In a significant ruling, the Telangana High Court held that General Anti-Avoidance Rules (GAAR) cannot be invoked merely because a transaction results in a tax benefit. The case involved a taxpayer who invested surplus funds from a business slump sale into listed shares, received bonus shares, and subsequently incurred a short-term capital loss due to the statutory tax treatment of bonus shares and the FIFO method for identifying shares sold. The taxpayer legally set off this loss against long-term capital gains.
The Revenue attempted to invoke GAAR, alleging that the transactions were structured to obtain a tax advantage. However, the Court observed that the shares were purchased and sold through recognized stock exchanges at market prices, without any pre-arranged counterparties or collusive arrangements. The loss arose from the operation of specific provisions of the Income-tax Act and not from any artificial or abusive tax scheme.
The Court emphasized that legitimate tax planning and utilization of statutory computation mechanisms cannot be treated as tax avoidance. It further clarified that the burden of proving an impermissible
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