2022 (4) TMI 684 - AT - Income Tax

Setting off the long term capital loss arising on sale of shares not subject to STT against long term capital gain arising from sale of Shares subjected to STT exempt from tax under section 10(38) - whether the assessee was legally correct in claiming carry forward of full amount of losses without setting of such losses against the Long-Term Capital Gain exempted u/s 10(38)? - HELD THAT - Having considered the scheme of law as also the interpretation taken in various legal precedents discussed above including the binding decision of Hon ble Jurisdictional High Court of Gujarat in Kishorbhai Bhikhabhai Virani 2015 (2) TMI 807 - GUJARAT HIGH COURT we are inclined to hold that the assessee has rightly claimed the carry forward of Long-Term Capital Loss (STT not paid) and Short-Term Capital Loss without setting off against the exempted Long-Term Capital Gain (STT paid) u/s 10(38). At this stage we would also like to make an additional mention that even if assume, without accepting, that the revenue s contention is correct in setting off losses against exempt income long term capital gain u/s 10(38) , there would be an absurd outcome. We find that the lower authorities are not justified in setting off losses against the exempted long-term capital gain thereby reducing the quantum of carry forward of losses claimed by the assessee. We therefore direct the Ld. AO to allow full carry-forward of losses as claimed by the assessee without set-off against exempted long-term capital gain. Appeal of assessee allowed.

Issues Involved:

1. Set-off of Long-Term Capital Loss (STT not paid) against Long-Term Capital Gain (STT paid) exempt under Section 10(38).
2. Set-off of Short-Term Capital Loss against Long-Term Capital Gain exempt under Section 10(38).

Issue-wise Detailed Analysis:

1. Set-off of Long-Term Capital Loss (STT not paid) against Long-Term Capital Gain (STT paid) exempt under Section 10(38):

The assessee filed a return declaring a total income of ?17,25,67,630/- and claimed carry forward of Long-Term Capital Loss (STT not paid) of ?15,41,625/- and Short-Term Capital Loss of ?5,06,74,578/-. The Assessing Officer (AO) set off the Long-Term Capital Loss against the Long-Term Capital Gain of ?2,62,06,472/- exempt under Section 10(38), thus reducing the quantum of carried-forward losses. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, citing that Section 70 does not preclude the set-off of losses against exempted gains. The CIT(A) relied on the case of Kishorbhai Bhikhabhai Virani Vs. ACIT (2014) 367 ITR 261, which held that exempted income does not enter into the computation of total income and thus cannot be set off against taxable income.

The Tribunal examined the scheme of the Income Tax Act, 1961, specifically Sections 4, 2(45), 10, 14, and Chapter VI. It concluded that exempted incomes under Chapter III do not form part of the total income and thus are not available for set-off against any loss under Sections 70 to 80. The Tribunal relied on the decision in G.K. Rammurthy Vs. JCIT (2010) 2 ITR (T) 139 (ITAT Mumbai), which allowed the carry forward of losses without setting them off against exempted gains. The Tribunal also considered the decision in Nikhil Sawhney 119 taxmann.com 372 (Delhi High Court), which upheld the denial of set-off of exempted losses against taxable income.

2. Set-off of Short-Term Capital Loss against Long-Term Capital Gain exempt under Section 10(38):

The AO also set off Short-Term Capital Loss of ?2,46,64,662/- against the Long-Term Capital Gain exempt under Section 10(38). The CIT(A) upheld this decision, again relying on the case of Kishorbhai Bhikhabhai Virani, which emphasized that exempted income does not enter the computation of total income.

The Tribunal reiterated its understanding of the Income Tax Act's scheme, emphasizing that exempted incomes do not form part of the total income and thus are not available for set-off against any losses. The Tribunal found that the CIT(A) misinterpreted the decision in Kishorbhai Bhikhabhai Virani. The Tribunal clarified that the decision supports the assessee's claim that exempted gains do not enter the computation of total income, and thus, losses should not be set off against such exempted gains.

Conclusion:

The Tribunal held that the assessee was correct in claiming the carry forward of Long-Term Capital Loss (STT not paid) of ?15,41,625/- and Short-Term Capital Loss of ?5,06,74,578/- without setting them off against the exempted Long-Term Capital Gain (STT paid) of ?2,62,06,472/- under Section 10(38). The Tribunal directed the AO to allow the full carry-forward of losses as claimed by the assessee without set-off against exempted long-term capital gain. The appeal of the assessee was allowed.

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