2015 (9) TMI 1300 - AT - Income Tax

Long term capital loss - investment in shares - exemption u/s 10(38) - CIT(A) allowed the carry forward of loss to the appellant instead of setting it off against the exempt income u/s.10(38) - Held that - Clause (b) of sub section (1) of section 74 provide that in so far as capital loss relate to capital asset, it shall be set off against income, if any, under the head Capital gains assessable for that assessment year in respect of any other capital asset not being a short term capital asset and arising in the following assessment year. Law makes it amply clear that long term capital loss can be set off only against assessable capital gains and not otherwise. However, while giving effect to the order of the ld. CIT(A) on 21st March, 2011. ld. AO set off the loss from the long term capital gain, not assessable to tax during the year under consideration. In view of specific provisions of section 74 as noted hereinabove ld.A.O was not entitled to reduce the loss, from the income exempt u/s 10(38) of the Income Tax Act, 1961. We do not find any infirmity in the order passed by the Ld. CIT(A) in allowing the carry forward of loss in view of the discussion above. - Decided against revenue.

Summary

Issues Involved:
1. Treatment of capital gains as business income.
2. Set off and carry forward of long-term capital loss against exempt income under Section 10(38) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Capital Gains as Business Income:
The assessee, engaged in investment activities, declared an income of Rs. 1,33,77,935/-. The Assessing Officer (AO) treated the capital gains as business income. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who ruled that, except for short-term capital gains of Rs. 19,30,207/-, the remaining gains should be assessed as capital gains, not business income. The CIT(A) noted that the assessee had consistently maintained separate portfolios for investments and trading, valuing them accordingly in balance sheets and tax audit reports. This practice was accepted in previous assessments. The CIT(A) relied on the Delhi High Court's judgment in CIT vs. Rohit Anand, emphasizing that the intention behind holding shares, the holding period, and the treatment in books are crucial in determining the nature of gains. The CIT(A) decided that shares held for more than a month should be treated as investments, yielding capital gains, while those held for less than a month should be treated as trading, yielding business income.

2. Set Off and Carry Forward of Long-Term Capital Loss:
The AO, while giving effect to the CIT(A)'s order, did not allow the set off of long-term capital loss against income exempt under Section 10(38) and consequently did not allow the carry forward of the said loss. The CIT(A) directed the AO to allow the carry forward of the loss instead of setting it off against the exempt income. Section 74 of the Income Tax Act, 1961, stipulates that long-term capital loss can only be set off against assessable capital gains and carried forward to subsequent years if not fully set off. The AO's action of setting off the loss against exempt income was contrary to these provisions. The Tribunal upheld the CIT(A)'s order, stating that the AO was not entitled to reduce the loss from the exempt income under Section 10(38), and allowed the carry forward of the long-term capital loss.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to treat most of the gains as capital gains and allow the carry forward of long-term capital loss in accordance with Section 74 of the Income Tax Act, 1961. The order was pronounced in open court on 04/09/2015.