Long Term Capital Loss from off market sale cannot be offset against other capital gains if it is not under the ambit of legitimate tax planning and is a colourable device to evade tax: Mumbai ITAT
In a recent noteworthy decision, Mumbai ITAT has held that long term capital loss (‘LTCL’) from off market sale of listed securities cannot be offset against current and future capital gains, if it does not fall under the ambit of legitimate tax planning and is a colourable device to evade tax.
Let us have a short overview of the case:
Assessee had earned long term capital gains (‘LTCG’) on sale of listed equity shares through stock exchange which were exempt under sec 10(38) of the Income Tax Act, 1961 (‘Act’). Assessee had also earned LTCG on sale of unlisted securities of INR 6,96,06,436. Further, the assessee had incurred LTCL of INR 16,15,92,420 from off market sale of listed securities to sister concern where assessee and his son held 100% ownership.
Assessee offset the LTCL from off market sale against LTCG from sale of unlisted securities and balance amounts of LTCL were carried forward.
Tax officer deemed those off-market transactions as a colourable device and an artificial transaction undertaken solely with the purpose to claim LTCL from off market sale against LTCG from sale of unlisted securities and carry forward the balance LTCL for offset against any future taxable income. In view of this, tax officer did not allow the offset of LTCL against LTCG and the carry forward.
CIT (A) overturned tax officer’s decision, stating that the transactions were part of legitimate tax planning and that the method of sale was a commercial consideration.
On appeal, ITAT held:
Assessee should not be encouraged to avoid payment of tax by resorting to dubious methods through colourable devices. Assessee on one hand took benefit of section10(38) of the Act by claiming exemption on LTCG earned from sale of listed securities, but on the other hand created LTCL artificially by transferring listed securities through off market sale to sister concern with an intent to offset current and future capital gains.
In nutshell, effectively the money was lying with the assessee i.e. consideration paid by the sister concern to the assessee, securities are still with the assessee i.e. held by the sister concern which is owned by assessee and his son.
Reference were made to SC rulings in case of McDowell & Co. Ltd, Vodafone International Holdings, Kone Elevators India Ltd, and Sundaram Finance Ltd and noted the importance of applying principles of substance over form.
ITAT discussed the provisions of GAAR, while duly appreciating that such provisions were not applicable for the year under assessment. It drew reference to the principles noted in GAAR regulations i.e. the facts of the current case lacked commercial substance, transactions created extraordinary rights and obligations that do not align with principles of fairness, suggesting it qualify as an impermissible avoidance arrangement.
The copy of the order is as under:
