Recently, Mumbai ITAT has held that long term capital loss (‘LTCL’) from off market sale of listed securities cannot be offset against the capital gains arising from sale of any capital asset, if it does not fall under the ambit of legitimate tax planning and is considered as a colourable device to evade tax.
Facts of the case:
Assessee had earned long term capital gains (‘LTCG’) from the sale of listed equity shares through stock exchange which were exempt under sec 10(38) of the Income Tax Act, 1961 (‘the IT Act’). Assessee had also earned LTCG from 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 an entity where assessee and his son, together 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 for set off against capital gains arising in future.
The Assessing Officer (‘AO’) deemed such off-market sale of listed securties as a colourable device stating that such sale was an artificial transaction undertaken solely with the purpose to claim LTCL, thereby reducing tax liability. Accordingly, in view of this, tax officer did not allow the offset of LTCL against LTCG and the carry forward.
CIT (A) overturned tax officers decision, stating that the transactions were part of legitimate tax planning and that the method of sale was a commercial consideration.
Upon further appeal by revenue, 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 section 10(38) of the IT 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 an entity owned by him and his son, with an intent to offset capital gains.
Considering that this was transaction whereby merely ownership changed and effectively assessee held such securties thought a company owned by him and his son. In the absence of involvement of any third party, such transaction was considered as colorable device for evasion of tax.
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 to qualify as an impermissible avoidance arrangement.
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