Tax on share profits: When can Income Tax reject your LTCG claim? Mumbai ITAT’s ₹85 lakh ruling explained

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has deleted a ₹85.35 lakh addition made against a taxpayer who claimed long-term capital gains (LTCG) from shares of Sunrise Asian Ltd., holding that the tax department could not establish her involvement in price manipulation or accommodation entries.

The ruling came in the case of Amita Rambilas Agarwal v. Income Tax Officer – Piramal Chambers, Mumbai (ITA No. 1216/Mum/2026) for assessment year 2014-15. The order was pronounced on 21 July 2026. The case concerned the taxpayer's claim of exemption on LTCG from the sale of 8,000 shares of Sunrise Asian Ltd., formerly known as Santoshima Tradelinks Ltd.

Why the tax department rejected the ₹85 lakh LTCG claim

Agarwal had reported LTCG of ₹85.35 lakh from the share sale and claimed exemption under Section 10(38) of the Income-tax Act, 1961. The Assessing Officer (AO), however, treated the transaction as a bogus penny-stock transaction.

The AO rejected the exemption and added ₹85.35 lakh as unexplained cash credit under Section 68 of the Income-tax Act. A further addition was made towards alleged commission for obtaining an accommodation entry. The first appellate authority, the Commissioner of Income Tax (Appeals), upheld the additions, prompting Agarwal to approach the ITAT.

The dispute essentially turned on whether the taxpayer's documented purchase and sale of the shares could be treated as genuine when the scrip itself had come under suspicion.

ITAT finds no direct link to manipulation

Before the Tribunal, the taxpayer produced evidence showing that the shares had been purchased through banking channels, reflected as investments and credited to her demat account before being sold through a recognised stock exchange.

The Tribunal noted that the Revenue had not pointed out any defect in the documentary evidence furnished by the taxpayer. More importantly, it had not brought material on record establishing that Agarwal herself was involved in price manipulation or had obtained an accommodation entry.

The ITAT therefore held that the LTCG claim could not be rejected merely on the basis of general allegations concerning the scrip.

The Tribunal also relied on earlier decisions involving the same stock, including Anraj Hiralal Shah (HUF) v. ITO, Dipesh Ramesh Vardhan v. DCIT and Rambilas S. Agarwal v. DCIT. It also referred to the Gujarat High Court ruling in PCIT v. Divyaben Prafulchandra Parmar.

What the ruling means for investors

The decision does not mean that every LTCG claim involving a penny stock must automatically be accepted. Rather, it underscores the importance of evidence linking a particular taxpayer to an alleged manipulation or accommodation-entry arrangement.

In Agarwal's case, the Tribunal found that the transaction trail was supported by banking records, demat records and exchange-based sale transactions, while the Revenue did not establish a direct connection between the taxpayer and the alleged manipulation.

With the principal ₹85.35 lakh addition deleted, the consequential addition relating to alleged commission became infructuous.

For taxpayers facing scrutiny over share transactions, the ruling highlights the importance of preserving contemporaneous records, including purchase documents, bank statements, demat statements and evidence of exchange-traded sales.

The key takeaway is that the fact that a particular stock has been viewed as suspicious does not, by itself, establish that every investor who traded in it participated in a bogus transaction. The Revenue still needs to establish the taxpayer-specific link to the alleged arrangement.