2024 (12) TMI 702 - AT - Income Tax

Set off of short term capital loss against long term capital gain - HELD THAT - When the transactions relating to purchase and sale of shares are beyond doubt and are not in the nature of sham transaction even there is no such allegation by the Assessing Officer, the short term capital loss derived by the assessee from sale of shares cannot be prevented from being set off against the long term capital gain by alleging adoption of colorable 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 Assessing Officer 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. Even, as rightly observed by the learned First Appellate Authority, the AO has accepted the computation of short term capital loss made by the assessee. It is further relevant observe, the long term capital gain shown by the assessee on sale of bonus shares of M/s Mindtree Ltd. have been accepted in subsequent assessment year i.e. A.Ys. 2017-18 and 2018-19. See ADAR CYRUS POONAWALLA 2018 (11) TMI 1339 - BOMBAY HIGH COURT - Decided against revenue.

Summary

Issues:
Set off of short term capital loss against long term capital gain.

Analysis:
The appeal and cross objection arose from an order by the National Faceless Appeal Centre regarding the set off of short term capital loss against long term capital gain for the Assessment Year 2016-17. The Revenue raised concerns regarding the deletion of disallowance on account of short term capital loss on the sale of shares without appreciating the alleged tax planning aspect. The Assessing Officer contended that the taxpayer used a colorable device to reduce tax liability by selling shares of a company that issued bonus shares, resulting in a short term capital loss. The First Appellate Authority, however, ruled in favor of the taxpayer, allowing the set off of the short term capital loss against the long term capital gain.

Upon review, the Tribunal found that the transactions were genuine, and there was no evidence of sham transactions. The Tribunal disagreed with the Assessing Officer's allegation of tax avoidance through a colorable device, stating that as long as the taxpayer operates within the legal framework to reduce tax liability, the Assessing Officer cannot prevent it. The Tribunal emphasized that there was no requirement for the taxpayer to pay more tax than legally obligated. Additionally, since there was no doubt about the genuineness of the transactions and the nature of the loss, the Tribunal upheld the decision of the First Appellate Authority to allow the set off. The Tribunal also noted that the long term capital gain from the sale of bonus shares had been accepted in subsequent assessment years.

The Tribunal referenced a decision by the Jurisdictional High Court to support its conclusion. Ultimately, the Tribunal dismissed the appeal, upholding the decision to allow the set off of the short term capital loss against the long term capital gain. Consequently, the cross objection by the assessee was also dismissed as it was in support of the First Appellate Authority's order. The appeal and cross objection were both dismissed, and the order was pronounced in open court on the specified date.