Madras HC: Suspicion Cannot Replace Proof — Rs 70.95 Crore Bogus LTCG Addition Deleted
Meenakshi had done everything right.
She had bought shares of two listed companies through her stockbroker on a recognised exchange. Held them for over a year. Sold them the same way — through the exchange, Securities Transaction Tax paid, money credited to her bank account. Filed her Income Tax Return showing Long Term Capital Gains, claimed the exemption available at the time, and moved on.
Three years later, a notice landed on her CA’s desk. The Assessing Officer had determined that the share prices of both companies had risen abnormally. The transactions, he concluded, were accommodation entries — a device to launder unaccounted money. The LTCG was not exempt income. It was unexplained income under Section 68. Rs 70.95 crore in additions. A penalty under Section 271(1)(c) on top.
“But everything went through the exchange,” Meenakshi said. “Every rupee came to my bank. I have the contract notes. I have the demat statement. What more can they want?”
Her CA had a very specific answer. And so, eventually, did the Madras High Court.
Decision at a Glance
The Commissioner of Income Tax, Chennai v. Sohanraj Uttamchand
T.C.A. Nos. 714 and 721 of 2018 · Madras High Court · Judgment: 28 August 2026
Revenue’s appeals dismissed. ITAT’s deletion of additions of Rs 32.90 crore and Rs 38.05 crore (total Rs 70.95 crore) upheld. Penalty appeals under Section 271(1)(c) also dismissed.
“Suspicion, however grave, cannot be equated with proof.”
— Madras High Court
What the Revenue Said — and Why It Wasn’t Enough
The Revenue’s case rested on a familiar template used in bogus LTCG cases: the share prices of PFL Infotech Limited and Risa International Limited had risen abnormally in the period before sale. This pattern, the Department argued, was characteristic of price manipulation by entry operators. The taxpayers must therefore have paid unaccounted cash to obtain inflated LTCG, which should be taxed as unexplained income.
- Share prices showed abnormal and unexplained appreciation
- Transactions were part of an accommodation entry arrangement
- Gains should be re-characterised as unexplained income under Section 68
- Penalty under Section 271(1)(c) for concealment was justified
The High Court examined each of these contentions and found them wanting — not on sentiment, but on evidence.
Seven Things the Madras High Court Held
The Court stated this in plain terms: however grave the suspicion, it cannot substitute for evidence. An assessing officer may have strong reasons to doubt a transaction — but doubt is the beginning of investigation, not the end of it and not a finding in itself.
Unusual or substantial appreciation in share price, by itself, is not a ground to treat LTCG as bogus. Markets move. Penny stocks move more. The Revenue must show that the taxpayer was connected to that movement — not merely that movement occurred.
The shares were bought and sold on a recognised stock exchange. STT was paid. The sale consideration entered the taxpayer’s bank account. These are not incidental facts — they constitute a credible transactional chain that the Revenue must specifically rebut with positive material, not general suspicion about the sector.
The Revenue produced nothing to show that these taxpayers had paid unaccounted cash to any entry operator or broker, or that they had any role in the alleged price rigging. The connection between the taxpayer and the alleged design was entirely missing from the record.
The test of human probabilities — reasoning from what commonly happens — is a legitimate inference tool in tax assessments. But it cannot take the place of evidence that directly connects the taxpayer to the alleged arrangement. Inference requires a factual foundation to infer from.
The Department had not completed its investigation into certain purchasers and alleged operators in the chain. An incomplete investigation cannot form the evidential basis for a complete addition. The burden of proof in such cases cannot be shifted to the taxpayer by default.
The High Court found no reason to interfere with the Tribunal’s finding. The additions were deleted. The question of tax jurisdiction over Rs 70.95 crore was settled in the taxpayer’s favour.
The Penalty Question — Section 271(1)(c)
When the Assessing Officer made the additions, he also levied penalty under Section 271(1)(c) — concealment of income or furnishing inaccurate particulars. The Revenue pressed these penalty appeals separately before the High Court.
The Court dismissed these as well. The principle is settled: when the addition on which the penalty rests is itself deleted, the penalty cannot survive independently. No addition. No penalty. The appeals were dismissed.
What This Means for Meenakshi — and for Your Clients
Let us return to Meenakshi. Her situation illustrates both the risk and the protection that this judgment provides.
If these documents are in order and the transaction genuinely occurred through the exchange, the Revenue cannot convert a suspicion about the company’s share price into a tax addition against the individual shareholder — unless it can affirmatively show that shareholder’s involvement in the manipulation.
This ruling is important — but it is not a universal shield. It is a standard of evidence.
The bogus LTCG issue has been a major Income Tax Department priority over the past several years. Multiple assessments have been made against taxpayers who bought and sold shares of companies later identified as penny-stock accommodation-entry vehicles. The Revenue’s position has been that the taxpayers must prove the transaction was genuine — in effect reversing the burden of proof.
This judgment restores the correct legal position: the burden to prove the addition lies on the Revenue. Suspicion, pattern-matching, and industry-wide observations about penny stocks are not substitutes for evidence that connects this taxpayer to this arrangement. For clients who hold or have sold shares of small-cap or micro-cap companies, this ruling provides an important framework — but it also makes the maintenance of complete documentation non-negotiable.
1. Maintain a complete transaction file for every share sale. Contract notes, demat account statements, bank credit entries, and STT challans must be preserved for at least eight years from the relevant assessment year. Do not rely on the broker or depository to preserve these — keep your own copies.
2. If a notice arrives questioning LTCG as bogus, respond with the full evidentiary chain immediately. Do not wait for the assessment order before organising documents. The response to the questionnaire is the first opportunity to establish the credible transactional chain that this judgment protects.
3. Challenge additions that rest solely on share-price movement without taxpayer-specific evidence. This ruling, alongside established precedents from the Supreme Court and multiple High Courts, provides a clear framework. An addition made purely on the basis of “the stock was suspicious” — without evidence connecting the specific taxpayer to cash payments or manipulation — is unsustainable.
Disclaimer: This article is for general informational and educational purposes only and does not constitute legal, tax or professional advice. Income tax law and judicial precedents are subject to change. Readers should consult a qualified Chartered Accountant for advice specific to their circumstances. The Madras High Court judgment referenced herein is subject to any further proceedings before the Supreme Court of India.