Penny Stock LTCG Addition Remanded: ITAT Raipur Directs CIT(A) to Conduct Independent Inquiry and Record Findings

Case Overview

Case Name: Jay Patel Vs ITO (ITAT Raipur)
Appeal Number: ITA No. 684/RPR/2026
Date of Order: 12/10/2026
Assessment Year: 2015-16

Background and Origin of the Dispute

The dispute originates from the income tax return filed by the late Shri Rajendra Kumar Patel for Assessment Year 2015-16 on 31 March 2016, in which he declared total income of ₹5,80,750. Along with this, he claimed an exemption under Section 10(38) of the Income Tax Act, 1961 on long-term capital gains of ₹8,61,760 arising from the sale of 3,300 shares of M/s Mahavir Advanced Remedies Ltd.

The shares in question were purchased on 4 July 2013 at a total cost of ₹29,865 through a cash transaction — outside the regular banking channel — and subsequently sold on 20 November 2014 at ₹272.20 per share, generating a recorded sale consideration of ₹8,93,768. The price appreciation over a period of roughly sixteen months was approximately thirty times the original purchase cost.

Shri Rajendra Kumar Patel passed away on 11 September 2021. His son, Jay Patel, informed the Income Tax Department of his father's death on 15 March 2022 and thereafter became the appellant in these proceedings as the legal heir.

Prior Proceedings and Earlier Tribunal Direction

An earlier reassessment for AY 2015-16, completed under Section 147 read with Section 144B on 28 March 2022, was challenged in appeal before the Commissioner of Income Tax (Appeals), who dismissed it on 7 November 2023. The matter was then carried before the ITAT Raipur Bench, which, vide its order dated 13 February 2024 in ITA No. 04/RPR/2024, declared that reassessment null and void. The Tribunal directed the Assessing Officer to comply with Section 159(2) of the Income Tax Act, 1961 by properly notifying the legal representative of the deceased before framing any fresh assessment.

This earlier ruling set the procedural foundation for the present round of litigation.

In compliance with the ITAT's earlier direction and after completing the procedure prescribed under Section 148A, a fresh notice under Section 148 was issued on 31 December 2024 to Jay Patel in his capacity as legal heir of the deceased, with prior approval from the specified authority under Section 151.

Notices under Section 142(1) dated 21 February 2025 and 6 March 2025 were subsequently issued, calling upon the assessee to furnish:

  • Details of the share transactions
  • Source of funds used for the original investment
  • Justification for the exceptional rise in share price

In response, Jay Patel submitted a written reply dated 8 March 2025, enclosing documents including:

  • Demat account details (Bahubali Financial Services Pvt. Ltd.)
  • Trading and ledger records (Shri Venkatesh Stock Broker Services India Pvt. Ltd.)
  • Purchase and sale bills
  • Investment particulars
  • Bank statements and transaction statements

However, the submission did not address the central question — the justification for the approximately thirty-fold increase in the share price. A show-cause notice dated 11 March 2025 issued thereafter went entirely unanswered by the assessee.

Assessing Officer's Findings and Basis for Addition

The Assessing Officer, relying extensively on the findings of the Directorate of Investigation, Kolkata, which had examined a nationwide arrangement for generating fictitious exempt long-term capital gains through rigged penny stocks, concluded that the transaction was a sham.

The key observations forming the basis of the addition were:

  • The shares were purchased off-market in cash at a nominal price — outside the banking channel
  • The scrip's underlying financial position could not support or justify the abrupt and steep price movement
  • The deceased was not a regular share trader, making the transaction commercially implausible
  • The same scrip, M/s Mahavir Advanced Remedies Ltd., had already been examined and the exemption claim rejected in Smt. M.K. Rajeshwari v. ITO, [2018] 99 taxmann.com 339 (ITAT Bangalore) for the same financial year FY 2014-15
  • Reliance was placed on CIT v. Sanghamitra Bharali, (2014) 361 ITR 481 (Gauhati High Court) for the principle of evaluating unexplained transactions