Telangana HC Sets Aside GAAR on ₹49 Crore Bonus-Stripping Loss: On-Market Share Trades Are Not an “Arrangement”
Can a taxpayer’s purchase and sale of listed shares through the stock exchange, even if the transactions result in a substantial tax loss, automatically be treated as an “impermissible avoidance arrangement” under GAAR?
The Telangana High Court has answered the question in the negative in a significant ruling involving a ₹49.33 crore short-term capital loss arising from transactions undertaken around a bonus issue.
In M/s EKGE Retail LLP v. ACIT, the Court set aside the directions of the GAAR Panel, holding that ordinary on-market transactions in listed shares could not, on the facts of the case, be treated as an “arrangement” merely because they produced a tax advantage.
The Background
The assessee had sold its business through a slump sale, generating substantial capital gains of approximately ₹175.92 crore.
Thereafter, the assessee purchased listed shares shortly before a bonus issue and subsequently sold an equivalent quantity of shares after the bonus issue.
The transactions resulted in a short-term capital loss of ₹49.33 crore.
The assessee sought to set off this loss against the gains arising from the slump sale.
The Revenue invoked the provisions relating to General Anti-Avoidance Rules (GAAR) and treated the transactions as an impermissible avoidance arrangement.
The matter ultimately reached the GAAR Panel.
Why Did the Revenue Invoke GAAR?
The Revenue’s concern was essentially that the share transactions had generated a substantial capital loss which could be used to reduce the tax liability arising from the much larger slump-sale gains.
According to the Revenue, the sequence of purchase, bonus issue and subsequent sale had the effect of creating a tax loss without any corresponding substantial economic rationale.
The GAAR mechanism was therefore invoked to deny the tax benefit arising from the transactions.
But the High Court examined a more fundamental question:
Could transactions carried out through the open stock market themselves constitute an “arrangement” for the purpose of GAAR?
Telangana High Court: A Market Transaction Is Not Automatically an “Arrangement”
The High Court set aside the GAAR Panel’s directions.
An important aspect of the decision was the nature of the share transactions.
The shares had been purchased and sold through the recognised market mechanism at market prices. The transactions were not shown to be privately negotiated or carried out pursuant to any pre-arranged understanding between the assessee and another identified counter-party.
In other words, the assessee was dealing in listed securities through the market, where the identity of the counter-party is ordinarily not known to the investor at the time of placing the trade.
The Court therefore did not accept the proposition that such ordinary market transactions could simply be characterised as an “arrangement” for GAAR purposes merely because the transactions produced a tax loss.
Investment Advice Was Also Relevant
The Court also considered the surrounding circumstances.
The assessee had documentary evidence regarding investment advice supporting the decision to undertake the share transactions.
Further, the assessee did not simply withdraw the amount after generating the tax loss. Approximately ₹49 crore remained invested.
This was relevant to the Court’s consideration of whether obtaining a tax benefit was the main purpose of the transactions.
The existence of a tax consequence does not, by itself, establish that a transaction was undertaken principally for obtaining a tax benefit.
Tax Benefit and Tax Avoidance Are Not Synonymous
This is perhaps the most important lesson from the judgment.
A transaction may have a tax consequence. That does not automatically make it a tax-avoidance arrangement.
GAAR is not intended to convert every transaction resulting in a lower tax liability into an impermissible arrangement.
There must be a proper examination of the statutory requirements and the actual substance and circumstances of the transaction.
In the present case, the High Court found that the Revenue had not established the necessary foundation for invoking GAAR against the assessee.
What About the ₹49.33 Crore Loss?
The assessee had incurred a short-term capital loss of approximately ₹49.33 crore.
The Revenue’s approach effectively treated the availability of this loss for set-off as itself demonstrating the existence of a tax-avoidance arrangement.
The High Court did not accept this approach.
The statutory mechanism for computing income permits eligible capital losses to be set off against eligible capital gains, subject to the conditions prescribed under the Act.
The set-off under Section 70(2) is therefore part of the statutory computation mechanism.
The mere fact that a taxpayer has a legitimate loss which reduces taxable capital gains cannot, by itself, be treated as a “tax benefit” sufficient to establish an impermissible avoidance arrangement.
GAAR Cannot Be Invoked Merely Because Tax Was Saved
The ruling is a useful reminder that GAAR requires something more than a mathematical comparison between tax payable with and without a transaction.
The Revenue must examine:
– whether there was an “arrangement”;
– whether the arrangement resulted in a tax benefit;
– whether the statutory conditions for invoking GAAR were satisfied;
– whether the arrangement had a legitimate commercial or investment rationale; and
– whether the alleged tax avoidance characteristics are actually established by evidence.
The fact that a transaction results in a substantial tax saving may certainly invite scrutiny.
But scrutiny is not the same as proof of impermissible avoidance.
Section 94(8): An Important Change in the Law
There is another important dimension to the judgment.
The Income-tax Act now contains a specific anti-abuse provision dealing with certain transactions involving bonus shares.
Section 94(8) has been expanded to cover such transactions from AY 2025-26.
The provision essentially addresses situations where securities are acquired before a bonus issue and subsequently sold in circumstances resulting in a loss, by restricting the recognition of such loss in accordance with the statutory mechanism.
Therefore, the legal position for transactions falling within the amended provision from AY 2025-26 onwards needs to be examined separately.
Why Is the EKGE Retail Judgment Still Important?
The transactions involved in the present case relate to AY 2018-19, substantially before the expanded operation of Section 94(8).
The judgment therefore assumes importance particularly for earlier assessment years where the Revenue seeks to use GAAR to challenge a transaction merely because it generated a substantial capital loss around a bonus issue.
The decision also illustrates an important principle:
A tax-saving consequence does not by itself establish an impermissible avoidance arrangement.
The Revenue must satisfy the statutory requirements for invoking GAAR and establish its case on the facts.
What Should Taxpayers Keep in Their Records?
The case also provides a practical lesson for taxpayers undertaking substantial investment transactions.
Where significant listed-share transactions are involved, taxpayers should preserve:
1. Investment advice and rationale
Keep contemporaneous investment recommendations and the commercial rationale for the investment.
2. Broker records
Maintain contract notes, broker statements and transaction confirmations.
3. Demat statements
The movement of shares should be clearly traceable.
4. Bank statements
The actual payment and receipt of consideration should be demonstrable through banking channels.
5. Evidence of market transactions
Where transactions are executed through recognised exchanges, retain appropriate records establishing their market nature.
6. Post-transaction conduct
The subsequent treatment of the investment may also be relevant when the Revenue alleges that the transaction had no genuine investment purpose.
The Bigger Picture
The ruling should not be read as saying that GAAR can never apply to share transactions.
If the Revenue is able to establish that market transactions were part of a pre-arranged structure, involved connected parties, lacked commercial substance, or otherwise satisfied the statutory conditions for GAAR, the outcome could be different.
Likewise, transactions covered by specific anti-avoidance provisions such as the amended Section 94(8) must be examined under those provisions.
The significance of the present judgment lies in the Court’s refusal to treat a substantial tax loss, by itself, as sufficient evidence of an impermissible avoidance arrangement.
The Takeaway
A ₹49 crore tax loss may attract the attention of the tax department—but attention is not evidence, and a tax benefit is not automatically tax avoidance.
Where listed shares are purchased and sold through the open market, the transactions are genuine, the consideration is at market prices, investment advice supports the decision and there is no evidence of a pre-arranged scheme or collusion, GAAR cannot be invoked merely because the transaction results in a substantial capital loss and corresponding tax benefit.
At the same time, taxpayers must distinguish between the law applicable to earlier assessment years and the statutory amendments that now specifically address bonus-stripping transactions.
Case: M/s EKGE Retail LLP v. ACIT
Court: Telangana High Court
W.P. No.: 21210 of 2022
Assessment Year: 2018-19
Order dated: 13 October 2026
GAAR provisions; Section 70(2); Section 94(8)
This article is for general tax awareness. The precise ratio of the judgment, the statutory provisions applicable to the relevant assessment year and the complete operative portion of the order should be examined before relying upon the decision in any assessment or appellate proceeding.
The copy of the order is as under:
