Court Rules Suspicion Insufficient Without Direct Evidence; Confirms Exemption of Long-Term Capital Gains Under Section 10(38) of Income Tax Act, 1961
News ReportIn a significant decision dated August 28, 2026, the Madras High Court (Division Bench) dismissed appeals filed by the Commissioner of Income Tax, Chennai, affirming the Income Tax Appellate Tribunal’s (ITAT) orders that deleted substantial income additions made under Section 68 of the Income Tax Act, 1961. The case involved the assessees, Sohanraj Uttamchand and his brother Sohanraj Praveen Kumar, who claimed exemption on long-term capital gains arising from the sale of shares in PFL Infotech Limited and Risa International Limited, respectively.
The Income Tax Department had alleged that these transactions were part of a “pump and dump” scheme designed to manipulate the share prices artificially and convert unaccounted money into exempt long-term capital gains. The Assessing Officer had treated the sale proceeds as unexplained cash credits under Section 68 and alternatively as taxable business income under Section 28 of the Act. The Commissioner of Income Tax (Appeals) upheld these additions and denied the exemption under Section 10(38).
However, the ITAT allowed the appeals, holding that the Revenue’s case was built on suspicion rather than concrete evidence linking the assessees directly to the alleged price manipulation. The ITAT emphasized that the shares were traded through recognized stock exchanges, Securities Transaction Tax was duly paid, and consideration was received through regular banking channels, all of which supported the genuineness of the transactions.
Upholding the ITAT’s findings, the Madras High Court noted that while the circumstances gave rise to suspicion, suspicion alone could not substitute for proof. The court highlighted that the Revenue failed to produce cogent, corroborated evidence directly implicating the assessees in any wrongdoing. Moreover, the court found that the Revenue did not investigate thoroughly, as summons issued to several purchasers of shares returned unserved, and no link was established between the named intermediaries alleged to have orchestrated the manipulation and the assessees.
The court distinguished the facts from Supreme Court precedents cited by the Revenue, namely CIT v. Durga Prasad More (1971) and Sumathi Dayal v. CIT (1995), clarifying that those cases dealt with cash credits and improbable winnings without documentary support, unlike the present case involving documented transactions on regulated stock exchanges.
Additionally, the court upheld the deletion of penalties levied under Section 271(1)(c) of the Income Tax Act, finding no concealment of income as the quantum of addition was unsustainable. The court also quashed reassessment and reopening proceedings that were based on the now-set-aside assessment orders.
This ruling reinforces the principle that tax additions and penalties cannot be sustained on mere suspicion and that documentary evidence of genuine transactions through proper channels holds substantial weight in income tax proceedings.
Bottom Line:
Income Tax - The Tribunal's decision to delete additions made under Section 68 of the Income-tax Act, 1961, was upheld as the Revenue failed to provide cogent, corroborated evidence directly linking the assessees with alleged share price manipulation, and the documentary evidence supported the genuineness of the transactions.
Statutory provision(s):
Income Tax Act, 1961 Sections 10(38), 28, 68, 143(3), 133A, 131, 271(1)(c), 260-A
Commissioner of Income Tax v. Sohanraj Uttamchand, (Madras)(DB) : Law Finder Doc Id # 2968903
