Can the Income Tax Department treat your long-term capital gains (LTCG) from shares as false just because the stock later flagged as suspicious?
The Mumbai Income Tax Appellate Tribunal (ITAT) recently dealt with a similar case involving a taxpayer whose LTCG claim was rejected by the tax department and treated as unexplained income.
The tribunal, however, found that the taxpayer had purchased shares through banking channels, held them in a Demat account, and sold them through a recognised stock exchange, while no direct evidence linked her to any alleged manipulation.
The ITAT ultimately provided relief, highlighting an important principle for taxpayers.
The case
In Amita Rambilas Agarwal v. Income Tax Officer – Piramal Chambers, Mumbai (ITA No: 1216/MUM/2026, Assessment Year: 2014-15, order dated 21-Jul-2026), the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has provided relief to the taxpayer in a case concerning the authenticity of long-term capital gains (LTCG) earned from the sale of shares.
The dispute occurred after Amita reported LTCG of Rs 85.35 lakh from the sale of 8,000 equity shares of Sunrise Asian Ltd, formerly known as Santoshi Maa Tradelinks Ltd. She had claimed exemption on these gains under Section 10(38) of the Income Tax Act, 1961. However, the Assessing Officer (AO) rejected the exemption claim and treated the LTCG amount of Rs 85.35 lakh as unexplained credit under Section 68 of the Income Tax Act, 1961.
The addition was subsequently upheld by the Commissioner of Income Tax (Appeals)/CIT(A).
Apart from treating the LTCG as unexplained income, the tax department also made an addition of Rs 2.56 lakh, citing the reason that the amount allegedly represented commission paid for obtaining the bogus LTCG entry. The taxpayer argued that there was no evidence of any such commission payment, arrangement, or exchange of benefits. She also said that the reason given for the payment was incorrect and not in line with the Income Tax Act and its rules.
Additionally, she challenged the imposition of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961, claiming that the income and transactions had been properly disclosed in her original income tax return, which was filed on July 31, 2014, and that neither income omission nor the disclosure of false particulars had occurred.
Before the Tribunal, the taxpayer demonstrated that the shares were purchased through banking channels, credited to the demat account, and sold through a recognised stock exchange. Importantly, the Tribunal noted that the AO had not found any defect in the documentary evidence submitted by the taxpayer.
The tribunal also took note of earlier decisions of coordinate benches involving the same stock, Sunrise Asian Ltd, where similar additions had been deleted. These included cases such as Anraj Hiralal Shah (HUF) vs ITO, Dipesh Ramesh Vardhan vs DCIT and Rambilas S. Agarwal vs DCIT. The ITAT also referred to the decision in PCIT-1 vs Divyaben Prafulchandra Parmar.
Where earlier ITAT decisions have considered the same stock and similar facts and have consistently accepted the transactions as genuine, those decisions provide important support to other taxpayers in similar cases.
“A subsequent ITAT bench would generally consider and follow the earlier decisions, particularly where the facts and evidence are similar and the Revenue has not brought any new or taxpayer-specific material. However, each case must ultimately be decided on its own facts,” said Rajesh Gandhi, Partner, Deloitte India LLP.
Relying particularly on an earlier ruling involving similar facts, the ITAT observed that merely receiving information regarding suspicious share transactions cannot, by itself, be sufficient to reject a taxpayer’s claim of capital gains. In the earlier case, the tribunal had held that where share purchases and sales were supported by evidence, shares were reflected as investments, and delivery was established through Demat accounts, the capital gains could not be treated as bogus in the absence of evidence directly linking the taxpayer to fraudulent price manipulation.
Applying the same ruling to the case of Amita Agarwal, the ITAT noted that she had purchased the shares through banking channels, held them in her Demat account and sold them through a recognised stock exchange. The tribunal further observed that there was no direct evidence linking the taxpayer with any market manipulation or accommodation entry provider.
Considering the documents submitted and the judicial precedents involving the same company, the ITAT held that the facts of the taxpayer’s case were covered by earlier decisions of the coordinate benches. Following the principle of judicial consistency, the tribunal allowed the taxpayer’s main ground challenging the denial of exemption on the LTCG.
In arriving at this conclusion, the Tribunal noted that the taxpayer had purchased through banking channels, the shares were held in a demat account, and sold on a recognised stock exchange, with no defect found in the supporting documents, and there was no evidence linking the taxpayer to any price rigging or accommodation entries.
Since the main issue relating to the addition of Rs 85.35 lakh was decided in favour of the taxpayer, the ITAT held that the remaining grounds, including those relating to the alleged commission payment and penalty proceedings, had become unproductive and did not require separate adjudication. The Mumbai ITAT ultimately partly allowed the taxpayer’s appeal through its order pronounced on July 21, 2026.
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The Tribunal has specifically noted that the shares were purchased through proper banking channels and held in the demat account, and that the AO could not find defects in the supporting documents.
Accordingly, taxpayers should maintain records and evidence of the transaction trail such as share purchase contract notes, source of purchasing the shares, bank statements showing entries related to the transaction, Demat account statements showing shareholding and Income-tax returns and balance sheets reflecting the investment.
