Beyond The Clock - GAAR Needs More Than Just Timing To Apply

Facts

The assessee was a regular investor in shares and securities for many years. As of 31.03.2020, she held shares worth Rs.31.88 crores and mutual funds worth Rs. 47.59 crores. From the available investment, she sold her shares in a company and earned Long Term Capital Gains (LTCG) of 44.14 crores. With a surplus of funds, she followed the market trend and purchased shares of M/s.HCL Technologies Pvt. Ltd. intending to make short term gains and subsequently disposing them for earning Long Term capital Gains. Further, she invested in units of mutual funds worth Rs. 32.92 crores and sold shares of M/s.HCL Technologies Pvt. Ltd. worth Rs.17.35 crores, to be left with a net investment of Rs.17.66 crores, all within the same assessment year continued. This sale and purchase of shares resulted in a loss of Rs. 17.65 crores for the assessee in the same financial year, i.e. 2019-20.

In the Revenue's view, this sale and purchase of shares of M/s.HCL Technologies Pvt. Ltd. amounted to an Impermissible Avoidance Arrangement (IAA) and hence, the General Anti Avoidance Rules (GAAR) provisions would apply.

Arguments by the Parties

The petitioner (assessee) contended that the sale and purchase was a routine transaction and denied any intent to abuse the law. Further, the petitioner highlighted that the department has not been able to justify how the transaction satisfies the criteria for an Impermissible Avoidance Arrangement under Section 96(1) of the Income Tax Act, 1961. Lastly, petitioner asserted that the said transaction was carried through the stock exchange. It relied on the illustration by the expert committee regarding GAAR Provisions which held that the sale and purchase of shares through stock market transactions would not come under the GAAR provisions.

The Revenue put forth two main contentions. Firstly, that the timing of the purchase and sale of shares is of prime importance as the authorities need to analyze the entire transaction to determine whether it was a routine activity or a tax planning mechanism to avoid taxes. Secondly, the revenue relied on the presumption under Section 96(2) of the Act and argued that it is the onus of the assessee to disprove the assumption and to prove that the transaction has not been arrived at to obtain tax benefits.

High Court's Ruling

The court noted that the revenue's entire stand was that the assessee's case falls under the arrangement specified under the section 96 of the Income Tax Act, 1961. On perusal of the conditions laid out in the section 96(1), the court deduced that for a sale and purchase to be considered as an Impermissible Avoidance Arrangement the following should be established-

i. Arrangement arrived between two or more parties; and

ii. the arrangement should have the four ingredients specified in clauses (a) to (d) of Sub-Section (1) of Section 96 of the Income Tax Act, 1961.

As per admitted facts in the case the assessee was an investor who was involved in the purchase and sale of shares, and the department was unsuccessful in establishing that the transactions were carried out with any of the known person/ entities. Further, all the transactions were made form DMAT account of the assessee and share were sold through stock exchange. No nexus was found between the sale and subsequent purchase and these transactions were duly reflected in the investment portfolio and Income Tax Returns. Lastly, the only basis of the claim that the transaction was an Impermissible Avoidance Arrangement, was the timing of the transactions.

Based on the above, the transactions did not fulfill the ingredients under section 96(1) for an Impermissible Avoidance Arrangement. On the revenue's heavy emphasis on the timing of the transactions, the court referred to the report by the expert committee under the Income Tax Act. Concerning the General Anti Avoidance Rules, the committee has explicitly illustrated that sale and purchase through stock market transactions would not come under the GAAR provisions. Therefore, the credibility of the transactions, from the perspective of GAAR provisions, cannot be question based on timing of the sale and purchase of the shares.

The General Anti Avoidance Rules were introduced to crack down on transactions employed only to avail tax benefits i.e. arrangements that would not be entered, if there was no tax reduction attached to them. Although the GAAR provisions are crucial to protect the revenue's interests, the authorities should be careful not to include genuine taxpayers by deviating from the requisites specified in the act. This ruling aligns with the Central Bureau of Direct Taxes' (CBDT) efforts to protect genuine taxpayers.

It is pertinent to note that in this case, the assessee had been involved in sale and purchase for a long time, which added weight to the genuineness of her transactions. What happens when a first-time investor ventures into sale and purchase coincidently timed in such a manner, remains unanswered. Section 97(4)(i) of the Income Tax Act, 1961 states the time period for which the arrangement exists may be relevant but shall not be sufficient for determining whether a transaction lacks commercial substance. One can infer that the legislative intent here was not to completely discredit the time period but to require stronger material to attract GAAR provisions when the time period is questionable.

Therefore, timing of the transaction is not completely irrelevant. In cases where the conduct already falls under the criteria laid out in the section 96 of the Act, timing can be taken into consideration to further substantiate the existence of an Impermissible Avoidance Arrangement.

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