Showing bank statements, demat records and broker documents may not be enough to prove the genuineness of penny-stock transactions. The wider circumstances of the trade can also come under the Income Tax Department’s scrutiny, as the recent Ahmedabad ITAT ruling shows.
The Tribunal upheld a Rs 14.85 lakh addition after holding that the sale consideration from shares of Kushal Tradelink Ltd. represented unexplained money under Section 69A of the Income-tax Act.
The case, Manishkumar Ramlakhan v. Income Tax Officer, Ward 6(1)(1) Ahmedabad, ITA No. 919/Ahd/2025 (Assessment Year: 2018-19), was about this individual declaring capital gains from share transactions and challenging that the trades were conducted through a recognised stock exchange and a SEBI-registered broker.
The ITAT ruling is an important development for retail investors in penny stocks. It clarifies that documentary evidence will be examined; explanations will be heard; and capital loss will not be denied merely because the ground was not dealt with during the appellate proceedings.
The key takeaway in penny stock cases is that documents are necessary, but explanations are equally essential. The Tax Department will test both.
The ITAT upheld the addition of Rs 14.85 lakh penny stock and settled the capital loss issue in an order dated September 14, 2026.
The brief facts of the case are that the assessee is an individual and filed his return of income for A.Y. 2018-19 on 27.08.2018, declaring total income of Rs.31,34,370/-.
The assessee reported Rs. 7,85,654 in Long-Term Capital Gain (LTCG) and Rs. 6,01,979 in Short-Term Capital Gain (STCG) in the income return, both of which were claimed as exempt under section 10(38) of the Act. On February 5, 2019, a search and seizure operation under Section 132 of the Act was carried out in the case of Kushal Group, Ahmedabad.
The Assessing Officer (AO) established that the assessee had engaged in transactions in the scrip of Kushal Tradelink Limited based on information obtained during the aforementioned search and investigation about alleged price rigging and accommodation entries through penny-stock companies.
According to the AO, the entire transaction value of Rs. 14,85,833/-represented unexplained money under section 69A of the Act, and the capital gains reported by the assessee were false accommodation entries. As a result, the aforementioned amount was added to the assessee’s income and taxed under section 115BBE of the Act.
The individual challenged the addition, claiming that the share transactions in Kushal Tradelink were legitimate, carried out via a recognized stock exchange and a broker registered with SEBI, and that the purchase and sale transactions were backed up by contract notes, broker statements, demat account statements, and bank statements.
It was claimed that the shares were properly credited to his demat account and that the payments were made via banking channels.
The tribunal examined the investigation findings that reportedly contained references to cash transactions, middlemen, alleged hawala transactions, and beneficiaries of bogus LTCG.
The tribunal also relied on an earlier ITAT ruling in Ramilaben Vinodbhai Patel vs ITO, ITA No. 1909/Ahd/2025, AY 2019-20 in an order dated June 17, 2026. In that case, the Tribunal upheld the finding that alleged capital gains involving the Kushal Group were not real.
In the Manishkumar Ramlakhan case, the Tribunal found no evidence to justify different findings because the facts were similar. The Tribunal cited a number of court rulings regarding alleged penny-stock transactions and fake capital gains, including NDR Promoters (P) Ltd – Delhi High Court, Suman Poddar vs. PCIT – Delhi High Court, Udit Kalra – Delhi High Court, Sanat Kumar vs. ACIT – ITAT Delhi, Abhimanyu Soin vs. Asst. CIT – ITAT Chandigarh, Somnath Maini vs. CIT – Punjab & Haryana High Court, and other cases.
The Tribunal noted that the Manishkumar Ramlakhan case’s facts and circumstances are extremely closely related, with the revenue going beyond the capital gains transaction to figure out the genuine operation of the abrupt fluctuation in the scrip’s pricing.
The aforementioned case and the Manishkumar Ramlakhan case contain comparable facts. The assessee has not shown any proof to support a different perspective.
When the surrounding facts demonstrate that the scrip was used to provide accommodation entries, their authenticity cannot be acknowledged just because the transactions were executed through the stock exchange and backed by bank and demat records.
Thus, in accordance with the Coordinate Bench’s aforementioned ruling, the tribunal upheld the Ld. CIT(A) order upholding the addition of Rs. 14.85 lakh under section 69A of the Act.
