMT) would be applicable. For the companies Minimum Alternate Tax (MAT) would be applicable u/s. 115JB of the Act.

So while calculating “book profit” under Explanation 1 to section 115JB(1), the agricultural income falling u/s. 10(1) to be excluded as per Explanation (ii), which reads as under:

“The amount of income to which any of the provisions of section 10 (other than provisions contained in clause 38 thereof) or section 11 or section 12 apply, if any such amount is credited to the statement of profit and loss.”

Query No. 4 : (Foreign Remittance)

A daughter of ‘A’ settled in U.S. (Green Card Holder) want to acquire house in US. for which Indian ‘A’ (parent) wants to remit 50,000/- US dollars from India. Is it required to obtain permission of RBI or any other Authority?


No, as per Liberalised Remittance Scheme (LRS) updated as on August 2,2017 vide Notification No. RBI/FED/2017-18, a resident individual through authorised dealer may remit up to USD 2,50,000 per financial year to any permitted current or capital account transactions or a combination of both. The scheme is not available to corporates partnership firms, HUF, trust. The permissible capital account transactions inter-alia, includes purchase of property abroad.

A. Principles of natural justice

1. At the time of preferring the appeal, the appellant had its place of business at its erstwhile premises, but by the time the appeal was listed for hearing, the appellant had shifted to a new address. Notice of the final hearing before the Tribunal was not served on the appellant though the new address was known to the Department, as was seen from the cause title of the appeal memo. The appellant did not therefore have the opportunity to appear before the Tribunal and present its case or to distinguish the judgment which was sought to be relied upon by the Tribunal.

Held: Without entering into merits of the case, on the ground that when the fact of the change in address was known, the appellant not having been served notice on the new address was violative of the principle of natural justice. The matter was therefore remitted back to the Tribunal.

[Expo-Fyn Electricals & Electronics v. Commissioner of Central Excise, Jaipur-I (2018 (8) GSTL 160 (Raj.)]

2. The Tribunal considered the grounds of appeal submitted, but passed its order without discussion, directly relying on previous case law on the issue, and dismissed the appeal. This action was challenged before the Hon’ble High Court.

Held: The Tribunal is a final fact-finding authority. Though the Tribunal had considered the grounds of appeal, there was no discussion. Further the reliance placed on the earlier case law could not be approved in the light of decisions of the Hon’ble Supreme Court in previous cases including
Tata Engineering & Locomotive Co. Ltd. v. Collector of Central Excise, Pune
[2006 (203) ELT 360 (SC)]
where it was held that it was not sufficient to give conclusions alone, and that it was necessary to give reasons in support of the conclusions arrived at. In the absence of such reasons, the matter was remitted to the Tribunal to pass orders on the appeal on merits and in accordance with law.

[Nandhi Spinning Mills (P) Ltd. v. Commissioner of C.Ex., Salem (2018 (8) GSTL 103 (Mad.)]

B. Demand of interest

3. The petitioner challenged a demand of interest stating that that no notice was issued to the petitioner prior to issuance of the impugned demand. The demand was also challenged on the ground that the basis of quantification had not been communicated.

Held: The contention that no notice was issued prior to issuance of impugned demand was liable to be rejected, as the demand for interest is consequent upon the order-in-original and payment of interest is automatic. However, the petitioner was entitled to know how the amount of interest had been arrived at, and therefore the first respondent was directed to issue a fresh demand giving details as to how the interest had been computed and thereafter, proceed to recover the interest in accordance with law.

[Thangam Steel Ltd. v. Asst. Commissioner of Central Excise, Chennai-II (2018 (8) GSTL 127 (Mad.)]

C. Refund of encashed bank guarantee

4. The petitioner filed a writ petition challenging an order rejecting the petitioner’s application for refund of an amount that had been recovered by the Department by encashing a bank guarantee on the basis that the petitioner had not fulfilled its export obligations in terms of an advance licence. The reason for rejecting the refund application was that the petitioner had not filed documents evidencing enforcement and deposit of the said amount.

Held: While the respondent Department could not be found fault with for encashing the bank guarantee, since the petitioner had subsequently produced the redemption letter from the Competent Authority / Additional Director General of Foreign Trade, the respondent Department was bound to honour the redemption letter and effect the refund. The respondent could not call upon the petitioner to prove when the bank guarantee was encashed, and it was for the Department to verify their records.

[R.K. Industries-IV v. Commissioner of Customs (Sea), Chennai-IV (2018 (8) GSTL 110 (Mad.)]

D. Judicial discipline

5. The petitioner was engaged in the business of textile printing and processing of fabrics. The petitioner made a payment of duty, which was sought to be increased by the Deputy Commissioner on enquiry. Aggrieved by such order, the petitioner preferred appeal to the Commissioner (Appeals), who reduced the duty amount. The petitioner therefore filed an application for refund of the excess duty, which application was filed within the period of two months. The Department ordering the refund but directed payment to the Consumer Welfare Fund, against which the petitioner filed another appeal before the Commissioner (Appeals), who held that since the duty had been paid on demand, there was no question of the petitioner passing on the duty burden to any consumer, and therefore, the petitioner was entitled to refund in its entirety. The lower authority then held that the refund claim was barred by limitation.

Held: The attempt of the lower authority to circumvent the order of the Commissioner (Appeals) could not be encouraged, and such attempts have been deprecated by the Hon’ble Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd. [1991 (55) ELT 433 (SC)] where it was held that the Department has to unreservedly follow the orders of appellate authorities unless operation thereof has been suspended by a competent court, and further that the mere fact of an appeal having been filed against the order was no ground for not following it. These were sufficient reasons to hold that the impugned order deserved to be set aside.

[Padma Raghvan v. Assistant Commissioner of C.Ex., Mettupalayam (2018 (8) GSTL 108 (Mad.)]

E. Customs valuation

6. The appellant is a subsidiary of Reebok International Ltd. (RIL), and regularly imported various sports goods from their parent, bearing the brand name ‘Reebok’. They had made an application before the Customs Special Valuation Branch, New Delhi for approving the transaction value of such imports from related parties. The Directorate of Revenue Intelligence investigated the allegation that certain costs pertaining to advertising and promotions were not included in the assessable value of the goods. Following the investigation and issue of show cause notice, an order was passed rejecting the assessable value of goods, and confirming the demand of differential duty with interest and penalty in respect of alleged undervaluation on the basis of a Distribution Agreement which required expenditure on advertisement and promotion of not less than 6% of the total invoice value which was considered to be a condition for sale of goods and to be added per Rule 10(1)(e) of the Customs Valuation Rules.

Held: For the payments to be addable, they should be made as a condition of sale, and should not already be included in the price actually paid. There was no doubt that the amounts were not already included in the price. As the appellant was allowed to import goods in terms of the Agreement per which it would have to necessarily spend 6% of the invoice value on advertisement and promotion, it was an obligation for import of the goods. Also, per other stipulations in the Agreement, RIL UK was controlling every aspect of promotion, and such promotion and advertising was towards promotion of the ‘Reebok’ brand as a whole and not only in respect of goods being imported – therefore, it was evident that the advertising and promotion expenses were incurred as a condition of sale and on behalf of seller and may be considered as satisfying the obligation of the seller.

It was also held that it could not be concluded in the facts of the present case, that the expenditure has been incurred by the appellant on their own account to apply the Interpretative Note of Rule 3(2)(b).

[Reebok India Company v. CC 2018-TIOL-561-CESTAT-Del.]

F. No Education Cess when Excise Duty exempted

7. In order to encourage the setting up of manufacturing units in industrially backward areas like the North-Eastern States, goods manufactured and cleared from units located in these States were exempted from Central Excise duty by notifications issued by the Government of India. The exemption methodology in these notifications was that the manufacturer was initially supposed to pay the excise duty leviable on such goods at the time of clearance as per the Central Excise Tariff and the refund thereof insofar as the duty was paid in cash after utilisation of the CENVAT credit available. Following the imposition of Education Cess and Higher Education Cess, which were levied as surcharges on the excise duty, the dispute before the Hon’ble Supreme Court was whether the Education Cess and Higher Education Cess was also liable to be refunded in terms of the exemption notifications. Whereas one view was that the cesses were refundable along with the Central Excise duty, there was another view that the Department was seeking to apply, that there was no obligation on the Department to refund the cesses as the exemption notifications only exempted the Central Excise duty.

Held: Divergent views have been expresses by the CESTAT and different High Courts, in which scenario it is important to examine how the Department has viewed the position on refund of the cesses when the Central Excise duty has been exempted. Referring to the circulars issued by the CBEC in the context of the cesses being levied on Central Excise duty and service tax, it was noted that the Government had itself taken the position that where the Central Excise duty or service tax was exempted, the cesses would not be payable, and that the Department was bound by these circulars. Further, it was rational to accept the view set out in the said circulars as Education Cess being a surcharge levied on Central Excise duty, it could be inferred that when no Central Excise duty was payable as it was exempted, there would not be any Education Cess as well.

It was further held that when the CESTAT had in earlier judgments held that the cesses were not refundable, another co-ordinate bench of the CESTAT could not take a contrary view, and that judicial discipline warranted reference to a Larger Bench. It was also noted that when two views were possible, one which favoured the assessee had to be adopted.

[SRD Nutrients Pvt. Ltd. v. Commissioner of C.Ex., Guwahati (2017 (355) ELT 481 (SC)]

The movement of consignments from source to destination in an efficient manner is the key for development and success of economy. Infrastructure as well as facilities involved for multimodal transport in the commercial world in India needs to be supported by the robust digital infrastructure for seamless movement of consignments and recording of transactions as well as their intelligent verification ensuring compliance of law. Proper recording of every transaction is a need for healthy competitive business where there is no scope of unhealthy competition due to possibility of tax evasion. The integrated solution having required attributes is also necessary for the collection of the proper and correct taxes essentially needed for the citizens of the country.

The ‘Goods & Services Tax’ no doubt has been planned with this objective and probably after initial hiccups it may stabilise and very soon achieve the goals. The "self-policing mechanism" i.e., matching of Outward supply with the Inward supply and consequently ensuring correct claim of ITC as well as due payment of tax by one and all was proclaimed as one of the effective advantage of GST. During the planning stage for GST it was propagated by the policy makers that all the checkposts on the borders of the States will go away and there would be seamless movement of goods from one corner to another corner of the country. This idea was well received not only by Trade & Industry but also by the Transport and Logistic sector, it was expected that in the GST regime the system of movement of goods and doing business in the country is going to tremendously change. Everyone of us was in great hope"¦"¦, but this hope has shattered as some of the States could not accept this idea, as administration was not able to garner the required trust of business
and industry to implement GST without ‘E-way Bill’.

Suddenly, the idea of ‘National E-way Bill’ cropped-up and hurriedly legal provisions now contained in Section 68 of CGST Act, 2017 and Rules 138 to 138-D of the CGST Rules 2018 were framed and incorporated into draft GST law just before the start of so-called very short public debate. At that time also the policy makers and law framers reassured the Trade & Industry including Transport and Logistics sector that the new system of GST would ensure hassle free and seamless movement of goods throughout the country.

The question that arise ‘Why E-way Bills’?

The ideal situation as well as one of the prime aim of introduction of GST in the country as "Tax Reform" was to make movement of goods easy and hassle free without any need of personal intervention by the Officers of the Tax Checkposts or on road by the Officer of Mobile Squad.

Since, E-way bill is introduced by Rule 138 of the CGST Rule, 2018 the other provisions such as following comes into play:

Rule 138-A which prescribe – Documents and Devices to be carried by a person-in-charge of the conveyance or

Rule 138-B which prescribe – Verification of documents and conveyance,

Rule 138–C which prescribe – Inspection and verification of goods; or

Rule 138–D which prescribe – Uploading of information regarding detention of vehicle etc.

Without these gripping provisions under GST Act there is no point for prescribing ‘E-Way Bill’. Thus, once these draconian provisions have been placed on the statute whereby total tax along with equivalent amount of penalty i.e., 200% of the basic tax amount is required to be forcefully deposited for release of the consignment and vehicle, such powers are bound to be misused by inspectors or officers on road in the Mobile Squad due to the discretion and availability of opportunity of personal interaction. Removing the checkposts in GST be than just an eyewash and nothing more.

Just to give a simple and live example in the State of U. P., since 9th February 2018 large number of consignments were detained throughout the State by the Mobile Squad Officers only for the reason that ‘U. P. E-Sancharan Form’ was not available with the interstate consignment even though the optional ‘National E-way Bill’ was very much available with the consignment. More than 300 transporters or business dealers have gathered courage to approach Hon’ble Allahabad High Court for release of consignment without deposit of the required 200% of the amount of basic tax (IGST) even through there was no effective Notification prescribing verification of inter-State movement of goods from one State to another state. It is important that Hon’ble High Court has repeatedly ordered to release such consignments and vehicle without the deposit of cash and bank guarantee. The top administration of the State of
U. P. is still allowing this wrong and illegal practice since 9th February, 2018 which is against the spirit of seamless movement of consignments in GST.

If such type of attitude/approach continues in GST regime by same set ofAdministrative Officers who were earlier responsible to check the consignments in the erstwhile Trade Tax or VAT regime then probably one of the major objectives of implementation of GST will be frustrated and the positive effects will not be available to the Indian economy. Not only Central Government, but every State needs to frame such law and procedures, so that it could not be misused by anybody including the officials in the larger interest of the economy and nation.

