The Income Tax Appellate Tribunal (ITAT) has held that minimising tax liabilities through lawful means is not illegal.

“The Assessing Officer cannot disregard a transaction just because it results in a tax advantage to the assessee. 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 Mumbai Bench of the tribunal said while disposing of an appeal by one Micheael E Desa. Minimisation of the tax liability, as long as it is through legitimate tax planning and without using colourable devices, is not illegal at all, it said.

Supreme Court rulings

The Bench highlighted parts of two rulings by the Supreme Court. First, in the McDowell & Co matter, the Court had observed that tax planning may be legitimate provided it is within the framework of law. Second, in the case of Vodafone International Holdings BV, the apex court had reiterated that every tax-payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the Treasury.

In the current case, the appellant had moved Mumbai Bench of ITAT, when set off of long-term capital loss of over ₹1.11 crore, incurred on the sale of shares in a company against the long-term capital gains of over ₹95.12 lakh, earned on the sale of a property was declined by the Income Tax Department.

The Assessing Officer (AO) was of the view that the long-term capital loss was attributed on account of equity shares of VCAM (the company), which appears to be prima facie fictitious and not entitled to be adjusted against any taxable income.

The appellant had sold shares of the company to one of its directors. The AO noted that the assessee knew the seller for over 10 years and had close business connections with him. The AO invoked Sections 23 and 24 of the Indian Contracts Act, 1872, which stipulates that 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.

Assessee’s choice

The ITAT Bench observed that there is loss and it could be booked only when the shares are actually sold by the assessee. “It is for the assessee to decide when he does so and finds a buyer willing to buy these shares. When he actually sells the shares in question, and the said transaction is given factual and legal effect, the loss will crystallise,” it said.

It concluded that 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 excuse enough for the tax authorities to err on the side of excessive caution.