Tax Planning Within Law Is Not Tax Evasion – Offsetting STCL Against LTCG Is Legal – ITAT Mumbai

ITAT Allows Taxpayer to Offset STCL Against LTCG, Rejecting Tax Evasion Claims

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has upheld the right of taxpayers to offset short-term capital losses (STCL) against long-term capital gains (LTCG) to reduce tax liability. The ruling dismissed allegations of tax evasion raised by the Income Tax Department, offering significant relief to taxpayers, especially stock market investors, who often face scrutiny for such set-offs during assessments.

The Case at a Glance

The case revolves around Ranu Vohra, a Mumbai-based taxpayer who filed her Income Tax Return (ITR) for the assessment year 2016-17, declaring an income of ₹15.87 crore. In her return, Ms. Vohra reported LTCG of ₹16.81 crore from the sale of shares of Avendus Capital Pvt. Ltd. on 2 February 2016. She offset this gain by claiming STCL of ₹9.14 crore, largely from the sale of shares in Mindtree Ltd..

The Assessing Officer (AO) scrutinized these transactions, alleging that Ms. Vohra had arranged her share sales to unfairly reduce her tax liability. However, both the Commissioner of Income Tax (Appeals) [FAA] and the ITAT ruled in favor of the taxpayer, confirming the legitimacy of her transactions.

ITAT’s Observations and Ruling

In its order dated 29 November 2024, the ITAT bench of Saktijit Dey (Vice President) and Amarjit Singh (Accountant Member) rejected the Income Tax Department’s claim of tax evasion. The bench clarified:

1. Genuine Transactions: The transactions involving the purchase and sale of Mindtree shares were legitimate and not sham or fraudulent.
2. Taxpayer Rights: A taxpayer has the legal right to arrange their financial affairs to minimize tax liability, provided it is done lawfully.
3. No Evidence of Wrongdoing: The AO failed to present any evidence challenging the genuineness of the transactions or disputing the nature of the loss (STCL).

The ITAT emphasized:

“When there is no doubt about the genuineness of the transactions, the resultant short-term capital loss (STCL) cannot be disallowed merely by alleging a ‘colourable device.’ Legitimate tax planning within the framework of the law is not prohibited.”

The AO’s Allegations

During the assessment, the AO raised several points against Ms. Vohra’s claims:

• Bonus Share Issue: Mindtree Ltd. announced a 1:1 bonus share issue on 18 January 2016, which significantly reduced its share price.
• Timing of Transactions: Ms. Vohra purchased Mindtree shares between 17 February 2016 and 4 March 2016and sold them between 9 March 2016 and 31 March 2016, realizing an STCL of ₹9.11 crore.
• Deferral of Bonus Share Sale: The AO argued that Ms. Vohra deliberately postponed selling the bonus shares to future years to claim LTCG exemption while using the STCL to offset her gains in the current year.

The AO concluded that Ms. Vohra adopted a “colourable device” to reduce her LTCG tax liability by claiming the STCL. He disallowed the STCL of ₹9.11 crore and added it back to her LTCG.

The Taxpayer’s Argument and FAA Ruling

Ms. Vohra contested the AO’s decision before the FAA, arguing that:

1. The transactions were genuine and properly documented.
2. The losses claimed were legitimate and arose naturally from market conditions.
3. The AO accepted the STCL computations, as well as the LTCG arising from the subsequent sale of Mindtree bonus shares in later assessment years (AY 2017-18 and AY 2018-19).

The FAA ruled in Ms. Vohra’s favor, stating that short-term capital losses from legitimate transactions can be offset against long-term capital gains as per the Income Tax Act.

ITAT’s Final Decision

The ITAT upheld the FAA’s ruling, providing further clarity:

• The AO had no grounds to doubt the genuineness of the transactions.
• There was no indication that Ms. Vohra’s actions violated any legal provisions.
• Timing transactions to reduce tax liability, when done within the boundaries of the law, constitutes legitimate tax planning, not tax evasion.

Rejecting the AO’s claims, the tribunal stated:

“The sale of Mindtree shares post-bonus issue was a legitimate transaction. Arranging financial affairs to lawfully minimize tax liability cannot be termed a ‘colourable device.'”

Key Takeaways for Taxpayers

1. Right to Set Off Losses: Taxpayers can offset STCL against LTCG to reduce tax liability if the transactions are genuine and well-documented.
2. Legitimacy of Tax Planning: Arranging financial transactions to minimize taxes is a lawful practice, provided it adheres to the provisions of the Income Tax Act.
3. Burden of Proof on Tax Authorities: The Income Tax Department must substantiate claims of tax evasion or misuse of tax provisions with concrete evidence.
4. Investor Confidence: This ruling assures investors that genuine transactions will not be penalized, even if they result in reduced tax payments.

Why This Ruling Matters

This landmark ruling strengthens taxpayers’ rights, particularly for stock market investors who engage in frequent buying and selling of shares. It provides a clear distinction between legitimate tax planning and tax evasion, reinforcing that the latter requires concrete proof of fraudulent intent.

The decision underscores the importance of maintaining accurate records and complying with statutory requirements, giving taxpayers confidence to claim rightful deductions without fear of undue scrutiny.

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