ACIT-2(1)(1),MUMBAI, MUMBAI vs. VALLABH ROOPCHAND BHANSHALI, MUMBAI

The AO perused these written submissions and held that the Assessee had declared income from L.T.C.G. on sale of equity shares through stock exchange after paying STT and claimed exemption u/s. 10(38) of the Act and also sold unlisted securities on which he earned a long term capital gain of Rs. 6,96,06,436/- (5,44,96,271/- + 2,23,06,540/- -71,96,375/-) ,the Assessee had declared a long-term capital loss of Rs. 16,15,92,420/- which he did partly set off against the LTCG on unlisted securities amounting to Rs. 6,96,06,436/- and balance amount carried forward to the A.Y. 2018-19. The AO observed that those shares on the equity market that were yielding gain were sold by the Assessee after paying the STT, whereas those shares which were not yielding gain were sold by the Assessee through an off-market transaction to his Sister Concern viz.

However, the AO observed that the Assessee had declared income from Long Term Capital Gain at Rs. 49,59,76,976, this income was claimed as exempt under section 10(38) of the Act. The AO thus held that the transaction of sale of shares of ‘Ansal Properties and Infrastructure Ltd.’ and ‘Welspun Enterprises Ltd.’ was a colourable device and artificial transaction done solely with the purpose to reduce the exempt LTCG income and increase the losses in the taxable category of capital gains to set them off against taxable income in future, the AO therefore held that the transactions of Rs. 16,15,92,430/- as incurred through transactions not done on the stock exchange and hence did not allow the LTCL to be set off against the current year’s LTCG and further carried forward.

The Assessee being aggrieved by the order of the AO passed under section 143(3) of the Act, dated 28.12.2019 preferred an Appeal before the Ld. CIT (A), Mumbai, the appeal was subsequently migrated to the National Faceless Appeals

The ACIT, Circle-2(1) (1), Mumbai being aggrieved by the order of the Ld. CIT (A) preferred the present appeal before us. We have gone through the order passed under section 143(3) of the Act, order of the Ld. CIT (A) passed under section 250 of the Act and submissions of the Appellant along-with grounds taken before us. It is observed that the Assessee had declared income from Long Term Capital Gain at Rs. 49,59,76,976 while filing its return of income originally under section 139(1) of the Act vide 21.09.2017. The only issue before us is whether the ‘off market’ sale of the scrips falls under the ambit of legitimate tax planning or is a colourable device used to evade tax. We observe that the AO held that the sale of the two scrips viz. ‘Ansal Properties and Infrastructure Ltd.’ and ‘Welspun Enterprises Ltd.’ violated the Spirit of the Act and is a colorable device through which the Assessee on the one hand seeks to take advantage of the Statutory Provisions i.e., Section 10(38) of the Act, by claiming exemption of Long-Term Capital Gains but on the other hand creates Long Term Capital Loss artificially by transfer the shares to his sister concern in order to offset current and future gains against losses as mentioned (supra).

The Hon’ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO, (1985) 3 SCC 230 has categorically held: -

Thus, in light of the above judgements it is patently clear that the Assessee should not be encouraged to avoid payment of tax by resorting to dubious methods through colourable devices and that such devices cannot be a part of tax planning. We came to this conclusion in view of the fact that assessee transferred the above mentioned two listed securities to its partnership firm, which in turn no doubt passed the consideration also to the assessee. In nutshell, if we analyse the whole transaction it can be concluded that effectively money is lying with the assessee i.e. consideration paid by the partnership firm to the assessee, securities /shares are still with the assessee i.e. hold by the partnership firm of the assessee, on the other hand without any effective loss of control of the securities and artificial transfer of consideration, he made himself entitled to create a long term

In these circumstances, the case laws relied upon by the assessee and Ld. CIT (A) is of no help as the facts of those judicial pronouncements vis-a-vis the facts of the assessee’s case cannot be equated. Further, in such type of matter, inference can be drawn from Section - 95, [CHAPTER X-A GENERAL ANTI- AVOIDANCE RULE], although applicable w.e.f. A.Y. 2018-19 onwards. It is further held that the arrangement under scrutiny appears to lack commercial substance. It was noticed that the transaction under consideration created extraordinary rights and obligations that do not align with principles of fairness, suggesting it qualify as an impermissible avoidance arrangement. The court observed that in the facts of the present case, the evidence and facts suggests that the arrangement was designed primarily for tax evasion.

The question of substance over form consistently getting importance and has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied. While some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity. The existence of anti- avoidance principles is based on various judicial pronouncements. There are some specific anti-avoidance provisions but general anti-avoidance has been dealt only

In these circumstances and facts on record we uphold the appeal and set aside the order passed by the Ld. CIT (A) and restore the decision passed by the AO keeping in view the ratio laid down by the Hon’ble Supreme Court in the cases of McDowell & Co. Ltd. v. CTO, (1985) 3 SCC 230 and Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613.

In the result, appeal of the Revenue is allowed.