Key Takeaways:
- Facts of the case
- AO's contention
- Ruling of CIT(A) and issues for consideration of the ITAT
- Observations of ITAT
- Final Ruling
- Way Forward
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FALLACIOUS DISREGARDING OF TRANSACTIONS THAT RESULT IN A TAX BENEFIT TO THE ASSESSEE
1. MICHAEL E DESA VS
INCOME TAX OFFICER
INTERNATIONAL TAXATION, WARD
1(1), MUMBAI
[2021] 130 TAXMANN.COM 314
(MUMBAI-TRIB)
FALLACIOUS DISREGARDING OF
TRANSACTIONS THAT RESULT IN A
TAX BENEFIT TO THE ASSESSEE
2. LEGENDS USED
AO Assessing Officer
AY Assessment Year
CIT(A) Commissioner of Income Tax (Appeals)
ICA Indian Contract Act, 1872
ITAT Income Tax Appellate Tribunal
LTCL Long Term Capital Loss
LTCG Long Term Capital Gain
NRI Non-Resident Indian
ROC Registrar of Companies
VCAM VCAM Investment Managers Private Ltd
3. PRESENTATION SCHEMA
Facts of the Case AO’s Contention
Ruling of CIT(A) and Issues for
consideration of the ITAT
Observations of ITAT Final Ruling Way Forward
5. FACTS OF THE CASE
Assessee, an NRI, sold a property in India and reported LTCG on such sale for AY 2010-11.
For the same AY, the assessee additionally reported LTCL on sale of certain shares in a loss-
making company named VCAM.
Assessee set-off the LTCL on sale of shares in VCAM with LTCG on sale of property.
7. AO’S OBSERVATIONS
Evidence of lack of
bonafides
• Discrepancy noted in the purchase price of shares of ₹ 2,95,445 as
confirmed by the buyer and the reported purchase consideration of
₹ 3,00,000
Not a genuine
transaction, but a sham
• Even after the sale of shares, the address of VCAM in the records of
ROC continued to be premises of the assessee.
Intent behind purchase
was not to continue
carry the business of the
company
• Though the valuation report presumed continuity of business, the
buyer, a close associate of the assessee, carried on no business
The transfer that lacked
commercial prudence
was merely a device to
generate artificial LTCL
for the assessee
• The buyer, one of the directors of VCAM, fully aware that the company
is worthless, and the transaction would yield him no material gains,
would not have purchased the shares if not for a tax benefit to the
assessee, who was his close associate
The AO, made the following observations regarding the sale of shares in VCAM by the assessee:
8. AO’S CONTENTION
The transaction
entered into, only to
nullify the levy of
LTCG, if permitted,
would defeat the
provisions of law and
shall be deemed
void, as per the ICA,
1872.
Losses in the
company which were
in the nature of
business had been
given the color of
capital loss in the
hands of the
assessee.
The LTCL was prima
facie fictitious and
pre-meditated,
created only to avoid
the tax liability on
account of sale of
immovable property.
The AO, thus convinced of the following, denied the benefit of set-off to the assesee:
10. RULING OF CIT(A)
The CIT(A) upheld the decision of AO.
Whether or not the authorities below were justified in declining the set- off of LTCL?
ISSUE(S) FOR CONSIDERATION OF
THE ITAT
12. ITAT’S OBSERVATION
The emphasis on the timing of booking the loss on account of the shares having become worthless with the
passage of time, is not germane, in the present context
The transaction, in the instant case, may be tax-motivated, but that factor does not, by itself, render the
transaction a colourable device, to avoid payment of tax.
There is window available to the taxpayer for tax planning. As long as tax planning is within the framework of
law, it cannot be questioned.
Every taxpayer is entitled to arrange his affairs so that his taxes shall be as low as possible and he is not required
to organise his fiscal affairs so as to serve the interests of the revenue authorities. (Vodafone International
Holdings BV v. Union of India [(2012) 341 ITR 1 (SC)]
It is upon the assessee to decide when to book the loss.
Where the AO himself agrees that the value of the shares is negative/worthless, it is not disputed that there is a
loss to the assessee.
13. ITAT’S OBSERVATION ON THE AO’S
CONTENTIONS
• ITAT’s Observation
AO’s Contention
• The variation is because the transaction value, vis-à-vis the
valuation report value (@ ₹ 2.95 per share) , has been agreed as
a round figure.
Discrepancy in actual purchase price
of ₹ 2,95,445 and reported purchase
consideration of ₹ 3,00,000
• It is incorrect to say that the shares are completely worthless as
by virtue of holding majority shares, a person gets control over
that juridical entity- whatever negligible be its worth
Lack of commercial prudence, on part
of the buyer, in buying shares that are
“worthless”
• The ownership is transferred, the consideration is paid and the
transaction is complete, in all respects.
• Not only has the sale been effected in records but there has also
been a change in the composition of the board of directors.
Not a genuine transaction (Transaction
effected with a close associate)
• This fact cannot negate the fact that ownership of the shares is
with the buyer of these shares and seller is not associated with
the company.
ROC records still show address of the
company as a premise belonging to
the assessee
14. WHETHER THE TRANSACTION IS
ILLEGAL UNDER THE ICA,1872?
When the object of a contract is illegality or something which would
frustrate the law, such a contract will be void.
Minimisation of tax liability, as long as it is through legitimate tax
planning and without using colourable devices, is not at all illegal.
Nor is it immoral as it is everybody's duty to himself to manage his
affairs properly within the framework of the law.
Just because the sale of shares in VCAM results in a tax advantage to
the assessee, it cannot be disregarded and deemed illegal.
16. FINAL RULING
There is nothing unusual about the assessee having sold his investment, which turned out to be bad, to one of
the directors of the company, who purchased it as its book value/effective net worth.
The sale was properly effected and is complete, in all respects.
The tax planning, being genuine and within the framework of law, cannot be disapproved.
The Mumbai ITAT ruled in favour of the assessee, directing the AO to allow the set-off of LTCL on sale of shares
in VCAM against the LTCG on sale of property.
18. WAY FORWARD
This ruling places emphasis on the fact that while it is true that the line of demarcation between
what is permissible tax planning and what turns into impermissible tax avoidance may be somewhat
thin, that cannot be excuse enough for the tax authorities to err on the side of excessive caution.
Further, it is vindicated that genuine tax planning techniques employed by taxpayers, within the
framework of law cannot be deprecated or disapproved by the department/Courts.
Thus, assesses are permitted to arrange their affairs in a way to reduce their tax liability, provided
the transaction is of bonafide nature and the intent is not to defeat the provisions of law.
![MICHAEL E DESA VS
INCOME TAX OFFICER
INTERNATIONAL TAXATION, WARD
1(1), MUMBAI
[2021] 130 TAXMANN.COM 314
(MUMBAI-TRIB)
FALLACIOUS DISREGARDING OF
TRANSACTIONS THAT RESULT IN A
TAX BENEFIT TO THE ASSESSEE](https://image.slidesharecdn.com/revisedmichaeledesaitatcaselaw-211023110338/85/FALLACIOUS-DISREGARDING-OF-TRANSACTIONS-THAT-RESULT-IN-A-TAX-BENEFIT-TO-THE-ASSESSEE-1-320.jpg)
