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Set-off of STCL on which STT was paid against STCG not subject to STT is valid: ITAT
iShares Msci EM UCITS ETF USA ACC vs. Deputy Commissioner of Income Tax - [2024] 164 taxmann.com 56 (Mumbai - Trib.)
Assessee, a Mauritius-based company, was registered with the Securities and Exchange Board of India as a foreign portfolio investor (FPI). During the relevant assessment year, the assessee earned short-term capital gain that was not subject to securities transaction tax (STT) and was taxable at the rate of 30 percent. The assessee also incurred short-term capital loss subject to STT and was in the 15% tax category.
While furnishing the return of income, the assessee had set off short-term capital losses against the short-term capital gains. During the assessment proceedings, the Assessing Officer (AO) contended that the set off of losses having lower taxability with gains of higher taxability was not in order. Thus, the AO computed set-off of short-term capital loss covered under section 111A against short-term capital gains chargeable to tax at the rate of 15% and did not grant any set-off short-term capital gain which was chargeable to tax at the rate of 30%.
On appeal, the Dispute Resolution Panel (DRP) also confirmed the action of the AO. Aggrieved by the order, the assessee preferred an appeal to the Mumbai Tribunal.
The Tribunal held that Section 70(2) provides that where the assessee suffers a short-term capital loss, the assessee shall be entitled to set off such losses against capital gain computed similarly as under sections 48 to 55 of the Act. According to section 70(3), where the assessee suffers long-term capital loss, the assessee shall be entitled to set off such losses against the long-term capital gains computed similarly as provided under sections 48 to section 55.
Sections 48 to 55 do not provide for the tax rate on capital gain. It specifically lays down the computation mechanism of capital gain and certainly not tax on such capital gains. It is not the case that either in the computation of short-term capital gains or short-term capital loss, there is any difference in the manner of computation. Therefore, short-term capital gain and short-term capital loss arising during the year are computed similarly as provided under sections 48 to 55 of the Act.
Thus, there was no reason to deprive the assessee of set-off of short-term capital losses suffered by the assessee for the same year against the short-term capital gains earned by the assessee. Such a claim was in accordance with the provisions of section 70(2) of the Act.
Synergy or Conflict? SAAR and GAAR in Tax Laws Understanding the Intersection between SAAR and GAAR
In the realm of tax law, combating avoidance strategies is a perpetual challenge that regulators face. Anti-Avoidance Rules ("SAAR") and General Anti-Avoidance Rules ("GAAR") represent two distinct yet interconnected approaches to curbing tax avoidance. While SAAR target specific transactions or arrangements deemed abusive, GAAR serves as a broader safeguard against arrangements lacking commercial substance primarily for obtaining tax benefits. The interplay between SAAR and GAAR is crucial in navigating the complex landscape of tax avoidance, planning and compliance, often raising questions about their overlap, application criteria, and the practical implications for taxpayers and tax authorities alike.
This conundrum has been a matter of much debate and discussion amongst the taxpayers and regulators around the world since the introduction of GAAR. Administrator's advocate that the principles of anti-avoidance rules can be synonymous, as the interaction between GAAR and SAAR take place with the same intention, which is to curb tax avoidance. Having said so, the taxpayers strongly press GAAR and SAAR to be mutually exclusive. Taxpayers strongly state that where SAAR may be applied, provisions of GAAR should not be invoked or vice versa.
This vexed question has been recently dealt by the Hon'ble Telangana High Court in the case of Ayodhya Rami Reddy Alla v. Pr. CIT (Central) [2024] 163 taxmann.com 277 clubbed with M/s. Oxford Ayyappa Consulting Services (India) Private Limited v. Principal Commissioner of Income- Tax (Central) Writ Petition No. 46467/2022/[2024] 163 taxmann.com 277 The decision provides a noteworthy jurisprudence on the delicate equilibrium between SAAR and GAAR enshrined in the Income Tax Act, 1961 ("the Act").
At the crux of the matter before the Hon'ble Court was the practice of "bonus stripping" a contentious tax avoidance strategy where transactions are scrutinized for their genuine commercial substance and intent. The court's deliberation centered on whether these transactions should be assessed under the provisions of SAAR or GAAR. Despite the assessee's argumentation that SAAR should govern the transactions in question, the court sided with the Tax Department and held the invocation of GAAR to be valid. The aforesaid decision underscores the judicial stance that the provisions of GAAR can be invoked to tackle tax avoidance schemes lacking authentic commercial rationale, irrespective of the presence of SAAR.
By upholding the revenue invocation of GAAR, the court has reinforced the overarching "principle of substance over form" in tax matters. The judgment elucidates the legislative intent behind the incorporation of GAAR into the tax framework and clarifies that GAAR is the potent weapon in the hands of the Tax Department to combat contrived arrangements which are devoid of genuine economic purpose and are undertaken without any business consideration.
The issue before the Hon'ble High Court centered around a company called Ramky Estate and Farms Limited ("REFL")wherein bonus shares were issued to its shareholders. On February 27, 2019, an Annual general meeting of REFL was held and the authorized share capital of the company was increased. Shares were allotted to assessee and another group company namely Oxford Ayyapa Consulting Services Private Limited ("OACSPL") through a private placement at a face value of Rs. 115 per share. The assessee shortly after the AGM purchased the shares held by OACSPL.
Thereafter REFL issued bonus shares to its shareholders at a ratio of 5:1 on March 4, 2019,as a result of which, the value of each share of REFL reduced to 1/6th of its original value.
Shortly thereafter assessee sold their shares in REFL to Advisory Services Pvt. Ltd ("ADR") on March 14, 2019. This sale led to a short-term capital loss ("STCL") for the assessee which the assessee set off from the long-term capital gains ("LTCG") from selling shares in another company. The interesting facts that were thrown into light by the Tax Department during the course of hearing were that ADR did not had any business purpose and funds to undertake the transactions, and the funds for the purchase of shares were provided by OACSPL. Further an Inter Corporate Deposit ("ICD") was provided to another group entity and the value of the same ICD was written off by more than 70% in the books of OACSPL within a month.
The tax authorities viewed these transactions as an attempt to avoid taxes in terms of the provisions of GAAR. Tax Department invoked the GAAR provisions under Chapter XA of the Act and issued a reference notice dated 02.08.2022 under Rule 10UB(1) of the Income Tax Rules, 1962, and sought objections from the petitioner under Section 144BA(1) of the Act.
The petitioner filed the response dated 16.08.2024 to the notice, disagreeing with the allegations, and questioning the validity of the notice. Despite this, the tax authorities issued another notice dated 14.12.2022 stating that the transactions undertaken by the Petitioner to be considered as an Impermissible Avoidance Arrangement ("IAA") under Chapter X-A of the Act, and objections were called upon again. Considering the second notice issued, the assessee assailed the said notice before the Hon'ble High Court by invoking the Writ Jurisdiction.
The relevant issue for determination before the Hon'ble High Court was (a) whether the writ petition seeking a writ of mandamus declaring the assessment proceedings as illegal, arbitrary, ultra vires, valid. and (b) Whether the provisions of GAAR & SAAR independently applicable or can be applied together.
Before the Hon'ble Court, the Petitioner put forth an argument that the instant transaction under consideration can at best be considered to fall within the ambit of the provisions of Section 94(8) of the Act pertaining to 'Bonus Stripping' and thus the provisions of GAAR under Chapter XA of the Act cannot be invoked in the presence of the SAAR. The Petitioner further contended that though SAAR exists, it shall again be not applicable to the factual matrix as Section 94(8) pertains to Mutual Funds Units and the transaction in question pertains to equity shares.
The assessee's contention that the Tax Departments must evaluate their case strictly within the framework of Chapter X, which deals with SAAR, and should not invoke Chapter X-A, which pertains to GAAR did not find favor with the Hon'ble Court.
