2024 (8) TMI 1044 - AT - Income Tax

Loss incurred through the 'off market' sale of shares to a partnership firm -colorable device aimed at tax evasion - Sale of the two scrips as violated the Spirit of the Act and is a colorable device through which the Assessee on the one hand seeks to take advantage of the Statutory Provisions i.e., Section 10(38) by claiming exemption of Long-Term Capital Gains but on the other hand creates Long Term Capital Loss artificially by transfer the shares to his sister concern in order to offset current and future gains against losses as mentioned HELD THAT - Assessee should not be encouraged to avoid payment of tax by resorting to dubious methods through colourable devices and that such devices cannot be a part of tax planning. We came to this conclusion in view of the fact that assessee transferred the above mentioned two listed securities to its partnership firm, which in turn no doubt passed the consideration also to the assessee. In nutshell, if we analyse the whole transaction it can be concluded that effectively money is lying with the assessee i.e. consideration paid by the partnership firm to the assessee, securities /shares are still with the assessee i.e. hold by the partnership firm of the assessee, on the other hand without any effective loss of control of the securities and artificial transfer of consideration, he made himself entitled to create a long term capital loss which is available for set off against the current years capital gain and also available for future long term capital gains. In these circumstances, the case laws relied upon by the assessee and Ld. CIT (A) is of no help as the facts of those judicial pronouncements vis-a-vis the facts of the assessee s case cannot be equate. he arrangement under scrutiny appears to lack commercial substance. It was noticed that the transaction under consideration created extraordinary rights and obligations that do not align with principles of fairness, suggesting it qualify as an impermissible avoidance arrangement. The court observed that in the facts of the present case, the evidence and facts suggests that the arrangement was designed primarily for tax evasion. In these circumstances and facts on record we uphold the appeal and set aside the order passed by the Ld. CIT (A) and restore the decision passed by the AO keeping in view the ratio laid down in the cases of McDowell Co. Ltd. 1985 (4) TMI 64 - SUPREME COURT and Vodafone International Holdings BV v. Union of India 2012 (1) TMI 52 - SUPREME COURT

Summary

Issues Involved:
1. Legitimacy of 'off market' sale of shares.
2. Validity of tax planning vs. colorable device.
3. Eligibility for set off and carry forward of long-term capital loss.
4. Applicability of General Anti-Avoidance Rule (GAAR).

Issue-wise Detailed Analysis:

1. Legitimacy of 'off market' sale of shares:
The revenue challenged the decision of the CIT(A) that the loss incurred by the assessee through the 'off market' sale of shares to a partnership firm controlled by the assessee is not a colorable device and is eligible for set off and carry forward. The AO observed that the shares yielding gains were sold on the stock exchange, while those incurring losses were sold off-market to a sister concern, M/s. Everfresh Enterprises LLP, where the assessee holds a 60% share. The AO deemed this transaction as a colorable device aimed at reducing taxable income by creating artificial losses.

2. Validity of tax planning vs. colorable device:
The CIT(A) held that the assessee's transactions were a legitimate exercise of tax planning, relying on the decision in Nomura India Investment Fund Mother Fund v. ADST(ST). However, the tribunal referred to the Supreme Court's judgments in McDowell & Co. Ltd. v. CTO and Vodafone International Holdings BV v. Union of India, emphasizing that while tax planning within the framework of law is legitimate, colorable devices aimed at tax evasion are not permissible. The tribunal concluded that the transactions were designed primarily for tax evasion and lacked commercial substance.

3. Eligibility for set off and carry forward of long-term capital loss:
The AO disallowed the set off and carry forward of the long-term capital loss incurred through the 'off market' sale, viewing it as an artificial transaction. The CIT(A) overturned this decision, but the tribunal reinstated the AO's decision, stating that the transactions were a means to create artificial losses without any effective loss of control over the securities, thus making the assessee eligible for undue tax benefits.

4. Applicability of General Anti-Avoidance Rule (GAAR):
The tribunal noted that although GAAR provisions were applicable from A.Y. 2018-19 onwards, the principles could be inferred in this case. The tribunal observed that the transaction lacked commercial substance and was designed to create artificial rights and obligations, qualifying it as an impermissible avoidance arrangement. The tribunal emphasized the need for statutory provisions to codify the doctrine of "substance over form" to address aggressive tax planning.

Conclusion:
The tribunal upheld the appeal by the revenue, setting aside the order of the CIT(A) and restoring the decision of the AO. The tribunal concluded that the 'off market' sale of shares was a colorable device aimed at tax evasion, and the losses incurred through such transactions were not eligible for set off and carry forward. The decision was pronounced in the open court on 6th August 2024.