The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has restored a ₹12.62 lakh LTCG exemption that was denied to a taxpayer who claimed long-term capital gains from shares of Blazon Marbles Ltd., formerly known as Shubham Granites Ltd. According to reports from Personal Finance News and Mint, the ruling came in the case of Gyanchand Baksharam Godhwani v. Income Tax Officer – Piramal Chambers, Mumbai (ITA No. 1216/Mum/2026) for assessment year 2014-15, with the order pronounced on August 25, 2026. The case involved a dramatic 7,800% price surge in the stock over just three years, with the taxpayer selling shares at a premium of ₹47.34 per share compared to his original cost of ₹0.60 per share.
Godhwani had purchased 10,000 shares of Shubham Granites Ltd for ₹30,000 in February 2011 through banking channels and sold 27,000 shares for ₹12.78 lakh in April-May 2014, claiming the resulting ₹12.62 lakh LTCG as exempt under Section 10(38) of the Income-tax Act. As reported by Personal Finance News and Mint, the Assessing Officer treated the transaction as a bogus penny-stock transaction, citing investigation inputs about alleged manipulation in penny stocks, the company's weak financial position, and the general modus operandi attributed to entry operators. The officer observed that Godhwani was not a regular trader, had not satisfactorily explained the price rise, and had sold shares near the peak while retaining the balance. The first appellate authority, the Commissioner of Income Tax (Appeals), upheld these additions, holding that investigation inputs and the test of human probabilities outweighed the documentary evidence.
Before the Tribunal, Godhwani produced evidence showing that the shares had been purchased through banking channels, reflected as investments and credited to his demat account before the stock split from ₹10 face value to ₹2 on June 6, 2012. According to Personal Finance News and Mint, 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. The Tribunal observed that "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 tribunal further noted that Godhwani retaining 23,000 out of 50,000 shares materially weakens the inference that the entire arrangement was pre-planned to introduce a fixed amount of unaccounted money. Additionally, no statement naming the assessee had been brought on record, and neither the assessee nor his registered broker had been identified by SEBI as a person involved in manipulation of the scrip.
The ITAT relied on earlier decisions involving the same stock, including Shri Yogesh P. Thakkar v. DCIT, where the SEBI order dated October 13, 2017 was examined and found to deal with penalties for procedural violations and non-appearance without alleging the assessee's involvement in manipulation. As reported by Personal Finance News and Mint, the tribunal held that "suspicion arising from a sharp rise in a share's price, without evidence linking the assessee to price manipulation, cannot sustain an addition under Section 68 of the Income Tax Act." The tribunal emphasized that "an unusual rise in price, without more, may generate suspicion, but suspicion, however strong, cannot by itself sustain an addition under section 68 of the Act." The ruling underscores that when the tax department invokes penny stock allegations, it must establish a transaction-specific link between the assessee and the alleged manipulation, rather than relying on general descriptions of modus operandi or company financial profiles. The tribunal noted that "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 decision emphasizes that preserving contemporaneous records, including purchase documents, bank statements, demat statements and evidence of exchange-traded sales is crucial for taxpayers facing scrutiny over share transactions. As noted by Personal Finance News and Mint, the ruling highlights that while a particular stock may be viewed as suspicious due to unusual price movements, the Revenue still needs to establish a direct connection between the taxpayer and alleged manipulation arrangements. The case demonstrates that taxpayers can successfully defend legitimate LTCG claims when they maintain proper documentation and can demonstrate genuine transaction trails. The ruling may serve as significant relief for investors whose legitimate stock market gains have been questioned under the penny stock scrutiny pursued by the Income Tax Department in recent years. Notably, the case occurred before the government revoked the LTCG exemption under Section 10(38) in Union Budget 2018, making such gains taxable from April 1, 2018.
