Tax Authority Challenges STCL Offset Claim, Invoking GAAR Provisions
Case: Ayodhya Rami Reddy Alla v. Principal Commissioner of Income-tax, [2024] 163 taxmann.com 277 (High Court of Telangana, June 7, 2024)Relevant Statutes used:
Section 95, read with sections 74, 96, and 144BA of the Income-tax Act, 1961
Summary of Facts:
The petitioner, Ayodhya Rami Reddy Alla, sold shares of a company, Ramky Estate and Farms Limited (REFL), incurring a short-term capital loss. The petitioner then set off this loss against a long-term capital gain from another transaction. The Assessing Officer treated these transactions as an impermissible avoidance arrangement under the General Anti-Avoidance Rules (GAAR) under Chapter X-A of the Income-tax Act.
Issues:
- Whether the transactions involving the sale of REFL shares and the subsequent set-off constituted impermissible tax avoidance under GAAR.
- Whether the initiation of proceedings under Chapter X-A of the Income-tax Act was legal and justified.
Holding:
The High Court held that the Revenue had persuasively demonstrated that the transactions were not permissible tax avoidance arrangements. The writ petitions filed by the petitioner were dismissed, allowing the respondents to proceed further with the process under Section 144AB.
Reasoning:
- The Revenue contended that the purchase of REFL shares followed by a fall in share price due to a bonus share declaration, leading to a business loss upon resale, constituted a tax evasion scheme with no commercial substance.
- The petitioner argued that the provisions of Section 94(8) of the Act, aimed at curbing tax avoidance related to bonus stripping, did not apply to the present case.
- The respondent maintained that the initiation of proceedings under Chapter X-A of the Act was lawful and necessary to address impermissible tax avoidance arrangements.
- The court emphasized the legislative intent behind the enactment of GAAR provisions and the burden of proof on the Revenue to establish fiscal misconduct.
- The court noted that the petitioner's decision to seek judicial intervention instead of following the prescribed process under Section 144AB raised questions about the petitioner's motives.
- The court concluded that the Revenue had successfully demonstrated that the transactions in question were impermissible tax avoidance arrangements, justifying the dismissal of the writ petitions.
In nutshell, in a scenario where the assessee offset a short-term capital loss (STCL) from the sale of REFL shares against a long-term capital gain (LTCG) from another company's shares, the tax authority contended that the purchase and subsequent sale of REFL shares at a loss, following a bonus share declaration, constituted a business loss.
The revenue further argued that the issuance of bonus shares was an artificial tax avoidance arrangement designed to circumvent tax obligations, thus invoking the provisions of the General Anti-Avoidance Rules (GAAR) under Chapter X-A of the Income Tax Act.
Decision:
The High Court dismissed the writ petitions and allowed the respondents to proceed with the process under Section 144AB of the Income-tax Act. The court found in favor of the Revenue, upholding the application of GAAR provisions in the case.