Loss Booking to Avoid Capital Gains Tax
Any tax planning must be the result of a proactive and continuous series of
initiatives from within on the basis of a well-defined process and not to be
indulged in bits and spurts only to fall flat at the end
Further often a person booking capital gains has a tendency to look into the
possibility of booking a parallel capital loss to avoid payment of tax. If such is a
case the following decision must not be lose sight off. In Bombay Oil Industries
Ltd. Dy. CIT (82ITD626), a Marico Group company, represented by S E Dastur,
the assessee in order to avoid capital gains tax sold shares of its 100%
subsidiary to its distributor and booked a huge loss. The assessing officer found
that the subsidiary, a shell company formed to undertake seed development
business had no present activity or assets other than a security deposit and it
owned loans to banks. The company had huge losses in its balance sheet.
The Tribunal also found no commercial justification in the transaction for the
following reasons:
a) The subsidiary had no attraction for a prudent businessman;
b) Credentials of the buyer were doubted for failure to submit any plans for
revival of bought out business;
c) The assessee was in a position to influence the buyer;
d) There was no movement of funds but a mere adjustment;
e) Malafide motive;
f) Inordinate speed and timing.
In a plain and concise manner the Bombay Tribunal held that under the Act, the
income-tax authorities are empowered to go behind the apparent to find out the
real and if a transaction, on the basis of the evidence and the surrounding
circumstances of the case, appears to them to be non-genuine or a facade or a
make believe affair, got up to evade the tax liability or if it appears that the series
of the steps taken to achieve the desired result is sham or collusive, they can
ignore the transaction.
Time is ripe that reputed senior counsel must desist from associating with such
clear cases of tax avoidance and rather proactively advice assessees of their
obligations under the Act.