Court rules that purchase and sale of pre-bonus shares on recognized stock exchanges, resulting in short-term capital loss set off against long-term capital gains from slump sale, does not constitute impermissible avoidance under Income Tax Act.
In a significant judgment dated October 13, 2026, the Telangana High Court (Division Bench) delivered a landmark ruling in the case of M/s. Ekge Retail LLP versus Assistant Commissioner of Income-Tax, Central Circle - 3(4) and others, concerning the applicability of General Anti-Avoidance Rules (GAAR) under the Income Tax Act, 1961.
The petitioner, M/s. Ekge Retail LLP, challenged the order dated February 23, 2022, passed under Section 144BA(6) of the Income Tax Act, which had held that certain transactions involving the purchase of pre-bonus shares and sale of equivalent post-bonus shares, resulting in short-term capital loss set off against long-term capital gains from a slump sale, constituted an impermissible avoidance arrangement under GAAR.
The factual matrix revealed that the petitioner, having realized a substantial surplus from the slump sale of its garment business, invested approximately Rs. 106.31 crores in shares of large listed companies on recognized stock exchanges before the declaration of bonus shares. Subsequently, shares worth Rs. 57.24 crores were sold post-bonus, resulting in a short-term capital loss of about Rs. 49.32 crores. This loss was set off against the long-term capital gains of Rs. 175.91 crores arising from the slump sale, as permitted under Section 70(2) of the Act.
The Revenue argued that these transactions were orchestrated to create a short-term capital loss solely for offsetting gains, thereby constituting an impermissible avoidance arrangement under GAAR. However, the Court thoroughly analyzed the scheme of Chapter X-A of the Income Tax Act and emphasized the need for strict construction of GAAR provisions and the heavy burden on the Revenue to prove each element of impermissible avoidance.
The Court observed that the transactions were conducted on regulated stock exchanges at arm's length and in a transparent manner, with market-driven prices and unidentified counterparties, negating the existence of a pre-ordained "arrangement" as defined in Section 102(1). It further held that the mere lawful computation of total income by setting off short-term capital loss against long-term capital gains, as statutorily permitted under Section 70(2), does not amount to obtaining a "tax benefit" in the GAAR sense.
Moreover, the Court rejected the Revenue's contention of misuse or abuse of the Act's provisions, noting that the petitioner complied with applicable sections including Section 50B (computation of slump sale gains) and Section 55 (cost of acquisition of bonus shares), and employed the FIFO method for accounting in line with CBDT circulars.
Significantly, the Court pointed out that the means and manner of transactions-purchase and sale through recognized stock exchanges with applicable taxes paid-were the most ordinary and bona fide methods of dealing in securities, thus not attracting clauses (b) or (d) of Section 96(1) of the Act.
The judgment also noted that the search and seizure operation conducted by the Revenue yielded no incriminating evidence against the petitioner and that of over 100 assessments reopened in the group, only the petitioner's assessment was targeted for GAAR invocation without adequate reasoned basis.
In conclusion, the Telangana High Court allowed the writ petition, setting aside the GAAR directions under Section 144BA(6) for the assessment year 2018-19. The Court affirmed the petitioner's entitlement to set off the short-term capital loss against long-term capital gains and clarified that lawful tax-efficient arrangements within the framework of the Income Tax Act cannot be invalidated under GAAR merely due to resulting tax benefits.
This judgment underscores the importance of distinguishing between genuine tax avoidance and impermissible avoidance arrangements, reaffirming taxpayers' rights to arrange their affairs legally to minimize tax liability without falling foul of GAAR.
Bottom Line:
Income Tax - GAAR - Purchase of pre-bonus shares of listed companies on recognised stock exchange and sale of equivalent shares post-bonus resulting in short-term capital loss, set off against long-term capital gains from slump sale under Section 70(2), does not by itself constitute an impermissible avoidance arrangement - Revenue must establish existence of an "arrangement", that the main purpose was to obtain tax benefit, and that the case falls within Section 96(1) - Mere lawful tax-efficient computation under the Act is not misuse or abuse of statutory provisions.
Statutory provision(s): Income Tax Act, 1961 - Sections 70(2), 50B, 55, 96(1)(b), 96(1)(d), 102(1), 144BA(6)
