ITAT Ruling: Taxpayers Win Big in Legitimate Tax Planning Case | Mumbai News – Times of India

MUMBAI: In a significant ruling, the income tax appellate tribunal (ITAT), Mumbai bench, has upheld a taxpayer’s right to engage in legitimate tax planning. It allowed the set-off of short-term capital losses (STCLs) incurred on the sale of shares against long-term capital gains (LTCGs), effectively reducing the taxpayer’s overall tax liability.
This decision comes as a relief for stock market investors, who often face scrutiny of set-off transactions during income tax assessments. Tax experts highlight that the crux of this ITAT order is the clear distinction between legitimate tax planning and tax evasion.
At the heart of the case during 2015-16 was the disallowance of an STCL of Rs 9.1 crore arising from the sale of Mindtree shares. This loss had been set off against an LTCG of Rs 16.8 crore derived from the sale of Avendus Capital shares. During the assessment, the I-T officer rejected the STCL claim, reclassified it as LTCG and added it back to the taxpayer’s income.
The taxpayer appealed successfully to the commissioner (appeals), prompting the I-T department to escalate the matter to the ITAT. The tribunal, however, dismissed the department’s appeal, ruling that the taxpayer had not employed any unfair means to reduce her tax liability.
Under tax laws, a capital loss arises when shares are sold at a price lower than their purchase price. If shares are held for less than 12 months, the resulting loss is classified as a short-term capital loss, which can be set off against any capital gain —short term or long term. In contrast, long-term capital losses (arising from shares held for more than 12 months) can only be offset against long-term gains.
The I-T officer had contended that the taxpayer used a ‘colourable device’ to minimise her tax liability, citing Supreme Court’s landmark judgment in 1985 in the case of McDowell & Co, which condemned such practices. The officer alleged that the taxpayer strategically sold Mindtree shares after a bonus issue announcement, which caused a drop in share prices. This timing, the officer claimed, was a deliberate attempt to generate STCL that could offset LTCG and lower her tax liability.
However, the ITAT bench, composed of vice-president Saktijit Dey and accountant member Amarjit Singh, dismissed the appeal filed by the I-T department. It observed that transactions were genuine and conducted within the legal framework. It emphasised that there was no evidence to classify the transactions as sham or dubious. “There is no requirement under the law that the taxpayer has to pay more tax. If the taxpayer arranges her affairs within the legal framework and through legitimate means to reduce tax liability, the I-T officer cannot prevent her from doing so.”
The ITAT also noted that when the taxpayer sold the bonus shares of Mindtree in the subsequent financial years, the LTCG arising from such sale was accepted by the I-T authorities. Consequently, it found no grounds to dispute the computation or nature of the loss in question.