3 hrs ago
Mumbai ITAT Deletes Rs 1.93 Crore Penny-Stock Tax Addition
Sanjaykumar Mehta bought shares for Rs 70,000.
Later, those shares were sold for much more money.
The tax department believed the large profit was not real and came from a scheme involving a penny stock.
It added nearly Rs 1.93 crore to his taxable income.
Mehta showed documents proving that he bought, held and sold the shares.
These included bank records, broker documents and demat statements.
The Mumbai ITAT said the tax department had made general claims about the company’s shares.
It had not shown specific evidence that Mehta helped manipulate prices or arranged a fake transaction.
The tribunal therefore ordered the tax addition to be deleted.
The ruling applies to the facts and evidence in this particular case, not to all penny-stock investments.
Sanjaykumar Mehta invested Rs 70,000 in 35,000 Toyam Industries shares in April 2013.
He sold the shares through the BSE between September 2014 and February 2015 for gains contributing Rs 1.93 crore.
The Income Tax Department treated the gain as unexplained cash credit under Section 68, citing alleged penny-stock manipulation.
Mehta submitted purchase and sale records, contract notes, demat statements, bank statements and other transaction documents.
The Mumbai ITAT deleted the addition, finding no specific evidence that Mehta participated in manipulation or arranged an accommodation entry.
- Who
- Sanjaykumar Mehta, the Income Tax Department, and the Mumbai bench of the Income Tax Appellate Tribunal.
- What
- The ITAT deleted a Rs 1,93,30,395 addition that the tax department had treated as unexplained income from an alleged bogus penny-stock gain.
- Where
- Mumbai; the shares were sold through the Bombay Stock Exchange.
- When
- The case concerned Assessment Year 2015-16; the ITAT order was dated September 4, 2026.
- Why
- The ITAT found that Mehta provided a documentary transaction trail and that the department lacked specific evidence connecting him to manipulation or an accommodation-entry arrangement.
Tax Department’s Position
Taxpayer and ITAT’s Position
Whether the capital gain was genuine
Tax Department’s Position
The department relied on an investigation report identifying Toyam Industries among scrips allegedly used to generate artificial long-term capital gains and argued that the price rise was unsupported by company fundamentals.
Taxpayer and ITAT’s Position
Mehta argued that his purchase and sale were genuine, exchange-based transactions supported by contract notes, demat records, bank statements and other documents.
Evidence linking the investor to manipulation
Tax Department’s Position
The Assessing Officer and Commissioner of Income Tax (Appeals) concluded that the investment was made to obtain an accommodation entry.
Taxpayer and ITAT’s Position
The ITAT said the department had not produced specific evidence that Mehta participated in price rigging, colluded with brokers or promoters, or arranged an accommodation entry.
Effect of the stock being flagged
Tax Department’s Position
The department treated the scrip’s alleged manipulation and unusual price rise as grounds to question Mehta’s reported gain.
Taxpayer and ITAT’s Position
The ITAT held that identifying a scrip as a penny stock or investigating its broader manipulation does not by itself prove that every investor’s gain was bogus.
Key facts
- Investor
- Sanjaykumar Mehta of Mumbai
- Initial investment
- Rs 70,000 for 35,000 Toyam Industries Ltd shares
- Purchase date
- April 2013
- Sale period
- September 2014 to February 2015
- Disputed addition
- Rs 1,93,30,395
- Tax provision
- Section 68 of the Income Tax Act
- Tribunal outcome
- The Mumbai ITAT directed the Assessing Officer to delete the addition
Quotes
Dinkar Sharma
Company Secretary and Partner at Jotwani Associates
“The taxpayer’s position is considerably more compelling when the documentary evidence is not simply a set of separate documents but rather constitutes a continuous and independently verifiable trail of transactions.”
financialexpress.com
“just because the scrip has been identified as a penny stock or because the scrip was generally manipulated does not mean that each investor in that scrip acquired a bogus LTCG.”
financialexpress.com
Mumbai ITAT
The Mumbai bench of the Income Tax Appellate Tribunal
“Thus, on the aforesaid analyzations, addition made be the AO, is liable to be deleted”
financialexpress.com
Sources
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