HC Rules GAAR Not Applicable On Timing Of Share Deals

Case Details: Smt. Anvida Bandi v. Deputy Commissioner of Income-tax - [2025] 177 taxmann.com 726 (Telangana)

Judiciary and Counsel Details

• P.Sam Koshy & Suddala Chaiapati Rao, JJ.
• B. Gangadhara Reddy for the Petitioner
•  N. Praveen Reddy, learned Senior Standing Counsel for the Respondent

Facts of the Case

Assessee was involved in making investments in shares and securities for many years. During the relevant assessment year, the assessee sold shares of one company and earned LTCG. In the relevant assessment year, the assessee purchased shares of HCL Technologies, which were sold in the same year, incurring STCL.

The Assessing Officer (AO) opined that the transaction of purchase and sale of shares of HCL, resulting in STCL set off against LTCG on the sale of unlisted shares, amounted to an Impermissible Avoidance Arrangement (IAA). Therefore, the provisions of Chapter X-A, the General Anti-Avoidance Rule (GAAR), would become applicable to the said transactions. Aggrieved by the order, the assessee filed a writ petition to the High Court.

High Court Held

The High Court held that to hold a transaction of purchase and sale of shares to be an impermissible avoidance arrangement, there must be an arrangement between two or more parties. The said arrangement must have the four ingredients envisaged in section 96(1). The four ingredients that would constitute an impermissible avoidance arrangement are:

a) The arrangement creating rights or obligations that are otherwise not ordinarily created between persons dealing at arm’s length;
b) There has to be cogent proof of misuse or abuse of the provisions of the Income Tax Act, either directly or indirectly;
c) The transaction should either lack commercial substance, or it leads to a deemed lack of commercial substance, in whole or in part; and
d) The arrangement entered into would reflect on the face of it to have been not ordinarily employed for bona fide purposes.

In the instant case, the revenue had not been able to show or collect any material to prove that the purchase and sale of shares made by the assessee were with any of their known persons or entities. Further, all the shares were sold through the stock exchange. The assessee was an investor who had been continuously engaged in the sale and purchase of shares. This would establish that the transaction of sale of shares by the assessee was not one of the isolated transactions specifically made to save tax.

Furthermore, all transactions, including the purchase and sale of shares, were conducted through the assessee’s DMAT account. There was no nexus that could be established between the purchase and sale of HCL shares made by the assessee. There was no new material available to support the revenue, which indicated that the so-called arrangement was subject to the provisions of Chapter X-A, i.e., the GAAR provision. There was no material to suggest that the transactions constituted an impermissible avoidance arrangement, except for the timing of the transactions. It was held that the timing of a transaction or a taxpayer would not be questioned under the GAAR provisions on the sale and purchase of shares made by the assessee.