Hon'ble Court held that Chapter X addresses special provisions related to tax avoidance. On the other hand, Chapter X-A was introduced as an amendment to the Act, through the Finance Act, 2013, effective from 01.04.2016. The Hon'ble courts observed that in this situation, there is a special provision in the law that existed in the Act before a general provision which was later added through an amendment. Typically, it is the opposite scenario where a general provision is already in place, followed by a subsequent enactment of a special provision. In such cases, both the Supreme Court of India and various High Courts have consistently ruled that when a special provision exists, the general provision cannot be invoked. Therefore, the argument put forth by the assessee was not accepted.
Furthermore, the Hon'ble Court observed that Chapter X-A begins with a non-obstante clause, specifically Section 95(1), which states that despite anything mentioned in the Act if the Assessing Authority determines that an arrangement entered by the taxpayer is an impermissible avoidance arrangement, the consequential tax must be assessed under Chapter X-A. Essentially, this non-obstante clause gives Chapter X-A precedence over the existing provisions of the law. Regarding the argument put forth by the petitioner that the petitioner's case should fall under Section 94(8) of the Act, Court noted that it is pertinent to examine Section 94(8) which pertains to the prevention of tax avoidance through specific transactions involving securities, which can include mutual funds, and derivatives from unrecognized stock exchanges. The Hon'ble Court also observed that the assessee's argument is weakened by the assessee's contradictory argument that the provisions of SAAR under Section 94(8) also does not apply to the instant transaction during the relevant period. Hon'ble Court noted that when the Petitioner itself is stating that the provisions of SAAR are not applicable to the given facts considering it to be transaction of shares and not mutual fund units, then objecting the application of GAAR stating presence of SAAR for 'Bonus Stripping' is self-contradictory.
The Revenue counter-argument to the aforesaid was that the case falls under Chapter X-A due to numerous taxpayer transactions. It was pressed that while Section 94(8), SAAR might apply to genuine bonus share issuances, the present tranche of transactions were undertaken to reduce the tax liability and had no economic substance behind it.
The petitioner's reliance on the 2012 Shome Committee Report was also held to be misplaced. The court specifically stated that the report pertains to international agreements, not domestic scenarios. Hon'ble Court also drew reference to the Finance Minister's announcement on 14.01.2013 which provides that invocation of GAAR or SAAR is case-specific.
Further, the Hon'ble Court placed reliance on the Finance Bill, 2013 which only partially adopted recommendations from expert committees, and the Central Board of Direct Taxes ("CBDT") vide Circular No. 7/2017 dated 27.01.2017clarified that both GAAR and SAAR would be applied based on the specifics of each case.
The petitioner's argument that the facts of the case are irrelevant in applying a general law was held to be fundamentally flawed. The Hon'ble Court placed reliance upon the decision of the Hon'ble Supreme Court in the case of CIT (Central) v. S. Zoraster and Company [1972] 4 SCC 15. The Court emphasized that laws should be interpreted considering the specific facts of each case. Therefore, the petitioner's argument not only lacks consistency but also contradicts established legal principles.
Hon'ble Court further held that the arrangement under scrutiny appears to lack commercial substance according to Section 97. It was noticed that the transaction under consideration created extraordinary rights and obligations that do not align with principles of fairness, suggesting it qualify as an impermissible avoidance arrangement under Section 96. The court observed that in the facts of the present case, the evidence suggests that the arrangement was designed primarily for tax evasion, and the Petitioner has not provided substantial evidence to refute this. Section 144AB requires a comprehensive evaluation of transactions to ensure fairness, but the Petitioner bypassed this procedure by approaching the court directly. This action raises questions about the Petitioner's intentions.
