ITAT Affirms Taxpayer’s Right To Set-Off Capital Losses Against Gains

The Income Tax Appellate Tribunal (ITAT) Mumbai bench has delivered a significant judgment, upholding a taxpayer's right to legitimate tax planning. In its decision, the tribunal permitted the set-off of long-term capital gains (LTCG) against short-term capital losses (STCL) received from the sale of shares. By defining the difference between legal tax techniques and tax evasion, this ruling provides solace to stock market investors, according to the Times of India.

In the case, a resident taxpayer claimed Rs 9.1 crore in short-term capital loss (STCL) from the sale of Mindtree shares. This amount was used to offset Rs 16.8 crore in long-term capital gains (LTCG) from the sale of Avendus Capital shares during the 2015–16 period. The income tax officer initially rejected the claim, arguing that the taxpayer had exploited a drop in Mindtree’s share price after a bonus issue to strategically sell the shares and generate a loss that could be set off against the LTCG, calling it a "colourable device".

The taxpayer declared an income of Rs 15.87 crore, including the claimed STCL. The officer, however, contested the set-off, arguing that the sale was a tactic to reduce tax liability by offsetting the LTCG, which is tax-exempt. In response, the taxpayer filed an appeal with the Commissioner of Appeals, who ruled in favour of the taxpayer. The ITAT was then notified of the situation by the tax department.

Vice-President Saktijit Dey and Accountant Member Amarjit Singh made up the ITAT which rejected the department's appeal. The bench emphasized that the transactions were genuine and lawful, with no evidence suggesting any malpractice. It asserted that taxpayers have the right to arrange their financial affairs within legal frameworks to minimize tax, a strategy that cannot be viewed as tax evasion.

Also, the ITAT emphasized that there was insufficient evidence to refute the taxpayer's transactions, confirming the validity of the set-off claim. The ruling affirmed that well-planned, legitimate transactions that meet legal requirements are permissible under tax laws.

The ITAT further pointed out that the income tax officer had not disputed the nature of the loss or the legitimacy of the transactions. Additionally, the LTCG reported by the taxpayer from the sale of Mindtree bonus shares was accepted in subsequent years (A.Y. 2017-18 and 2018-19), validating the taxpayer’s approach.

By rejecting the department's claim that the taxpayer's acts were a "colourable device," the panel upheld the exemption from paying additional taxes for law-abiding taxpayers. This ruling emphasizes that as long as all legal conditions are met, lawful transactions are permissible, even when they are carefully thought out.