2016 (1) TMI 80 - AT - Income Tax

Disallowance of set off of brought forward loss from transfer of short-term capital asset against gains arising from transfer of long-term capital asset - Held that - As seen from the explanatory notes to Finance Act, 2002 , the loss arising from transfer of short-term capital asset can be set off against any capital gains, whether short-term capital gains or long-term capital gains . It further stipulated that the anomaly existing due to long-term capital gains being subject to lower rate of tax, are hence-forth allowed to be set off only against long-term capital gains. Hence, the contentions of Revenue in this respect as advanced in this appeal cannot be accepted. Similarly , the contention of the revenue that short-term capital loss cannot be set off against long-term capital gains due to difference in tax rate can also not be accepted because of the provisions of Section 74(1)(a) of the Act which clearly stipulates that carried forward losses arising from transfer of shortterm capital asset can be set off against income from capital gains assessable for the assessment year in respect of any other capital asset. Assessee company has rightly claimed the set off of brought forward loss arisen from the transfer of short-term capital asset incurred during the assessment year 2009-10 to be set off against the gains arising from transfer of long-term capital asset earned during the previous year relevant to the assessment year 2010-11 which has been wrongly denied by the A.O. and confirmed/sustained by the CIT(A). Hence, we set aside the orders of authorities below and direct for allowing the set off. - Decided in favour of assessee

Summary

Issues Involved:
1. Set off of brought forward short-term capital loss against long-term capital gains.

Detailed Analysis:

Issue 1: Set off of brought forward short-term capital loss against long-term capital gains

Background:
The assessee company, engaged in share broking and trading, filed an appeal against the order of the CIT(A) for the assessment year 2010-11. The core issue was the non-allowance of set off of brought forward short-term capital loss of Rs. 19,21,095 from the assessment year 2009-10 against long-term capital gains of Rs. 39,89,235 for the assessment year 2010-11.

Assessment Proceedings:
During the assessment proceedings, the AO disallowed the set off, citing Section 70(3) of the Income Tax Act, 1961, which addresses intra-head adjustments of losses within the same assessment year. The AO argued that the difference in tax rates for short-term (15%) and long-term (20%) capital gains precluded the set off.

Assessee's Argument:
The assessee contended that Section 74(1)(a) of the Act, which allows the set off of brought forward short-term capital losses against any capital gains in subsequent years, was applicable. The assessee highlighted the amendment by the Finance Act, 2002, which clarified that short-term capital losses could be set off against any capital gains, while long-term capital losses could only be set off against long-term capital gains.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, asserting that the different tax rates for short-term and long-term capital gains meant they did not fall under "similar computation" as required by Section 70(3).

Tribunal's Analysis:
The Tribunal examined the relevant sections:
- Section 70: Deals with intra-head adjustments within the same assessment year.
- Section 74: Pertains to the carry forward and set off of capital losses in subsequent years.

The Tribunal noted that Section 74(1)(a) explicitly allows the set off of brought forward short-term capital losses against any capital gains, irrespective of the tax rates. The Tribunal referred to the explanatory notes of the Finance Act, 2002, and CBDT Circular No. 8 of 2002, which clarified the legislative intent to rectify anomalies and permit such set offs.

Precedent:
The Tribunal also cited the case of *Capital International Emerging Market Fund v. DDIT*, where it was held that different tax rates do not preclude the set off of short-term capital losses against long-term capital gains.

Conclusion:
The Tribunal concluded that the assessee was correct in claiming the set off of the brought forward short-term capital loss against the long-term capital gains. The orders of the AO and CIT(A) were set aside, and the set off was allowed.

Final Order:
The appeal filed by the assessee company was allowed, and the set off of the brought forward short-term capital loss of Rs. 19,21,095 against the long-term capital gains of Rs. 39,89,235 for the assessment year 2010-11 was permitted.

Pronouncement:
The order was pronounced in the open court on 16th December, 2015.