LTCG Exemption Upheld Where Genuine Share Transactions Were Supported by Evidence

The Supreme Court’s dismissal of the Revenue’s Special Leave Petition in Principal Commissioner of Income-tax v. Sanjay Kumar Damjibhai Gangani reinforces the importance of documentary evidence in cases involving alleged penny-stock transactions and disputed Long-Term Capital Gains (LTCG).

Case at a Glance

• Case: Principal Commissioner of Income-tax v. Sanjay Kumar Damjibhai Gangani

• Court: Supreme Court of India

  Need help with this? Talk to A. S. Darve & Co. →

• SLP: Civil Diary No. 29525 of 2026

• Relevant provision: Section 10(38) of the Income-tax Act, 1961

• Issue: Alleged bogus LTCG/penny-stock transaction

  Need help with this? Talk to A. S. Darve & Co. →

• Outcome: Revenue’s challenge was dismissed and the relief granted to the assessee was sustained.

The Supreme Court record confirms that the matter appeared before the Court in June 2026, and the case was subsequently disposed of in July 2026. (Sci API)

Background of the Case

The assessee had claimed exemption under Section 10(38) in respect of LTCG earned from sale of shares. The Assessing Officer (AO), relying principally on information received from the Investigation Wing, treated the transaction as part of an alleged penny-stock/accommodation-entry arrangement.

An addition was consequently made under Section 68 of the Income-tax Act on the allegation that the assessee had received a bogus accommodation entry.

However, the assessee produced supporting evidence relating to the share transactions, including:

• Contract notes;

• Demat account records;

• Details relating to bonus shares; and

• Other transaction-related documentary evidence.

The appellate authorities found that the documentary evidence had not been effectively disproved by the Revenue.

Findings of the Gujarat High Court

The Gujarat High Court, in its order dated 1 September 2025 in R/Tax Appeal Nos. 924 and 929 of 2024, upheld the Tribunal’s decision.

The High Court noted that the Tribunal had arrived at a finding of fact that the shares of Sunrise Asian Ltd. could not be treated as bogus merely on the basis of suspicion or uncorroborated allegations. The Tribunal also considered the fact that the assessee had held the shares for about two and a half years and that there was no evidence establishing the assessee’s involvement in price manipulation. (Indian Kanoon)

The High Court concluded that no substantial question of law arose from the Tribunal’s order and dismissed the Revenue’s appeals. (Indian Kanoon)

Supreme Court Decision

The Revenue thereafter approached the Supreme Court through SLP (Civil) Diary No. 29525 of 2026.

The Supreme Court did not find sufficient ground to interfere with the High Court’s order. Accordingly, the Revenue’s challenge was dismissed, leaving the relief granted to the assessee undisturbed. The Supreme Court cause-list records identify the matter as Principal Commissioner of Income Tax 1 v. Sanjay Kumar Damjibhai Gangani, SLP(C) Diary No. 29525/2026. (Sci API)

Key Takeaways for Taxpayers

This decision highlights an important practical principle: an allegation that a share is a “penny stock” does not, by itself, establish that every transaction undertaken by an assessee is bogus.

Taxpayers dealing with substantial share transactions should therefore preserve a complete documentary trail, including:

1. Purchase and sale contract notes.

2. Demat statements showing movement of shares.

3. Bank statements evidencing payment and receipt of consideration.

4. Details of bonus shares, splits or corporate actions, wherever applicable.

5. Broker and exchange-related records.

6. Evidence supporting the period of holding and acquisition of shares.

At the same time, the ruling should not be understood as providing an automatic exemption for all penny-stock LTCG claims. Each case depends on its facts and the evidence available on record.

Important Note on Section 10(38)

Section 10(38) relates to exemption of specified long-term capital gains from listed equity shares and certain other securities subject to prescribed conditions. The provision was subsequently withdrawn with effect from 1 April 2019, following the introduction of Section 112A for specified securities.

Therefore, the Gangani decision concerns the legal framework applicable to the relevant assessment year and should not be read as creating a new exemption for present-day share transactions.

Conclusion

The Gangani case demonstrates that tax authorities must evaluate the evidence relating to an assessee’s individual transaction rather than relying solely on general investigation reports or broad allegations of price manipulation.

For taxpayers, the practical lesson is clear: maintain a strong and verifiable documentary trail for every significant investment and sale of shares. Proper records can be critical in establishing the genuineness of a transaction during income-tax proceedings.

For expert guidance on this topic, contact your tax professional today.

EXCERPT: Supreme Court sustains LTCG relief where genuine share transactions were supported by documentary evidence.

SEO_TITLE: LTCG Exemption: Supreme Court Ruling on Penny Stocks

SEO_DESCRIPTION: Supreme Court upholds LTCG relief in a penny-stock case. Read the key findings and documentation lessons for taxpayers.