India: Long-term capital loss on sale of shares by foreign company allowed, not sham transaction

The long-term capital loss was eligible to be set off and carried forward.

The long-term capital loss was eligible to be set off and carried forward.

The Mumbai Bench of the Income-tax Appellate agreed with the taxpayer (a foreign company) that it was eligible to set off or carry forward a long-term capital loss resulting from the taxpayer’s sale of its shares in an Indian company. The tribunal did not find the sale was a sham transaction.

The case is: Swiss Reinsurance Company Ltd v. DCIT (ITA No. 6531/Mum/2017)

The taxpayer—a Switzerland-based entity providing re-insurance services globally to various insurance companies—sold all of its shares in a wholly owned Indian subsidiary to a second Indian company, thereby resulting in a long-term capital loss, and the taxpayer claimed a carry forward of the loss on its income tax return.

The Assessing Officer disagreed with this treatment and contended there was no justifiable reason for the taxpayer’s investment in the shares and then selling the shares at a loss. The Assessing Officer asserted that the long-term capital loss claimed by the taxpayer on the sale of shares was an artificial loss and therefore was not to be allowed.

The tribunal held that taxpayer’s sale of shares in the Indian company was not a sham transaction and that the long-term capital loss on this transaction was eligible to be set off and carried forward.

Read a July 2021 report [PDF 325 KB] prepared by the KPMG member firm in India


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