Investor Relief! HC Rules Stock-Exchange Timing Not Enough for GAAR Invocation

The assessee is a long-time investor in shares and securities. As on 31.03.2020, the portfolio included shares valued at Rs. 31,88,81,428 and mutual funds of Rs. 47.59 crores. During FY 2019–20, long-term capital gains of Rs. 44,14,05,007 arose on the sale of investments. Subsequent deployments included purchases of shares of M/s. HCL Technologies Pvt. Ltd. and mutual fund units worth Rs. 32.92 crores. Part of the HCL position was sold within the same year for Rs. 17.35 crores, leaving a net investment of about Rs. 17.66 crores; cumulatively, those HCL trades resulted in a short-term loss of about Rs. 17.65 crores.

GAAR was invoked on the premise that the short-term loss was booked to offset long-term gains. The matter went to the Approving Panel, which passed an order under Section 144BA(6) dated 23.01.2023, treating the stock-exchange transactions as an impermissible avoidance arrangement. The assessee had objected, inter alia, pointing out a detailed e-reply to the Rule 10UB(1) notice and emphasising that all trades were exchange-routed through a demat account without a counterparty nexus.

Issue Before Court: Whether timing-based reliance on stock-exchange purchases and sales, absent material showing an “arrangement” or lack of commercial substance, can justify invoking GAAR by treating the transactions as an “impermissible avoidance arrangement” under Section 96.

HC Held: The Court held that GAAR requires an “arrangement” meeting the statutory ingredients in Section 96(1). On the admitted record: there was no material of trades with known persons, no nexus between purchase and sale of the specific shares, all trades occurred through the stock exchange via the investor’s demat, the conduct reflected continuous investing rather than a one-off tax device, and the Department relied essentially on timing. The Bench’s query also elicited no cogent material beyond timing.

Taking note of the expert committee’s view that stock-exchange transactions by themselves do not attract GAAR and that timing of such trades is not to be questioned, the Court concluded that Section 96 was not satisfied. The impugned order dated 23.01.2023 passed under Section 144BA(6) for AY 2020-21 was set aside.

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