On June 7, 2024, the Telangana High
Court in the case of Ayodhya Rami Reddy Alla vs. PCIT1
rejected the writ petition challenging
the initiation and continuation of proceedings u/s.144BA
of the Income-tax Act, 1961 (“the Act”)
for AY 2019-20.
Facts
The moot issue in the case appears to
be that the Petitioner claimed set-off of short-term capital loss arising on the sale of shares and business loss arising on the writing-off of loan against
long-term capital gains arising on the sale of other shares.
Business Loss arising on writing-off of loan:
On February 5, 2019, the Petitioner
placed an inter-corporate deposit (ICD) of ₹350 crores with a related entity,
repayable in 60 days with a moratorium period of 2 years. The loan was partly
disbursed in the month of February-March 2019 and the loan amount of ₹288.50
crores was written off in the books in March 2019, resulting in a business
loss.
Long Term Capital Loss arising on sale of shares:
In the AGM held on February 27, 2019,
Ramky Estate and Farms Limited (REFL) increased its authorized share capital.
In the same AGM, it decided to allot shares on a private placement basis to Shri
Alla Ayodhya Ram Reddy and M/s. Oxford Ayyapa Consulting Services Private
Limited (OAC).
In a short span, the Petitioner purchased the shares of REFL from OAC. On March 4, 2019, REFL declared bonus shares in a ratio of 1:5. As a result, the price of REFL shares declined from ₹115 to ₹19.20. On March 14, 2019, the Petitioner sold the said shares to Advisory Services Pvt. Ltd (ADR) at ₹19.20, resulting in a short-term capital loss2 of ₹462 crores.
ADR did not have sufficient funds to
purchase the shares from the Petitioner and the same was funded by way of a loan
from OAC to ADR.
Long Term Capital Gains arising on the sale of shares:
The Petitioner sold shares held in
Ramky Enviro Engineers Limited (REEL) which resulted in long-term capital
gains. The aforesaid business loss on account of ICD written-off and the
short-term capital loss on the sale of shares of REFL were claimed as a set-off
against the long-term capital gains. The tax department initiated proceeding
u/s.144BA by seeking to treat the transactions as impermissible avoidance
arrangements under General Anti Avoidance Rules (GAAR) provisions laid down
under Chapter X-A.
Assessee’s Contention
∞ Since the transaction undertaken by the Petitioner
falls under Chapter X (more specifically S. 94(8)), which deals with Specific
Anti-Avoidance Rules (SAAR), the provisions of Chapter X-A containing GAAR
cannot be invoked.
∞ For the captioned year, S. 94(8) on bonus stripping
was not applicable on shares. It was contended that what has been specifically
excluded from the provisions curbing bonus stripping by way of SAAR cannot be
indirectly curbed by applying GAAR.
∞ Specific provision u/s. 94(8) would apply over
general provisions of GAAR.
∞ Shome Committee recommended that where SAAR is
applicable, GAAR should not be invoked to look into that element.
Department’s Contention
∞ At the stage of show cause, where Assessee has the
right to appear and make submissions, this writ should not be entertained.
∞ On facts, clearly, all transactions were pre-ordained
and with a motive to evade tax andresulted in round-tripping of funds with no
commercial motive.
Ruling/Observations, while dismissing
the Writ Petition:
HC ruled out the settled principle of interpretation that specific provisions override general provisions on the basis that this is a unique case where a special provision was already enacted and the general provisions of GAAR were introduced subsequently.
Since S. 95(1) dealing with the applicability of GAAR starts with a non-obstante clause, the provisions of Chapter X-A get an overriding effect over and above the other existing provisions of law.
Prior to GAAR, the judicial system had established its own set of rules known as Judicial Anti-Avoidance Rules (JAAR) which operated on the principle of “substance over form”. The legal amendments that followed were driven by the judiciary’s firm commitment to uphold anti-avoidance principles, using the power of law to enforce the same.
Petitioner’s own
contention is self-contradictory. It wants to challenge GAAR where SAAR applies
but contends that during this assessment year, provisions of S. 94(8) (part of
SAAR) were not
applicable to the facts of their case.
On fact, it is clear
that the arrangement was primarily designed to sidestep tax obligations.
Reliance on the Shome
Committee Report is misplaced and misconstrued. Further as per Finance
Minister’s declaration made on January 14, 2013, the applicability of either GAAR
or
SAAR would be determined on a case-to-case basis3 .
It is an impermissible avoidance agreement u/s. 96 as it is devoid of commercial substance, it is perceived as a deliberate misuse of the provisions of the Act and it creates extraordinary rights and obligations that seem to be conducted not in good faith and not in line with the general principles of fair dealing.
In contrast to the decision of the Supreme Court in Vodafone which placed the burden of proof on Revenue to prove any fiscal misconduct, S. 96(2) places responsibility on the assessee taxpayer.
In this case, there is clear and convincing evidence to suggest that the entire arrangement was intricately designed with the sole intention of avoiding tax and not a case of legitimate tax planning within the framework of law.
In this ruling, it
appears that the facts were perverse which led to certain observations made by the
Court on merits as well. The debate on GAAR v/s SAAR or GAAR v/s LOB or GAAR
v/s denial of treaty benefit post-MLI will continue, and like in most cases,
facts would be most critical.
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