Bonafide trade through tainted brokers not illegal, says Jharkhand High Court

MUMBAI: Transactions of an investor on a stock exchange through tainted brokers cannot be deemed a "sham" and benefits of capital gains disallowed if the shares were purchased "bonafidely" and "innocently", and are supported by documents such as contract note, bank statement and demat account.

This was an important judgment given by the Jharkhand High Court recently in a case involving the income tax commissioner of Jamshedpur and one Arun Kumar Agarwal and other assessees regarding penny stocks.

Quashing a revenue department order, the court ruled that Agarwal was eligible for long-term capital gains benefit despite trading shares on the Calcutta Stock Exchange through a broker suspended by the bourse after a Sebi inquiry found that he (the broker) was involved with others in raising the price of the same shares through bogus transactions.

The court ruled that though a broker may be involved in unfair trade practices, the same cannot apply to a person who trades on a stock exchange through such an entity if he has all the relevant information and documents (bank statement, contract note, demat account) and has purchased the shares without the knowledge of the broker's complicity in raising prices through sham transactions.

"Transactions done through tainted brokers need not be termed a sham and long-term capital gains benefit disallowed if the purchase and sale of shares are genuine," said chartered accountant and tax counsel Bhupendra Shah.

For instance, in a separate appeal involving another assessee, the tax official disallowed long-term capital gains benefit -- no tax if shares are held for over a year -- as the shares sold rose from 9 to 160 in 17 months because of sham transactions by eleven brokers found guilty by Sebi.

However, bank statements, contract note and demat account credit showed the assessee held the shares prior to when their meteoric rise began.