The Income Tax (I-T) department has launched criminal prosecution against shell companies, stock brokers, beneficiaries and operators involved in laundering over Rs 10,000 crore in Mumbai alone by manipulating listed penny stocks to claim bogus long term capital gain (LTCG), sources familiar with the tax probe told The Indian Express.
Penny stocks trade at a relatively low price and have small market capitalisation.
The first such criminal prosecution has been filed against Mukesh Ruia, promoter of the listed Shekhawati Poly-Yarn Ltd on February 28. The I-T has alleged that Ruia laundered over Rs 17 crore between 2012 and 2014 through Unno Industries Ltd, a listed penny stock and availed tax exemption by showing fake long term capital gains.
WATCH VIDEO | Income Tax Department Launches Criminal Prosecution Against Entities Making Illegal Profits Via Penny Stocks
Currently, any capital gains from shares held for more than a year are fully exempt from paying taxes.
“In the last two years, the tax department in Mumbai has unearthed laundering of over Rs 10,000 crore through a number of penny stocks in the form of fictitious long term capital gains. The criminal case by the agency will set a precedent. In the next few months, criminal prosecution is expected against several entities and shell firms involved in such tax evasion,” said a person familiar with details of the case.
According to court filings, the I-T department has sought seven years of rigorous imprisonment under sections 276C (1), 278 of the I-T Act and sections 120 B and 420 of the Indian Penal Code for Ruia and six others — a Mumbai-based chartered accountant, three partners of a brokerage firm and two “dummy” directors of four shell companies — who assisted Ruia in converting black money into white.
The court filings of the tax department in the case of Ruia also detail the modus operandi of the entities to convert black money into white. It said that a Kolkata-based brokerage firm, Intellect Stock Broking Pvt Ltd, allegedly helped Ruia buy 41.71 lakh shares of Unno Industries in 2011 at Rs 1.79 a piece through preferential allotment.
The court filings state that in the next two years, the owners of the brokerage, through Kolkata-based shell companies Nimbus Vincom Pvt Ltd, Viewlink Dealer Pvt Ltd, Vedant Commodeal Pvt Ltd and Touchwin Dealcomm Pvt Ltd, rigged the share prices of Unno Industries through circular trading (buyers and sellers are connected) in its shares. As a result, the shares of Unno Industries in 2013 touched about Rs 38 a piece with Ruia’s stake valued at about Rs 17 crore. Ruia then funded the same shell companies, allegedly bringing in the black money into these shell firms, which subsequently bought Ruia’s stake in Unno Industries, the court filings state.
The I-T has alleged that Ruia later claimed tax exemption on the profit of Rs 17 crore he made through trading in the penny stock. The brokerage and the shell firms also received a commission of 4 to 6 per cent from Ruia, the department said.
Emails to Ruia, Intellect Stock Broking and Unno Industries did not elicit any response.
The case against Ruia comes at a time when the government is working on measures to curb the menace of domestic shell companies which are used to convert black money into white.
Investigation agencies have identified close to 30.000 shell companies in Kolkata alone. Most of these shell companies, according to the I-T department, share the same office address and employ dummy directors — typically “people of no means” to act as fronts for the main operators.
For instance, in the case of Ruia, at least three shell firms, Viewlink Dealer, Vedant Commodeal and Touchwin Dealcomm, have listed a common address as their registered office address, according to the Registrar of Company (RoC) website.
In July 2015, the Special Investigation Team (SIT) on black money recommended proactive mining of RoC database by government’s fraud office to weed out shell companies. This, after the SIT found shell companies had been used to provide accommodation entries to launder black money in a number of high-profile cases investigated in the recent past.
The SIT pointed out that there were 2,627 individuals holding directorships in more than 20 companies in violation of Section 165 of the Companies Act, 2013. There were also 345 addresses that were being used by at least 20 firms each. Data compiled by the Ministry of Corporate Affairs showed that the total number of such companies was 13,581.