ITAT Surat Dismisses Appeal in Sunrise Asian Ltd. Penny Stock LTCG Case — Section 68 Addition Sustained
Case Reference
Rameshkumar Karsanbhai Patel Vs ITO (ITAT Surat)
Assessment Year: 2015-16
Order Pronounced: 09.04.2026
Background and Overview
The Income Tax Appellate Tribunal, Surat Bench, dismissed the appeal filed by the assessee challenging the order of the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, passed under Section 250 of the Income-tax Act, 1961 for Assessment Year 2015-16.
The central controversy in this case revolved around the denial of exemption under Section 10(38) of the Income-tax Act, 1961 on long-term capital gains (LTCG) declared by the assessee from the sale of equity shares of Sunrise Asian Ltd., and the consequential treatment of the sale proceeds as unexplained cash credit under Section 68 of the Act.
Facts of the Case
Return Filed and LTCG Claimed
The assessee, an individual, filed a return of income for AY 2015-16 declaring total income of Rs. 6,78,620/-. The case was picked up for scrutiny through CASS on account of suspicious share sale transactions and exempt LTCG from alleged penny stock.
During the relevant financial year, the assessee claimed LTCG of Rs. 70,33,182/- arising from the sale of 15,000 equity shares of Sunrise Asian Ltd. (SUNASIAN) and sought exemption under Section 10(38) of the Income-tax Act, 1961.
Assessee's Explanation Regarding Share Acquisition
Before the Assessing Officer, the assessee stated that the shares were originally acquired in FY 2011-12 by purchasing shares of Conart Traders Ltd. from Santoshima Tradelinks Ltd. for Rs. 3,00,000/- through banking channels. Subsequently, pursuant to a scheme of amalgamation sanctioned by the Hon'ble High Court of Judicature at Bombay, Conart Traders Ltd. merged with Sunrise Asian Ltd. under Section 391 to 394 of the Companies Act, 1956. As a result of this amalgamation, equivalent shares of Sunrise Asian Ltd. were allotted to the assessee and credited to the demat account, which were later sold through a recognized stock exchange.
Assessing Officer's Findings
The Assessing Officer, relying on information received from the Investigation Wing about penny stock manipulation, concluded that the scrip of Sunrise Asian Ltd. was systematically exploited for generating bogus LTCG entries. Key observations made by the Assessing Officer included:
- Abnormal and disproportionate rise in share price of the scrip despite poor financial performance of the company
- Purchase of shares through an off-market transaction in an unlisted company
- Failure on the part of the assessee to substantiate the genuineness of the transaction with complete documentary evidence
On this basis, the Assessing Officer treated the entire sale proceeds of Rs. 70,33,182/- as unexplained cash credit under Section 68 of the Income-tax Act, 1961. An additional sum of Rs. 35,166/- was also added under Section 69C towards estimated commission paid for procuring accommodation entries.
Proceedings Before CIT(A)
Addition Under Section 68 Confirmed
The Commissioner of Income-tax (Appeals) upheld the addition of Rs. 70,33,182/- under Section 68, observing that despite being given adequate opportunity, the assessee failed to offer any satisfactory explanation for the sudden and extraordinary rise and subsequent fall in the share price of Sunrise Asian Ltd. The appellate authority noted that mere production of banking records, contract notes, and demat statements was insufficient to establish the genuineness of the transactions when surrounding circumstances pointed to price manipulation.
The CIT(A) placed reliance on the Calcutta High Court decision in the case of Principal Commissioner of Income-tax vs. Swati Bajaj [2022] 139 taxmann.com 352 (Calcutta), wherein it was held that:
"Where there is information and data available of unreasonable rise in price of shares of penny stock companies over a short period, the genuineness of such steep rise in prices needs to be established and the onus is on the assessee to do so as mandated in Section 68."
The CIT(A) further held that the LTCG claimed by the assessee from the sale of shares of Sunrise Asian Ltd. was bogus and represented a pre-conceived sham arrangement designed to evade tax, and accordingly confirmed the addition under Section 68.