Fraudulent transactions: the income tax department raids stock brokers

On December 3, the IT department carried out search and investigation operations in 39 locations across the country, including Mumbai, Kolkata, Kanpur, Delhi and Ghaziabad.

On December 3, the IT department carried out search and investigation operations in 39 locations across the country, including Mumbai, Kolkata, Kanpur, Delhi and Ghaziabad.

A large number of brokers and traders have come under the scrutiny of the Department of Income Tax for allegedly inauthentic transactions in the equity and currency derivatives segment of BSE to generate gains or losses contrived to evade taxes.

On December 3, the IT department carried out search and investigation operations in 39 locations across the country, including Mumbai, Kolkata, Kanpur, Delhi and Ghaziabad.

While the search operations resulted in the seizure of ₹1.2 crore in unaccounted cash, the Department believes that the fraudulent transactions led “unscrupulous entities” to record artificial gains or losses amounting to over of ₹3,500 crore.

“…the Department of Income Tax has searched and investigated certain stock brokers/traders who have been involved in facilitating the recognition of profit/loss through ‘Illiquid equity option reversal trades in the equity derivatives segment and also in the currency derivatives segment on the Bombay Stock Exchange (BSE),’ the Ministry of Finance said in a statement.

Furthermore, while the search operations resulted in the seizure of unaccounted cash to the tune of ₹1.20 crore, the tax department believes that the fraudulent trade led to “unscrupulous entities” recording earnings or artificial losses amounting to over ₹3,500 crore.

“The search/investigation action also resulted in the identification of unwarranted long-term capital gains realized in at least 3 BSE-listed penny stocks, where the manipulated profits used by the beneficiaries aggregate to approximately ₹ 2000 Crore,” the ministry statement said, adding that the number of beneficiaries benefiting from such manipulated transactions stands at “a few thousand scattered across India.”

By the way, this is not the first time such actions of traders and brokers have come under the scanner of a government body or regulatory body.

The Securities and Exchange Board of India (SEBI) has fined hundreds of entities over the past year for such fraudulent transactions.

The SEBI investigation was launched after the regulator uncovered numerous instances of trade reversals between 2014 and 2015.

According to a SEBI order, over 80% of all trades during this period saw individuals reversing their buy or sell position to generate artificial volumes and prices.

Operating mode

Since derivative contracts are illiquid – thinly traded – entities can agree and transact at a pre-determined price.

Typically, in transactions that have gone under the computer scanner, Entity A sells the contract to Entity B at a pre-determined price. Subsequently, A buys back the contract at a predetermined higher price than B to record artificial profits while B will record losses. In addition, losses are compensated by cash transactions in accordance with the agreement between the buyer and the sellers.

SEBI investigations revealed that such arrangements are made to convert black money into white money through fraudulent transactions on the exchange platform. These artificial losses are also used to offset actual gains to reduce the overall tax payable.

Dolores W. Simon