Black money to White money

There are number of ways to convert Black money to White money. Some ways which are used by assessee are also known to assessing officers. Income tax department of Gujarat issued one book in which they mentioned how different ways are adopted by assessee to make their black money to white. But it becomes difficult to trace it as it is done in legitimate manner. Recently The Economic Times thrown some light on this aspect which is mentioned below:-  

In April last year the shares of a company called Global Securities, listed on the Bombay Stock Exchange (BSE), were trading in a band of Rs 15-25 a share. Daily volumes during the month varied wildly — from a few hundred shares, to a few lakh. The company's net profit in 2012-13 was to the tune of around Rs 3.9 lakh.

Between April 2012 and March 2013, the price of the stock rose slowly but steadily. It peaked at Rs 151 per share in early March 2013 before falling sharply. Between late May and December, volumes in the stock averaged a few hundred to a few thousand a day. From January onwards, volumes soared to as much as a few lakh shares before dropping steeply after April 1 this year.

Global Securities, along with two other companies also listed on the BSE, Finalysis Credit and Guarantee and Aricent Infra, are the subject of a recent complaint to the BSE that claims that the shares of these companies were traded in a way as to enable brokers to convert client funds from black to white. ET Magazine approached each of the companies asking for a response. Finalysis managing director Sajjad A Qadir said: "Yes we are aware of complaints. We are conducting an inquiry and the authorities too are investigating the matter."

A compliance officer of Aricent infra responded: "We have not yet received intimation of any such complaint by the BSE authorities nor we have received any such complaint at our end. We will certainly look into the matter at our end." Communications to the official email IDs of Global Securities and follow-up calls to officials did not elicit a response.

In response to a questionnaire, BSE responded: "The exchange routinely receives various letters/complaints on various scrips ... wherever warranted [it] conducts the necessary analysis/ investigation... The exchange does not comment on the status of the investigation of individual cases."

Regulators could well find that trading in stocks of these companies was legitimate, and that they were not used by operators to launder funds. But complaints about manipulation of stocks, many of them 'penny' stocks, to enable conversion of black money into white are hardly new. Here's how shares in listed companies are used for conversion:

Black Listing

While there are various ways in which this is done, the basic principle arises from the fact that under Indian tax law, long-term capital gains on listed equity shares (capital gains when there is at least a year's gap between the time a share is bought and when it is sold) is tax-free.

A broker and his client could strike a deal whereby the broker sells shares in a penny stock to his client for a low price, say a few rupees. The catch here is that the contract note issued to the client is backdated to a year earlier. In the interim, the broker has manipulated the price of the stock up through circular trading — two or more brokers circulate the stock between them each selling at a higher price than earlier.