Tax authorities must change attitude of doubting –causing litigation lot of wastage of public money and resources and harassment of tax payers – a discussion about gains or loss in security transactions

[CA DEV KUMAR KOTHARI]

Security transaction tax (STT)- was to simplify:

Security transaction tax (STT) was introduced to simplify taxation of gains arising in transactions of securities. This should have been implemented in right spirit. However, due to doubts and disbelief, lot of litigation and harassment have already taken place and lot of litigation is still going on.

Changes in legislative intention on introduction of Security Transaction Tax (STT):

The changes in legislative intentions on introduction of security transaction tax and corresponding changes in treatment and taxation of income on sale of shares and units of mutual funds need to be considered in purpose seeking manner.

After these changes, the old rulings on these aspects are not much relevant. Security Transaction Tax (STT) and corresponding benefits of Income-tax are for simplification of tax regime on security transactions.

Memorandum Explaining provisions of the Finance (No. 2) Bill, 2004 relevant portions are at 268 ITR (196- 197) (St.) under the heading “Levy of Transaction tax and exemption / concession on capital gain arising from securities entered in a recognized stock exchange”. On page 197 it is stated as follows in para 2:

“With a view to simplify the tax regime on securities transactions, it is proposed to levy a tax at the rate of 0.15 per cent. On the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax shall be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provision relating to the proposed tax are contained in Chapter VII of the Finance (No.2) Bill,2004, and shall take effect from the date this Chapter comes into force.

Further, it is proposed to insert clause (38) in section 10 of the income -tax Act, so as to provide exemption from long-term capital gain arising out of securities sold on the stock-exchange. It is also proposed to insert a new section 111A and amend section 115AD of the Income-tax Act,1961, so as to provide that short-term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate of ten per cent.

These amendment will take effect from 1^st April,2005 and will, accordingly, apply to assessment year 2005-06 and subsequent years.” {Chapter VI, and clauses 5,24,25}.”

The purpose of levy of STT and corresponding concessions under I.T.Act, should be considered harmoniously and in purpose seeking manner.

When STT is paid considering of concessions u/s 111A, 112 and 88E should be considered in a liberal manner.

The assessee may be considered to have options to adopt benefit of taxes under head capital gains or against business under S.88E as may be found tax advantageous to him.

It need to be considered in a manner that the law grant option to assessee to treat shares and units of mutual fund as stock-in-trade or as capital assets. This is so particularly in view of S.45(2).

The options and privileges granted under law may not be considered in a manner so as to burden tax payer with more taxes and litigation. In this regard ruling in case of CIT V Mahindra Mills and others (2000 (3) TMI 3 - SUPREME Court in context of S. 32 relating to depreciation is important.

Therefore, there should not be an attempt to disregard transactions merely because STT levied is less than Income-tax which could be levied if the capital gains are taxed in normal way of capital gains.

 STT is levied even at stage of acquisition, when there is no gain, STT is levied even if securities are sold at a loss. Therefore, once a tax by way of STT has been collected, there should not be an attempt to nullify policy of simplified taxation introduced by GOI, in form of STT.

Tax authorities going against legislative intent:

From history of reported judgments we find that tax authorities have tried to go against legislative intent leading to complexities and litigation. In large number of cases wrong approach was adopted by tax officers in just taking a contrary view from the view taken by assesse. For example when assesse treated a gain as capital gain, AO tried to treat it as business income. When assesse claimed a business profit or loss, AO tried to treat it as capital gain or loss.

INVESTMETN RESULTING INTO CAPITAL GAINS OR LOSS:

Investment in shares are made based on expectation in future. A company may be on death bed but it may turn around in future and can become a healthy company. We also find many healthy companies in past are now sick or on death bed. We also notice repeated revival packages of many companies which are very much affected by external factors like market conditions, government policies etc. For example we can consider case of chares of sugar mill companies which had seen very bad phase due to adverse government policies and world market and has improve considerably due to some changes in government policies and change in market price for sugar. Within last 15-18 months we observe very bad time and now improving fortunes of sugar companies.

If a company is active and is listed, there are chances that it may turnaround and give good results in price of its shares. A company may be listed, delisted again listed. It may become sick, then healthy and again go sick. Just like in case of living being, in case of companies also health chart vary. In fact health variations are more prominent in companies then in case of human being.

A human being who is disciplined and maintain good living habits about his meals, quality of meals, physical activities, sleep, work discipline etc. and have good thoughts and controls over thoughts and activities can live healthy life without much ups and downs. Whereas careless person have more chances of becoming sick frequently.

