Share sale not an impermissible avoidance arrangement under s96; order under s144BA(6) for AY 2020-21 set aside

HC held the share purchase and sale transactions did not constitute an impermissible avoidance arrangement under s96, finding no arrangement between parties nor the four statutory ingredients. The court noted commercial substance is governed by s97 but the Department failed to produce strong material showing lack of commercial substance or requisite arrangement in the petitioner's sale of shares. The writ petition was allowed and the order passed under s144BA(6) for AY 2020-21 was set aside.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the purchase and sale of listed equity shares effected through stock exchange transactions can constitute an "impermissible avoidance arrangement" within the meaning of Section 96(1) of the Income Tax Act.

2. Whether mere timing of purchase and sale (resulting in short-term loss used to set off long-term capital gains) without additional cogent material satisfies the ingredients of an impermissible avoidance arrangement under Section 96(1) and the presumption in Section 96(2).

3. Whether the approving panel's order under Section 144BA(6) applying GAAR is sustainable in absence of evidence of an arrangement between parties, lack of arm's length dealing, misuse/abuse of the Act, lack of commercial substance or non-bona fide purpose.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of Section 96(1) GAAR to stock-exchange trading of shares

Legal framework: Section 96(1) defines "impermissible avoidance arrangement" as an arrangement the main purpose of which is to obtain a tax benefit and which (a) creates non-arm's-length rights/obligations, (b) results in misuse/abuse of the Act, (c) lacks commercial substance (see Section 97), or (d) is entered into in manners not ordinarily employed for bona fide purposes.

Precedent treatment: The Court refers to the expert committee report under the Income Tax Act that treats sale and purchase through stock market transactions as not falling under GAAR; no contrary judicial precedent is relied upon by the approving panel in the impugned order.

Interpretation and reasoning: On a plain reading, Section 96(1) requires (i) existence of an "arrangement" between two or more parties and (ii) satisfaction of one or more of clauses (a)-(d). Stock-exchange transactions executed through a demat account, where buyers and sellers are unknown to each other and are conducted in the ordinary course of investing/trading, do not prima facie constitute an "arrangement" as contemplated by Section 96(1). The timing of transactions alone, without other indicia, does not establish creation of non-arm's-length rights, misuse/abuse, lack of commercial substance or non-bona fide purpose.

Ratio vs. Obiter: Ratio - stock-exchange transactions lacking evidence of an underlying arrangement do not, by timing alone, attract Section 96(1) GAAR. Obiter - reliance on the expert committee's report as persuasive guidance that timing of market transactions is generally not a GAAR trigger.

Conclusion: The Court concludes that sales and purchases of listed shares effected through the stock exchange, in absence of evidence of an arrangement satisfying Section 96(1), do not amount to an impermissible avoidance arrangement.

Issue 2 - Sufficiency of "timing" and operation of presumption in Section 96(2)

Legal framework: Section 96(2) creates a presumption that an arrangement is entered into for the main purpose of obtaining a tax benefit if a step or part of the arrangement has that main purpose; the assessee may rebut the presumption by adducing cogent materials.

Precedent treatment: The approving panel relied principally on timing; no additional material or distinct factual matrix was presented to substantiate misuse, non-commerciality or non-bona fides.

Interpretation and reasoning: The presumption in Section 96(2) requires a foundational showing of an "arrangement" or a step in an arrangement; absent proof of an arrangement (i.e., nexus between parties, coordinated steps, or other indicia), the statutory presumption cannot be sustained by timing alone. The Department failed to produce cogent material other than timing; consequently the assessee's evidence of regular trading activity, use of demat account, disclosures in returns, and lack of nexus with known parties rebutted the presumption.

Ratio vs. Obiter: Ratio - the statutory presumption in Section 96(2) cannot be mechanically applied where there is no evidence of an arrangement beyond temporal proximity; timing alone is insufficient to displace the presumption once the assessee produces cogent contrary material. Obiter - emphasis that the assessee's regular trading history and market mechanism are relevant to rebuttal.

Conclusion: The Court holds that, in the absence of cogent material beyond timing, the presumption under Section 96(2) was not rightly applied and was rebutted by the petitioner's evidence.

Issue 3 - Requirement of cogent material showing misuse, lack of commercial substance, non-arm's-length dealings or non-bona fide purpose

Legal framework: Section 96(1)(a)-(d) list discrete ingredients (non-arm's-length rights/obligations; misuse/abuse; lack of commercial substance per Section 97; non-ordinarily employed means) that must be either proven or reasonably inferred from material on record to establish IAA.

Precedent treatment: The approving panel concluded an IAA primarily on timing; the Department could not point to other evidence in response to the Court's query.

Interpretation and reasoning: The Court evaluates admitted facts: transactions executed through stock exchange/demat account; absence of nexus or known counterparties; investor's long history of trading and portfolio investments; all information reflected in tax returns; no fresh material indicating coordinated steps or contrived rights/obligations; the only factor relied upon by the Department was timing. Given these facts, none of clauses (a)-(d) are shown to be satisfied. The expert committee's report bolsters the view that ordinary market trading and timing per se are not indicia of GAAR applicability.

Ratio vs. Obiter: Ratio - GAAR cannot be invoked where the only purported indicium is timing and no independent material satisfies any clause of Section 96(1); such invocation is arbitrary and unsustainable. Obiter - guidance that authorities must seek cogent, contemporaneous evidence of arrangement, misuse/abuse or lack of commercial substance before applying Chapter X-A.

Conclusion: The impugned order lacked requisite material to establish any of the prerequisites in Section 96(1); therefore the application of GAAR was unsupportable and the order was set aside.

Cross-references and Final Determination

Cross-reference: Issues 1-3 are interlinked - absence of an "arrangement" (Issue 1) defeats the presumption under Section 96(2) (Issue 2) and precludes satisfaction of the Section 96(1)(a)-(d) ingredients (Issue 3).

Final conclusion: The Court allowed the writ petition, set aside the approving panel's order under Section 144BA(6), and held that GAAR provisions did not apply to the listed shares transactions in the absence of cogent material beyond timing demonstrating an impermissible avoidance arrangement.

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