Taxpayers Celebrate ITAT Victory in Capital Gains Tax Planning Case

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Pee Vee
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Taxpayers Celebrate ITAT Victory in Capital Gains Tax Planning Case

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In a recent decision in the case of ACIT vs Ranu Vohra (ITAT Mumbai), the Mumbai ITAT confirmed that taxpayers can offset short-term capital losses against long-term gains, which helps lower their tax bills. The tribunal dismissed the tax department's argument that the situation was a deceptive move, stating that the sale of Mindtree shares, although after the announcement of a bonus issue, was a legitimate approach to tax planning and not evasion.

The income tax appellate tribunal (ITAT) in Mumbai in the case of ACIT vs Ranu Vohra (ITAT Mumbai) has made a noteworthy ruling in favor of taxpayers, affirming their right to engage in proper tax planning. This ruling allows the offsetting of short-term capital losses (STCLs) from share sales against long-term capital gains (LTCGs), thus lightening the tax burden.

This outcome is a relief for investors in the stock market, who often find themselves under scrutiny regarding their set-off transactions during tax assessments. Tax experts point out that this ruling highlights the important difference between proper tax planning and illegal tax evasion.

The case centered around the year 2015-16 and involved an STCL of Rs 9.1 crore from the sale of Mindtree shares. The taxpayer sought to offset this loss against an LTCG of Rs 16.8 crore from selling Avendus Capital shares. During the assessment, the income tax officer denied the claim, reclassifying the loss as LTCG and adding it back to the taxpayer's income.

The taxpayer successfully appealed to the commissioner (appeals), which led the income tax department to bring the matter before the ITAT. However, the tribunal rejected the appeal, concluding that the taxpayer acted fairly and did not resort to any unfair tactics to lower her tax liability.

According to tax rules, a capital loss occurs when shares sell for less than their purchase price. If shares are held for less than 12 months, the loss is categorized as a short-term capital loss, which can be used against any capital gain, either short-term or long-term. However, long-term capital losses (from shares held for over 12 months) can only offset long-term gains.

The income tax officer argued that the taxpayer employed a 'colourable device' to lower her tax liability, referencing a significant Supreme Court ruling from 1985 in the McDowell & Co case, which criticized such practices. The officer claimed that the timing of the sale of Mindtree shares, right after a bonus issue announcement that caused prices to drop, was a calculated move to create STCL to offset LTCG and decrease tax liability.

Nevertheless, the ITAT bench, which included vice-president Saktijit Dey and accountant member Amarjit Singh, sided with the taxpayer, stating the transactions were genuine and within the law. They noted there was no evidence to label the transactions as fake or questionable. "The law does not require a taxpayer to pay more tax. If a taxpayer organizes her affairs legally and in a legitimate way to lessen tax liability, the income tax officer cannot stop her."

The ITAT further remarked that when the taxpayer sold the bonus shares of Mindtree in later financial years, the resulting LTCG was accepted by the income tax authorities. They concluded there were no valid reasons to challenge the computation or nature of the loss in question.
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