However, the same may not be fully applicable in case of companies. This is because health of a company depends more on health of global economy, national and regional economic factors related with its business. factors effecting its revenue and costs etc. A good decision can improve prospects of company whereas a bad decision can ruin the company.

The price of shares of a listed company depends on fundamentals of working and prospects of improvement, global factors, local factors, and also technical aspects of its share price behaviour. We can find price of any share increasing and falling in a pattern or even without a pattern. It is common saying in share market that buy on rumours and sell on news.

In fast information available a change in any part of globe may effect price of shares of a company. For example, if price of raw material (say crude) jumps, the price of shares of company consuming crude oil will fall, whereas price of shares of companies producing crude oil will improve. This happens very often when prices of commodities are volatile.

We find that even in case of government controlled PSU many companies had seen status of penny stock (price being very low trading volumes being low) as well as blue chip (good price and trading volumes). Please see the table attached, in which price of shares of some renowned PSU, and data of many other widely traded companies and thinly traded companies are provided.

Even from amongst PSU companies we find some companies becoming a penny company and then blue chip company. Even companies under category of NAV RATNA faced situation of beig penny stock some times. To name a few:

Company	life time high price	Life time low price	Significant ration of H/ L (times	CMP
NMDC LIMITED	571.80	0.40	1430 times	109
MMTC LIMITED	2846.58	0.50	5693 times	46
STATE TRADING CORPORATION OF India	868.00	5.00	174 times	117
STEEL AUTHORITY OF INDIA LTD	292.50	3.95	74 times	49.55
HINDUSTAN ZINC LTD	230.70	0.43	537 times	229

We find many other government companies which were penny stocks at some time but then gained considerable profitability and market price and later became penny stock. For example, we can recall case of SAIL, share price has tumbled to about 4/- , then rose to about ₹ 300/- and came down to about ₹ 15/- and is now ruling in range of 40-55 with some exceptions of higher or lower price..

In list of many now widely traded shares at higher price we find that at some time they were also like penny stock. For example, Infosys Ltd, Wipro Ltd, Vedanta Ltd , Bharati Airtel, Biral Corpn. To name a few such companies.

This shows that in case of listed companies, wide fluctuations in price of shares is very common and factors impacting fundamentals may have greater impact on price of shares and changing technical parameters. For examples, we can listen and see in business news that a company which was running into huge losses for many years, has reduced loss and then made a small profit is considered a very positive factor and price of share may shoot up on some rumour and or news. We can find many such companies at all times.

Suppose a luckiest person had purchased shares of a PSU MMTC @ 50 paise per share and sold them @ 2846/- per shares. This is quite possible, and one should not have any doubt merely because at some time MMTC was a real penny stock traded even below one rupee per share.

We also find cases of companies suspended by S/E then regularized on S/E and on such regularization there can be huge appreciation in price of shares. We also find cases of delisting and again listing resulting into appreciation.

Therefore, there should not be any bias against results of investments resulting into huge gains or loss. Such gains and losses are part and parcel of investment activity.

Merely because assesse is getting a tax benefit under simplified scheme of taxation, the tax authorities must not adopt attitude of doubting and disbelieving transactions of assesse in securities resulting into gains already taxed by way of STT.

Investment in companies are made based on some expectations, news even rumours heard from others or on TV in news, read on websites, newspapers, social groups, discussion forum etc. A fortunate person may gain substantially, whereas an unfortunate person may suffer loss. There should not be a doubt on these.

Doubts and disbelief by tax authorities:

Unfortunately the tax authorities have attitude of doubting and disbelieving everything. If a person has suffered loss, they call it as bogus loss, if a person has gained, they call it not genuine and try to treat as income by way of other source or un-explained credit by discarding all statutory and documentary evidences. The loss is disallowed and in case of tax free long-term capital gains or concessional short term capital gains attempt is being made by adding them as income from other sources and applying normal rate of tax instead of special rate.

Massive Litigation is going on:

From reported judgments of various tribunals and High Court, we find that massive litigation is taking place due to additions made or disallowance made by tax authorities merely on presumption, doubt and conjectures. The blatant way in which tax authorities have adopted practice of calling transactions as bogus, not genuine really casts a serious doubt on honesty of tax authorities.

This forces tax payers to recall a famous proverb ‘choro ko sare najar aate he chor’ . Public feeling is that tax authority might have made addition or disallowance due to some ulterior motive. Otherwise there should not be a reason to doubt, when tax under alternate and simplified tax regime has been collected, then why tax authorities are adopting such practices.

Documentary evidence should not be disregarded:

Tax authorities should not disregard documentary evidences due to some hearsay or merely on basis of unreliable verbal evidence or confession of some persons which might have been given by fearful persons to avoid his own harassment by tax authorities – some time called entry operator or accommodator. Public feeling is also that perhaps confessional statement might have been made by some people for gaining some personal advantage from tax authorities like reward or soft corner towards such persons making confession which can avoid harassment of such people. It is not clear as to what action has been taken by department against such persons who made some confession which is being used as a tool by tax authorities against other assesses.

Threatening practices must come to an end: Threatening practices adopted by tax authorities are not un-common. Many times notices for hearing or calling of information also include a statement that in case of failure penalty can be imposed. Even during hearing of cases, many officers have practice to tell and highlight about penalty provisions. This is not with an approach to educate assesse, but definitely with a motive of exerting pressure. No action against officers on their wrong actions, or omission to take proper action is reason that tax authorities are not at all hesitant, in knowingly doing wrong additions, disallowance, and in not disposing off matters which they should in a reasonable time.

Author feels that there has been some gradual reduction in threatening practices, adopted by tax authorities directly or indirectly, in comparison to situation which prevailed 25-30 years ago, still threatening practices are being adopted and applied in different manner like raising un-necessary demands, commencing un-necessary penalty proceedings even in respect of issues on which there are precedence in favour of assesse, withheld tax refunds as and when it can be taken in human hands, attaching bank accounts, debtors, spreading adverse publicity by way of news and press release causing damages to goodwill of tax payers.

This should come to an end.

Penny stocks:

Tax authorities have coined a new name for some stocks called ‘penny stocks’ because price of such stock was very low at some time and very high at some other time. Tax authorities are disbelieving deals in such stocks and trying to brand them bogus or not genuine.

We find that even some of NAVRATNA and MAHARATNA PSU have been traded at very low price some times and where penny stock , if the price or ratio between high and low price is considered from the point of view as adopted by tax authorities in relation to many such stocks.

Favourable judgments of High Court and Tribunals:

We find that in litigation, in majority of cases, properly represented by assesse, relief was allowed. In some cases assesse was not allowed relief because of nonappearance or inadequate representation without necessary documents.

On search on this website any one can get sufficient number of cases. On study of a large sample (30 or more), one can conclude that tax authorities are in habit of making additions or disallowance due to bias, surmise, conjecture and applying doubts and disbelieve theory by having a pre notion that tax payer has evaded tax. Fortunately, the judiciary is having open mind, sensing presumptions and bias of tax authorities and is coming to right conclusion.

PRICE OF COMPANIES – ALL TIME HIGH / LOW

The following table shows life time high and low price of shares of some companies in different segment of business. These companies are PSU / some companies have become Private sector companies but still stake of government is quite high.

Company	life time high price	Life time low price	H/ L times	CMP
Some public sector companies/ old PSU these include some navratna** and maharatna* as well:
NMDC LIMITED**	571.80	0.40	1430 times	109
MMTC LIMITED **	2846.58	0.50	5693 times	46
STATE TRADING CORPORATION OF India*	868.00	5.00	174 times	117
STEEL AUTHORITY OF INDIA LTD*	292.50	3.95	74 times	49.55
HINDUSTAN ZINC LTD	230.70	0.43	537 times	229
IFCI	121.20	2.65	9 times	28.15
IDBI BANK	202.25	13.95	15 times	71
ICICI BANK (EARLIER ICICI	393.20	4.30	91 times	254
ICICI (OLD FI)	320.00	38.25	8 TIMES	NA
STATE BANK OF INDIA	351.50	33.00	11 TIMES	259
OIL AND NATURAL GAS CORPORATION *	472.00	15.87	30 TIMES	241
GAIL *	551.35	22.67	24 times	364
INDIAN OIL CORPORATION LIMITED* There seems some mistake in high price shown at 488.35 at ICICI so taken 52 week high from BSE	593.00 (bse 52WEEK H)	34.02	17 times	566
INDIAN PETROCHEMICALS COR *	486.00	31.50	15 times	481
Scooters India ltd	53.85	1.50	36 times	34
BHARAT HEAVY ELECTRICALS LTD *	585.00	6.63	88 times	142
BHARAT ELECTRONICS LTD	1416.70	5.75	246 times	1233
BEML LIMITED	1849.95	12.65	146 times	1039
NATIONAL FERTILIZERS LIMITED	149.25	2.75	54 times
GUJARAT NARMADA FER & CHEM LTD	231.00	11.00	21 times	156
GUJARAT STATE FERTILIZERS & CH	124.50	1.80	69 times	72
SHIPPING CORP OF INDIA LT	221.33	7.87	28 times	70.90
DREDGING CORPORATION OF INDIA	1356.10	2.05	661times
MAHANAGAR TELEPHONE NIGAM LTD	390.00	9.71	40 times
ENGINEERS INDIA LTD	538.00	10.58	51 times
HMT LIMITED	163.50	3.35	49 times
INDIA TOURISM DEVELOPMENT CORP	2217.55	56.00	40 times

