LTCG Cannot Be Treated as Bogus Merely Because Share Prices Rose Sharply: ITAT Ahmedabad
LTCG supported by broker, bank and demat records cannot be treated as an accommodation entry merely on the basis of an Investigation Wing report and an abnormal rise in share price, without a money trail or a direct link to alleged price rigging.
The Ahmedabad Bench of the Income Tax Appellate Tribunal has once again highlighted an important principle in cases involving alleged bogus Long-Term Capital Gains (LTCG) from listed shares.
In Radhaben Arvindbhai Patel v. ITO, ITA Nos. 2647 to 2649/Ahd/2026, involving Assessment Years 2016-17 to 2018-19, the Tribunal examined whether genuine-looking share transactions supported by broker, banking and demat records could be treated as accommodation entries merely because the scrip had witnessed an abnormal increase in price.
The Tribunal, by its order dated 12 October 2026, deleted the additions made by the Revenue for all three years.
The Facts of the Case
The assessee had purchased shares of Kushal Tradelink between January and May 2015 through a registered stock broker.
The shares were subsequently sold over a period of approximately three years.
The assessee claimed the resulting capital gains as exempt under Section 10(38), which was the applicable provision for eligible long-term capital gains from listed equity shares during the relevant period.
The transactions were supported by conventional documentary evidence, including:
– broker records;
– demat account entries;
– bank transactions; and
– purchase and sale records.
However, the assessment proceedings took a different turn when the Revenue relied upon search material relating to the Kushal Group and information suggesting that certain transactions in the scrip were part of an accommodation-entry arrangement.
The LTCG of approximately ₹1.10 crore for AY 2016-17 was consequently treated as an accommodation entry and brought to tax.
The addition was sustained by the NFAC, leading the assessee to approach the ITAT.
Why Did the Revenue Treat the LTCG as Bogus?
The principal argument of the Revenue was based upon the unusual movement in the price of the shares.
According to the Revenue, the rise in the share price was not supported by the fundamentals of the company and was therefore indicative of artificial price manipulation.
The Investigation Wing material relating to the group and certain instances of synchronised trading were also relied upon.
The Revenue’s broad theory was that the assessee had obtained an accommodation entry in the guise of a share transaction.
But the Tribunal examined whether there was sufficient evidence connecting this particular assessee with the alleged manipulation.
That distinction proved crucial.
ITAT: Price Rise Alone Is Not Conclusive Evidence
The Tribunal noted that there was no direct evidence establishing that the assessee had participated in any arrangement for generating bogus LTCG.
In particular, the Tribunal found an absence of:
1. Money trail
There was no evidence demonstrating that cash had moved from the assessee to any person in exchange for the alleged accommodation entry.
2. Implicating statement
There was no statement directly implicating the assessee in an arrangement to generate artificial capital gains.
3. Cash exchange
No evidence of cash being paid or received in connection with the share transactions was established.
4. Nexus with alleged rigging
Most importantly, there was no established nexus between the assessee’s transactions and the persons allegedly involved in synchronised trading.
This was significant because evidence showing that manipulation occurred somewhere in a particular scrip does not automatically establish that every investor who traded in that scrip participated in the manipulation.
Documentary Evidence Cannot Be Ignored
The assessee’s purchase and sale transactions were carried out through a registered broker and were reflected in the demat account.
The corresponding banking transactions were also not disputed.
The Tribunal therefore had before it a documented chain of transactions:
Purchase → Broker → Demat Account → Holding → Sale → Bank Realisation
Where such a transaction trail exists, the Revenue must establish why the particular transaction is not genuine.
An abnormal increase in the market price may certainly justify an investigation.
But investigation and proof are two different things.
The existence of suspicion cannot by itself replace evidence necessary to sustain an addition.
Investigation Wing Report Is Not the Final Word
This aspect is particularly important in cases involving alleged penny-stock or accommodation-entry transactions.
An Investigation Wing report may provide information that justifies further examination of a transaction.
However, the assessment must ultimately be based upon material that establishes the assessee’s involvement in the alleged arrangement.
A report concerning manipulation of a particular scrip cannot automatically lead to the conclusion that every investor in that scrip has received bogus LTCG.
The Revenue must establish the necessary factual connection.
In the present case, the Tribunal found that such a connection was missing.
Absence of a Money Trail Was Important
One of the strongest aspects of the Tribunal’s reasoning was the absence of a money trail.
In an alleged accommodation-entry transaction, the Revenue’s case ordinarily becomes stronger when there is evidence showing a circular movement of funds, cash payment, intermediary involvement or a direct financial connection between the investor and the alleged entry provider.
Here, however, no such evidence was found connecting the assessee with the alleged manipulation.
The Tribunal therefore found that the addition could not be sustained merely by relying upon the abnormal appreciation in the value of the shares.
What About the Persons Involved in Synchronised Trading?
The Revenue had referred to four persons allegedly involved in synchronised trading.
However, the Tribunal found that there was no established nexus between those persons and the assessee.
This is an important evidentiary distinction.
Suppose a particular group of persons is found to have manipulated the price of a listed company.
It does not automatically follow that an unrelated shareholder who purchased shares through a registered broker and subsequently sold them through the stock exchange must also have participated in the manipulation.
There must be evidence connecting the investor to the alleged scheme.
Reliance on Sanjaykumar Gangani
While deciding the matter, the Ahmedabad ITAT followed the principle emerging from Sanjaykumar Gangani v. [Revenue], a decision of the Gujarat High Court, as relied upon in the Tribunal’s order.
The Tribunal consequently deleted the additions made in respect of the alleged bogus LTCG for all three assessment years.
