Stories
Telangana High Court sets aside GAAR action in bonus share deal case
- •The Telangana High Court ruled that tax authorities cannot invoke GAAR solely because a taxpayer gains a tax advantage from genuine stock market transactions.
- •The court struck down a decision against EKGE Retail LLP that had characterized listed-share transactions around a bonus issue as an impermissible avoidance arrangement.
- •The Revenue argued the trades were structured to generate short-term capital losses to offset gains from a business undertaking sale.
- •The court noted that shares were traded on recognized stock exchanges at prevailing prices, meaning outcomes and losses were subject to market movements.
- •The judgment emphasized that obtaining a tax benefit alone does not make a transaction abusive, and authorities must prove the dominant objective was tax avoidance.
Key Questions Answered
The Telangana High Court ruled that tax authorities cannot invoke anti-avoidance provisions solely because a taxpayer derived a tax advantage from genuine stock market transactions. The court found no evidence that the trades were part of a pre-planned scheme or lacked commercial substance.
The dispute centered on share purchases and sales executed around a bonus issue, after which the taxpayer reported short-term capital losses. These losses were then adjusted against long-term capital gains earned from a slump sale transaction, prompting tax authorities to claim the arrangement was meant to reduce the tax burden.
The court underlined that obtaining a tax benefit, by itself, does not automatically render a transaction abusive or colourable. To apply GAAR, authorities must demonstrate that the dominant objective of the transaction was tax avoidance and that it met the prescribed legal conditions.