The requirement and system of ‘E-way Bill’ could be dispensed with if "GSTN IT platform" of the Government ensures the correct matching of ‘Tax Invoices’ as recorded by the outward supplier and the inward recipient of the goods. Unfortunately, due to the reasons known to the Government in spite of GST in place for more than eight months, GSTN system has not yet taken any information of inward supply i.e., purchases etc., including Input Tax Credit in GSTR-2. Probably the in-efficiency of the Government IT Platform is forcing the requirement of introduction of the system of ‘National E-Way Bill’. Unfortunately, it is at the detriment of honest & fully complied Tax-payers.

Had there been a mandatory requirement as envisaged in GST Law of additionally uploading of "Tax Invoice" through Official Web Portal of the Government then there would have been no distinct need of creation of ‘E-way Bill’. This will not only eliminate the burden on the official web portal for separately issuing ‘E-way Bill’ for every transaction of ₹ 50,000/- or more for which ‘Tax Invoice’ has already been issued and recorded by the supplier. This will also save the precious time consumed by the employees of Trade & Industry including transporters avoiding duplicacy of work and possibility of wrong punching of any information while generating ‘E-Way Bill’. Further it will also save time and burden of again uploading of invoice data on web portal at the time of furnishing monthly returns i.e., GSTR-1 which will also relieve burden on IT platform making it comparatively free during the last days of return filing.

To my mind, the advantages as claimed by bureaucracy in favour of the requirement of ‘E-way Bill’ are much less than the disadvantages in the shape of repetition of work as well as enhanced burden on IT platform. Every action entails some cost to the stakeholder which is an avoidable burden on economy making transaction more cost effective, this should be considered by the policy makers in the larger interest of competitive business.

The biggest advantage as assumed and propagated by the administration is to stop the multiple re-use of the same ‘Tax Invoice’ on the same day for movement of more than one set of similar goods specially for the short distances across the borders of the States as the consignment is covered under ‘E-way Bill’, but my strong apprehension is that the procedure prescribed under Rules 138 to 138-D under Notification No. 12/2018 – Central Tax dated 7-3-2018 this aim could not be achieved as this notification provides that the cancellation of ‘E-Way Bill’ is possible within 24 hours by the supplier as well as rejection of ‘E-Way Bill’ by the recipient within 72 hours, this unscrupulous method may be adopted to hide the multiple transaction, so the aim to check the repeated movement of goods under one set of documents cannot be achieved by the newly designed system of ‘E-Way Bill’.

It is required that the fast and efficient digitally supported system should be put in place under which the transaction is automatically verified through RFID Tag for the individual consignment or group of consignments loaded in any mode of transportation without physical intervention or stoppage of vehicle.

The most important issue in GST concerning the ‘E-Way Bill’ is that this system is adversely impacting the basic philosophy of the Government of minimal interaction between taxpayer and the tax controller/tax inspectors. The philosophy of the present Government of minimal contact to avoid corruption seems to be not achieved, this may be against the roadmap of corruption free India.

Apart from this issue, the Government with open heart have considered many suggestions of Trade & Industry including Transporters & Logistics sector to provide better and unambiguous procedures in the reintroduced ‘National E-way Bill’ system under certain eventualities which may avoid many practical difficulties.

In the era of multimodal transportation the Government has to certain extent already envisaged the practical requirement that consignments may take various modes like road, rail, water-ways, sea or air during its transportation from source to destination and thus provided in ‘Rule 138A(1)(b) proviso’ that there is no requirement of ‘E-way bill’ in physical form or ‘E-way Bill’ number in electronic form or ‘E-way bill’ mapped on RFID device embedded on the conveyance when the goods are moving by rail or air or vessel. So only E-way bill is required to be kept by the person incharge of the vehicle when the goods are transported on road. The railway has been placed under responsibility to deliver the goods only when the recipient furnishes the valid copy of ‘E-way Bill’ for the consignment. Further the responsibility of generation of ‘E-way Bill’ has not been cast on the shoulders of railways or airways or vessel companies while a transporter in addition to a registered person being the supplier or the recipient may generate ‘E-way Bill’ if authorised in that respect.

Further, the transporter needs to be enrolled or registered on the ‘E-way Bill Portal’ of the Government to update details of mode/conveyance of transport in Part–B of E-way Bill 01 in respect of the transaction under movement, each transporter will be allotted a TRANSID (a unique number like GSTIN) for identification, it is important to note that the transporter must declare the details of all the warehouses and offices on the ‘E-way Bill Portal’ at time of obtaining TRANSID at GST Portal, this is necessary in order to avoid harassment from tax authorities during verification raids conducted at the warehouses or offices of the transport companies.

The well-designed intelligent and integrated system of reporting and verification of commercial transactions based on a robust Information Technology Platform could be a great help for faster and smoother movement of goods in the era of multimodal transportation.

An important question that arises for consideration after the enactment of the Goods and Services Tax (GST) Act, 2017 (both Central as well as State) is as to whether police can investigate a cognisable offence of evasion of tax under the GST Act by taking resort to Section 4(2) of the Code of Criminal Procedure (CrPC), 1973 and whether police has the power to conduct search and seizure in respect of a cognisable offence under the GST Act without specific power having been conferred on the police and/or the Bureau of Investigation which comes under the police department under the GST Act to investigate into any offence committed under the GST Act.

Section 132 of the Central Goods and Services Tax (CGST) Act, 2017 prescribes punishment for certain offences. It provides that whoever commits any of the offences enumerated in sub-section (1) of Section 132 of the Act, shall be punishable with imprisonment for different terms on the basis of the nature of offence. Sub-section (4) of Section 132 provides that notwithstanding anything contained in the CrPC, 1973, all offences under the Act, except the offences referred to in sub-section (5) of Section 132 shall be non-cognisable and bailable. Sub-section (5) of Section 132 provides that the offences specified in clauses (a), (b), (c) or (d) of sub-section (1) and punishable under clause (i) of sub-section (1) of Section 132 shall be cognisable and non-bailable. Sub-section (6) of Section 132 provides that a person shall not be prosecuted for any offence under Section 132 except with the previous sanction of the Commissioner. Section 134 of the Act of 2017 provides that no court shall take cognisance of any offence punishable under the Act of 2017 or the Rules made thereunder except with the previous sanction of the Commissioner, and no court inferior to that of a Magistrate of the First Class, shall try any such offence. Similar provisions are contained in the Assam Goods and Services Tax Act, 2017.

The offences specified in clauses (a), (b), (c), (d) of sub-section (1) of section 132 have therefore been made cognisable and non-bailable. As such whoever supplies any goods or services or both without issue of an invoice, in violation of the provisions of the Act of 2017 and the Rules made thereunder, with the intention to evade tax, or issues any invoice or bill without supply of goods or services or both in violation of the provision of the Act of 2017 and the Rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax or avails input tax credit using an invoice or bill without supply of goods or services or both or collects any amount as tax but fails to pay the same to the Government beyond the period of three months from the date on which such payment becomes due, are cognisable offences and the same are non-bailable.

Chapter XIV of the CGST Act, 2017 deals with powers of inspection, search, seizure and arrest. Section 67 of the Act confers power of inspection, search and seizure on a proper officer who should not be below the rank of Joint Commissioner. Sub-section (10) of Section 67 provides that the provisions of CrPC relating to search and seizure, shall, so far as may be, apply to search and seizure under section 67 subject to the modification that sub-section (5) of section 165 of the said Code shall have effect as if for the word “Magistrate”ť, wherever it occurs, the word “Commissioner”ť were substituted. The question that arises for consideration is as to whether Section 67 of the Act of 2017 does away with the powers and functions of the authorities other than the proper authorities as specified in the Act of 2017 to act in accordance with the provisions of Section 132(1) read with section 132(5) of the CGST Act, 2017 and sub-section 2 of section 4 of the CrPC. Section 4 of the CrPC reads as under –

“4. Trial of offences under the Indian Penal Code and other laws.-

(1) All offences under the Indian Penal Code (45 of 1860) shall be investigated, inquired into, tried and otherwise dealt with according to the provisions herein contained.

(2) All offences under any other law shall be investigated, inquired into, tried and otherwise dealt with according to the same provisions, but subject to any enactment for the time being in force regulating the manner or place of investigating, inquiring into, trying or otherwise dealing with such offences.”

Sub-section (2) of section 4 of CrPC provides about the investigation of all offences under any law other than the Indian Penal Code which are to be investigated and inquired into and tried in accordance with the provisions of CrPC except in respect of offences for which any law for the time being in force regulates the manner and place of investigation, inquiring into or trying or otherwise dealing with such offences. As such the offences other than the offences under the Indian Penal Code, procedure relating to investigation, inquiry and trial would be applicable if provided under any other law other than the CrPC. However, in the absence of such procedures specifically providing the procedure regulating the manner and place of investigation, inquiring into or trying or otherwise dealing with such offences, all such offences are to be investigated, inquired and tried according to the procedure provided under the CrPC. Section 132 of the Act of 2017 does not provide for trial of an offence under the Act or its investigation or inquiry for its trial and convictions. There is no provision under the Act of 2017 specifically providing any procedure for investigation, inquiry or trial other than as provided in CrPC or for trial of an offence under section 132 of the Act of 2017. Section 132 of the Act of 2017 indicates the offences and provides for penalty for committing the offences, where an offence is proved and a person is found guilty. Sub-section (5) of Section 132 of the Act makes the offences enumerated in clauses (a), (b), (c) and (d) of sub-section (1) of Section 132 to be cognisable and non-bailable meaning thereby a police officer can take cognisance of the offence committed by a person under clauses (a), (b), (c) and (d) of sub-section (1) of Section 132 without any orders of the Magistrate. As such in the absence of any provision specifically providing for investigation, inquiry and trial of offences under Section 132(1)(a), (b), (c), (d), the provisions of CrPC would be applicable under Section 4(2) of the CrPC. The provision of sub-section (6) of Section 134 of the Act of 2017 to the effect that no court shall take cognisance of any offence punishable under the Act or the Rules made thereunder except with the previous sanction of the Commissioner and that no court inferior to that of a Magistrate of the First Class shall try such offence and the provisions of sub-section(6) of Section 132 of the Act providing for that a person shall not be prosecuted for any offence under Section 132 of the Act except with the previous sanction of the Commissioner, is only for the purpose of the court to take cognisance of any offence and for the purpose of prosecution for the said offence, meaning thereby the court shall have the right to proceed in the matter only after previous sanction of the Commissioner and not otherwise. But so far as sub-section (5) of Section 132 is concerned, it makes the offences enumerated in clause (a), (b), (c), (d) of Section 132(1) to be cognizable and non-bailable, notwithstanding anything contained in CrPC, meaning thereby a Police Officer may proceed to investigate any case in relation to offences committed under clause (a), (b), (c), (d) of Section 132(1) of the Act without any order of a Magistrate. The power of the proper officer under Section 67 of the Act of 2017 for the purpose of the provisions of the Act do not take away the powers of police to investigate cognisable offences under sub-section (5) of Section 132 of the Act. The proper officer not below the rank of the Joint Commissioner shall have the power to inspect, search and seize accounts, registers, documents, goods etc. on having reason to believe that any person has evaded tax or is attempting to evade tax under the Act and in that case the provisions of CrPC relating to search and seizure shall as so far as may be applicable, but if any person has committed the offences enumerated in clauses (a), (b), (c), (d) of Section 132(1), namely cognisable offence, a police officer may be entitled to resort to the provisions of Section 4(2) of the CrPC.

A similar view has been taken by a Division Bench of the Hon’ble Guwahati High Court in Crompton Greaves Ltd. v. Commissioner of Taxes, (2000) 3 GLR 429 while examining the similar question in respect of the Assam Finance (Sales Tax) Act, 1956. The appeal filed before the Supreme Court against the said judgment was also dismissed, no doubt for non-prosecution.

In view of the above, it appears that the police officer shall have the power to investigate, conduct search and seizure in respect of the cognisable offences under the GST Act, 2017. It may be that the Police while exercising the power to investigate a cognisable offence under the Act exceeds its jurisdiction which may be a case of exercise of jurisdiction in excess but the same cannot be said to be without jurisdiction.

Forthcoming Programmes

Date & Month Programme Place
5-5-2018 National Executive Committee Meeting Indore
5, 6-5-2018 National Tax Conference Indore
17-5-2018 One Day Tax Seminar Puri
9-6-2018 Symposium on Income Tax Kolkata
9-6-2018 Annual General Meeting of Eastern Zone Kolkata
11-8-2018 National Executive Committee Meeting Amritsar
11, 12-8-2018 National Tax Conference Amritsar
8, 9-9-2018 Justice Dr. B. P. Saraf National Moot Court Competition Kolkata
6-10-2018 National Executive Committee Meeting Thane
6, 7-10-2018 National Tax Conference Thane
21, 22, 23-12-2018 21st National Tax Convention, 2018 Guwahati

Humans! We keep bringing new ideas and creations to simplify our lives and yet end up creating an intricate and complicated web which is anything but simple. We graduated from bartering to commerce and trading to make our lives easy and then to complicate the whole thing, we invented an abstract entity called “company”ť to limit our risk. A legal notion of Corporate personhood backed by various legislations across the globe, legalizing companies created a corporation, separate from its associated human beings (like owners, managers, or employees), has at least some of the legal rights and responsibilities enjoyed by natural persons (physical humans). This notion was blessed by House of lords in famous case of Salomon v. A. Salomon and Co. Ltd. (1897) AC 22. These brought about rise of trading of shares and thus formation of Stock Exchanges. In this paper my discussion is restricted to tax implications on penny stocks.