Reliance was further placed by the Hon'ble Court on the decision in Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202/204 Taxman 408/31 ITR 1 (SC) which emphasized that business intent is crucial in determining whether a transaction is genuine or aimed at tax evasion. The Hon'ble court further relied on the landmark judgment of McDowell & Co. Ltd. v. CTO [1985] 22 Taxman 11/154 ITR 148 (SC) as it underscores a departure from the Westminster principle in the interpretation of taxation statute, advocating for a judicial approach that scrutinizes transactions for their intent to avoid taxes rather than adhering strictly to literal or liberal statutory interpretations. It emphasizes the judiciary's role in identifying and disapproving of sophisticated legal maneuvers designed to circumvent tax obligations, stressing the moral and ethical implications of such practices.
The Hon'ble Court further opined that legitimate tax planning if conducted within the boundaries of the law is permissible. However, using deceptive or dishonest methods under the guise of tax planning is unacceptable. The Hon'ble court concluded that the transactions in question do not qualify as legitimate tax planning under the law. The evidence presented by the Revenue convincingly demonstrates that these transactions are impermissible tax avoidance schemes and the specific provisions of SAAR under Section 94(8) though dealing with 'bonus stripping' do not apply to the instant transaction. Hon'ble Bench upheld the invocation of the general anti avoidance provisions enshrined under Chapter X-A of the Act. As a result, the court dismissed the writ petitions, allowing the Revenue to proceed with the process under Section 144AB.
The argument of the Petitioner that though there is a specific provision in terms of Section 94(8) of the Act, which provides for taxability in the cases of bonus stripping pertaining to mutual fund units means that the authorities intentionally did not cover 'shares' within the ambit of such SAAR and since the instant transaction was intentionally kept out of SAAR (dealing with similar transactions for mutual fund units), the provisions of GAAR should also not be invoked, did not find place with the minds of the Hon'ble Court. The Hon'ble Court ridiculed the said argument as being self-contradictory.
The court addressed the foundational principle that while tax planning within the bounds of legality is acceptable, using colorable or deceptive devices to evade taxes is prohibited and unethical. The court's decision to depart from the Westminster principle, as articulated in earlier British jurisprudence, signifies a departure towards a more purposive and anti-avoidance approach in interpreting tax statutes. This shift underscores the judiciary's inclination towards synonymity of the specific and general anti avoidance regulations, as a commitment to ensuring tax laws are not manipulated through artificial transactions designed solely to minimize tax liabilities. The judgment emphasizes the multifaceted detrimental effects of tax avoidance, such as loss of public revenue essential for a welfare state, economic distortions caused by black-money accumulation, and the erosion of public confidence in tax systems. By placing the onus on taxpayers to substantiate the bona fides of their transactions, the court reinforces the principle of accountability and transparency in tax matters.
Having said so, internationally on the similar subject Hon'ble Supreme Court of Canada (SCC) in the case of Canada v. Alta Energy Luxembourg SARL (2021 SCC 49) comprising of 9 judges in 6:3 took a different view and decided against the invocation of GAAR even in the absence of SAAR.
Cote Justice in Alta Energy for the majority stated that GAAR acts as a
"legislative limit on tax certainty by barring abusive tax avoidance transactions, including those in which taxpayers seek to obtain treaty benefits that were never intended by the contracting states." Hon'ble Bench further held that intention "is found by going behind the text of the provisions under which a tax benefit is claimed in order to determine their object, spirit, and purpose."
The interesting question that was framed before the Hon'ble Court was how far the Court should go to unearth and determine the provision's object, spirit, and purpose.
By way of facts, the query before the SCC largely focused on the intentions of the treaty countries, as to who and who should not be entitled to take benefit of the treaty's capital gains article. Out of nine judges, Hon'ble six judges, noted that the treaty specifically provided for SAAR denying treaty benefits to certain defined Luxembourg holding companies. They further noted that though such SAAR applies to holding companies, there was no SAAR denying treaty relief to conduit companies in general. Thus, the majority referred to the intention of the partner countries and inferred that it was intended by the treaty parties to exclude the conduit companies out of SAAR and thus other companies with limited economic ties to Luxembourg could claim treaty relief. The Hon'ble SCC on perusal and analysis of the treaty held that the absence of the specific SAAR represents "an enlightening contextual and purposive element as it sheds light on the contracting states' intention." The majority found that there was no abusive tax avoidance because the contracting states' intentions were consistent with the capital gains exemption being available to the taxpayer. As a result, GAAR did not apply.
