The Telangana High Court has ruled that tax authorities cannot invoke anti-avoidance provisions solely because a taxpayer derives a tax advantage from genuine stock market transactions, providing important clarity on the scope of the General Anti-Avoidance Rule (GAAR).
In a judgment involving EKGE Retail LLP, the court struck down a decision that had characterised a series of listed-share transactions as an impermissible avoidance arrangement. The Revenue had argued that the transactions were structured primarily to generate short-term capital losses that could be used to offset gains arising from the sale of a business undertaking.
The dispute centred on share purchases and sales executed around a bonus issue. The taxpayer subsequently reported short-term capital losses from those trades and adjusted them against long-term capital gains earned from a slump sale transaction. Tax authorities contended that the arrangement was aimed at reducing the tax burden and therefore attracted GAAR provisions.
HC finds no evidence of a tax-avoidance scheme
Rejecting the Revenue’s position, the High Court said the material on record did not establish that the transactions were part of a pre-planned arrangement designed mainly to secure a tax benefit.
The court noted that the shares were acquired and sold on recognised stock exchanges through regular market mechanisms and at prevailing prices. Since the outcome of the transactions depended on market movements, the gains or losses could not be viewed as predetermined, it observed.
The judgment underlined that obtaining a tax benefit, by itself, does not automatically render a transaction abusive or colourable. For GAAR to be applied, authorities must demonstrate that the dominant objective of a transaction was tax avoidance and that the arrangement falls within the conditions prescribed under the law.
Relief for taxpayers in genuine market transactions
The court also found no evidence suggesting that the taxpayer had misused provisions of the Income Tax Act or carried out the transactions in a manner lacking commercial substance. Nor was there material to show that the trades were conducted through unusual or artificial means inconsistent with ordinary business practices.
Setting aside the directions of the approving panel, the court allowed the taxpayer’s challenge and held that the Revenue had failed to meet the threshold required for invoking GAAR.