2017 (4) TMI 721 - AT - Income Tax

Ability to offset short-term capital losses ( STCLs ) first towards short-term capital gains ( STCGs ) generated from transactions in derivatives and then subsequently towards STCGs from sale of equity shares which were subject to securities transaction tax ( STT ) - Held that - Under the provisions of section 70(2), STCL arising from any asset can be set off against STCG arising from any other asset under a similar computation made. Merely because the two set of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. Therefore, STCL arising from STT paid transactions can be set off against STCG arising from non-STT transactions. - Decided in favour of assessee.

Summary

Issues:
1. Computation of tax due on short-term capital gains.
2. Set off of short-term capital losses against short-term capital gains.
3. Applicability of sections 70 and 71 of the Income Tax Act.
4. Distinction between short-term capital losses from different sources.
5. Inapplicability of surcharge on income-tax for a specific assessment year.

Issue 1: Computation of tax due on short-term capital gains:
The appeal involved the computation of tax due on short-term capital gains (STCG) for a specific assessment year. The Appellate Tribunal considered the provisions of section 115AD of the Income Tax Act, which divides total STCG into two portions based on the applicability of section 111A. The Tribunal emphasized that the computation of tax under section 115AD is separate from the gross total income calculation and does not involve sections 70 or 71. The Tribunal upheld the AO's decision based on the specific provisions of section 115AD and dismissed the appeal.

Issue 2: Set off of short-term capital losses against short-term capital gains:
The issue revolved around the set off of short-term capital losses (STCL) against short-term capital gains (STCG) from different sources. The assessee had incurred STCL from transactions subject to securities transaction tax (STT) and other transactions. The AO set off the STCL against STCG from both types of transactions separately. The Appellate Tribunal referred to previous decisions allowing the set off of STCL from one asset against STCG from another asset, even if taxed at different rates. Following these precedents, the Tribunal allowed the appeal filed by the assessee, enabling the set off of STCL against STCG from various sources.

Issue 3: Applicability of sections 70 and 71 of the Income Tax Act:
The assessee argued for the application of sections 70 and 71 in determining the tax due on STCG under section 115AD. However, the Appellate Tribunal clarified that the computation of tax under section 115AD does not involve the provisions of sections 70 and 71. The Tribunal emphasized that the computation of tax under section 115AD is distinct and does not require the application of the set off ratios contemplated under sections 70 and 71. Consequently, the Tribunal upheld the AO's decision based on the specific provisions of section 115AD.

Issue 4: Distinction between short-term capital losses from different sources:
The appeal raised concerns about the distinction made between STCL from transactions subject to STT and other STCL. The Tribunal acknowledged that while there is no inherent distinction between STCL from various sources, the set off mechanism should allow flexibility for the assessee to choose the most beneficial option. Referring to previous judgments, the Tribunal emphasized that the assessee has the right to exercise the option that is most advantageous, especially when the Act does not specify a particular set off mode. This approach favored the assessee's position in the appeal.

Issue 5: Inapplicability of surcharge on income-tax for a specific assessment year:
The assessee contended that the surcharge on income-tax was inapplicable for the relevant assessment year. However, the Tribunal did not adjudicate this specific ground raised by the appellant. The decision primarily focused on the computation of tax due on STCG and the set off of STCL against STCG from different sources.

In conclusion, the Appellate Tribunal's judgment addressed various issues related to the computation of tax on short-term capital gains, the set off of short-term capital losses, and the applicability of relevant provisions under the Income Tax Act. The decision provided clarity on the treatment of STCL and STCG from different sources, emphasizing the assessee's right to choose the most beneficial set off option in the absence of specific guidelines.