ITAT: Tax planning can be legitimate unless it is within the framework of law

The assessee had sold a property and earned long-term capital gains on it. The assessee has reported a long-term capital loss on the sale of certain equity shares in a company. But the Assessing Officer declined the set-off of long-term capital loss, stating that company equity shares appear to be prima facie fictitious. Hence, the assessee cannot adjust the said loss against any taxable income.  

The tribunal has held that the benefit of this long-term capital loss could not be denied to the assessee only because if the assessee had not taken these proactive measures, he would have paid more taxes. Thus, the Assessing Officer was directed to allow the set-off of this long-term capital loss on the sale of shares against long-term capital gains on the sale of the property.

The Mumbai Bench said that the assessing officer could not disregard a transaction because it results in a tax advantage to the assessee. 

Case Description

During the particular financial year, the assessee had sold a property which resulted in long-term capital gain. Also, the assessee had reported a long-term capital loss on the sale of shares of an unlisted company, where he is also a director in a company. The assessee then adjusted the long-term capital loss on shares with the long-term capital gain of the property.

But the assessing officer rejected such a set-off of loss, stating that the assessee had known the buyer of the shares for the last 10 years and had close business relationships with him. The assessing officer further noted that the buyer has every reason to know that the company is worthless. The purchase of the shares was motivated for tax benefits to the assessee rather than any benefit to the buyer of the shares. 

Aggrieved by the decision, the assessee had appealed to the appellate tribunal. The tribunal observed that the ownership of the shares was transferred, the consideration was received, and the transaction was complete. It was held that the mere fact of the assessee’s association with the buyer of the shares does not mean that the transaction did not take place. It further added that minimising tax liability through legitimate tax planning and without colourable devices is not illegal.

Supreme Court Judgements

The Mumbai bench also referred to the Supreme Court rulings in the case of McDowell & Co Ltd, which mentioned that “tax planning may be legitimate provided it is within the framework of the law”. It also referred to the case of Vodafone International Holding, where the court reiterated that “every assessee 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”.


The ITAT bench concluded that Just as we cannot legitimise and glorify tax evasion through colourable devices and tax shelters, we cannot also disapprove the genuine tax planning within the framework of the law. The line of distinction 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.” As a result, the assessing officer was directed to allow set-off of this long-term capital loss on the sale of shares against the long-term capital gains on the sale of the property.

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