Case Law Details
Michael E Desa Vs ITO (ITAT Mumbai)
Undoubtedly, when the object of a contract is illegality or something which would frustrate the law, such a contract will be void, but then minimisation of tax liability, as long as it is through legitimate tax planning and without using colourable devices, is not at all illegal; it is not even immoral as it is everybody’s duty to himself to manage his affairs properly within the framework of the law. Let us see the whole transaction from a different perspective. As the assessee is looking at his long term capital gains, he realises, or his consultant points out to him, that he has already incurred a long term capital loss by making an investment in the shares of VCAM and that he can book this loss in case he can find a buyer for these shares even at zero value. He then looks around and narrows down to Saldhana, a director in the same company and his associate, who is ready to buy these shares at a token consideration at 3% of the face value of these shares, and the assessee then sells the shares to book the loss incurred by him in these shares. His long term capital loss is thus crystallised, and the corollaries are to follow. The benefit of this long term capital loss could not be declined to the assessee, as long as transaction has been actually effected, only on the ground that if the assessee had not taken these proactive measures, even if that the sale of shares can be described as a proactive measure, he would have paid more taxes. The assessee may so end up saving taxes but then that is perfectly legitimate. The Assessing Officer 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 colourable devices and tax shelters, we cannot also deprecate and disapprove genuine tax planning within the framework of 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. In view of these discussions, as also bearing in mind the entirety of the case, we deem it fit and proper to vacate the stand of the authorities below on this point. The Assessing Officer is directed to allow set-off of this long term capital loss on the sale of shares in VCAM Investment Managers Pvt Ltd, against the long term capital gains on the sale of the property. The assessee gets the relief accordingly.
Minimizing tax liabilities through lawful means is not illegal
As regards the transaction of sale of shares having been rendered illegal under section 23 and 24 of the Indian Contract Act, 1872, this proposition proceeds on the fallacious assumption that minimising tax liabilities through lawful means, even if the sale of shares be treated as tax-motivated, is illegal. Undoubtedly, when the object of a contract is illegality or something which would frustrate the law, such a contract will be void, but then minimisation of tax liability, as long as it is through legitimate tax planning and without using colourable devices, is not at all illegal; it is not even immoral as it is everybody’s duty to himself to manage his affairs properly within the framework of the law. Let us see the whole transaction from a different perspective. As the assessee is looking at his long term capital gains, he realises, or his consultant points out to him, that he has already incurred a long term capital loss by making an investment in the shares of VCAM and that he can book this loss in case he can find a buyer for these shares even at zero value. He then looks around and narrows down to Saldhana, a director in the same company and his associate, who is ready to buy these shares at a token consideration at 3% of the face value of these shares, and the assessee then sells the shares to book the loss incurred by him in these shares. His long term capital loss is thus crystallised, and the corollaries are to follow. The benefit of this long term capital loss could not be declined to the assessee, as long as transaction has been actually effected, only on the ground that if the assessee had not taken these proactive measures, even if that the sale of shares can be described as a proactive measure, he would have paid more taxes. The assessee may so end up saving taxes but then that is perfectly legitimate. The Assessing Officer 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 colourable devices and tax shelters, we cannot also deprecate and disapprove genuine tax planning within the framework of 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.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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