Legitimate tax planning not illegal: ITAT

MUMBAI: The Mumbai bench of the Income

Tax

Appellate Tribunal (

ITAT

) has held that minimisation of tax liability through legitimate

tax planning

is not illegal.


In the case of

Michael E Desa

, a US-based non-resident, it upheld in a recent order the set-off of loss arising on sale of shares of a private company against the profits made on sale of property in India.

During the financial year 2009-10, Desa had set off the long-term

capital loss

of Rs 1.1 crore against long-term capital gains of Rs 95 lakh from the property sale. In other words, owing to such a set-off, there was no taxable long-term capital gains in the hands of the non-resident taxpayer.

The income tax (I-T) officer denied such a set-off by holding that the transaction of sale of shares was a sham to generate artificial and incorrect long-term capital loss in the hands of Desa. The buyer of these shares was a director in this private company with whom Desa had a business relationship for over 10 years. After the sale of the shares, no business was carried on by the company.

“Under sections 23 and 24 of the Indian Contract Act, 1872, when the object is to defeat any provisions of law, and when consideration is of such nature that, if permitted, it would defeat the provisions of any law, the contract will be void. It was noted that the transaction is only to nullify the levy of long-term capital gains. It was thus observed that the sale contract for the sale of shares is vitiated in law,” held the I-T officer.

However, the ITAT bench of vice-president Pramod Kumar and judicial member Ravish Sood pointed out that commercial decisions such as sale and purchase of shares of a private company must be best left to the persons concerned.

“What the buyer of these shares does to the company is the business of the buyer of the shares.” The bench pointed out that it is a common practice to find such companies changing hands. The ITAT concluded its order with strong words, saying that the I-T officer cannot disregard a transaction just because it results in a tax advantage to the taxpayer.

“Just as much as we cannot legitimise 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 an excuse enough for the tax authorities to err on the side of excessive caution,” stated the order.

The ITAT bench relied on earlier judicial decisions, including that of the Supreme Court in the case of Mc Dowell and Company, where it was held that that tax planning may be legitimate provided it is within the framework of law.


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