Interestingly, the Tribunal did not decide certain other legal grounds raised by the assessee, including issues relating to Section 153C vis-à-vis Section 147 and the validity of the notice issued by the Jurisdictional Assessing Officer.
The relief was therefore granted principally on the merits of the alleged accommodation-entry addition.
Does This Mean Every LTCG Claim Is Genuine?
Certainly not.
This judgment should not be understood as laying down that an Investigation Wing report can never be relied upon or that every share transaction supported by a demat statement must automatically be accepted.
The real principle is narrower and more important:
«The Revenue must establish the assessee’s connection with the alleged manipulation before treating genuine-looking share transactions as bogus accommodation entries.»
Where there is independent evidence of manipulation, collusion, cash payment, accommodation-entry providers or a direct nexus between the assessee and the alleged scheme, the outcome may be entirely different.
A Practical Example
Suppose an investor purchases listed shares for ₹10 lakh through a registered broker.
The shares are credited to the investor’s demat account.
After holding them for the prescribed period, the investor sells them through the stock exchange for ₹40 lakh.
The purchase consideration is paid through banking channels, and the sale proceeds are also received through the banking system.
Later, the Investigation Wing reports that the particular scrip had experienced artificial price manipulation.
Can the entire ₹30 lakh gain automatically be treated as bogus?
Not merely because the share price increased sharply.
The Revenue would still need to examine the investor’s individual transaction and establish the necessary nexus with the alleged manipulation.
The existence of suspicious transactions involving other persons is not, by itself, conclusive proof against every investor.
What Taxpayers Should Preserve
This decision highlights the importance of maintaining a complete documentary trail for investments in listed securities.
Taxpayers should preserve:
– contract notes issued by the broker;
– demat account statements;
– bank statements showing purchase payments;
– bank statements showing sale proceeds;
– broker ledger;
– details of the scrip and quantity purchased;
– details of the holding period;
– sale contract notes;
– STT and other statutory transaction details;
– income-tax return records; and
– supporting evidence explaining the source of the original investment.
These documents become particularly important when the transaction is subsequently questioned by the Department.
What Should Tax Professionals Check in Bogus LTCG Cases?
When an LTCG addition is proposed on the basis of an Investigation Wing report, the following questions deserve careful examination:
1. What exactly does the Investigation Wing report say?
A taxpayer should examine whether the report specifically refers to the assessee or merely discusses the scrip generally.
2. Is there a direct connection with the alleged entry operators?
The Department should be asked to identify the specific nexus.
3. Is there a money trail?
Check whether there is evidence of cash payment, layering or circular movement of funds.
4. Is there an incriminating statement?
If statements of third parties are relied upon, their contents and relevance to the assessee’s transaction should be carefully examined.
5. Were the transactions conducted through recognised channels?
Broker, demat and banking records can provide significant corroborative evidence.
6. Is the alleged manipulation connected to the assessee’s trades?
The mere fact that manipulation occurred in the same scrip is not necessarily enough.
7. Has the assessee been given the underlying material?
Where third-party statements or investigation material are relied upon, the taxpayer should examine whether the material has actually been supplied and whether an effective opportunity to rebut it has been provided.
A Significant Message on Evidence
The case demonstrates an important distinction between suspicion and proof.
An abnormal share-price movement can certainly be suspicious.
An Investigation Wing report can certainly justify further inquiry.
But an assessment addition requires something more: credible evidence connecting the alleged arrangement with the assessee’s actual transaction.
The stronger the documentary trail of the taxpayer’s transaction, the more important it becomes for the Revenue to establish a specific contrary case rather than relying merely on general allegations concerning the scrip.
The Larger Significance
Cases involving alleged bogus LTCG have occupied significant attention in income-tax litigation.
The Department has often relied upon investigation reports, unusual price movements, statements of alleged entry operators and patterns of trading to challenge capital gains claims.
These factors cannot simply be ignored.
At the same time, each taxpayer’s transaction must be examined independently.
A taxpayer cannot be denied a legitimate claim merely because another person has allegedly manipulated the same security unless the evidence establishes the taxpayer’s involvement or otherwise demonstrates that the particular transaction was not genuine.
That is the important lesson emerging from the Ahmedabad ITAT ruling.
The Takeaway
A sharp rise in the price of a share is a reason to investigate—not conclusive proof that every investor’s LTCG is bogus.
Where the purchase and sale are supported by broker records, demat statements and banking transactions, and there is no money trail, no implicating statement, no cash exchange and no established nexus with the alleged rigging, an addition under Section 68 cannot be sustained merely on suspicion and general investigation material.
For taxpayers facing reassessment or appellate proceedings involving alleged bogus LTCG, the focus should therefore be on the evidence connecting the assessee with the alleged accommodation-entry arrangement.
The case is a useful reminder that in tax litigation, the question is not merely “Was the scrip manipulated?”
The more important question is:
“What evidence proves that this particular taxpayer participated in that manipulation?”
Case at a Glance
Case: Radhaben Arvindbhai Patel v. ITO
ITA Nos.: 2647 to 2649/Ahd/2026
Assessment Years: 2016-17 to 2018-19
Tribunal: ITAT Ahmedabad
Order Date: 12 October 2026
Key Provision: Section 68 of the Income-tax Act, 1961
Issue: Alleged bogus LTCG/accommodation entry in listed shares
Outcome: Additions deleted for all three years
Legal Note: This article is based on the case details supplied for the ruling. Before relying upon the decision in any assessment, appeal or judicial proceeding, the complete Tribunal order and the cited judicial precedents should be independently verified.
The copy of the order is as under:
