Taxpayer denied LTCG exemption over suspected share price manipulation after 7,800% jump: How he won the case

A multi-fold surge in the share price of a little-known company can easily attract the income tax department’s attention, especially when the assessee is also not a regular trader. That is exactly what happened in the case of a Mumbai taxpayer whose ₹12.62 lakh long-term capital gain (LTCG) exemption claim was denied over suspected price manipulation.

The taxpayer in question had sold part of his shareholding in 2014 after the stock price surged nearly 7800% over three years. He subsequently claimed the then-available LTCG exemption on the sale of listed shares.

After the tax department denied the exemption and scrutinised the transaction, the matter reached the Income Tax Appellate Tribunal (ITAT), Mumbai, which ultimately deleted the addition of ₹12,61,955 made against the said taxpayer.

In an order, delivered on August 25, 2026, ITAT Mumbai held that suspicion arising from a sharp rise in a company’s share’s price, without evidence proving the assessee’s role in price manipulation, cannot sustain an addition under Section 68 of the Income-tax Act.

The share purchase that started it all

Gyanchand Baksharam Godhwani, a Mumbai-based taxpayer, purchased 10,000 shares of Shubham Granites Ltd. (later renamed as Blazon Marbles Ltd.) on February 28, 2011. He bought the shares from Ahmedabad Gases Ltd. for ₹30,000, with the payment made through banking channels.

After a stock split from ₹10 face value to ₹2 on June 6, 2012, Godhwani’s holding increased to 50,000 shares. He sold 27,000 of these shares on the stock exchange in April and May 2014 for a net consideration of ₹12,78,155.

He reported a long-term capital gain (LTCG) of ₹12,61,955 and claimed it as tax-exempt under Section 10(38) of the Income-tax Act. The remaining 23,000 shares continued to be held in his demat account.

Earlier, the income tax law allowed taxpayers to claim an exemption on LTCG from the sale of listed equity shares and equity-oriented mutual funds. However, the government revoked this exemption under Section 10(38) in Union Budget 2018, making such gains taxable from April 1, 2018.

Why was the transaction subject to scrutiny?

Godhwani filed his return of income on August 26, 2015, declaring his total income of ₹10,48,560. His case was picked for scrutiny on account of sale of shares and claim of exempt LTCG.

The Assessing Officer relied on investigation findings about alleged manipulation in penny stocks, along with the sharp rise in Blazon Marbles’ share price and the company’s weak financial position. He also pointed to the alleged modus operandi of entry operators in such cases.

Separately, it was also noted that Godhwani was not a regular share trader, had failed to satisfactorily explain the sharp price rise, and had sold the shares near their peak while retaining the remaining shares.

The officer treated the LTCG of ₹12,61,955 as a non-genuine transaction and added it under Section 68.

The CIT(A) also upheld the addition, holding that investigation inputs and the test of human probabilities outweighed the documentary evidence. However, the ITAT found this approach untenable.

What did the ITAT Mumbai order state?

The tribunal noted that the purchase of 10,000 shares for ₹30,000, their dematerialisation, the stock split, the sale of 27,000 shares through the stock exchange, payment of securities transaction tax, and receipt of sale proceeds through banking channels had not been disproved by the Revenue.

“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,” the order noted.

Additionally, no statement naming the assessee had been brought on record. Neither the assessee nor his registered broker had been identified by SEBI as a person involved in manipulation of the scrip.

ITAT Mumbai also stated in its order, “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.”

The tribunal directed the Assessing Officer to delete the addition of ₹12,61,955 and allow the exemption claimed under Section 10(38).