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2022 (4) TMI 687 - AT - Income TaxRevision u/s 263 by CIT - Wrong claim of carry forward of long term capital loss - As per AO exempt income does not form part of the total income, therefore, it should not be considered for set off losses - PCIT observed that provision of section 74(1)(b) and 74(1)(c) of the Act clearly provide that loss relating to any long term capital asset shall be set off against income relating to any other long term capital asset, assessable for that assessment year and if the loss cannot be wholly so set off, then the amount of loss not so set off shall be carried forward to the following assessment year and so on - HELD THAT - Assessee earned long term capital gain to the tune of ₹ 35,49,832/- which is exempted under section 10(38) of the Act, therefore, current year long term capital loss and previous year s long term capital loss should not be set off against such exempted long term capital gain (LTCG) under section 10(38) of the Act. We note that provisions of law as envisaged in section 74(1)(b) and 74(1)(c) of the Income Tax Act are clear and unambiguous leaving no scope for more than one interpretation. The provisions of section 74(1)(b) and 74(1)(c) of the I.T. Act clearly provide that loss relating to any long term capital asset shall be set off against income relating to any other long term capital asset, assessable for that assessment year and if the loss cannot be wholly so set off, then the amount of loss not so set off shall be carried forward to the following assessment year and so on. However, we note that current year s long term capital gain earned by the assessee was exempt under section 10(38) of the Act. Therefore, the long term capital gain, which is exempted under section 10(38) of the Act, would not enter in the computation of total income of the assessee, therefore, assessee cannot set off its current year and previous year s long term capital loss against such long term capital gain, which is exempted under section 10(38) of the Act, therefore, the stand taken by the ld PCIT is wrong. Assessing officer, having examined the assessee s claim has not allowed the assessee s current year and previous year s long term capital loss against such long term capital gain, which is exempted under section 10(38) of the Act. Hence, view taken by the assessing officer is sustainable in law. We note that assessee is trading in shares and securities, which were exempted from tax under section 10(38) of the Act, therefore the capital gain exempted from tax, will not form part of total income and it is also not considered for set off of long term capital losses. Therefore, stand taken by the assessing officer that assessee should not utilize the exempt income to set off the losses, is correct. Since the exempt income does not form part of the total income, therefore, it should not be considered for set off losses and therefore, order passed by the assessing officer is neither erroneous nor prejudicial to the interest of revenue - Decided in favour of assessee.
Issues Involved:
1. Rejection of claim for carry forward of long-term capital loss. 2. Consideration of setting off carried forward capital loss against exempt income. 3. Validity of the assessment order passed by the Assessing Officer (AO). 4. Interpretation and application of Section 74 read with Section 10(38) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Rejection of Claim for Carry Forward of Long-Term Capital Loss: The assessee challenged the rejection of the claim for carry forward of long-term capital loss amounting to ?10,39,479 for AY 2013-14 and previous years' brought forward losses of ?16,11,359 for AY 2011-12 and 2012-13 by the Principal Commissioner of Income Tax (PCIT). The PCIT observed that the aggregate long-term capital loss of ?26,50,798 should have been set off against the long-term capital gain of ?35,49,832, which was exempt under Section 10(38) of the Act. The PCIT held that the claim for carry forward of long-term capital loss was incorrect and resulted in an erroneous and prejudicial assessment order. 2. Consideration of Setting Off Carried Forward Capital Loss Against Exempt Income: The PCIT contended that under Section 74(1)(b) and 74(1)(c) of the Income Tax Act, the long-term capital loss should be set off against any long-term capital gain assessable for that assessment year. The assessee argued that set off of past losses should not be taken against exempt income, especially those covered under Section 10. The assessee maintained that the interpretation of disallowing carry forward of loss on the ground of not setting it off against exempt income was not tenable and was against the spirit of the law. 3. Validity of the Assessment Order Passed by the AO: The assessee contended that the AO had correctly and consciously allowed the carry forward of losses after due scrutiny and verification during the assessment proceedings. The AO had examined the details and documentary evidence provided by the assessee and concluded that the long-term capital loss should not be set off against the exempt long-term capital gain under Section 10(38). The assessee argued that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. 4. Interpretation and Application of Section 74 Read with Section 10(38) of the Income Tax Act, 1961: The Tribunal noted that the provisions of Section 74(1)(b) and 74(1)(c) are clear and unambiguous, requiring long-term capital loss to be set off against long-term capital gain assessable for that year. However, since the long-term capital gain of ?35,49,832 was exempt under Section 10(38), it would not enter the computation of total income. Therefore, the long-term capital loss could not be set off against such exempt income. The Tribunal held that the AO's decision not to set off the long-term capital loss against the exempt long-term capital gain was correct and sustainable in law. Conclusion: The Tribunal quashed the order passed by the PCIT, stating that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal relied on the judgment of the Hon'ble Supreme Court in Malabar Industries Ltd. vs. CIT, which held that an order could be considered erroneous and prejudicial to the interest of the Revenue only if it was based on incorrect facts, incorrect application of law, or lack of investigation. The Tribunal concluded that since the exempt income does not form part of the total income, it should not be considered for setting off losses, and thus, the AO's order was valid. Final Order: The appeal of the assessee was allowed, and the order was pronounced on 13/04/2022.
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