Novice or Maha-Guru?
Technically speaking, it may be insulting to refer to Prakash Chand Bhutoria as a novice.
This is because his achievements in the stock market have surpassed that of Maha-Gurus like Warren Buffett and Rakesh Jhunjhunwala.
Bhutoria homed in on an unknown penny stock named Pinnacle Vintrade Ltd. He bought a chunk of the stock for a paltry price of Rs. 100,000.
To his good luck, Pinnacle Vintrade merged with another company named Unno Industries Ltd. He was allotted 91000 equity shares of Unno Industries ltd.
Unno Industries appears to have been a powerhouse of some sort because the stock price surged like a rocket.
Bhutoria had the good sense to dump the stock when the going was good.
He sold his entire holding for the consideration of Rs. 31.62 lakhs and took home a massive gain of about 3000% on his investment of Rs. 100,000.
The gains were raked in within a short period of 24 months.
ITO plays spoil-sport …
Unfortunately, the Income Tax Officer did not appreciate Bhutoria’s stock picking wizardry.
Instead, he smelt a rat.
He claimed that there was a “huge syndicate of entry operators, share brokers and money lender involved in providing bogus accommodation entries of Long Term Capital gain and short term capital loss”.
He also alleged that there was “large scale manipulation” in the market price of certain companies listed in the BSE.
“Some of the listed companies directly or in directly owned by operators and whose shares price have been apparently manipulated by the syndicate of operators,” he observed in a dry tone.
He also made the shocking allegation that Unno Industries was also a “main manipulated company” and was “under the syndicate”.
The bottom line is that the Income Tax Officer shattered Bhutoria’s dreams of enjoying tax-free long-term capital gains (LTCG).
… But Tax Court comes to rescue and holds penny stocks capital gains to be tax-free
Thankfully for Bhutoria, Hon’ble J. Sudhakar Reddy, the judge in the Tax Tribunal in Kolkata, was not impressed by the baseless allegations levelled by the ITO.
Instead, he castigated the ITO for proceeding on “suspicion” and not on “evidence”.
“A perusal of the order of the AO demonstrates that this addition was made merely on “suspicion” and in a routine and mechanical manner,” Reddy observed in a stern tone.
He also pointed out that the fact that there is an increase of 3100% of the value of shares over the period of 2 years is “highly suspicious” but cannot take the place of “evidence”.
Ultimately, after a lot of legalese and referring to judgements of other courts, Reddy upheld Bhutoria’s claim.
“I find force in the submission of the assessee and there are backed by evidence,” the Judge declared, bringing a smile to the face of Bhutoria and other novices who may have pocketed similar capital gains.
However, gains from 100 bagger penny stock Khoobsurat Ltd were held taxable
At this stage, we have to lament the bad luck of Shantadevi Bimalchand Jain, a senior citizen in Nagpur.
Shantadevi had also demonstrated amazing stock market wizardry. She bought a chunk of a penny stock named Khoobsurat Ltd at the throwaway price of Rs. 5.
Within 24 months, the stock price surged to Rs. 485, giving Shantadevi mind-boggling gains of nearly 10,000% (100-bagger).
However, two lady judges of the Bombay High Court named Justices Vasanti A Naik and Swapna Joshi were not sympathetic towards Shantadevi.
“The assessee had not tendered cogent evidence to explain as to how the shares in an unknown company worth Rs. 5 had jumped to Rs. 485 in no time,” they said.
They also 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 Rs.5 of a little known company would jump from Rs.5 to Rs. 485.”
Ultimately, the lady judges threw out Shantadevi from the Court.
“The assessee had indulged in a dubious share transaction meant to account for the undisclosed income in the garb of long term capital gain,” they fumed, sealing her fate forever.
In penny stocks, the gains must be encashed ASAP
Surprisingly, both penny stocks, Unno Industries and Khoobsurat Ltd, are today defunct. Neither company’s shares are traded on the stock market.
The big takeaway from this is that if we are ever lucky enough to snare mega multibagger gains from a penny stock, we must follow the lead given by Bhutoria and Shantadevi and cash in on the gains without any delay.
If we wait too long, the companies may close down and our gains will evaporate into thin air!