Income Tax Appellate Tribunal

Michael E Desa vs. Income Tax Officer, International Taxation Ward 1(1)

MANU/IU/0631/2021

20.09.2021

Direct Taxation

Minimisation of tax liability, as long as it is through legitimate tax planning and without using colourable devices, is not at all illegal

The assessee is a non-resident Indian. During the relevant previous year, the assessee sold a property, of which he was 50% co-owner on an earning of long term capital gain. The assessee also reported a long term capital loss on sale of certain shares in VCAM Investment Managers Pvt. Ltd. (VCAM) and wanted to set off the same against his capital gains. The Assessing Officer was of the view that "the (this) long term capital loss was attributed on account of equity shares of VCAM which appears to be prima facie fictitious and not entitled to be adjusted against any taxable income". Hence, the assessment was reopened. The Assessing Officer observed that "the transfer of shares by the assessee is preconceived, preordained and fabricated for extra commercial consideration and a device to generate artificial and incorrect long term capital loss in the hands of the assessee". He thus rejected this long term capital loss.

Aggrieved, the assessee carried the matter in appeal before the CIT(A) but without any success and so, the assessee has filed the present appeal. The present court has perused the material on record and duly considered the facts of the case in the light of the applicable legal position. The court found that the shares in VCAM were practically worthless and there is clearly a loss to the assessee, and, to that extent, there can be no doubt or controversy. However, this loss could be booked only when the shares are actually sold by the assessee, and it is for the assessee to decide when he does so and find a buyer willing to buy these shares. When he actually sells the shares in question, and the said transaction is given factual and legal effect, the loss will crystallize. That is what probably leaves a window for planning the affairs, as long as the assessee can actually dispose of these shares, so as to minimise the tax liability in respect of long term capital gains, if any, since such a loss can only be set off against the long term capital gains.

Ironically, however, the Assessing Officer has primarily questioned the timing of booking the loss and selling these shares, which, even according to the Assessing Officer, are "worthless". It is not for the Assessing Officer to take a call on how should an assessee organise his fiscal affairs so as to serve the interests of the revenue authorities. This transaction may be tax-motivated, but that factor does not, by itself, render the transaction a sham transaction or a colourable.

As regards the transaction of sale of shares having been rendered illegal under Sections 23 and 24 of the Indian Contract Act, 1872, this proposition proceeds on the fallacious assumption that minimising tax liabilities through lawful means, even if the sale of shares be treated as tax-motivated, is illegal. Undoubtedly, when the object of a contract is illegality or something which would frustrate the law, such a contract will be void, but then minimisation of tax liability, as long as it is through legitimate tax planning and without using colourable devices, is not at all illegal; it is not even immoral as it is everybody's duty to himself to manage his affairs properly within the framework of the law.

As the assessee is looking at his long term capital gains, he realises that he has already incurred a long term capital loss by making an investment in the shares of VCAM and that he can book this loss in case he can find a buyer for these shares even at zero value. He narrows down to a director in the same company and his associate, who is ready to buy these shares at a token consideration at 3% of the face value of these shares, and the assessee then sells the shares to book the loss incurred by him in these shares. His long term capital loss is thus crystallised, and the corollaries are to follow. The benefit of this long term capital loss could not be declined to the assessee, as long as transaction has been actually effected, only on the ground that if the assessee had not taken these proactive measures, even if that the sale of shares can be described as a proactive measure, he would have paid more taxes. The assessee may so end up saving taxes but then that is perfectly legitimate. The Assessing Officer cannot disregard a transaction just because it results in a tax advantage to the assessee. Just as much as we cannot legitimize and glorify tax evasion through colourable devices and tax shelters, we cannot also deprecate and disapprove genuine tax planning within the framework of law. The line of demarcation between what is permissible tax planning and what turns into impermissible tax avoidance may be somewhat thin, but that cannot be excuse enough for the tax authorities to err on the side of excessive caution.

In view of the above, stand of the authorities below on this point vacated and Assessing Officer is directed to allow set-off of this long term capital loss on the sale of shares in VCAM Investment Managers Pvt. Ltd., against the long term capital gains on the sale of the property. The assessee gets the relief accordingly.

Tags : Legitimate tax planning

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