The following table shows life time high and low price of shares of some companies in different segment of business. This table shows some of prominent companies – now or at some time in past:

Company	life time high price	Life time low price	H/ L times
VEDANTA LIMITED	494.30	0.96	515
HINDALCO INDUSTRIES LIMITED	251.90	36.90	7
TATA STEEL LIMITED	969.80	85.50	11.34
FEDERAL BANK LTD	79.73	11.50	7
RELIANCE INDUSTRIES	1626.05	31.75	51
INFOSYS LTD	1278.00	0.28	4564
TATA CONSULTANCY SERVICES LTD	2834.00	209.00	14
TECH MAHINDRA LIMITED	749.50	50.93	15
WIPRO LTD	980.00	0.52	1885
GREAT EASTERN SHIPPING CO LTD	572.00	13.80	41
VARUN SHIPPING CO LTD	110.50	3.75	8
IDEA CELLULAR LTD	203.90	34.05	6
BHARTI AIRTEL LTD	574.50	10.33	56
RELIANCE COMMUNICATIONS LIMITE	844.00	45.55	19
TATA TELESERVICES MAHARASHTRA	57.35	4.10	14
KESORAM INDUSTRIES LTD	313.33	36.46.	9
BIRLA CORPORATION LTD	684.00	11.00
SOUTHERN PETROCHEMICAL INDUSTR	235.00	4.00	59
INDO GULF CORPORATION LTD	141.00	18.00	8
EICHER MOTORS LTD	22945.00	9.00	2550
TVS MOTOR COMPANY LIMITED	340.90	0.85	401
BAJAJ HOLDINGS & INVESTMENT LI	3325.00	73.33	45
HINDUSTAN UNILEVER LIMITED	979.00	9.13	107
GODREJ CONSUMER PRODUCTS LTD	1676.40	24.00	70
NESTLE INDIA LIMITED	7,499.95	113.33	66
WALCHANDNAGAR INDUSTRIES LTD	1204.89	2.61	462
DYNAMATIC TECHNOLOGIES LTD	4225.00	10.50	402
BAJAJ HINDUSTHAN SUGAR LIMITED	212.93	11.01	19
BALRAMPUR CHINI MILLS LTD	205.00	7.23	28
PFIZER LTD	2724.00	48.75	56
WOCKHARDT LTD	2166.05	67.50	32
SUN PHARMACEUTICAL INDUSTRIES	1270.00	1.65	770
JET AIRWAYS (INDIA) LIMITED	1379.00	115.25	12
INDIAN HOTELS CO LTD	159.67	16.66	10
HOTEL LEELA VENTURE LIMITED	89.71	2.30	39

Some less known companies not regularly traded or thinly trades or which were used to trade in big way in past or are trading now but not regularly

	life time high price	Life time low price	High/low times
HIMACHAL FUTURISTIC COMMUNICAT	2552.90	5.95	430 times
HANIL ERA TEXTILES LTD	88.00	0.50	176 times
VENUS SUGAR LTD	25.00	0.60	42 times
SHREE VAANI SUGARS &	24.00	0.55	44 times
AMTEK AUTO LIMITED	526.00	0.88	598 times
GV FILMS LTD	16.36	0.05	327 times
MANALI PETROCHEMICALS LTD	41.67	1.20	35 times
RAMA PAPER MILLS LIMITED	108.80	0.85	128 times
NEPC INDIA LTD	174.55	1.20	145 times
NEPC AGRO FOODS LTD	93.75	1.00	94 times
BHARAT COMMERCE & IN	123.75	0.70	177 times
RAJASTHAN POLYESTER	30.00	0.33	91 times
UNIPLAS INDIA LTD NSE	60.00	0.40	150 times
UNIMIN INDIA LTD	33.00	0.35	94 times
CONSOL.FIBRES & CHEM	22.50	0.30	75 times
BHARAT COMMERCE & IN	123.75	0.70	177 times

Note about sources of information:

Prices are taken for BSE from http://getquote.icicidirect.com/trading_stock_quote.aspx?Symbol= ….

In few cases some mistake was noticed therefore 52 week H/ : price has been taken from website fo BSE . In some cases it seems that all time high price is not for all time but as per information available with the website of iciciedirect.com However, by and large the information is correct subject to some minor discrepancies.