AO can’t disregard a transaction just because it results in tax advantage to assessee: Mumbai ITAT

Case details: Michael E Desa v. ITO - [2021] 130 taxmann.com 314 (Mumbai - Trib.)

Judiciary and Counsel Details

• • Pramod Kumar, Vice President and Ravish Sood, Judicial Member
  • B.N. Rao for the Appellant.
  • T. Oommen for the Respondent.

Facts of the Case

Assessee had sold a property and reported long-term capital gain. It has also reported a long-term capital loss on sale of certain shares in VCAM Investment Managers Pvt Ltd. Assessing Officer (AO) was of the view that long term capital loss was attributed on account of equity shares of VCAM appeared to be prima facie fictitious and not entitled to be adjusted against any taxable income.

He AO rejected assessee’s claim on the ground that the net worth of VCAM was fully eroded and was wiped out by losses, and the value of shares sold was in negative with no future profit-earning capacity or any future business prospects. Thus, the loss was prima facie fictitious and premeditated and was created to avoid the tax liability on account of the sale of immovable property.

Assessee carried the matter before the CIT(A) but without any success. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Mumbai Tribunal held that the benefit of long-term capital loss could not be declined to the assessee, only on the ground that if the assessee had not taken these proactive measures, he would have paid more taxes. The assessee may so end up saving taxes, but then that is perfectly legitimate.

AO cannot disregard a transaction just because it results in a tax advantage to the assessee. Just as much as we cannot legitimize and glorify tax evasion through colorable devices and tax shelters, we cannot also deprecate and disapprove genuine tax planning within the framework of the law. 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.

Thus, AO was directed to allow set-off of this long-term capital loss on the sale of shares in VCAM against the long-term capital gains on the sale of the property.