1. What are penny stocks?

The word “penny stocks”ť comes with a lot of connotations. However, it’s a common term that simply refers to stocks that trade at low prices per share off of major national exchanges. Penny stocks are defined by the US Securities and Exchange Commission (SEC) as a security that trades for less than $5 per share, is not listed on a national exchange, and fails to meet other specific criteria. In the UK, they’re called penny shares, and they’re categorised in a similar way (although the stock price limit is £1). Other countries call them cent stocks.

Over the years, the term “penny stock”ť has become synonymous with scams and “get rich quick”ť schemes. One Google Search will reveal thousands of results promising to make you the next penny stock multimillionaire. Not all penny stocks are a scam. However, penny stock markets are abound with low-quality companies, shadow organisations, and pump-and-dump schemes – and a few legitimate companies mixed in for good measure. Penny stocks have existed in some form or another for as long as stock markets have existed. There’s very little information about the early history of penny stocks. After the 1929 Stock Market Crash, however, the US Federal Government realised it needed to overhaul securities regulation and bring an end to the unbridled speculation surrounding penny stocks. In the Government’s eyes, the speculation was what caused the stock markets to crash in 1929. Increased regulation would help investors avoid low-quality, value-less stocks while promoting stocks from more reputable companies – or at least, that was the idea.

Starting in the mid-1990s, penny stock trading exploded with growth, fuelled by the spread of the internet around the world. Prior to the internet, the only real way to trade penny stocks was by phone or over the counter at a stocks exchange floor. Now, with the internet, penny stock discount brokers emerged, offering online platforms where traders could buy and sell penny stocks at discount rates. Investors were lured to penny stocks by the promises of cheap trading fees and the chance of making enormous profits on tiny investments. Throughout the 1990s, new investors entered the stock market.

Penny stocks in the Indian stock market can have prices ranging from ₹ 5 to 20. These stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information. Considering the nature of penny stocks, they are susceptible to frauds and scams. Hence one has to be cautious while investing in such stocks.

2. News and web-articles

Government is making continuous efforts to curb black money and to stop various schemes being tools used to convert black money, one may still see various and continuous advertisement are made for penny stocks, which can be seen as under:

a) dt.21st February, 2018

Radhakishan Damani endorses Porinju Veliyath’s “Chor”ť Theory & Buys Recommended stock.

Porinju Veliyath’s theory with regard to buying stocks of “Chor”ť promoters has been cold-shouldered by investors. However, the endorsement of the theory by none other than billionaire Radhakishan Damani means that we can no longer ignore it but have to pay attention and implement it.

Porinju explained that there is a world of a difference between a “good company”ť and a “good stock”ť, implying that even a “bad company”ť can be investment worthy if it has the necessary virtues.

b) dt. 10th February, 2018

20 multibagger penny stocks which cost less than ₹ 10 give gains of up to 750% in 2017

c) Business standard dt. 8th February, 2018

CAG seeks SEBI explanation on losses due to long term capital gains benefit.

“The Comptroller and Auditor General of India (CAG) has written to the Securities and Exchange Board of India (Sebi) seeking an explanation on the loss incurred by the exchequer from misuse of the long-term capital gains (LTCG) exemption. According to sources, the market regulator has identified loss worth Rs 150 billion due to price manipulation on the stock market platform to avail the LTCG benefit. So far, Sebi has passed nine interim orders in the matter. Besides, the CAG has sought details of the manipulators. Currently, LTCG is exempt from taxes. The Union Budget 2018-19 proposed to levy a 10 per cent tax on such gains, starting April 1. The regulators have come across several cases were shares of penny stocks and shell companies were jacked up to convert black money into white by showing LTCG. “The audit authority wants to know the size of the preferential allotment and whether it would be equal to the size of the LTCG violation, especially when the allottee sold the shares,”ť said a person in the know. In the last one year, the regulator has examined over 14,000 persons but could not establish the trail of fund movement. It was yet to gather sufficient evidence and references to conclude the cases, sources said. Even the information provided by the tax authorities was not sufficient to establish connections among the promoters of these companies, the beneficiaries and the ‘last traded price’ providers and ‘exit’ providers, said the person cited above. In January 2017, the regulator had informed the income tax (I-T) department that there was not enough evidence to establish charges against the manipulators. Sebi, in one of its board information memorandums in 2017, had pointed out practical problems in dealing with these cases. “Enforcement proceedings against such a large number of entities will involve issuing a show-cause notice, inspection of documents, personal hearing and passing of orders. This is when preliminary examination of cases revealed that collusion among the entities was weak or absent, since most of the transactions were settled in cash. Thus, a further probe based on weak evidence will clog the system and could also result in a futile exercise,”ť it had said. Official data suggests the I-T department had referred 361 scrips to Sebi for investigating the LTCG manipulation. Of these, Sebi had identified 144 scrips for investigation and concluded investigation in 94 cases during that time. Accordingly, it had barred 1,500 people from trading in the securities market. Further investigations revealed that over 14,000 people were involved in price manipulation to avail the tax exemption. These were apart from the 64,000 entities identified by the taxman as having evaded taxes worth ₹ 380 billion. The regulator is examining if the price of shares was manipulated, since it could proceed under Section 11B of the Sebi Act. This allows it to impound or retain the sale proceeds of the company or entity in question. Sebi is of view that it is
bound to check only for market manipulation and not the tax evasion angle in these cases.”ť

d) dt. 13th January, 2018

Why investing in low priced penny stocks is not a good idea

e) dt. 21st February, 2018

37,000% return!!! This is what a penny stock can do to your wealth

f) dt. 31st March 2017

SEBI Cracks Down on Misuse of Penny Stocks

g) dt. 6th March, 2017

Beware of these 774 rising penny stocks; stock exchanges up vigil

“Mumbai: Stock exchanges have stepped up vigil on movements of smaller and penny stocks in the wake of the sharp surge in their prices. The Bombay Stock Exchange and the National Stock Exchange of India have included 774 lesser-known companies under a graded surveillance measures framework, which is aimed at checking whether the recent advancement in their stock prices was commensurate with their financial health and fundamentals.”ť

h) dt.20th November, 2017

I-T Department, SEBI begin crackdown on penny stock firms in PMO-led push.

The Prime Minister’s Office apprised the CBDT of 80 scrips earlier this month. The taxman and SEBI are working together to clamp down tax evasion and tighten the norms.

3. Search, surveys and the investigation report

There are various previous instances where Department investigated in penny stock matters. Not once but twice, Investigation has been conducted on Mr. Mukesh Chokshi and one may notice many judicial decisions wherein shares dealings took place through his broking firms. On analyzing those decisions one may see that the information collected by the department was not foolproof and the government lost badly in those cases. This turned out a fight for the department to nail down illegal and fraudulent practices in and around penny stocks.

3.1 Kolkata Investigation report

The Directorate of Investigation, Kolkata had undertaken the investigation on a much larger scale than earlier and as a result, they identified a very large number of beneficiaries who may have together taken a huge amount of bogus entries of LTCG. A detailed investigation report dt. 24-7-2015 named “Project bogus LTCG/STCL through BSE listed penny stocks”ť was made. The span of investigation can be gauged from the fact that they identified 64,811 beneficiaries involving bogus LTCG of nearly ₹ 38,000 crore.

As per the report, the illegal business of bogus LTCG involves three different personalities. The promoter of ‘Penny stock’ companies (also known as syndicate member), the share brokers & the entry operator who purchases the shares through paper companies by taking cash. Many a times the three categories of individuals perform overlapping roles and, at times, a single individual may perform all the three functions.

In the earlier investigations, the approach was to target the individuals and through them identify the penny stocks and beneficiaries. This method yielded results on a limited scale emanating only from individual / individuals targeted. However, keeping in mind the rampant nature and exponential growth of alleged illegal business in recent times and to cast the net wide, during Kolkata investigations, Department reversed the methodology of investigation. ‘Penny Stocks’ were first identified and then department started targeting the individuals who dealt in them. As a result, department was able to virtually uncover almost all Kolkata based operators in one investigation itself. It was an on-going process, which acquired the character of a project that continued for quite some time, unlike usual investigation which ends with the statement of the individual involved.

3.2 Modus operandi as per the report

As per the report the business of providing entries of bogus LTCG over the years has become much more organised and with economy of scale in full operation the stakes involved had become huge. Before the actual transaction starts taking place, there were brokers in different towns who contact prospective clients and took paper booking for entries. The commission to be paid to the operators was decided at this stage however, no money was paid. Once the booking is complete, the operators have a reasonably good idea of how much LTCG is to be provided along with the break-up of individual beneficiaries. This data is essential to decide which penny stock or companies to use for the job and which beneficiary to buy how many shares.

3.2.1 Types of Penny stock companies

Broadly speaking there are two types of companies.

a) An old already listed company, the entire shareholding of which is bought by the syndicate to provide LTCG entries. These are generally dormant companies with no business and with accumulated losses.

b) A new company which is floated just for the purpose giving LTCG entries. Such new companies are often floated after the initial booking is complete and the capital base is decided keeping in mind the entries to be provided.

3.2.2 The entities involved in the transactions

As mentioned earlier there are three categories of individuals who are involved in the transactions.

a) Syndicate Members

They are the promoters of the Penny Stock companies who own the initial shareholding mostly in the name of paper companies either in a fresh IPO or purchased from the shareholders of a dormant company. They are usually a group of 4-5 individuals who are also referred to as Syndicate Members and are sometimes also referred to as Operators. Their nominees are directors of the Penny Stock companies which are indirectly controlled by them through such dummy directors. The whole operation is managed by them. They get the net commission income from the transactions. Their name however, seldom appear in the actual transactions.

b) The Brokers

These are registered brokers through whom shares are traded both online and offline. They are fully aware of the nature of transactions and get paid a commission over and above their normal brokerage. Some of the big broking houses are also indulging in such transactions mostly through sub-brokers. Even Calcutta Stock Exchange has registered itself as a broker with BSE and has given a large number of terminals to sub-brokers who are dealing into this type of transactions. In the said investigation, some of the sub-brokers of big broking houses like Anand Rathi, Religare Securities, SMC etc. were also uncovered. As a standard modus operandi, the brokers often compromise on KMC norms of the clients to help the Syndicate Members.

c) The Entry Operators

These are individuals who control a large number of paper/shell companies which are used for routing cash for the transactions as well as buying and selling shares during the process of price rigging. They work for commission to be paid by the Syndicate Members. To cut cost sometimes in smaller operations, the same group perform more than one function.

3.2.3 The Transaction Conventional method

The transaction involves three legs.

a) Purchase of share by the beneficiary

In this the beneficiary is sold a fixed number of shares at a nominal rate. The price and the number of shares to be purchased are decided on the basis of the booking taken and the value up to which price would be rigged. This leg of the transaction mostly is offline. This is done to save on STT using the loophole in Section 10(38) of the IT Act which places restriction of trading by payment of STT on sale of shares and not on purchase.

b) Price rigging

After the shares have been purchased by the beneficiaries, the syndicate members start rigging the price gradually through the brokers. In these transactions the volume is almost negligible. Two fixed brokers, who are in league with the Syndicate, buy shares at a fixed time and at a fixed price. These low volume transactions are managed through paper companies of entry operators.

c) Final sale by the beneficiary

This is done after the beneficiary has already held the shares for one year. The period of holding may be a little more to match the amount of booking with the final rate. The beneficiary is contacted either by the Syndicate member or the Broker (Middle man) through whom the initial booking was done. The beneficiary provides the required amount of cash which is routed through some of the paper companies of the entry operator and is finally parked in one company which will buy the shares from the beneficiary. The paper company issues cheque to the beneficiary.

The above mentioned methodology is referred to as Conventional Method.

Another method which also used quite often is called Merger Method. The methodology adopted in Merger Method is as under: Merger method:

In this method the operators first form a Private Limited Company and the shares at par are allotted to beneficiary individuals. This private limited company is then amalgamated / merged with a listed penny stock company by a High Court order. Depending on the capital of the amalgamating and amalgamated companies, the investors are allotted stock of the listed companies in the same proportion. The capital of the Penny stock listed company and the private limited company are so arranged that the beneficiaries post-merger, get shares of listed company in the ratio 1:1, thus the investor gets equal number stocks of the listed company. The promoters of the listed penny stock companies run the syndicate, the brokers and the entry-operators through whose paper/shell company’s cash are routed are merely commission agents. The penny stock listed company is such that though its capital base is small its market capitalisation is many times its capital base. This is managed again through small volume predetermined transaction amongst members of the syndicate. The prices of shares are thus manipulated at 20 to 25 times the face value. For example the quoted price of such a company would be around ₹ 250 with minor fluctuations synchronised with rise and fall in the market to avoid regulatory glare. One such company is quoted on CSE. The investors hold these shares in the penny stock listed company which it got as a result of merger for one year (statutory lock-in period for exemption under IT Act) and then sell it to one of the shell private limited companies of the operator. The investor thus makes a LTCG of 25 times its original investment. The purchase consideration is again provided in cash by the investor which is laundered to the buyers account through a maze of shell companies as mentioned in the previous method.

