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LTCG Can Be Set Off Across Assets: Tribunal

A tribunal has held that long-term capital gains (LTCG) from one asset class could be set off against another and such tax planning undertaken to reduce the tax burden is legal, thus offering clarity to serval companies dealing with tax adjustment problems.

The Income Tax Appellate Tribunal held that undertaking tax planning is “not illegal” and shouldn’t be disregarded by tax authorities merely because it’s beneficial to the taxpayers.

The ruling said that not every tax panning can be construed as tax avoidance.

According to the details of the case an individual, who was also a director in a company, had sold some shares in an unlisted company.

The LTCG from the shares was then set off against LTCG received from selling real estate.

The ruling said that companies and individuals can set off LTCG from selling shares against that from selling real estate.

According to the details of the case, Michael E Desa, a resident of the US, had set off LTCG incurred from sale of shares in a company against LTCG earned by the sale of property.

The tax department had questioned the set-off, claiming that the sale of shares “prime facie appears to be fictitious and cannot be adjusted against any taxable income.”

“The Assessing Officer (tax official) has primarily questioned the timing of booking the loss and selling these shares, which, even according to the Assessing Officer, are “worthless”. It is not for the Assessing Officer to take a call on how an assessed should organize his fiscal affairs so as to serve the interests of the revenue authorities,” the tax ruling said.

In the last few years several companies had got notices and tax demands and were not allowed to set off capital gains across assets.

“The tax department in the past has questioned taxpayers when they set off long-term capital gains from one asset class to another. The ruling not only allows it but also says that tax planning shouldn’t be frowned upon by the revenue authorities. The genuine and permissible tax panning cannot be considered to denigrate taxpayers,” said Paras Savla, partner at KPB & Associates, a tax advisory firm.

“The buyer was a director of the company in question and this is a sale of shares in a private limited company, which was made only on a private basis and not by way of stock exchange,” the Income Tax Appellate Tribunal (ITAT) said in a September 20 ruling.

The tax officials had questioned this transaction and posed a question why should someone buy these dud shares and what he does after buying these shares. The tax officials in a way questioned the valuation of the transaction.

“The commercial decisions must be best left to the person’s concerned.

What the buyer of these shares does to the company is the business of the buyer of the shares, and it is not even necessary that he would do anything immediately. It is incorrect to say that these shares are completely worthless,” the tax tribunal said.

Industry trackers say that in the past the tax department has questioned several similar transactions.

ITAT said that while tax evasion cannot be glorified, genuine tax planning within the framework of law cannot be disapproved.

“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 an excuse enough for the tax authorities to err on the side of excessive caution,” ITAT ruling said. S-ET

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