Sham Transactions: Recent Developments In Indian Tax Law

• Delhi Tribunal holds that the mere fact that one of the steps in a transaction resulted in capital loss for the taxpayer would not make the series of transactions a sham.
• Karnataka High Court holds that shares bought at a premium, and sold at a lower value to individuals (ex-employees / advisors of the seller group) on the same day amounted to a colourable device.
• Based on commercial rationale provided by the taxpayer, Delhi High Court accepts that steps pertaining to a group acquisition were not structured for prima facie avoidance of taxes.

BACKGROUND

Indian tax jurisprudence has consistently dealt with the age old debate of 'form over substance'. Indian courts have traditionally followed the approach that since tax statutes must be literally and strictly interpreted, tax planning within the four corners and black letter of the law is permissible.¹ Only in extraordinary circumstances could courts 'look through' the form of a transaction to examine its