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Setting off long-term gains against long-term losses fully legal: ITAT Mumbai

The ruling is expected to help many income tax assessees to plan their taxes well

September 30, 2021 / 10:12 AM IST

You can take advantage of the recent ruling of the Income Tax Appellate Tribunal (ITAT), Mumbai, if you have loss-generating assets. The same can be set-off against Long Term Capital Gains (LTCG) from a profitable account (asset transfer), thus effectively reducing the overall tax liability.

The ITAT-Mumbai reiterated in the Michael E Desa Vs Income Tax Officer International Taxation case that tax-planning is a legal activity and cannot be deemed as tax avoidance, if done within the framework of the law.

To be sure, according to income tax rule, long-term capital loss cannot be set off against any income other than long-term capital gain. However, short-term capital loss can be set off against long-term or short-term capital gain.

However, many times, the assessing officer raises questions on such set-offs and claims that the taxpayers are trying to avoid taxes. The latest ruling will help tax payers to claim the set-off henceforth.

In this particular case, the ITAT allowed the appellant to set-off losses on sale of shares of an unlisted company with the long term capital gains on sale of property.

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The case in brief

The assessee, a US citizen, made LTCG on sale of a property. He reported a long term capital loss (LTCL) on sale of shares in an unlisted company. The assessing officer rejected the adjustment saying that sale of shares appeared, prima facie, fictitious.

Ruling in favour of assessee, the ITAT held that the assessing officer cannot disregard a transaction just because it results in a tax advantage to the assessee.

What experts say about the ruling

Observing that there are provisions in the income-tax law that allow a set-off of losses from income, Sandeep Sehgal, Director- Tax and Regulatory, AKM Global, says, “this ruling can very well come across as an example of one of the ways to plan capital gains on sale of financial assets – equity, bonds and immovable properties – which is simply setting off the loss from one asset class with income from another.”

The best way to plan your taxes, says Vivek Jalan of Tax Connect,  “is to book any certain loses in the same year itself. Hence tax payers crystallize their LTCL, if any, and the corollaries follow.

The benefit of this LTCL could not be declined to a taxpayer, as long as the transaction has been actually effected, only on the ground that had the taxpayer not taken proactive measures, he would have paid more taxes. The taxpayer may so end up saving taxes, but that is perfectly legitimate.”

He adds, “this ruling reconfirms the position that while the line of demarcation between what is permissible tax planning and what turns into impermissible tax avoidance may be somewhat thin, it cannot be an excuse for the tax authorities to err on the side of excessive caution.”

This ruling is significant in today’s times, as the General Anti-Avoidance Rule (GAAR), base erosion and profit shifting (BEPS), the Principal Purpose Test (PPT) and the Multilateral Instrument (MLI) issues have started gaining momentum.

"It is possible that the tax authorities may invoke GAAR or PPT to regard the tax planning arrangement done by the tax payer as a colorable device to evade tax. But, it is a well-settled position that planning tax efficiently is legally allowed and the taxpayer is well within his right to plan his tax liability," Sehgal added.

Jalan says the principle laid down in this case would be useful in other such cases, specifically of capital gains. The ruling is expected to help many income tax assessees plan their taxes well.
Ashwini Kumar Sharma
first published: Sep 30, 2021 10:12 am

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