2011 (4) TMI 721 - AT - Income Tax

Set off of indexed long term capital loss against non-indexed long term capital gains - assessee submitted that when long term capital loss is carried forward, the same is allowed to be set off without any restriction with regard to the mode of computation of such loss. He also submitted that section 70(2) of the Act in the context of set off short term capital loss has used the similar expression. In this regard he submitted that while computing short term capital loss the mode of computation cannot be different as in the case of computation of long term capital loss/gain. According to him this also suggests that the expression similar computation refers to the computation under sections 48 to 55 of the Act and not the computation (under) second proviso to section 48 of the Act vis- -vis proviso to section 112(1) of the Act - Held that that the expression similar computation used in section 70(3) of the Act does not refer to the computation under sections 48 to 55 of the Act and not the computation second proviso to section 48 of the Act vis- -vis proviso to section 112(1) of the Act but the computation under sections 48 to 55 of the Act - The Assessing Officer is therefore directed to accept the claim of the assessee in this regard - The appeal of the assessee is accordingly allowed.

Summary

Issues Involved:
1. Set off of indexed long-term capital loss against non-indexed long-term capital gains.

Issue-wise Detailed Analysis:

1. Set off of indexed long-term capital loss against non-indexed long-term capital gains:

The primary issue in this appeal was whether the assessee could set off indexed long-term capital loss against non-indexed long-term capital gains. The assessee, an individual engaged in share trading, filed a return of income for the assessment year 2004-05, offering income under the head "Capital Gains." The assessee computed long-term capital gains and losses as follows:

- Long-term capital loss (with indexation): Rs. 6,47,991
- Long-term capital gains (without indexation): Rs. 63,11,933

The assessee claimed the set off of the indexed long-term capital loss against the non-indexed long-term capital gains.

Section 48 of the Income-tax Act, 1961:

Section 48 provides the mode of computing capital gains, allowing the assessee to increase the cost of acquisition by applying the Cost Inflation Index, thereby reducing the taxable capital gain. However, the benefit of indexation is only available for long-term capital assets.

Section 112 of the Income-tax Act, 1961:

Section 112 specifies the tax rates on long-term capital gains. If the assessee opts out of indexation, the long-term capital gains are taxed at a lower rate of 10% instead of the standard 20%.

Assessing Officer's View:

The Assessing Officer disallowed the set off, arguing that the computation of long-term capital loss (with indexation) and long-term capital gain (without indexation) were not similar as required by Section 70(3) of the Act. According to the Assessing Officer, the set off could only be permitted when the mode of computation of both gains and losses was similar.

CIT(A)'s Decision:

The CIT(A) upheld the Assessing Officer's decision, emphasizing the importance of "similar computation" in Section 70(3). The CIT(A) reasoned that only if the capital gains and losses were computed similarly could the set off be allowed.

Tribunal's Analysis:

The Tribunal examined the provisions of Section 70(3), which allows the set off of long-term capital loss against long-term capital gain if the computation is made under sections 48 to 55 of the Act. The Tribunal concluded that the term "similar computation" referred to the computation under sections 48 to 55, not the specific methods of computation (indexation vs. non-indexation).

The Tribunal noted that Section 70(3) existed before the introduction of the proviso to Section 112(1) (which allows non-indexed gains to be taxed at a lower rate). Therefore, the legislature could not have intended the term "similar computation" to mean different methods of computation under the second proviso to Section 48 and the proviso to Section 112(1).

Conclusion:

The Tribunal held that the expression "similar computation" in Section 70(3) referred to the computation under sections 48 to 55 of the Act and not the specific methods of computation under the second proviso to Section 48 and the proviso to Section 112(1). Consequently, the Tribunal directed the Assessing Officer to accept the assessee's claim for setting off the indexed long-term capital loss against the non-indexed long-term capital gains.

Result:

The appeal by the assessee was allowed.