Setting-off STCL from Sale of Shares against LTCG is Tax Planning, not Evasion: ITAT backs Assessee [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) recently granted relief to an Assessee, ruling that setting-off of Short Term Capital Losses (STCL) against Long Term Capital Gains (LTCG) using proceeds from the sale of shares is a method of genuine tax planning, effectively decreasing the Assessee’s aggregate tax liability.

The decision was given by the ITAT while hearing an Income Tax Appeal filed by the Assistant Commissioner of Income Taxes (ACIT), Circle 4(1)(1), Mumbai against Ranu Vohra, appealing against the order of the National Faceless Appeal Centre (NFAC), Delhi with regards to the financials of the Assessee for the Assessment Year  (A.Y.) 2016-17.

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Ranu Vohra, being a resident individual filed their returns of income on 30.07.2016 declaring an income of Rs.15,87,53,630/-. The Assessee’s matter was scrutinized by the Assessing Officer, observing that the Assessee had sold 1,23,73,872 shares of Avendus Capital Pvt. Ltd. and derived long term capital gains amounting to Rs.16,81,07,825/-.

The AO observed that during the period under consideration, Mindtree Ltd. had announced issuance of bonus shares, priced at almost half their original price; the Assessee proceeded to sell their shares in Mindtree Ltd. purchased about a month earlier, resulting in STCL of Rs.9.1 Crores.

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The derived LTCG from the sale of Avendus Capital shares had been set-off by the Assessee against STCL of Rs.9,11,83,666/- from sale of shares of M/s. Mindtree Ltd.

The AO deemed such actions to be a usage of Colourable Devices by the Assessee to arrange their affairs in a manner to derive maximum benefit by deferring the sale of bonus shares to later dates, all as a means to derive exemption from long term capital gains.

Under the laws of taxation, a capital loss occurs when shares are sold for less than their original purchase price. If the shares are held for less than 12 months, the loss is categorized as a short-term capital loss and can be offset against both short-term and long-term capital gains. However, long-term capital losses arising from shares held for more than 12 months may only be used to offset long-term capital gains.

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In Appeal, the NFAC buttressed the conduct of the Assessee, identifying genuineness of the transactions, which has been appealed by the Revenue through the present appeal.

The Mumbai Bench of the Income Tax Appellate Tribunal of Saktijit Dey, Vice President And Amarjit Singh, Accountant Member observed that the trail of purchase and sale of shares are not disputed and have not been deemed as sham transactions, even by the concerned AO. In such an event, the STCL derived by the Assessee from sale of shares may not be prevented from being set off against the LTCG by merely alleging adoption of colourable devices.

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Upholding Assessees’ rights to arrange affairs within the legal framework to avail tax benefits and reduce their tax liabilities, the ITAT Bench proceeded to dismiss the appeal, drawing support from the decision of the Bombay High Court in PCIT vs. Cyrus Poonawalla (2018).

To Read the full text of the Order CLICK HERE

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