LTCG claim rejected? How important is direct evidence?
This issue has been specifically dealt with by the Tribunal. The Tribunal held that the Revenue had not brought any material on record showing that the assessee was part of fraudulent price rigging.
It emphasized that there was no direct evidence linking the assessee with any manipulation or accommodation-entry provider.
In the absence of such evidence, the LTCG claim could not be rejected merely because the scrip itself was viewed as suspicious. In other words, mere suspicion regarding a company or stock is not enough. The department must connect the taxpayer to the alleged manipulation.
Hence, it is critical that direct evidence is on record.
Direct evidence linking is important – in the absence of such linkage, courts and tribunals have often held that the claim cannot be denied solely on the basis of suspicion or general allegations relating to the scrip.
“Where the taxpayer is able to substantiate the transaction through contract notes, banking records, demat statements and exchange-traded sale records, the Revenue would generally be expected to demonstrate a direct nexus between the taxpayer and the alleged manipulation,” stated Gandhi.
Section 68 addition: Is an investigation report enough?
The Tribunal held that there was no direct evidence showing that the taxpayer was involved in price manipulation, fraudulent price rigging, or any accommodation-entry arrangement. Merely because the scrip was considered suspicious could not justify rejection of the LTCG claim.
The ruling reiterates that suspicion, however strong, cannot replace evidence. Unless the Revenue can specifically connect the taxpayer with the alleged scheme, genuine documentary evidence cannot be ignored.
Therefore, the tax authorities need evidence to establish the taxpayer’s involvement in the alleged manipulation of price and his connection with the accommodation entry operators and the financial trail demonstrating that the taxpayer benefited from the scheme.
For this purpose, there should be evidence on record that supporting documents provided by the taxpayer are false, fabricated or manipulated.
Share transactions: How crucial is demat proof?
It is critical to establish ownership of shares and actual delivery of stocks. For this purpose, disclosure in the balance sheet or other financial records showing the investments, evidence of receipt and sale in the taxpayer’s demat account are very important to demonstrate the genuineness of the transaction.
Company under investigation? What should taxpayers do?
Riaz Thingna, Partner, Grant Thornton Bharat, says that, from the perspective of the taxpayer, it is important to preserve all supporting records of the transaction to demonstrate that:
- purchases and sales were made through regular banking channels
- source of funds used for purchase was identifiable and supported by appropriate records
- there was actual delivery of stock, reflected in demat records
- transactions were carried out at prevailing market prices through a registered broker
- financial statements or other contemporaneous records reflecting the investment, where applicable
Once the records are in place, the taxpayer should cooperate with the revenue authorities during assessment proceedings and prove that the investments were correctly declared in the balance sheets and tax returns.
Based on the Tribunal’s decision, a genuine investor should not be penalised merely because a company or intermediary is later investigated, as long as there is no evidence showing the investor’s involvement in the manipulation.
Investing in small stocks? Watch these red flags
With various informal sources across digital and other platforms, investors may be caught off-guard.
“Hence, factors such as unexplained price or volume spikes, weak business fundamentals, frequent promoter or business changes, large off-market transactions, assured-return tips, unusual corporate actions, and dealings through unfamiliar brokers or connected parties should be on the watch list of taxpayers,” as per Rahul Jain, Partner at Khaitan & Co.
There is no complete or comprehensive guide to red flags that an investor should avoid. Some specific alarm bells that investors may keep in mind are:
- Investments in stocks promising guaranteed returns
- Dealing through unregistered intermediaries
- Transactions involving cash payments or settlements
- Participating in off-market arrangements
- Lack of documentary evidence
- Trading in illiquid stocks with abnormal price movements
Above all, investors should maintain complete documentation of the chain of transactions and correctly reflect the investments in their balance sheet and tax returns.
ITAT rulings on same stock: Why judicial consistency matters
The Tribunal in this decision specifically observed that several earlier decisions involving the same scrip had already deleted similar additions. Therefore, while following binding precedents and maintaining judicial consistency, it granted relief to the taxpayer.
The principle of judicial consistency means that where facts are substantially identical and there is no distinguishing evidence, courts and tribunals generally follow earlier decisions to ensure certainty and uniformity in tax administration.
“The ruling reinforces the importance of maintaining robust contemporaneous documentation to substantiate claims of exempt long-term capital gains (LTCG). The ruling underscores that a consistent and verifiable transaction trail remains critical in establishing the genuineness of an LTCG exemption claim,” said Rajat Singhi, Partner, Price Waterhouse & Co LLP.
If different ITAT benches have considered the same scrip, similar facts and the same investigation findings, and have consistently reached the same conclusion, subsequent benches would generally follow those decisions unless there are different facts or a higher court has taken a different view.
Disclaimer: This article is based on the Mumbai ITAT order in Amita Rambilas Agarwal v. Income Tax Officer – Piramal Chambers, Mumbai (ITA No. 1216/MUM/2026, AY 2014-15), order dated July 21, 2026. The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
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