Tax Planning

Official tax planning not unlawful: ITAT

Mumbai: The Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that minimizing tax liability through legitimate tax planning is not illegal.
In the case of Michael E. Desa, a US resident, it confirmed in a recent order that losses from the sale of shares in a private company were offset against gains from the sale of real estate in India.
During the 2009/10 fiscal year, Desa offset the long-term capital loss of Rs 1.1 billion against long-term capital gains of Rs 95 lakh on the property sales. In other words, due to such offsetting, there were no taxable long-term capital gains for the foreign taxpayer.
The Income Tax (IT) official denied such offsetting, arguing that the transaction of selling shares was a sham to create an artificial and false long-term loss of capital in Desa’s hands. The buyer of these shares was a director in this private company, with which Desa had been in business for over 10 years. The Company has ceased to do business after the sale of the Shares. ”Pursuant to Sections 23 and 24 of the Indian Contract Act of 1872, if the aim is to violate the law and the consideration is such as to do so this is permissible, if it would contradict the provisions of a law, the contract becomes null and void. It was pointed out that the transaction is only intended to cancel the levy of long-term capital gains. This established that the purchase agreement for the sale of shares was illegal, ”said the IT officer.
However, Vice President Pramod Kumar and Legal Counsel Ravish Sood’s ITAT bank indicated that commercial decisions such as selling and buying shares in a private company are best left to those concerned. “What the buyer of these shares does with the company is up to the buyer of the shares.” The bank noted that it is common practice for such companies to change hands. The ITAT concluded its order in strong terms, saying that the IT officer cannot ignore a transaction just because it brings a tax benefit to the taxpayer. “As much as we cannot legitimize and glorify tax evasion through dyes and tax evasion, we cannot disapprove or reject real tax planning within the framework of the law. The line between permissible tax planning and impermissible tax avoidance may be a bit narrow, but the tax office cannot use that as an excuse for excessive caution, ”the decision says.
ITAT-Bank relied on previous court decisions, including that of the Supreme Court in the Mc Dowell and Company case, in which this tax planning was considered legitimate if it was within the law.

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