Upholding a taxpayer's right to offset short-term capital losses (STCL) against long-term capital gains (LTCG) for reducing tax liability, the Mumbai bench of the income-tax appellate tribunal (ITAT) rejected the claim of tax evasion by the income-tax (I-T) department. The ruling provides a huge relief to taxpayers who invest in stock markets and, often, face scrutiny of set-off transactions during tax assessments.
In an order on 29 November 2024, the Mumbai ITAT bench of Saktijit Dey (vice president) and Amarjit Singh (accountant member) said, "In our view, the conclusion drawn by the assessing officer (AO) is wholly irrational and unsustainable. When the transactions relating to the purchase and sale of shares are beyond doubt and are not in the nature of sham transactions, even if there is no such allegation by the AO, the short-term capital loss -STCL derived by the assessee from the sale of shares cannot be prevented from being set off against the long term capital gain -LTCG by alleging adoption of the colourable device."
"There is no requirement under the law that the assessee has to pay more tax. If the assessee arranges her affairs within the legal framework and through legitimate means to reduce its tax liability, the AO cannot prevent her from doing so. When there is no evidence on record to doubt the genuineness of the transactions entered into by the assessee, the resultant capital loss derived out of such transaction cannot be disallowed. More so, when the AO has not expressed any doubt or dispute regarding the nature of loss, being capital," the bench says.
Further, it says that, as rightly observed by the first appellate authority (FAA), the AO has accepted the computation of short-term capital loss made by the assessee. "It is further relevant to observe the long-term capital gain shown by the assessee on the sale of bonus shares of Mindtree Ltd have been accepted in subsequent assessment years (AY), i.e. AY17-18 and AY18-19. That being the factual position emerging on record, we do not find any infirmity in the decision of the FAA," ITAT ruled.
ITAT was hearing an appeal filed by the I-T department against a decision by the FAA in favour of Mumbai-based Ranu Vohra, a taxpayer. On 30 July 2016, Ms Vohra filed her income-tax return (ITR) declaring an income of Rs15.87 crore. During the assessment, the AO, while verifying the return, noticed that Ms Vohra sold about 1.24 crore shares of Avendus Capital Pvt Ltd on 2 February 2016 and derived long-term capital gain -LTCG of Rs16.81 crore.
The AO found that as against the capital gain so derived, Ms Vohra set off a short-term capital loss of Rs9.14 crore, comprising mainly a short-term capital loss of Rs9.11 crore from the sale of shares of Mindtree. On further verification, the AO found that the shares of Mindtree were purchased by Ms Vohra between 17 February 2016 and 4 March 2016 and sold from 9 March 2016 to 31 March 2016.
After searching the internet, the AO found that Mindtree had announced the issuance of bonus shares on 18 January 2016 at a ratio of 1:1. He observed that due to the issue of bonus shares, the share price reduced almost to half its original price. According to the AO, taking advantage of such a reduction in the price of shares, Ms Vohra sold the shares purchased earlier, resulting in a short-term capital loss of Rs9.11 crore.
According to the AO, by adopting the 'colourable device' of selling the shares of Mindtree, having anticipated the reduction in price due to the issuance of bonus shares, Ms Vohra arranged her affairs to derive maximum benefit by selling the shares purchased earlier at a loss and deferring the sale of bonus shares to future dates to derive exemption on long-term capital gain.
Thus, ultimately, the AO concluded that, by adopting unfair means, Ms Vohra reduced her tax liability on LTCG derived from the sale of shares of Avendus Capital. Accordingly, he disallowed the STCL of Rs9.11 crore and added it back to Ms Vohra's income as LTCG.
Ms Vohra contested the addition before the commissioner of I-T (appeals) or FAA. Holding that the short-term capital loss arising from a legitimate transaction has to be set off against the long-term capital gain, the FAA deleted the addition of Rs9.11 crore made by the AO.
The I-T department then filed an appeal before the tribunal. The ITAT bench observed that the AO does not have any dispute with regard to the genuineness of the acquisition and sale of shares. The only grievance of the AO is that after the issuance of bonus shares by Mindtree, which resulted in a reduction in the price of shares of Mindtree purchased by Ms Vohra, the latter, to reduce her tax liability, had sold the shares of Mindtree to derive STCL and set it off against LTCG.
The AO further alleged that Ms Vohra, the assessee, has deliberately deferred the sale of bonus shares to future dates to derive long-term capital gain and claim exemption.
However, the tribunal rejected the tax department's claim of a 'colourable device,' ruling that the Mindtree share sale, though timed after a bonus issue announcement, is legitimate tax planning, not evasion.
(ITA No412/Mum/2024 Date: 29 November 2024)
NSE Should have passed instructions on how to split cost basis after stock split, this guy made advantage of a loop hole and saved crores
It could be as simple as adjusting cost basis after stock split
However this advantage of the taxpayer was cancelled by Bonus stripping rules amended vide Section 94(8) of the IT Act in the 2022 Budget effective 01.04.23