Though LTCG is booked while the share price is going up, the downward journey is used by the operators for booking bogus losses. People who have huge profit take the Short Term Capital loss (STCL) to set-off their profit. The methodology used is the same. The beneficiary who wants loss buys the share at a high rate from the beneficiary who is taking LTCG. The loss taking beneficiary pays cheque to the LTCG taking beneficiary and the cash provided by the LTCG beneficiary is returned to the Loss taking beneficiary. The operator deducts his commission before payment by cash. As prices crash the loss taking beneficiary sells these shares bought at high value for small value resulting in artificial loss.

3.3 Results of Kolkata investigations

In the report department identified the 84 BSE listed penny stocks which have been used for generating bogus LTCG from individual / individuals targeted. Post that number of search and surveys were conducted in the office premises of more than 32 Share broking entities, which accepted that they were actively involved in the bogus LTCS/STCL Scam. Surveys were also conducted in the office premises of many accommodation entry providers and their statements recorded. As per the report all had accepted their role in the scam. The report further stated that beneficiaries of more than
₹ 38 thousand crore were identified. A Total of more than 60 thousand PAN numbers of the beneficiaries were identified. The report further covered more than 5000 paper/shell companies, also known as “Jamakharchi”ť companies, which are involved in providing bogus accommodation of various kinds. Statements for most of the directors of companies had been recorded under oath. The department also prepared cash trail of ₹ 1570 Crore. The case trail reflected how unaccounted/undisclosed cash of beneficiaries was being routed through this modus to convert black money into LTCG. The investigating team had followed the money trail from the point it is being deposited to the undisclosed proprietorship bank accounts, to the accounts of share brokers. Then they recorded statements of share brokers where they have accepted that cash has been used for providing accommodation entry of bogus LTCG.

3.3.1 Capital gain side or sale side beneficiaries (as per the report)

Dgit Wise No. of Pan Amount (₹)
Mumbai 17344 1223392,20,545
Kolkata 12236 671804,06,328
Delhi 6632 609972,97,795
Ahmedabad 6962 241851,44,408
Lucknow 3996 221427,35,005
Chandigarh 2519 165985,63,664
Bhopal 3118 151807,09,899
Jaipur 3471 150909,93,477
Bengaluru 1619 107038,20,659
Hyderabad 2604 105012,00,292
Chennai 1790 90944,04,614
Patna 1133 42251,14,570
Pune 399 514,21,00,307
International Taxation 136 2757,35,307
Kochi 187 2172,38,411
Total 64811 3838746,85,281

3.3.2 Short term capital loss or purchase side beneficiaries / jamakharchi providers (as per the report) :

Dgit Wise No. of Pan Amount
Kolkata 12240 2246797,65,038
Mumbai 11854 797756,89,393
Delhi 2920 311585,30,784
Ahmedabad 4742 117224,30,395
Bhopal 1514 87343,71,717
Chandigarh 1241 59263,52,548
Jaipur 2098 57041,28,394
Lucknow 2062 56115,31,092
Bengaluru 914 24008,04,555
Chennai 899 16965,42,285
Hyderabad 1187 16060,99,482
International Taxation 248 11497,68,948
Patna 437 4635,75,503
Pune 300 7950,47,517
Kochi 216 734,28,064
Total 43154 3814980,65,714

Though this report was sent to relevant officers, to further boost the process, new button ‘Penny Stocks’ has been added on Individual Transaction Screen (ITS) to display information related to penny stocks, on the screen of the Assessing Officers (AOs).(See Letter F.No.287/30/2014 IT (Inv.II)- Vol.- III, dated 16-3-2016 issued by CBDT to the officers). Further such information was continuously updated on their computers under Actionable Information Monitoring System (Letter F. No.287/30/2015-IT (INV.II)-VOL-III, dated 29-3-2016)


The Government’s two-pronged approach “” investigation and regulation “” involves action against tax evaders and tightening of norms for scrips prone to price manipulation. The market regulator and the taxman have in the past come down strongly on penny stocks. With income tax department into action, SEBI, on the other hand, is drawing up stringent rules for companies prone to price manipulation and widening the scope of Graded Surveillance Measures. SEBI has passed various interim order and confirmatory orders against the operators and its associates upon preliminary enquiry. These orders were passed against:

a) Promoters and promoter related entities

b) Preferential allotttees

c) Penny stock sellers/traders who rig the prices

d) LTP contributers

e) Exit providers.

However, upon completion of the investigation, SEBI did not find any adverse evidence/ findings amounting to any violation in respect of many entities and hence those orders were partially revoked.

5. SOPs, Assessments and tax effects

Post the investigations and to observe that the tax evaders are not left out on procedural and technical grounds, the department had prepared Standard operating procedures (SOPs) to be adopted by the Assessing officers while framing assessment orders in penny stock cases. Not only the procedures standardised, but the specific formats were given for the following:

a) Draft questions for statement to be recorded u/s. 131

b) Draft Show cause notices

c) Draft assessment orders

d) Draft of reasons recorded u/s. 148

Further a draft order noting is given in following situations

a) If a request is made for cross examination

b) If deponent files affidavit retracting statements, etc.

One may observe that the statements recorded and assessment orders are similarly worded except the factual aspects of penny stocks traded in.

In spite of above, in few cases, the Assessing officers have treated LTCG as cash credits u/s. 68 and in few cases as unexplained money u/s. 69A. Addition on account of underling commissions u/s. 69C also varies from 0.10% to 0.50% in different assessment orders.

Rate of tax : Section 115BBE

Finance Act 2012, inserted section 115BBE w.e.f. 1-4-2013, which provides that in case total income of an assessee includes an income chargeable under sections 68, 69, 69A, 69B, 69C or 69D, the income would be chargeable @ 30% without there being any benefit of slab rate which would have been otherwise available to such assessee. This amendment was brought to ensure that the undisclosed income is chargeable to tax @ 30% and the assessees’ should not be able to take advantage of the basic exemption limit or lower slab of the rate of tax applicable to assessees’.

This section was further substituted by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. 1-4-2017 wherein rate of tax was increased from 30% to 60%. The amended section further provides that the section would apply irrespective of fact, whether the income is disclosed by the assessee in its return of income under sections 68 to 69D or the Assessing Officer makes such an addition. Its seems that the purpose of the amendment is to put a check on the assessee depositing money in his bank account pursuant to the demonetisation from 8th November, 2016. Persons who had declared under IDS would be taxed @ 45% and post demonetisation those should not get away by offering the same as income @ 30%. Hence, the rate has been increased to 60%.

6. Judicial Precedents

The issue of penny stocks is not recent. In the “war to curb black money”ť, wherein usage of penny stock was at its peak, this issue has gained momentum and hence would be worthwhile to be appraised about few important decisions on this issue.

6.1 Pr. CIT v. Prem Pal Gandhi in ITA-95-2017 (O&M) dt. 18-1-2018 (Punjab & Haryana HC)

The Court in the context of penny stocks held that the appreciation in the value of the shares is high does not justify the transactions being treated as fictitious and the capital gains being assessed as undisclosed income if,

(a) the shares are traded on the Stock Exchange,

(b) the payments and receipts are routed through the bank,

(c) there is no evidence to indicate it is a closely held company, and

(d) the trading on the Stock Exchange was manipulated in any manner

6.2 ITO v. Arvind Kumar Jain HUF ITA No. 4862/MUM/2014 dt. 18-9-2017 (Mum.)(ITAT)

Tribunal while dealing with the issue of bogus capital gains from penny stocks held that if the DEMAT account and contract note show details of the share transactions and the AO has not proved the transactions to be bogus, the capital gains earned on the said transactions cannot be treated as unaccounted income u/s. 68. The fact that the broker was tainted and violated SEBI regulations would not make assessee’s transactions bogus.

6.3 ITO v. M/s. Indravadan Jain (HUF) ITA No. 4861/Mum./2014 dt. 27-5-2016

The Tribunal while dealing with LTCG on penny stocks has held that Long-term capital gains arising from transfer of penny stocks cannot be treated as bogus merely because SEBI has initiated an inquiry with regard to the Company if, payment is by cheque and delivery of shares is taken.

6.4 CIT v. Shyam R. Pawar [2015] 229 Taxman 256 (Bombay)

In this case, assessee declared capital gains on sale of shares of two companies. Assessing Officer, observing that transaction was done through brokers at Calcutta and performance of concerned companies was not such as would justify increase in share prices, held the transaction as bogus and having been done to convert unaccounted money of assessee to accounted income and, therefore, made addition under section 68. On appeal, Tribunal deleted addition observing that DEMAT account and contract note showed credit/details of share transactions. The High Court held that the transactions in shares were rightly held to be genuine and addition made by Assessing Officer was rightly deleted.

6.5 CIT v. Smt Jamna Dev Agarwal 328 ITR 656 (Bombay)

It was held that from the documents produced before the Court it was seen that the shares in question were, in fact, purchased by the assessees on the respective dates and the company had confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares of the respective buyer was also established by producing documentary evidence. It is true that some of the transactions were off-market transactions. However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates, as was seen from the documents furnished by the assessee. Therefore, the fact that some of the transactions were off-market transactions could not be a ground to treat the transactions as sham transactions.

6.6 CIT v. Vivek Mehta 204 Taxmann 177 (Punjab & Haryana)

In this case the assessee declared long term capital gain on sale/purchase of the shares of ‘M’ Ltd. and claimed the same as exempt under section 54F. The Assessing Officer held that the purchase of shares of ‘M’ Ltd. was bogus and manipulated and, therefore, the subsequent sale was also bogus. The Assessing Officer further held that the assessee introduced his unaccounted income under the garb of long-term capital gain and claimed same as exempt under section 54F. The credit entries in bank account of the assessee reflecting sale consideration of share were found to be unexplained credits and added to the income of the assessee under section 68. It was held by the High Court that on the basis of the documents produced by the assessee in appeal, the Commissioner (Appeals), recorded a finding of fact that there was a genuine transaction of purchase of shares by the assessee on 16-3-2001 and sale thereof on 21-3-2002. The transactions of sale and purchase were as per the valuation prevalent in the stock exchange. Such finding of fact has been recorded on the basis of evidence produced on record. The Tribunal has affirmed such finding. Such finding of fact is sought to be disputed in the present appeal. The finding of fact recorded by the Commissioner (Appeals) doesn’t give rise to any question(s) of law as sought to be raised in the appeal.

6.7 CIT v. Mahesh chandra G. Vakil 220 Taxman 166 (Gujarat)(HC)

It was held by the High Court that where assessee proved genuineness of share transactions by contract notes for sale and purchase, bank statement of broker, demat account showing transfer in and out of shares, as also abstract of transactions furnished by stock exchange, Assessing Officer was not justified in treating capital gain arising from sale of shares as unexplained cash credit.

6.8 Ms. Farrah Marker v. ITO (Mumbai) ITA No. 3801/Mum/2011

The assessee, an individual, filed her return of income for A.Y. 2005-06 on 4-8-2005 declaring income of ₹ 1,19,653/- after claiming the income from long term capital gain (LTCG) of ₹ 93,00,012/- on sale of listed equity shares and subjected to STT as exempt under section 10(38). In the course of assessment proceedings, the AO observed that the shares of Shukun Constructions Ltd. are nothing but penny stocks and that the assessee has backdated the purchase of the said shares in transactions to generate artificial gain. The AO made an addition of the sale proceeds on sale of the said shares amounting to ₹ 95,12,812/- under section 68 of the Act. Hon’ble ITAT held that the documents pertaining to the purchase and sale of shares of M/s. Shukun Constructions Ltd. such as contract notes of brokers, copies of physical share certificates, transfer of physical shares to the name of the assessee and consolidation by the company, the DEMAT account statement of the assessee with SHCIL confirming the said shares in the assessee’s name, bank statements and summary thereof and financial statements of the assessee, viz., Balance Sheet of earlier years showing that the fact of holding these shares were furnished before the AO from 16-7-2007 onwards, i.e., well before the assessment was concluded on 31-12-2007. From the details filed by the assessee on record in pursuance of the query by the AO in the course of assessment proceedings, that the shares of Shukun Constructions Ltd. is listed on BSE and that the sale transaction of the ‘said shares’ by the assessee is at the rate quoted on the date of sale has been confirmed both by BSE and the concerned stock broker M/s. Khambatta Securities Ltd. It is strange that the AO has made the addition under section 68 of the Act treating the entire sale proceeds of the ‘said shares’ received by the assessee through regular banking channels from stock broker registered with SEBI, M/s. Khambatta Securities Ltd., which facts have been confirmed by the said stock broker.

6.9 CIT v. Smt. Sumitra Devi 49 37 (Rajasthan)

The High Court observed that the AO had failed to show that the material documents placed on record by the assessee like broker’s note, contract note, relevant extract of cash book, copies of share certificate, demat statement etc. were false, fabricated or fictitious. The appellate authorities have rightly observed that the facts as noticed by the AO, like the notice under s, 133(6) to the company having been returned unserved, delayed payment to the brokers, and dematerialisation of shares just before the sale would lead to suspicion and call for detailed examination and verification but then, for these facts alone, the transaction could not be rejected altogether, particularly in absence of any cogent evidence to the contrary.

6.10 Arvind Mehta v. ITO ITA No. 2799/Mum/2015 pronounced on 29-2-2016

The assessee had declared a long term capital gain of ₹ 7,01,773/- on the sale of said shares of M/s. Essar Oil Ltd. The Assessing Officer noted that certain information was received from the Investigation Wing as a consequence of a search and seizure action carried out under section 132 of the Act in the case of M/s. Mahasagar Securities Pvt. Ltd. on 25-11-2009. As per such information received, it was noted that there was some companies which were under the control of one Shri Mukesh Chokshi which, inter-alia, included M/s. Alliance Intermediaries & Network Pvt. Ltd., broking concern from whom assessee had claimed the purchase of shares of M/s. Essar Oil Limited. As a consequence, the entire sale consideration of ₹ 8,80,332/- was added to the returned income as ‘income from undisclosed sources’. Hon’ble ITAT held that the DEMAT account which evidences the sale of shares does justify an inference that the assessee was indeed in possession of the shares of M/s. Essar Oil Ltd. prior to its sale. There is no material on record to suggest that the sale consideration received by the assessee in question i.e. ₹ 8,80,332/- is on account of any transaction other than the sale of shares of M/s. Essar Oil Ltd. Therefore, under these circumstances the onus was entirely on the Assessing Officer to establish that the purchase and sale of the shares of M/s. Essar Oil Ltd. was bogus. If the orders of the authorities below are examined in this context, it is clear that there is no clinching material to say that the impugned transaction was bogus. Though a reference has been made to the investigation in the case of Shri Mukesh Chokshi, but no effort has been made by the Assessing Officer to demonstrate that qua the instant transaction of the assessee, any infirmity has been confessed by Shri Mukesh Chokshi. Be that as it may, assessee has been consistently canvassing before the lower authorities that the statement of Shri Mukesh Chokshi be confronted to him. There is nothing on record to suggest that any specific statement Shri Mukesh Chokshi has been confronted to the assessee. Considering the entirety of circumstances and the material on record, there is no justification for the Assessing Officer to hold that that the sale consideration received on the sale of shares of M/s. Essar Oil Ltd. of ₹ 8,80,332/- is unexplained or from undisclosed sources.

6.11 Commissioner of Income-tax-I v. Himani M. Vakil [2013]10 326 (Guj.)

The Court held that where assessee duly proved genuineness of share transactions by bringing on record contract notes for sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit.

6.12 ITO v. Aarti Mittal 41 118 (Hyderabad – Trib.)

The Tribunal held that the prescribed procedure was followed from the stage of purchase till the shares are dematted, and thus there is hardly any room to doubt or suspect that the transactions in purchase are not genuine. No such cogent evidence having been brought on record, and the Assessing Officer merely proceeded to arrive at his conclusion basing on mere surmise and suspicion that the purchase transactions are bogus. Even though enquiry with Calcutta Stock Exchange (CSE) revealed that no purchase had taken place, since transactions were in physical form and done through off market, question of the same being routed through floor of a recognized stock exchange did not arise. The most crucial aspect which could be considered as incriminating in such transactions may relate to a case where compensatory payments are made by the seller to the buyer. No evidence has been brought on record that the assessee have made any such compensatory payment to the buyer of the stocks. In the absence of any such observation, the Commissioner (Appeals) was correct in holding the view that the sale transactions cannot be doubted on suspicion. Moreover, these are the cases in which the transactions have taken place through the floor of the stock exchange and Securities Transactions Tax have been paid. In view of these evidences which have not been rebutted by the Assessing Officer, it is difficult to hold that the sale transactions are non-genuine and the proceeds thereof are liable to be taxed under the head ‘other sources’. Further on the basis of the report received from the SEBI, upon enquiries got conducted that some of the brokers named have been suspended for some act of omission and commission, the Assessing Officer held that the transactions entered through these brokers are not genuine. But merely based on such a report, such transactions cannot be treated as sham merely for some discrepancies or adverse report by the SEBI. The Assessing Officer has not brought out any material to establish the final outcome of the enquiry initiated by the SEBI and specific shares purchased by the assessee in course of making investment. Therefore, it is not possible to take any adverse view on the basis of mere suspicion that the SEBI had initiated some action and found the brokers violating the rules of the SEBI. It is all the more so, since the assessee has paid STT. Even the absence of experience of the assessees in transaction of the shares except dealing in these penny stocks, does not clinch the issue against the assessee. This may at the most lead to a suspicion but the same cannot be treated as conclusive to draw any adverse inference against the assessees to the effect that the transactions are not genuine. Similarly, even the opening of DEMAT accounts at Calcutta, a remote place may give rise to a suspicion, but the same cannot lead to any adverse inference against the assessee. Even with regard to the enquiry got conducted by the Assessing Officer through the Deputy Commissioner, Calcutta, which revealed that most of the brokers and the companies were not traceable, the Commissioner (Appeals) was correct in concluding that mere failure to trace the brokers and companies cannot be held as fatal to the transaction of both purchase and sale, when the details of which have been duly explained by the assessee. The assessee has duly discharged the onus that lies on it in establishing the genuineness of the transactions, and that being so, it is for the revenue to disprove the claim of the assessee, by bringing on record the evidence to the contrary. The Tribunal thus deleted the additions made.

6.13 DCIT v. Anil Kaniya ITA No. 4077/Mum/2013 (Mumbai)

The assessee produced the copies of contract note, money was received through banking channel from sale of shares, and purchases of earlier years were not doubted. Dematting was done by the assessee, sale was affected, thus, addition made u/s. 68 of the Act cannot be sustained and also the resultant disallowance of commission at the rate of 5% made by the Assessing Officer. Even otherwise, for making addition u/s. 68 of the Act, there has to be credit of amounts in the books of the assessee and if the assessee offers no explanation about the nature and source of such credits, then, the sum so credited may be charged to tax as income of the assessee. However, in the present case, the assessee has offered its explanation and if the learned Assessing Officer is still not satisfied with such explanation, onus shifts upon him to prove otherwise. The assessee’s burden is confined to prove creditworthiness of the creditor with reference to the transaction found in the books of the assessee. No adverse material was brought on record by the Assessing Officer to substantiate his presumption, and thus addition cannot be sustained.

6.14 Sudhanshu Suresh Pandhare v. ITO I.T.A. No. 5185/Mum/2012 (Mumbai)

The Tribunal held that the assessing officer has disbelieved the claim of Long term capital gain only on the basis of the statement given by the broker. However, the assessee had furnished the details of purchase of shares, copies of share certificates, the details of sale of shares and the details of receipt of money towards the sale consideration. Sale of shares had taken place through Ahmedabad Stock Exchange. The Tribunal further observed that the documents and the claim of the assessee were not examined by the AO. Assessee filed return of income showing the purchases in the year relevant to AY 2003-04 and the sales in the return of income relating to AY 2004-05. Further, assessee sought for the copy of statement claimed to have been given by Shri Mukesh Choksi with regard to the transactions carried on by his group of companies, which was not provided to the assessee. Since the assessing officer had not shown that the transactions of the assessee have been claimed to be accommodation entries by Shri Mukesh Choksi, he could not have taken adverse view of the matter on the basis of generalized statement. The statement of Shri Mukesh Choksi has been relied upon without confronting the same with the assessee. Thus there was no justification in disbelieving the claim of the assessee.

6.15 Surya Prakash Toshniwal HUF v. ITO ITA No.1213/Kol/2016 (Kol. ITAT)

The Tribunal observed that in spite of having all information the lower authorities held the long term capital gains as bogus and from undisclosed sources on the basis of certain facts as under :

A) The assessee was a HUF and the transaction was routed for both purchase and sale of the shares through an individual broker who happened to be the Karta of assessee i.e. HUF.

B) The shares were sold to M/s. Ahilaya Commercial Private Limited (for short ACPL) but the financial statements of the company were not filed to the stock exchange. The assessee also failed to furnish the necessary details of ACPL to establish the genuineness of the transactions except that the transactions were routed through account payee cheques.

C) The SEBI has also directed M/s ACPL not to carry out any transaction of purchase and sale of securities in any manner either directly or indirectly.

D) The assessee has also failed to submit the net worth of M/s RFL and ACPL to justify the amount of capital gain earned during the year.

The Tribunal held that the lower authorities have not brought on record any concrete evidence for disallowing the long term capital gain of the assessee. The AO should have issued notices and summons to M/s. RFL and ACPL under sections 133(6) and 131 of the Act for the production of the necessary financial information before rejecting the claim of the assessee. All the necessary information which were available with the assessee had been brought on record by the assessee before the lower authorities. In case ACPL had not filed the financial statements with the stock exchange then the assessee for the fault of ACPL cannot be held guilty under the income tax proceedings. The Tribunal held that assessee had made the transactions for the sale and purchase of the shares through a valid stock broker who was in existence at the relevant time with the stock exchange and this fact has not been doubted by the lower authorities.


6.16 ITO v. Shamim M. Bharwani [2016] 69 65 (Mumbai – Trib.)

The Tribunal was posed with a question that whether the documents furnished by the assessee, including averments made by him, or even his broker, satisfy the test of preponderance of human probabilities. It observed that if the assessee has reasonably explained the ‘intriguing’ facts and circumstances as pointed by the AO, and on the strength of which the genuineness is assailed by him, and with the fact that it is a case of penny stock company, then no case for treating the transaction as not genuine shall ever arise. The Tribunal held that onus u/s. 68 though is on the assessee, so that his explanation is substantiated or proved. Firstly, documentary evidences, in the face of unusual events, and without any corroborative or circumstantial evidence/s, cannot be regarded as conclusive. Two, the preponderance of probabilities only denotes the simultaneous existence of several ‘facts’, each probable in itself, albeit low, so as to cast a serious doubt on the truth of the reported ‘facts’, which together make up for a bizarre statement, leading to the inference of collusiveness or a device set up to conceal the truth, i.e., in the absence of credible and independent evidences. For a scrip to trade at nearly 50 times its’ face value, only a few months after its issue, only implies, if not price manipulation, trail blazing performance and/or great business prospects (with of course proven management record, so as to be able to translate that into reality), while even as much as the company’s business or industry or future programme (all of which would be in public domain), is conspicuous by its absence, i.e., even years after the transaction/s. The company is, by all counts, a paper company, and its share transactions, managed. The Tribunal thus confirmed the assessment of the impugned sum u/s. 68 of the Act.

6.17 Sanjay Bimalchand Jain v. Pr. CIT [2018] 89 196 (Bombay) (HC)

The High observed that the authorities found that the assessee had made investment in two unknown companies of which the details were not known to her. It was held that the transaction of sale and purchase of shares of two penny stock companies, the merger of the two companies with another company, viz. Khoobsurat Limited did not qualify an investment and rather it was an adventure in the nature of trade. It was held by all the authorities that the motive of the investment made by the assessee was not to derive income but to earn profit. Both the brokers, i.e., the broker through whom the assessee purchased the shares and the broker through whom the shares were sold, were located at Kolkata and the assessee did not have an inkling as to what was going on in the whole transaction except paying a sum of ₹ 65,000/- in cash for the purchase of shares of the two penny stock companies. The authorities found that though the shares were purchased by the assessee at ₹ 5.50 per share and ₹ 4/- per share from the two companies in the year 2003, the assessee was able to sell the shares just within a years time at ₹ 486.55 and ₹ 485.65 per share. The broker through whom the shares were sold by the assessee did not respond to the assessing officer’s letter seeking the names, addresses and the bank accounts of the persons that had purchased the shares sold by the assessee. The authorities have recorded a clear finding of fact that the assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain. While so observing, the authorities held that the assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth ₹ 5/- had jumped to ₹ 485/- in no time. The Income Tax Appellate Tribunal held that the fantastic sale price was not at all possible as there was no economic or financial basis as to how a share worth ₹ 5/- of a little known company would jump from ₹ 5/- to ₹ 485/-. The findings recorded by the authorities are pure findings of facts based on a proper appreciation of the material on record. The High Court refused to interfere with the Tribunal decision.

7. Penalties and prosecutions

7.1 Penalties

As per sections 271(1)(c) penalty would be leviable in case of concealment of income or furnishing of inaccurate particulars. These may apply on penny stock assessments. The penalty levied may range from 100% to 300%. However, the Taxation Laws (Second Amendment) Act, 2016 has inserted section 271AAC w.e.f. 1-4-2017 which provides for a penalty of 10% of the tax payable under section 115BBE, in case an addition has been made by the Assessing Officer. However, no penalty would be leviable if assessee suo motu makes an addition in the return of income. One may observe that the tax rate as per section 115BBE is 60% and penalty over such income is 10% which makes the
effective rate of tax for additions made under sections 60 to 69D at 66% plus surcharge plus education cess.

In case such additions have been made pursuant to a search action u/s. 132, then, the penalty is leviable under section 271AAB. The sections provides for lower rate of penalty on fulfilment of certain conditions. One of the conditions is that the assessee “substantiates the manner in which the undisclosed income was derived;”ť This aspect is subjective in nature and hence litigation prone. Questions like whether an assessee should substantiate during the search action, or during the assessment proceedings, wait till the officer asks relevant questions, would arise.

7.2 Prosecution

The department has issued many show cause notices for initiation of prosecution proceedings u/s. 276C(1)& 277 r.w.s 278E. Sub-section 1 of Section 276C deals with wilful attempt to evade any tax, penalty or interest; whereas sub-section 2 deals with wilful attempt to evade the payment of any tax, penalty or interest levied under Income Tax Act. Section 277 deals with false statements.

The standard of proof required in criminal proceedings is much more than required in penalty proceedings. The fundamental principle of penal liability is that an act alone does not amount to a crime, it must be accompanied by a guilty mind, as laid down by the maxim, ‘Actus Non Facit Reum Nisi Mens Sit Rea’, there must be a guilty mind behind an act for the completion of a crime. Thus if a person is punished under criminal law, it is generally agreed that he must have done such act with a guilty mind. The word ‘wilful’ used in section 276C of the Act generally means an act done with a bad purpose, with an evil motive as a constituent element of the offence and it should be established beyond reasonable doubt and there should be presence of mens rea / bad motive and a guilty mind. Thus, mens rea, (culpable mental state) is an important ingredient of the offences under the act also.
The word ‘wilful’ imports the concept of ‘mens rea’.

The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 inserted with effect from 10th September, 1986 section 278E of the Act, according to which, in any prosecution for any offence under this Act which requires culpable mental state on the part of the accused, the Court shall presume the existence of such mental state. Section 278E also provides that it shall be for the defence of the accused to prove the fact that he had no such mental state with respect to the act charged as an offence. Here, however, it is important to note that the legal presumption contained in section 278E is limited to the existence of mens rea alone and it does not absolve the prosecution of its responsibility to prove the facts which prima facie establish the charge before cognisance of an offence is taken. A prima facie case for prosecution should be made out against the accused by the Department. A suspicion however, strong against the accused, but, if there is a reasonable possibility of innocence the accused would be entitled to acquittal.

However before accusing the Assessee, an opportunity of cross-examination of the third party whose statements are relied upon needs to be given to the assessee along-with full copy of the statement. The Hon’ble Supreme Court in Andaman Timber Industries v. CCE (2015) 281 CTR 241 (Bom)(HC) has held that failure to give the assessee the right to cross-examine witnesses whose statements are relied upon results in breach of principles of natural justice. It is a serious flaw which renders the order a nullity. Also see
Kishinchand Chellaram v. CIT [1980] 125 ITR 713 (SC).

8. Issues that need to be addressed

Whoever desires any Court to give judgement as to any legal right or liability dependent on the existence of facts, which he asserts, must prove that those facts exist. When a person is bound to prove the existence of any fact, it is said that the burden of proof lies on that person. However, shifting of onus is the process of transferring the obligation to affirmatively prove a fact in controversy or an issue brought during a lawsuit from one party in a legal controversy to the other party. Such a shifting of onus is a continuous process in the evaluation of evidence.

In most of the cases and even in the draft assessment orders circulated by the department it has treated sale considerations of such penny stocks as cash credits under section 68. The Assessee may be able to discharge their onus by providing evidences link contract details, share certificates, demat accounts, trade details on Stock exchanges, banking transactions, etc. The issue for consideration is whether the assessee is required to prove identity, creditworthiness, and genuineness in spite of the fact that the transaction of sale of shares was made on platform of a recognized stock exchange and was subject to STT. Assuming that the assessee discharges his/her onus, the burden then shifts on the Department. The question then arises that only on the basis of statements
recorded and the theory of preponderance of probability, can additions be made in the hands of the assessee.

Considering the fact that there are diverse judgments, and the quantum as envisaged by the department, it is necessary that Supreme Court intervenes. Few important questions are as under:

a. Whether basic principles of cash credit u/s. 68 i.e., identity, creditworthiness, genuineness apply for share transactions under taken at recognized stock

b. Where share transaction be treated as bogus, where SEBI has revoked its interim order qua few beneficiaries, despite the fact that SEBI has still found few operators and beneficiaries guilty?

c. Whether the transactions have to be looked at holistically including all beneficiaries, operators, etc. or it is necessary to conduct inquiries individually and prove the cash trails for each and every case.

d. Who is supposed to discharge the onus to establish that there is bogus LTCG and whether such onus needs to be discharged for all assessments separately?

9. Conclusion

The allegations made by the department in its report that penny stock are being used as a tool for conversion of black money. However, in some cases, it may just be theory, which further needs to be corroborated with sufficient evidence and statistics. Any way sufficient amendments have been brought in to put this menance at rest, and hence use of penny stocks to evade taxes may decline drastically.

[Source : Paper presented in souvenir of National Tax Conference held at Baroda on 7th to 18th March, 2018]

The Prohibition of Benami Property Transactions Act, 1988

As amended by The Benami Transactions (Prohibition) Amendment Act, 2016


The problem of property held as Benami has been causing concern to the tax authorities for quite some time. The Select Committee on the Taxation Laws (Amendment) Bill, 1969 had also recommended that Government. should examine the existing law relating to Benami Transactions with a view to find out whether such transactions should be prohibited. Hence the Benami Transactions Prohibition Act was enacted in 1988. As there was various lacunae and shortcomings in the Act, a new Amendment Act was introduced renaming the Title as The Benami Transactions (Prohibition) Amendment Act, 2016.

The brief history of the introduction and later amendment of this Act is as under:

May 19, 1988    On the recommendations of the 57th Law commission Report promulgated an Ordinance called The Benami Transactions (Prohibition of Right to recover Property) Ordinance, 1988
September 5, 1988    The Benami Transactions (Prohibition) Bill 1988 was passed by both the Houses of Parliament. Hence the Benami Transactions (Prohibition) Act, 1988 (i.e., the Original Act).
May 13, 2015    The Benami Transactions (Prohibition) Amendment Bill, 2015 introduced in Lok Sabha to amend and incorporate certain provisions to the Original Act.
April 28, 2016    Standing Committee submitted its Report on examination of the Bill.
July 22, 2016    Government proposed amendments to the Amendment Bill, 2015.
July 27, 2016    Amendment Bill was passed by Lok Sabha
August 2, 2016    Rajya Sabha passed the Amendment Bill
August 10, 2016    President gave his assent to the Amending Act
November 1, 2016    Date on which the Amending Act came into force
November 1, 2016    The Prohibition of Benami Property Transactions Rules, 2016 came into force

Meaning of Benami

The term “Benami” is originated from Persian compound word which implies “without a name”. According to Advanced Law Lexicon Benami means Nameless, fictitious, fraudulent, (a sale or purchase made in the name of someone other than the actual vendor or purchaser). The habit of holding land benami is inveterate in India as held in a number of cases. Fiction and falsehood are very usual in benami disputes. Benami purchases are very common in India, and are due to many considerations which may not find their counterpart in other countries [1922 P.C. 235]. Before 1988, the legislature did not by any measure, declared Benami transactions to be illegal and was recognised and effect given to them by Courts. Benami used in Hindu Law to designate a transaction, contract, or property that is made or held under a name that is fictitious or is that of a third party who holds as ostensible owner for the Principal or beneficial owner. The word “Benami” is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies, a transaction which is real, as for example, the benami purchase, i.e. a real purchase by one in the name of another. Occasionally the word “benami” is used to refer to a sham transaction for example when A purports to sell property to B without intending that title should pass to B (Shree Meenakshi Mills Ltd. v. CIT) AIR 1957 SC 49 at p. 66.

“A Benami transaction is one where one buys property in the name of another or gratuitously transfers his property to another, without indicating an intention to benefit the other. The benamidar, therefore, has no beneficial interest in the property or business that stands in his name; he represents in fact the real owner and so far as their relative legal position is concerned, he is a mere trustee for him. In other words, a benami purchase or conveyance leads to a resulting trust in India, just as a purchase or transfer under similar circumstances leads to a resulting trust in England. The general rule and principle of the Indian Law as to resulting trusts differs but little, if at all, from the general rule of English Law upon the same subject.” [Treatise on Hindu Law, Mayne 11th Edition p. 953 as cited in Controller of Estate Duty Lucknow v. Alok Mitra, AIR 1981 S.C. 102 and Rajesh Kumar Agarwal v. Virendra Kumar Agarwal AIR 1994 All 135).

The expression “Benami” denotes transactions for the benefit not of the persons taking part in the transactions but of the persons or persons not mentioned in the transaction. In other words, in simple terminology, Benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person therefore the former will be the nominal owner and the latter will be the beneficial or real owner of the property. The Privy Council in the case Pether Perumal v. Muniandy (1908) I.L.R. 35. Cal. 551 held that the person who lends his name for the purchase of property and has ostensible title, i.e., the benamidar is nothing but an alias for the real owner who is has beneficial ownership of the property.

Brief History

The earliest noteworthy mention of benami transactions was in the 18th Century when the British had colonised the territory of India. In the case of Gopeekrist Gosain v. Gungapersuad (1854) 6 MIA 53, it was held that such benami transactions were a part of India’s custom and therefore must be recognised unless otherwise provided by law. Thereafter, Sections 81 and 82 of the Indian Trusts Act, 1882 (hereinafter referred as the “Act, 1882”) extended legislative recognition to benami transactions due to which the Indian Courts were bound to enforce them. The rationale provided for justifying these transactions was Section 5 of the Transfer of Property Act, 1882 according to which there is no prohibition on transfer of property in the name of one person for the benefit of the other. Eventually such transaction were entered between parties to defraud public revenues. In order to remedy this situation Parliament introduced Section 281A in the Income-tax Act, 1961 (hereinafter referred as the “Act, 1961”) to prohibit the institution of suits with regards to benami properties. The widespread menace of illegal benami transactions was not effectively curtailed and therefore Sections 81 and 82 of the Indian Trusts Act, 1882 and Section 281A of the Income-tax Act, 1961 were repealed. Thereafter following the recommendations of the 57th Law Commission report the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 (hereinafter referred as the “Ordinance”) was promulgated by the President on 19th May, 1988.

The said Ordinance was subject to criticism from press and public on the grounds that it was not an effective mechanism to curb benami transactions. Accordingly 130th Law Commission Report submitted certain recommendations as enumerated below:

• All kinds of property must be covered by Benami transactions

• The new law must declare that entering into Benami transactions is an offence except when a father or husband transfers property in the name of his daughter or wife.

• Omission of Section 94 of the Indian Trusts Act, 1882.

• Acquisition of properties in the same procedure as provided in Chapter XXA of Income-tax Act, 1961

Thus, after incorporating the relevant recommendations of the Law Commission the Benami Transactions (Prohibition) Act Bill was passed by both the Houses of Parliament and on 5th September, 1988 it became the Benami Transaction (Prohibition) Act, 1988.

• Benami Transaction (Prohibition) Act, 1988

The Benami Transaction (Prohibition) Act, 1988 (hereinafter referred as the “Act”) was enacted in order to prohibit all benami transactions and recovery of property which has been held as benami. The Act consisted of only nine sections out of which Sections 3, 4 and 5 are significant.

– Section 3 prohibits entering into a benami transaction. The exceptions to the same are as follows:

“The purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife or the unmarried daughter.”

– Section 4 provides that no suit or claim shall be maintained to enforce rights with respect to benami properties. The exceptions to the same are:

“(a) where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or

(b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”

– Section 5 provides that the benami properties shall be acquired by authority without any compensation or payment in return.

Delay in implementation of the Act

The flourishing of black money is not due to lack of deterrent law but due to non-implementation of an enacted statute by the administration. In other words, although twenty eight years ago the Act was passed by the Parliament, however, it was not implemented despite the request by the Central Vigilance Commission to the Government to empower the former under the Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the same. Hence, recently the legislators drafted a new bill in tune with the current circumstances and requirements.

Benami Transactions (Prohibition) Amendment Bill, 2016

In the recent past, there have been various instances in which people use their unaccounted money to purchase property in name of a fictitious or non-existent person therefore the need for a strong mechanism to combat such activities has become inevitable. This Act has come into operation w.e.f. 1-11-2016 and the Govt. introduced demonetisation on 8-11-2016 which is worth noting.

The object and purpose of the Benami Transactions (Prohibition) Amendment Bill, 2016 (hereinafter referred as the “Amendment Bill”) is not only to efficaciously prohibit benami transactions but also to prevent evasion of tax by illegal practices. The most significant aspect of the Amendment Bill is that all the benami properties shall be confiscated after following due procedure of law. However, the law extends immunity under the Income Declaration Scheme to those who made a declaration in respect of their benami properties.

Journey of the law on prohibition of benami transactions

On 13th May, 2015 the Benami Transactions (Prohibition) Amendment Bill, 2015 (hereinafter referred as the “Amendment Bill, 2015”) was introduced in Lok Sabha in order to amend and incorporate certain very important provisions of the Act, i.e., amendment to the definition of benami transactions, establishment of Adjudicating Authority and Appellate Tribunal, penalties on benami transactions, etc.

The rules and all the provisions of the Benami Transactions (Prohibition) Act, came into force on November 1, 2016.

Distinction between the Old Act and Amended Act

Old Act Amended Act
Benami Transactions (Prohibition) Act, 1988 Prohibition of Benami Property Transactions Act, 1988
9 Sections 72 Sections
Acquisition of Property Confiscation of property
Benami Transaction Rules Absent Benami Transaction Rules notified
No administration Administration defined
Imprisonment for 3 years or fine or both Rigorous imprisonment for a period not less than one year but which may extend to Seven years and also fine which may extend to 25% of the F.M.V. of the property

The significant developments of law on prohibition of benami transactions is traced in the following table in a concise form:

St. No. Amendment Bill, 2015 Recommendations of the Standing Committee Government proposals for amendment Amendment Act, 2016
1. Clause 4 expands the definition of “benami transactions” and adds the following arrangements/ transactions to the definition: To provide exemption to the following Accepted the Standing Committee Recommendations. Proposed exemption Explanation to Section 2(9)

Benami transaction shall not include any transaction involving

i) property is held for another for immediate/ future benefit, direct or indirect except- Karta or HUF, person in fiduciary capacity, holding in name of spouse, property in the name of the person’s brother or sister or lineal ascendant or descendant

ii) transaction is made under a fictitious name

iii) the owner is in denial of the ownership of property

iv) transaction in which the person who has provided consideration for the purchase of property is not traceable

i) bona fide transactions in which Consideration has been paid.

ii) Transaction which involves transfer of immovable property via

a) registered agreement of sale

b) registered General Power of Attorney or

c) registered development agreement on stamp duty payment

to the contract involving transfer of property which is partly executed under the Transfer of Property Act, 1882 provided that stamp duty is paid and contract is registered the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882. This requires that the requisite stamp duty is paid and the contract is registered
2. The aforesaid mentioned provides exemption to individual purchasing property in name of family member provided he is using “known source of income” for this purpose Recommended to substitute “known sources of income” with “known sources” Recommendation accepted S.2(9)(A)(i) –

Exemption to Karta provided the consideration for the purchase of property is paid out of known source.

S. 2(9)(A)(iii) –

Exemption for purchase of property in the name of spouse and any child provided the consideration paid out of known source

S. 2(9)(A)(iv) –

Exemption for purchase of property in the name of brothers or sisters or lineal ascendants provided the consideration is paid out of known source and the purchaser is joint owner

3. Clause 8

There shall be no re-transfer of the benami property from the one who is holding the property (benamidar) to the one who has paid the consideration (beneficial owner) and any such
re-transfer shall be void

No recommendation The corresponding provisions of the bill will not apply to those who disclose their benami properties under the Income Disclosure Scheme of the Finance Act, 2016 Section 6(3) –

The provisions of sub-sections (1) and (2) shall not apply to a transfer made in accordance with the provisions of section 190 of the Finance Act, 2016.

4. Clause 27(3)

All the rights and titles shall vest, free of all encumbrances, in the Central Government after the confiscation of the benami property. No compensation shall be paid for such confiscation.

Since land is subject of the State List of the Schedule VII of the Constitution of India therefore all the rights of the confiscated property to be vested with the State Government No amendment S. 27(3) –

Where an order of confiscation has been made under sub-section (1), all the rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and no compensation shall be payable in respect of such confiscation

5. Clause 24(1)

On grounds of suspicion, the Initiating Officer, after recording reasons, may initiate investigation after issuance of notice to show cause as to why the property in question should be considered as benami

A specified time frame must be enunciated for the completion of investigation against benami transaction No amendment Section 24(1 )–

Where the Initiating Officer, on the basis of material in his possession, has reason to believe that any person is a benamidar in respect of a property, he may, after recording reasons in writing, issue a notice to the person to show cause within such time as may be specified in the notice why the property should not be treated as benami property

6. Clause 24(2)

When the notice as mentioned in Clause 24(1) specifies the property held by the benamidar then the copy of notice shall also be provided to the beneficial owner

No recommendation Notice to be issued to the beneficial owner provided his identity is known Section 24(2) where a notice under sub-section (1) specifies any property as being held by a benamidar referred to in that sub-section, a copy of the notice shall also be issued to the beneficial owner if his identity is known
7. Clause 26(1)

Within the period of 30 days, the Adjudicating Authority may require the benamidar or the beneficial owner of the benami property to submit all the necessary documents

The time period to furnish the documents must be extended to three months No amendment Section 26(1)

On receipt of a reference under sub-section (5) of section 24, the Adjudicating Authority shall issue notice, to furnish such documents, particulars or evidence as is considered necessary on a date to be specified therein

8. Clause 46(1)

The Appellate Tribunal shall be the appellate body against the order of the Adjudicating Authority

The time period of two years must be provided for disposal of appeals No amendment Section 46(1)

Any person, including the Initiating Officer, aggrieved by an order of the Adjudicating Authority may prefer an appeal in such form and along with such fees, as may be prescribed, to the Appellate Tribunal against the order passed by the Adjudicating Authority under sub-section (3) of section 26, within a period of forty five days from the date of the order

9. Clause 32(1) A sitting or former High Court Judge shall be qualified for the purpose of being a Chairperson of the Appellate Tribunal The Chairperson must have an experience of minimum five years as a High Court Judge Recommendation accepted Section 32(1)

A person shall not be qualified for appointment as Chairperson of the Appellate Tribunal unless he is a sitting or retired Judge of a High Court, who has completed not less than five years’ of service.

• What is Benami transaction as per Act?

(9) “benami transaction” means:-

(A) a Transaction or an arrangement:

(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person;


(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,

except when the property is held by –

(i) a Karta, or a member of a Hindu Undivided Family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family

(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;

(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual.

(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;

Explanation – For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882, if, under any law for the time being in force –

(i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;

(ii) stamp duty on such transaction or arrangement has been paid; and

(iii) the contract has been registered.

2. In this Act, unless the context otherwise requires –

(29) “transfer” includes sale, purchase or any other form of transfer of right, title, possession or lien;

The term ‘transfer’ is inclusively defined. The second part states that any other form of transfer (i.e., a form other than sale or purchase) of right, title, possession or lien is also covered. Therefore mortgage, lease, tenancy, gift, will all be transfers.

(24) “person” shall include-

(i) an individual;

(ii a Hindu Undivided Family;

(iii) a Company;

(iv) a Firm;

(v) an association of persons or a body of individuals, whether incorporated or not;

(vi) every artificial juridical person, not falling under sub-clauses (i) to (v); the definition is identical to the definition of ‘person’ in s. 2(31) of the Income-tax Act, 1961 except that local authority is not included herein.

(26) “Property” means asset of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property.

(2) In this Act, unless otherwise requires

(31) words and expressions used herein and not defined in this Act but defined in the Indian Trusts Act, 1882, the Indian Succession Act, 1925, the Indian Partnership Act, 1932, the Income-tax Act, 1961, The Depositories Act, 1996, the Prevention of Money-Laundering Act, 2002, the Limited Liability Partnership Act, 2008 and the Companies Act, 2013, shall have the same meanings respectively assigned to them in those Acts.

Therefore, if a word/expression is used in this Act but is not defined in this Act one will need to check if it is defined in any of the 8 Acts mentioned above. If the answer is in the affirmative, such word/expression will have the same meaning assigned to them in those Acts. A difficulty may arise if a word/ expression is defined in more than one of these 8 Acts and the two definition are different, which one be adopted for the purposes of this Act.

Judicial Interpretation of Benami Transactions

There are couple of factors that need to be taken into account in order to determine as to whether a particular sale of property is benami or not. In the case of Om Prakash Sharma v. Rajendra Prasad Shewda & Ors. Civil Appeal No. 8609-8610 of 2009 decided on 9th October, 2015 the Supreme Court made reference to a landmark precedent known as Jaydayal Poddar (Deceased) through L. Rs. & Anr. v. Mst. Bibi Hazra & Ors. AIR 1974 SC 171 and laid down certain important factors as stated below:-

“(1) the source from which the purchase money came;

(2) the nature and possession of the property, after the purchase;

(3) motive if any, for giving the transaction a benami colour;

(4) the position of the parties and the relationship, if any, between the claimant and the alleged benamidar;

(5) the custody of the title-deeds after the sale and

6) the conduct of the parties concerned in dealing with the property after the sale.”

The Apex Court also cautioned that no straight jacket formula can be laid down in this context and the aforesaid mentioned factors are not exhaustive therefore the facts and circumstances of each case become excessively relevant.

What are the legal consequences of Benami transactions?

The following are the legal consequences of Benami transactions:

1. Benami transaction is a punishable offence – Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may be extended to three years or with fine or with both – Section 3(2) of the Act.

After 1-11-2016 as per Sec. 53(2) shall be punishable with R.I. for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to 25% of the E.M.V. of property.

2. Prohibition of the right to recover property held benami – No suit, claim or action to enforce any right in respect of any property held benami against the person in whose name this property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property – Section 4(1)

3. No defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action or by or on behalf of a person claiming to be the real owner of such property – Section 4(2).

4. Property held benami liable to confiscation – Any property, which is the subject matter of benami transaction, shall be liable to be confiscated by the Central Government – New Section 5 as substituted by the 2016 Amendment Act.

5. Prohibition on re-transfer of property by benamidar – No person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf – New section 6(1). Any such re-transfer shall be null and void – New section 6(2). However, this prohibition shall not apply where the re-transfer is made in accordance with the Income Declaration Scheme, 2016 – i.e., in accordance with section 190 of the Finance Act, 2016 – New section 6(3).

Authorities under the Act – Section 18

Authorities    Designated Officers
Initiating Officer :    ACIT/DCIT
Approving Authority :    Jt. CIT/ Addl. CIT
Administrator :    T.R.O.
Adjudicating Authority :   Officer in the grade of
(Administrative as well Commissioner of Income tax
as legal and a person of I.L.S. not below
the Rank of Jt. Secretary

 (2) The authorities shall exercise all or any of the powers and perform all or any of the functions conferred on, or, assigned, as the case may be, to it under this Act or in accordance with such rules as may be prescribed.

Section 19(1) of the Act provides that for the purposes of this Act, the authorities shall have the same powers as are vested in a Civil Court while trying a suit in respect of the following matters viz. –

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any official of a banking company or a public financial institution or any other intermediary or reporting entity, and examining him on oath;

(c) compelling the production of books of account and other documents;

(d) issuing commissions;

(e) receiving evidence on affidavits; and

(f) any other matter which may be prescribed.

All the persons summoned under s. 19(1) shall be bound –

(i) to attend in person or through authorised agents, as any authority under this Act may direct, and

(ii) to state the truth upon any subject with respect to which they are examined or make statements, and produce such documents as may be required.

Powers of Authorities – Section 19

• Every proceeding under sub-sections (1) and (2) shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code.

• Any authority under this Act may, for the purposes of this Act, requisition the service of any police or other officer or any officer of the Central Government or State Government or both to assist him for all or any of the purposes specified in sub-section (1), and it shall be the duty of every such officer to comply with the requisition or direction.

• Sub-section (5) defines “reporting entity” for the purposes of this section to mean any intermediary or any authority or of the Central or the State Government or any other person as may be notified in this behalf.

• Explanation to the section states that the term ‘intermediary’ for the purposes of sub-section (5) shall have the same meaning as assigned to it in section 2(1)(n) of the Prevention of Money Laundering Act, 2002.


Q.1 What is Benami Transaction? What is Benami Property?

Ans. Benami property can be any property whether movable or immovable, the source and ownership of which is not known. When the owner of the property is not able to define the source of funding of the property, the property could become benami.

Q.2 How does Benami transaction take place?

Ans. Benami transaction takes place between two parties. On the one hand is the beneficial owner of the property who pays the consideration for the benami transaction. On the other hand is the owner of the property in whose name the property has been purchased, such person is called the benamidar.

Q.3 What are the conditions to be fulfilled for a transaction to be classified as Benami?

Ans. As per the Benami Transaction (Prohibition) Amendment Act, 2016: A transaction shall be regarded as a Benami Transaction if it fulfils the following two conditions:

1) Property is held by or transferred to any person for which the consideration is paid by another person and

2) The property is held for the benefit or future benefit, either directly or indirectly, for the person who has provided such consideration.

Q.4 Whether Benami Property includes only Immovable property?

Ans. As per the Prohibition of Benami Property Transactions Act, Benami property includes both immovable property (like land or building) and movable property/assets.

Here, an important point to be noted is that in case of the ongoing process of de-monetisation, if a person deposits old currency in the account of another person with the understanding that the account holder will return the money in new currency can also be regarded as a benami transaction. Here, the Tax department can issue notices under the Benami property Act also.

The person who deposits old currency in the bank account shall be treated as beneficial owner and the person in whose bank account the old currency has been deposited shall be categorised under as a benamidar.

Q.5 What are the transactions that are also included in the definition of Benami Transaction?

Ans. Following are also considered as Benami Transactions:

• Any transaction or arrangement made in respect of a property carried out or made in a fictitious name.

• Any transaction or arrangement made in respect of a property, where the owner of the property is not aware of such ownership.

Q.6 Will POA transactions be regarded as benami transactions?

