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Taxpayer Wins ₹12.62 Lakh LTCG Case After Share Surge
Gyanchand Baksharam Godhwani bought shares in a small company and later sold some of them for a large profit.
The share price had risen by nearly 7,800% in three years.
He claimed the profit was exempt from tax under the law that applied at that time.
Tax officials suspected that the shares were part of a price-manipulation scheme.
They added the profit to his taxable income.
Godhwani argued that the purchases and sales were properly documented.
The tribunal found that he paid through banks, sold the shares on the stock exchange, and received the money through banking channels.
It also found no evidence that he or his broker helped manipulate the share price.
The tribunal therefore cancelled the tax addition.
ITAT Mumbai set aside a ₹12,61,955 addition against Mumbai taxpayer Gyanchand Baksharam Godhwani.
Godhwani bought 10,000 Shubham Granites shares for ₹30,000 in February 2011 through banking channels.
After a 2012 stock split, he sold 27,000 shares in 2014 for ₹12,78,155.
The Income Tax Department alleged the transaction was linked to penny-stock price manipulation and denied the LTCG exemption.
The tribunal ruled that a sharp price rise and general suspicion were insufficient without evidence linking Godhwani to manipulation.
- Who
- Mumbai taxpayer Gyanchand Baksharam Godhwani, the Income Tax Department, and ITAT Mumbai.
- What
- ITAT Mumbai overturned a ₹12,61,955 addition after the department rejected Godhwani’s claimed LTCG exemption on share-sale profits.
- Where
- The transactions involved the stock exchange, and the case was decided by ITAT Mumbai.
- When
- Godhwani bought the shares on 28 February 2011, sold them in April and May 2014, and the tribunal delivered its order on 25 August.
- Why
- The tax department suspected a non-genuine penny-stock transaction because of the sharp price rise and Godhwani’s sale near the stock’s peak; the tribunal found no transaction-specific evidence of manipulation.
Tax Department’s Position
Taxpayer and Tribunal’s Position
Meaning of the sharp price rise
Tax Department’s Position
The department relied on investigative findings about penny-stock manipulation, the company’s weak financial position, and the nearly 7,800% increase in its share price.
Taxpayer and Tribunal’s Position
The tribunal said the price movement and the company’s financial profile justified scrutiny but did not prove that Godhwani participated in manipulation.
Documentary evidence versus suspicion
Tax Department’s Position
The Assessing Officer and CIT(A) considered the alleged modus operandi of entry operators and the test of human probabilities stronger than the documents produced.
Taxpayer and Tribunal’s Position
The tribunal found that the purchase, dematerialization, stock split, exchange sale, securities transaction tax, and banking-channel payments had not been disproved.
Evidence linking the taxpayer to manipulation
Tax Department’s Position
The department treated the gain as non-genuine because Godhwani was not a regular trader, sold near the peak, and retained 23,000 shares.
Taxpayer and Tribunal’s Position
ITAT Mumbai noted that no cash trail or statement linked Godhwani or his registered broker to an operator, buyer, or manipulation of the shares.
Key facts
- Tax addition disputed
- ₹12,61,955
- Shares purchased
- 10,000 shares for ₹30,000 on 28 February 2011
- Stock split
- The holding increased to 50,000 shares after a split on 6 June 2012
- Shares sold
- 27,000 shares in April and May 2014
- Sale proceeds
- Net consideration of ₹12,78,155
- Claim made
- Long-Term Capital Gain exemption under Section 10(38)
- Tribunal decision
- ITAT Mumbai set aside the addition on 25 August
Quotes
ITAT Mumbai
The Mumbai bench of the Income Tax Appellate Tribunal hearing Godhwani’s tax appeal.
“The addition rests substantially upon a general description of the modus operandi in penny-stock cases, the financial profile of the company, the movement in its share price and the inference drawn from the timing and quantity of the assessee's sale. Such circumstances may call for close scrutiny, but they cannot, without a transaction-specific link, displace documentary evidence or establish that this assessee was a party to price manipulation.”
livemint.com
“There is no material referred to in either of the impugned orders showing that the purchase consideration was paid in cash, that sale proceeds were funded by the assessee, or that any cash trail was traced from the assessee to a broker, operator or purchaser.”
livemint.com
Sources
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