The majority inferred that, because there was a SAAR denying treaty benefits to certain defined Luxembourg holding companies but no SAAR denying treaty relief to conduit companies in general, it was intended by the treaty parties that other companies with limited economic ties to Luxembourg could claim treaty relief. The majority found that there was no abusive tax avoidance because the contracting states' intentions were consistent with the capital gains exemption being available to the taxpayer. As a result, GAAR did not apply. Hon'ble Court held that the absence of SAARs that would have prevented the situation is not necessarily determinative of the application of GAAR; if that were the standard, it would provide a full response in every case and gut GAAR. However, the majority found that, in this case, Canada and Luxembourg made a deliberate choice to guard some benefits against conduit corporations and to leave others, such as the business property exemption, unguarded.
In the facts of the present decision of Hon'ble Telangana High Court the argument advanced by the Ld. Senior counsel for the assessee is facing severe criticism by the professional forum. In our considered view, taking note of the intention test as explained by the SCC in Alta Energy, the arguments advanced had a solid legal premise behind them and the only reason of the arguments not finding favors with the Hon'ble court was the facts in hand and that's why the arguments advanced by the Ld. Senior counsel fell on their head. The legal argument put forward by the taxpayer doesn't appear to lack merit as much as it has been portrayed in public discussions about the judgment. While the argument might not entirely align with the specifics of the case, the legal principle it is based on holds significant legitimacy. Nevertheless, whether this principle will ultimately benefit the taxpayer remains uncertain, especially given the limited information publicly available about the commercial rationale, if any, behind these interconnected transactions that appear to be closely linked and undertaken without any business interest other than Tax avoidance. However, while reading the aforesaid decision the one thing that has to be kept in mind is that the facts of the present case were peculiar and there were clear discrepancies and flaws in the conduct of the assessee and group companies. The way in which transactions were planned routing the same money through different entities will draw the attention of the tax department in most cases.
The aforesaid decision marks the beginning of long overdue judicial analysis of the complex interplay between GAAR and SAAR and thus giving rise to a new flashpoint between the tax department and the taxpayer. Law makers around the world highlights that while SAAR can sometimes offer insights into the legislative intent behind specific provisions, they are often narrowly focused and may not fully clarify the underlying rationale for either the related provisions or the SAAR itself. Therefore, courts should generally avoid relying on SAARs to inform their analysis of the GAAR. This approach aligns with the initial sentiments when GAAR was introduced, which aimed to render many SAARs unnecessary and minimize their future role. Indeed, it is advocated by the law makers that a key objective of implementing GAAR was to relieve them from the constant need to identify and address new developments in tax planning, thus moving away from the practice of reacting to specific tax schemes through frequent legislative updates and bring some certainty to tax legislations.
That said, it has been pressed by the taxpayers and the professional fora that notwithstanding the introduction of provisions of GAAR, the number of SAARs in tax legislations has continued to be introduced and increased. Defending the taxpayers, it has been strongly pressed that if even after introduction of GAAR, SAARs are being introduced, then it should be inferred that once specific SAAR is being introduced, and a transaction is considered permissible within the standards of that SAAR, tax authorities should be estopped from invoking GAAR.
In this backdrop, to shed the controversy of supremacy of SAAR or GAAR, legislators may explore creating a comprehensive strategy and exploring the idea of creating "Specific General Anti Avoidance Rules" that blend various methods. These could include defining legislative intent, implementing objective criteria, offering clear interpretive directives, and mandating a practical assessment of arrangements.
Assisted by Aditya Gupta, Associate and Aishwary Jain, Intern
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