2019 (11) TMI 634 - AT - Income Tax

Set off of long term capital loss on sale of shares with long term capital gain - HELD THAT - Co-ordinate Bench of Kolkata Tribunal in the case of United Investments vs. ACIT 2019 (9) TMI 366 - ITAT KOLKATA had also endorsed the same view. We find that the provisions of Section 70-80 of the Act does not speak about payment of STT at all. There is no mention of STT even in Section 74 of the Act which talks about set off of carry forward of losses under the head capital gains . Respectfully following the aforesaid decision, we are inclined to accept the argument of the ld. AR that the source of income remains income derived from transfer of shares and that STT paid long term capital loss and non-STT paid long term capital gains are only segments of such source and cannot be construed as a separate source altogether. We hold that assessee is entitled for set off of STT paid long term capital loss with non-STT paid long term capital gains in the facts of the instant case. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in upholding the action of the AO by not allowing the set-off of long-term capital loss on the sale of shares with long-term capital gain of the assessee.

Issue-wise Detailed Analysis:

1. Set-off of Long-term Capital Loss with Long-term Capital Gain:

The primary issue in this appeal was whether the CIT(A) was justified in upholding the AO's decision to disallow the set-off of long-term capital loss on the sale of shares with long-term capital gain of the assessee. The assessee, a partnership firm engaged in investing in shares, securities, and bonds, claimed a set-off of long-term capital gain of ?4,62,28,825/- (without indexation) incurred on the sale of shares (on which no STT was paid) against a long-term capital loss of ?4,71,41,155/- incurred on the sale of shares (on which STT was paid), leaving a balance loss of ?9,12,330/-.

The AO, invoking provisions of Section 10(38) of the Income Tax Act, 1961, contended that long-term capital gains on which STT is paid are exempt under Section 10(38) and thus, the loss incurred on such shares cannot be set off against non-STT paid long-term capital gains. Consequently, the AO added ?3,43,92,549/- towards non-STT taxable long-term capital gains in the assessment.

The CIT(A) upheld the AO's decision, relying on the Tribunal's decision in DIT(IT) vs. Asia Pacific Performance SICAV and the Hon'ble Madras High Court's decision in CIT vs. S.S. Thiagarajan, which stated that if income from a source is exempt from tax, the loss from that source cannot be set off against income from another source or head.

Arguments by the Assessee:

The assessee argued that long-term capital loss on which STT is paid is not a separate source of income but a segment of the main source of income arising from the transfer of shares. The bifurcation into short-term and long-term capital gains is merely a classification and does not constitute separate sources of income. The payment of STT does not create a separate source of income. The assessee also cited the decision of the Hon'ble Madras High Court in CIT vs. S.S. Thiagarajan, which supports the view that only a particular segment of the source is exempt under Section 10(38), not the entire source.

Tribunal's Analysis and Decision:

The Tribunal considered the arguments and relied on the decision of the Co-ordinate Bench in Raptakos Brett and Co. Ltd. vs. DCIT, which in turn relied on the Hon'ble Calcutta High Court's decision in Royal Calcutta Turf Club vs. CIT. The Tribunal noted that the definition of capital assets and the provisions of Sections 45 to 48 and Sections 70 and 71 do not exclude equity shares from the computation of capital gains. Section 10(38) exempts only the income from the transfer of long-term equity shares subject to certain conditions, not the entire source of capital gains from shares.

The Tribunal held that if only a part of the source is exempt, the losses from that source should be allowed to be set off against gains from other sources. The Tribunal distinguished the case from the Hon'ble Gujarat High Court's decision in Kishorebhai Bhikhabhai Virani vs. Asst. CIT, noting that the Calcutta High Court's decision was more aligned with the Supreme Court's principles.

The Tribunal concluded that the source of income remains the income derived from the transfer of shares, and STT paid long-term capital loss and non-STT paid long-term capital gains are segments of the same source. Therefore, the set-off of STT paid long-term capital loss against non-STT paid long-term capital gains is permissible.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the set-off of STT paid long-term capital loss with non-STT paid long-term capital gains is permissible. The grounds raised by the assessee were allowed, and the order was pronounced in the open court on 11/09/2019.