2004 (5) TMI 42 - HC - Income Tax

Short-term capital loss set off - (1) Whether on a correct interpretation of section 70(2)(i) the Appellate Tribunal erred in law in holding that short-term capital loss in respect of one asset could be set off against short-term capital gain in respect of another asset in the same assessment year? (2) Whether on a correct interpretation of section 71(3) the Appellate Tribunal erred in law in holding that short-term capital loss can be sought to be set off against income assessable under any head of income other than capital gains (i.e. against income from other sources also) even if there is income from capital gains? - We answer both the questions in the negative i.e. in favour of the Department and against the assessee.

Summary

Issues:
1. Interpretation of section 70(2)(i) regarding set off of short-term capital loss against short-term capital gain in the same assessment year.
2. Interpretation of section 71(3) regarding set off of short-term capital loss against income assessable under any head other than capital gains.

Analysis:
1. The case involved an application under section 256(1) of the Income-tax Act, 1961, where the Tribunal referred questions on the correct interpretation of sections 70(2)(i) and 71(3) for the opinion of the High Court. The assessee, a limited company, suffered short-term capital loss and had long-term capital gain and income from other sources in the relevant assessment year. The Income-tax Officer initially set off the short-term capital loss against long-term capital gain and then against income from other sources. The Commissioner of Income-tax (Appeals) upheld this view, but the Tribunal allowed the claim of the assessee, stating that section 71(3) would enable the loss to be set off against income from other sources if not against long-term capital gains.

2. The dispute revolved around the interpretation of sections 70(2)(i) and 71(3) of the Act. The Department argued that short-term capital loss should first be set off against short-term or long-term capital gains before being set off against income from other sources. On the other hand, the assessee contended that under section 71(3), the choice of set off lies with the assessee when there are two independent provisions for set off of short-term capital loss. The Tribunal believed that both sections provided separate rights to the assessee, and the construction beneficial to the assessee should be adopted.

3. Section 70(2)(i) allows the set off of short-term capital loss against income from any other capital asset in the same assessment year. Section 71(3) provides that if the net result of the computation for capital gains is a loss and the assessee has income assessable under any head other than capital gains, the short-term capital loss can be set off against income under any other head. The Tribunal's view that the assessee has a choice to set off the loss against any head of income was deemed incorrect by the High Court.

4. The High Court clarified that if there is short-term or long-term capital loss, it can be set off against the corresponding gains first. If the entire loss cannot be set off against capital gains, then the balance can be set off against income under any other head as provided in section 71(3) of the Act. The Court emphasized that no distinction is made between short-term and long-term capital loss under the heads of income specified in the Act.

5. Ultimately, the High Court answered both questions in the negative, favoring the Department and ruling against the assessee. The Court concluded that the Tribunal's interpretation allowing the assessee a choice in setting off short-term capital loss against income from any head was incorrect. The reference application was disposed of accordingly.