GAAR Invocation Requires Concrete Evidence — Mere Timing of Transactions Cannot Trigger Anti-Avoidance
Telangana High Court in case of Smt. Anvida Bandi v. DCIT [2025] 177 taxmann.com 726
The Telangana High Court has held that invoking the General Anti-Avoidance Rules (GAAR) requires demonstrable evidence of an impermissible arrangement. Merely relying on the timing of share purchases and sales, without establishing collusion, lack of commercial substance, or misuse of law, cannot justify treating genuine stock-exchange trades as tax-avoidance arrangements.
1. Brief Facts of the Case
The taxpayer, an individual investor actively engaged in trading and investing in shares and securities, earned long-term capital gains (LTCG) of ₹ 44.14 crore during FY 2019-20 from the sale of unlisted shares. Using part of those proceeds, the taxpayer purchased HCL Technologies Ltd. shares through the stock exchange and later sold them in the same year, incurring a short-term capital loss (STCL) of ₹ 17.65 crore.
The Assessing Officer viewed the loss as a deliberate step to set off against the earlier LTCG and thus characterized the series of trades as an “impermissible avoidance arrangement (IAA)” under Chapter X-A (GAAR). A reference was made to the Approving Panel, which upheld this view and issued an order TP Services In Hyderabad under section 144BA(6) confirming the GAAR application.
Aggrieved, the taxpayer approached the Telangana High Court under Article 226, arguing that all trades were legitimate market transactions carried out through recognised exchanges and DMAT accounts, with no arrangement or nexus between counterparties.
2. High Court’s Observations
The Court examined section 96(1) of the Income-tax Act, which defines an impermissible avoidance arrangement as one whose main purpose is to obtain a tax benefit and that also meets at least one of four statutory tests—non-arm’s-length dealings, misuse or abuse of the Act, lack of commercial substance, or absence of bona fide purpose.
It noted that the Revenue:
Produced no material evidence of any arrangement between the taxpayer and other parties;
Failed to establish any link or nexus between the purchase and sale of HCL Technologies shares;
Accepted that all trades were routed through the stock exchange and DMAT accounts; and
Overlooked the fact that the taxpayer had a consistent history of investment activity and the HCL trades were part of that pattern.
It was emphasised that timing alone—earning a gain and a loss within the same year—does not constitute an avoidance arrangement. Referring to the Expert Committee Report on GAAR, the Court observed that bona fide stock-exchange transactions cannot be questioned merely for their sequence or coincidence of timing.
Accordingly, the High Court set aside the Approving Panel’s order under section 144BA(6), holding that GAAR provisions are exceptional anti-abuse measures to be invoked only when supported by concrete evidence of tax avoidance intent and not for routine market-based transactions.
3. Key Takeaways / Implications
GAAR cannot be triggered on mere timing or perception; evidence of an arrangement and lack of commercial substance is mandatory.
Genuine stock-exchange trades executed through recognized intermediaries carry inherent transparency and should not attract GAAR.
The Revenue bears the initial burden of proof before the onus can shift to the taxpayer.
Taxpayers must maintain robust documentation demonstrating commercial intent and investment rationale.
The ruling reinforces judicial restraint against arbitrary GAAR application and supports bona fide investment behaviour.
This judgment reinforces that GAAR is an exceptional, evidence-driven anti-abuse measure, not a substitute for conventional scrutiny. While the threshold for its invocation remains high, taxpayers should continue to document commercial intent and investment rationale for significant transactions to pre-empt potential disputes amid increasing regulatory scrutiny.
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