ITAT Mumbai: Long-Term Capital Gains Cannot Be Branded Bogus Without Concrete Evidence

Long-term capital gains earned from the sale of listed shares cannot be dismissed as bogus unless the tax department can produce clear, case-specific evidence to the contrary, the Income Tax Appellate Tribunal (ITAT) in Mumbai has held, according to a recent report by LiveLaw. The Tribunal stressed that suspicion or general allegations about penny-stock misuse cannot replace concrete proof when a taxpayer has furnished complete documentation.

Tribunal Rejects Additions Built On Broad Accusations

The case involved gains from the sale of SAL and MHSL shares. The assessing officer took the view that the gains were nothing more than entries generated through a suspected penny-stock arrangement. Acting on that belief, the officer brought the amount to tax under Section 68 and also struck down the related expenses under Section 69C, wiping out the benefit normally available on genuine long-term capital gains.

Once the dispute went before the ITAT, the bench went through the evidence step by step. They examined the demat records tracing how the shares moved, the contract notes for each buy and sell order, and the bank statements reflecting the money trail behind the transactions.

The documentation, the Tribunal observed, was comprehensive and internally consistent. Nothing in the material indicated artificial price manipulation, hidden cash, or any arrangement suggesting that the transaction was not genuine.

In contrast, the revenue relied heavily on broad departmental findings about certain scrips being misused in other cases. There was no evidence tying this particular assessee to any price-rigging activity or accommodation-entry network. The Tribunal made it clear that general suspicion cannot override specific facts. Unless the department can show a direct connection between the taxpayer and any fraudulent activity, gains arising from listed-share trades conducted through recognised exchanges must be treated as legitimate.

What The Ruling Signals For Investors

For investors, especially those trading in smaller or less-liquid stocks, the decision offers clarity and reassurance. Several taxpayers in recent years have faced additions merely because the shares they invested in appeared on lists linked to past penny-stock probes. The Tribunal’s ruling sets a firm line: when documentation is in order, and the transaction trail is transparent, the tax department cannot disregard genuine gains based solely on the perceived reputation of a scrip.

The ruling serves as a reminder of how crucial it is for investors to keep their paperwork in order. In any tax dispute, the strongest defence comes from clear records, the demat trail, the contract notes, and the bank transactions that tie every step together. When these documents tell a consistent story, the onus moves to the tax department to show what is wrong with the transaction, rather than relying on conjecture.

For assessing officers, the ruling is a reminder that additions under Sections 68 and 69C must be grounded firmly in fact. Each case must be assessed on its own merits, not on broad patterns or unrelated investigations.

By reinforcing these principles, the ITAT’s ruling strengthens fairness in tax administration, protects honest investors, and reaffirms that credible evidence, not speculation, must guide assessments involving capital gains.