Ans. It appears that by virtue of Explanation to Section 2(9), power of attorney transactions will not be regarded as Benami Transactions provided the conditions mentioned therein are satisfied. In his reply to the debate on the Amendment Bill in Rajya Sabha on 3-8-2016, the Finance Minister has clarified as under:

“As far as power of attorneys are concerned, I have already said properties which are transferred in part performance of a contract and possession is given then that possession is protected conventionally under section 53A of the Transfer of Property Act. That is how all the power of attorney transactions in Delhi are protected, even though title is not perfect and legitimate. Now, those properties have also been kept out as per the recommendation made by the Standing Committee.”

Q.7 Why do people enter into benami transactions?

Ans. Many people want to know why anyone enters into benami transactions.

Some of the reasons for entering into benami transactions are:

(1) People who enter into Benami transactions are those who have money earned from unknown sources i.e., black money. Therefore, in order to utilise the black money, these persons enter into Benami transactions where the transaction is done in the name of another person but the consideration is paid by another person out of his black money. Since these persons cannot show the transaction in their own names therefore they use names of other persons or some fictitious names for entering into such transactions.

(2) Another reason for entering into Benami transactions is that people want to hide the ownership of the benami property from their creditors or from the banks in case where such people have taken loans from such banks. Some people also want to hide the ownership from their relatives.

Q.8 What are the transactions that are not classified as benami transactions?

Ans. As per the Benami Transactions Amendment Act, 2016, following transactions are not classified as Benami Transactions:

(1) If the property is held by a Karta or any member of the HUF and the property is held for the benefit of the members of the HUF and the consideration for such property has been paid through known sources of the HUF.

(2) A person standing in the fiduciary capacity for the benefit of another person towards whom he stands in such capacity. Ex: A trustee, a director of the company.

(3) In case of an individual, where the property is in the name of the spouse or in the name of any child of the individual and the consideration for such property has been paid out of known sources of the individual.

(4) In case of an individual, in the name of his brother or sister or lineal ascendant or descendant and where the names of the individual and brother/sister or lineal ascendant or descendant appear as joint owners.

Q.9 What can be the consequences of entering into Benami Transactions?

Ans. Following are the consequences of entering into Benami transactions:

• As per the provisions of Prohibition of Benami Property Transactions Act, entering into benami transactions is prohibited.

• This Act further provides that whosoever enters into any benami transactions shall be punishable with rigorous imprisonment for a term which shall not be less than one year and shall not exceed seven years.

• In addition to this, fine of 25% of the fair market value of the property shall be payable.

• The Act further prohibits recovery of the benami property from the benamidar by the real owner and where the benamidar retransfers the property to the beneficial owner, then the transaction for such re-transfer shall be deemed to be null & void.

• Properties that are held as benami are liable to be confiscated by the Government without payment of any compensation.

Q.10 What would be impact of the amendment to the Prohibition of Benami Transactions Act on black money in wake of the recent demonetisation of the currency?

Ans. Some of the impact of the Amendment to the Benami Act would be as follows:

• The major impacts of the application of the Benami Act would be on the real estate sector. This Act will ensure that the real estate transactions shall be in the name of the actual owners i.e., in the name of the person paying the consideration for such property. This is likely to lower prices in the real estate sector.

• It is also likely to solve a major problem in the real estate sector i.e., the lack of clarity of title of the property. This lack of clarity deters investors such as PE and NBFCs from investing in the real estate sector.

• In case of the ongoing process of demonetisation, if a person deposits old currency in the account of another person with the understanding that the account holder will return the money in new currency can also be regarded as a benami transaction. Here, the Tax department can issue notices under the Benami Property Act also.

There might be some other impacts of the Benami Act such as:

• A company raising share capital that is not able to produce its shareholders to the concerned authorities can fall under the ambit of benami transactions.

• If a person takes a loan and is not able to substantiate the genuinity of the lender or is not able to produce the lender may also fall under the ambit of the Benami Act.

• The new law is also likely to have a serious impact on rural India where, because of large number of cash transactions and poor state of land records, even genuine landowners may find it difficult to establish their titles.

The enactment of the amended Prohibition of Benami Transactions is a major step by the Government to curb the flow of black money; however, it is also equally important to protect all the genuine commercial transactions from the ambit of the Amended Benami Act.

[Source : Paper presented in souvenir of One Day Conference held at Kolkata on 20th January, 2018]

My Dear Brothers and Sisters of AIFTP

Happy new financial year to all of you. the last financial year will go in the history as the one that created lot of upheavals for our fraternity and business. It is the year of change and tax reforms has brought the country under the umbrella of uniform tax structure that will eventually reduce litigation, promote business and curb on unaccounted trade practice. The digitalisation of the system has reduced human intervention eradicating corruption.

I believe that tax laws in India particularly GST is one of the world’s most dynamic laws because we see notifications and clarifications almost every alternate day keeping us on our toes all the time.

The E-way bill for inter-state transaction now recently introduced from 1st April is reasonably free from system glitches and there are not much complaints and shortcomings. It is now going to be introduced as a second step in 15 States for intra-state transactions also. We are hopeful that now it must succeeded so that things get streamlined and are found fit to face and pass GST (Great Stress Test) effect.

We have seen lot of pandemonium in the Parliament and Upper House. It is the norm of the day to stall the proceedings of Parliament by opposition benches on one pretext or other. It is the greatest Mockery on democracy. The tax payers’ hard earned money is wasted by the lawmakers in not allowing to function the house and the budget session proved to be complete failure.

The Finance Bill was passed without any discussion in the house, important tax changes particularly capital gains on sale of securities and shares got through in spite of the fact that securities transaction tax is still there which was brought in lieu of capital gains, when it was exempted. The other provisions of the Finance Bill became Act without thread bare consideration.

It is a celebrated principle of physics that every action has a reaction equal and opposite to the action. The ruling party when it was in opposition did not allow Parliament to function under UPA Government regime. Now it is at receiving end and facing the same turmoil that it had once created.

It is clear that whosoever may be in power they are least worried about the wastage of tax payer’s money. It is reported that the cost of having Parliament session is ₹ 1.80 Lakhs per minute and it is not usefully utilised.

John D. Rock feller Junior has said “I believe that thrift is essential to well ordered living and that economy is a prime requisite of sound financial structure whether in Government, business or personal affairs.”

I hope that good sense shall prevail on all and they will think about the plight of the taxpayer.

I do not wish to criticise anyone but the laxity on the part of the executive is at large. No appointment has been made on the post of ITAT President, even the post of Vice-Presidents are not filled, the Vice-Presidents are retiring one after other without filling the gap. It is adversely effecting the functioning of the ITAT. I am afraid if it continues we will have to give serious consideration to it and make representations and if need a PIL may be filed.

We are holding a seminar and NEC Meeting on 5th & 6th of May 2018 at Indore. I request all the members to participate in the seminar in large number.

In case it is reaching your hands after the seminar then my request to you is to join in Amritsar National Tax Conference and NEC Meeting scheduled for 11th & 12th August 2018 and a visit to Wagha Border is being planned on
10th of August. I request all the members to gear up for the same and participate in large numbers in all the coming events.

My dear friends! A successful team beats with one heart. Individually we are one drop. Together, we are an ocean. If everyone is moving forward together then success takes care of itself so, say in unison that we are one and will work for the betterment of our organisation.

Looking forward to meeting you in the seminars.

Ganesh N. Purohit

National President

Publications for sale

Sr. No. Name of Publication Rate (₹)
Edition Members Non-Members Courier Charges
1. “Income Tax Appellate Tribunal – A Fine Balance – Law, Practice, Procedure and Conventions – Frequently Asked Questions” Dec., 2017 1,000.00 1,050.00 100.00
2. AIFTP – Of Milestone and Beyond – History Book Nov., 2016 400.00 450.00 80.00

Notes: 1. The above publications are available for sale; those who desire to buy may contact the office of the Federation.

2. Local/Outstation members not collecting from office are requested to add courier charges, as mentioned above.

3. Please draw Cheque/Draft in favour of “All India Federation of Tax Practitioners” payable at Mumbai.


On February 01, 2018, the Hon’ble Finance Minister in his Budget speech at Para 157 stated as under:

“We had introduced E-assessment in 2016 on a pilot basis and in 2017, extended it to 102 cities with the objectives of reducing the interface between the department and the taxpayers. With the experience gained so far, we are now ready to roll out the E-assessment across the country, which will transform the age-old assessment procedure of the Income Tax department and the manner in which they interact with taxpayers and other stakeholders. Accordingly, I propose to amend the Income- tax Act to notify a new scheme for assessment where the assessment will be done in electronic mode which will almost eliminate person to person contact leading to greater efficiency and transparency”.

The Finance Act, 2018 is also set to launch a new system of assessment proceedings pan India basis i.e. “Jurisdiction-Free Assessment” for scrutiny related assessments, where system envisages allocation of a particular taxpayer’s profile to any assessing officer across the country via special software. For example, Mumbai based assessee can be assessed by an Assessing Officer deputed at Kolkata or Chennai or vice versa.

The new system would do away with the Assessing Officers’ discretionary powers to call for additional documents, records, and most importantly, ask the taxpayer to appear in person. Thus, the new system will –

1. Minimise interaction between the taxpayer and the Assessing Officer.

2. Curb corrupt practice in the Department.

3. Ensure a transparent and no-harassment culture.

4. Deal with all kinds of tax–related matters such as filing of returns for scrutiny etc.

5. Identities of the taxpayer and his Assessing Officer will be kept as confidential.

6. It will save precious time of the taxpayer.

7. Provides a 24/7 anytime/anywhere convenience to submit details to the Department.

8. Compliance burden on taxpayers in the form of time and resources will be reduced.

9. The Scheme is environment friendly as information can be exchanged online.

10. Taxpayer would retain complete information for future reference.

The E-assessment system was introduced in 2016 on a pilot basis in New Delhi and Mumbai. In 2017, it was extended to 102 cities with the objectives of reducing the interface between the department and the assessees. It is expected that the same will dissolve the 18 assessment zones which account for all direct tax collection in coming days.

To implement the new system, an amendment made in Section 143 of the Income- tax Act, 1961, implementing e-assessment proceedings, no doubt, India is moving towards borderless compliance within the country.

Furthermore, the Prime Minister, while addressing a Conference of senior tax officials, asked to push E-assessment in income tax proceedings, and anonymity of proceedings using technology, so that vested interests do not impede the due course of law. He also suggested that human interface be kept to a minimum in the tax administration’s dealings.

One of the significant advantages of E-assessment is the time saved. A taxpayer need not travel to the income tax office, and await his turn in the corridor to meet the Tax Officer (at times, that wait would stretch to a few hours). Even if one is not in the same city, one can still respond to the notices.

The second significant advantage is that the taxpayer is no longer subject to the potential corruption of a Tax Officer, with threats to make additions to the income unless one pays up. This is indeed a big relief for honest taxpayers, and which is what the Prime Minister has been stressing on.

At the same time, practical implementation of E-assessment in many cases, which involve complex commercial transactions, lot of supporting evidences and documents. In manual assessments, we often see cases of unnecessary adjustments being made by Tax Officers, either they are not able to understand commercial reason and structure of any business/transaction or they find the evidences submitted by taxpayer in support of its claim as inadequate or unclear.

In case of complete e-assessment proceedings without personal interaction may result in many arbitrary additions and adjustments by tax authorities, where Tax Officer making E-assessment is not able to understand the case and make addition only to protect interest of department. This will also result in increasing litigation and increasing paper-work at appellate levels and also multiple rounds of litigation in same case.

In fact, currently, during the course of assessment hearings, one is able to explain to the tax officer the commercial rationale, and is able to clear his doubts about a transaction. Most tax practitioners would testify to the fact that tax officers do not get convinced merely by written submissions, however eloquent they may be, but when the same issue is explained to such officers orally in a manner which they can understand, the issue is understood much better. Tax officers’ arguments can be countered on the spot, clearing their misgivings.

Audi Alteram Partem therefore the courts have held that the right to be heard is one of the fundamental principles of natural justice to be followed in assessment proceedings, which are quasi-judicial proceedings. If such right of hearing is not granted, serious injustice may be caused to a taxpayer.

While the idea of e-assessment is in principle an excellent one, the systems and procedures need to be tweaked a little to ensure that it does not result in injustice to taxpayers in the form of unjustified additions in the assessments. The space limit for uploading documents needs to be increased, and on change of tax officers, login access to the system has to be granted to the new officers immediately. Also, tax officers need to be given adequate training regarding trade practices and procedures in different industries, and for different types of transactions. Ideally, they need to be deputed for a year or two to a public sector entity, to understand commercial realities.

E-assessments need to be monitored by a Commissioner. Wherever any addition is proposed by the tax officer, a show cause notice needs to be given to the taxpayer, that too only after seeking approval of the Commissioner. At that stage, the taxpayer needs to be given an option to either e-file his reply, or seek an appointment for attendance and reply in person. The scope for corruption can be reduced by a requirement of seeking approval of the Commissioner for every addition, and a right to the taxpayer to appear before the Commissioner to explain his case before grant of such approval.

It is only then perhaps that the process of e-assessment will really live up to its true potential, and taxpayers as well as the tax department will reap the benefits that it is supposed to provide.

H. N. Motiwalla

Joint Editor