Mumbai man’s Rs 70,000 becomes Rs 1.93 Cr in penny stock; tax dept calls gain ‘bogus’ – ITAT says this

The case relates to Sanjaykumar Mehta, Mumbai, for Assessment Year 2015-16. In its September 4, 2026 order, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) deleted the addition of Rs 1,93,30,395, saying the taxpayer had produced documents supporting the share transactions and the tax department had not brought specific evidence linking him to any manipulation or accommodation-entry arrangement.

From Rs 70,000 to Rs 1.93 crore

Mehta said he had purchased 35,000 shares of Toyam Industries Ltd for Rs 70,000 in April 2013. The shares were initially allotted to him in physical form.

He later got the shares dematerialised through his broker, Inventure Growth & Securities, in August 2014. He subsequently sold the shares between September 2014 and February 2015 through the BSE at prices ranging from Rs 447 to Rs 556 per share.

The transactions resulted in a long-term capital gain of Rs 2.14 crore from his broader share portfolio, of which Rs 1.93 crore came from Toyam Industries shares.

The sale transactions were carried out through a recognised stock exchange and the taxpayer said securities transaction tax was paid. The sale proceeds were also received through the broker and reflected in his bank accounts.

Why did the tax department question the gain?

The tax department had received information through the Insight portal based on an investigation into alleged penny-stock transactions.

Toyam Industries was among 18 scrips identified by the Investigation Wing. According to the assessment order, the investigation had found alleged manipulation in certain penny stocks to generate artificial long-term capital gains and short-term capital losses.

The Assessing Officer also noted that the sharp rise in Toyam Industries’ share price was not supported by the company’s financial fundamentals.

Based on the investigation report, the AO concluded that the taxpayer’s long-term capital gain was not genuine and treated Rs 1.93 crore as unexplained cash credit under Section 68 of the Income Tax Act.

The CIT(A) also upheld the addition, observing that the taxpayer had invested in the scrip to obtain an accommodation entry.

Dinkar Sharma, Company Secretary and Partner, Jotwani Associates, said the tax department can invoke Section 68 when specific facts indicate that the reported capital gain is actually unexplained money. However, “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.”

Taxpayer produced transaction trail

The taxpayer, however, argued that there was a proper documentary trail for the entire transaction.

He submitted purchase and sale documents, contract notes, demat statements, bank statements and other records. He also pointed out that the shares had actually been held for more than a year before being sold.

Sharma said the transaction trail is particularly important in such cases. “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.”

The taxpayer argued that the tax department had accepted the purchase and sale of the shares but had questioned only the sharp increase in their value.

He also said there was no evidence showing that his money had been used in any manipulation or that he had colluded with brokers, promoters or other parties to generate a bogus gain.

ITAT says evidence against taxpayer is missing

The Mumbai ITAT examined the documents and found that the taxpayer had discharged the initial burden under Section 68.

The Tribunal noted that he had produced “bank statements, demat statements, purchase and sale contract notes and other supporting documents” to establish the transactions.

The ITAT also looked at earlier cases involving the same Toyam Industries scrip. In those cases too, tribunals had considered similar transactions where taxpayers had produced documentary evidence supporting their purchases and sales.

A key point for the Tribunal was the absence of specific evidence against Mehta.

The order said the Revenue had made general allegations about the scrip but had not produced specific material showing that the taxpayer himself was involved in price rigging or manipulation.

Sharma said this distinction is important in penny-stock cases. “The issue goes beyond that of whether the scrip was manipulated; the real question is whether there is credible evidence showing a connection between the assessee and the alleged manipulation.”

The ITAT also noted that no investigation agency, including SEBI or the Income Tax Department, had alleged or proved that Mehta was involved in such manipulation.

“Thus, on the aforesaid analyzations, addition made be the AO, is liable to be deleted,” the Tribunal said.

Rs 1.93 crore addition deleted

The ITAT therefore set aside the CIT(A)’s order and directed the Assessing Officer to delete the Rs 1,93,30,395 addition.

The taxpayer’s appeal was allowed.

The Tribunal did not, however, give a blanket clean chit to penny-stock investments. Its decision was based on the evidence available in this particular case.

The key issue was that while the department had relied on the investigation report and allegations surrounding the scrip, it did not bring specific material showing that this taxpayer had participated in manipulation or arranged an accommodation entry.

What this means for investors

The ruling highlights an important distinction in penny-stock tax cases.

A stock being flagged as a penny stock or being investigated for alleged manipulation does not, by itself, establish that every investor in that stock has generated a bogus capital gain.

At the same time, investors facing such scrutiny would need to be able to establish the actual transaction trail. In this case, the taxpayer’s defence was supported by purchase records, demat statements, contract notes, bank statements and exchange transactions.

Disclaimer: This story is based on the Mumbai ITAT order in the case of Sanjaykumar Mehta for Assessment Year 2015-16. The ruling is specific to the facts and evidence presented in the case and should not be treated as a general view that gains from penny stocks are automatically genuine. Investors should seek professional tax advice based on their individual circumstances.

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