The assessee lost the challenge to the penny-stock addition but obtained a fresh opportunity to have the capital loss issue examined.
This ITAT judgment in Manishkumar Ramlakhan serves as a reminder that appellate authorities must adjudicate each ground raised by a taxpayer.
Penny stocks: What proof can establish a genuine transaction?
The Ahmedabad Tribunal does not appear to have laid down any exhaustive or prescribed checklist for demonstrating the genuineness of a penny-stock transaction. The order is better read as a fact-specific decision.
In the present case, the assessee had maintained a documentary trail comprising contract notes, broker statements, demat account statements and bank statements. The trades were routed through a recognised stock exchange and a SEBI-registered broker, payments were made through banking channels, and the shares were credited to the assessee’s demat account.
Notwithstanding these documents, the Tribunal found, on the facts before it, that there was no sufficient material to take a view different from that of the tax authorities, and the addition was sustained.
“The practical takeaway is therefore nuanced. Ordinarily, contemporaneous documentation such as contract notes, demat statements and banking records remains important evidence of genuineness. However, such documents may not, by themselves, be determinative where the Revenue is able to rely on surrounding circumstances and credible material indicating that the scrip formed part of an accommodation-entry arrangement,” said Riaz Thingna, Partner, Grant Thornton Bharat.
The ITAT has also specifically indicated that its conclusion is based on the specific facts of the case. Accordingly, the safer position is that taxpayers should maintain a complete evidentiary trail, including purchase and sale contract notes, demat statements, stock-exchange trade confirmations, broker records and bank statements.
At the same time, such evidence should ideally be supported, where available, by commercial rationale and other contemporaneous material demonstrating that the investment decision was genuine and not merely part of a pre-arranged accommodation-entry structure.
Can the tax department question share transactions despite valid documents?
On the reasoning of this order, while contract notes, demat statements, broker records and bank statements are relevant and necessary evidence, they may not conclusively establish genuineness in every case. The tax authorities may, depending on the facts, examine the wider circumstances surrounding the scrip and the transaction.
This approach is consistent with the broader principle that tax authorities may, in appropriate cases, look beyond the form of a transaction and examine the surrounding circumstances. The apparent position is generally relevant, but it is not always conclusive.
Mere payment through banking channels or the availability of demat records may not, on its own, prevent further enquiry where there is credible material suggesting artificial price movement, market manipulation, or participation of the scrip in an accommodation-entry network.
“Factors such as abnormal price movements, investigation findings, trading patterns, the financials of the company, and other evidence of market manipulation may therefore be examined. At the same time, the Revenue’s case should be supported by relevant material and should not rest only on broad or generalised allegations regarding penny stocks,” commented Thingna.
The Manishkumar Ramlakhan Agrawal ruling supports this balanced position by indicating that there must be material connecting the assessee’s transaction with the alleged manipulation. The position cited from Somnath Maini is broadly to similar effect: a claim of genuineness may be rejected where the evidence relied upon is found, on facts, to be unreliable or not trustworthy.
How do courts assess genuine gains in penny-stock cases?
“When assessing the genuineness of penny-stock transactions, three aspects attract scrutiny: abnormal price spikes unrelated to corporate news, a company teetering on the edge of insolvency, and investigation findings pointing to coordinated schemes,” said Ashish Mehta, Partner at Khaitan & Co.
Together, these factors create a presumption against genuineness that at times may overshine flawless documentation.
Tax impact of treating bogus gains as unexplained money
Where sale proceeds are characterised as unexplained money under section 69A, they may be subject to the special tax regime under section 115BBE.
“This can result in a significantly higher tax cost (additional tax @ 60% plus surcharge and cess- this baseline rate has been reduced to 30% vide Finance Act 2026) and restrictions are placed on set-off of losses or deductions against such incomes,” according to Mehta.
In addition, there is also a risk of invocation of prosecution proceedings under the income tax provisions.
Disclaimer: This article is based on the Ahmedabad ITAT order in Manishkumar Ramlakhan v. Income Tax Officer, Ward 6(1)(1) Ahmedabad, ITA No. 919/Ahd/2025 (Assessment Year: 2018-19). The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
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