2014 (8) TMI 1225 - AT - Income Tax

Set off the Short term Capital Loss (transactions with STT paid) against the Short term capital gain (transactions without STT paid) - HELD THAT - We have heard the arguments and have perused the orders of the revenue authorities and the cases cited before us. The impugned issue has been the subject matter of dispute before various coordinate Benches of the ITAT and coordinate Benches have consistently interpreted the provisions of section 111A in favour of the assessee. Respectfully, therefore, following the decisions already in place and with identical facts in hand, we do not find any reason either to distinguish the cases cited before us or to disturb the findings of the CIT(A) on the impugned issue. See FIRST STATE INVESTMENTS (HONGKONG) LTD. VERSUS ASSISTANT DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION), MUMBAI 2009 (7) TMI 908 - ITAT MUMBAI - Decided in favour of assessee.

Summary

Issues Involved:
1. Set off of Short Term Capital Loss (STT paid) against Short Term Capital Gain (non-STT paid) under Section 70(2) of the Income Tax Act.

Detailed Analysis:

Issue 1: Set off of Short Term Capital Loss (STT paid) against Short Term Capital Gain (non-STT paid) under Section 70(2) of the Income Tax Act

The department contested the CIT(A)'s decision allowing the set off of short-term capital loss (STT paid) against short-term capital gain (non-STT paid). The department argued that Section 70(2) of the Income Tax Act mandates that short-term capital loss can only be set off against similar computation of short-term capital gain, and the tax rates for STT and non-STT transactions are different under Section 111A.

The assessee, a technical consultant, had set off a brought forward short-term capital loss of Rs. 19,22,326, resulting in a net short-term capital gain of Rs. 4,98,817. The Assessing Officer (AO) objected, stating that the assessee arbitrarily adjusted losses against off-market transactions, which are taxed at a lower rate, without a clear basis. The AO recalculated the short-term capital gains separately for off-market transactions (taxable at 30%) and STT paid transactions (taxable at 10%).

The CIT(A) held that the determination of total income should precede the application of tax rates. Section 111A, which modifies the tax rate for STT paid transactions, cannot be applied during the computation of total income. The CIT(A) concluded that all short-term capital gains and losses should be aggregated to determine the net capital gain chargeable to tax, following the method beneficial to the assessee. The CIT(A) provided a detailed calculation, showing that the short-term capital loss from STT transactions should first be set off against short-term capital gain from non-STT transactions, followed by any remaining losses against STT paid gains.

The department appealed to the ITAT, relying on the AO's order. The assessee, supported by previous ITAT decisions in similar cases, argued that the language of Section 70(2) allows the assessee discretion in setting off short-term capital losses against any short-term capital gains. The ITAT examined previous judgments, including First State Investment (Hong Kong) Ltd. vs Asst. DIT and ACIT vs T. Rowe Price International Discovery Fund, which supported the assessee's position.

The ITAT noted that various coordinate benches of the ITAT had consistently interpreted Section 111A in favor of the assessee. Following these precedents, the ITAT found no reason to deviate from the CIT(A)'s findings. Consequently, the ITAT dismissed the department's appeal, upholding the CIT(A)'s order and confirming that the assessee's method of setting off short-term capital losses was correct.

Conclusion:
The appeal filed by the department was dismissed, and the CIT(A)'s order allowing the set off of short-term capital loss (STT paid) against short-term capital gain (non-STT paid) was upheld. The ITAT's decision was based on consistent interpretations by coordinate benches favoring the assessee's discretion in setting off losses under Section 70(2).