2006 (3) TMI 202 - AT - Income Tax

Computation tax under the head capital gains - Set Off - Losses - Setting off of short-term capital gains against long term capital losses is permissible? - HELD THAT - We find that there is no basis in grouping short term capital assets as a separate source of income and long term capital assets as a separate source of income. Not only short term and long term assets are different sources of income but even the different short term assets and different long term assets involved in the respective transactions are again different sources of income. When section 70 provides that a loss falling under a source of income can be set off against income from any other source under the same head it means that the long term capital loss being a separate source can be set off against short term capital gains which is another separate source of income. Within the provisions of law contained in section 70 there is no further identification of sources of income against which alone loss of a particular source can be set off. Therefore the contention of the assessee that irrespective of the identity of the source of income it is possible for the assessee to set off the loss of a particular source against income from another source both falling under the same head of income is tenable in law. Accordingly the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law. The CBDT Circular No. 8 of 2002 issued as explanatory notes is a speaking testimony to the arguments advanced by the learned senior counsel that there is no hitch in the law existed for the assessment years 1988-89 to 2002-03 in selling off long term capital loss against short term capital gain. When the statute provide such a freedom to the assessee the Assessing Officer is not justified in making a further grouping of sources and to hold that long term capital loss must be set off first against long ten n capital gains. The Assessing Officer is in fact bringing out an order of priority of his own relating to the manner in which a loss has to be set off when the statute has not provided any such order of priority. The statute has not prescribed any order of precedence according to which the loss out of one source has to be set off against income from any other source. There is no provocation to visualize that the long term capital loss must first be set off against long term capital gains. That could only be an extreme case of logical argument. Such an argument cannot find support from the provisions of law contained in section 70 as it stood for the relevant time. Thus we find that the assessee had its right to set off the long term capital loss against short term capital gains for the reason that every transaction relating to the assets brought under the common head of income capital gains is to be treated as separate source of income. Every transaction is for that matter a source of income with reference to transfer of that asset. Further during the relevant period statute has not placed any distinction between long term asset and short term asset or for that matter long-term capital gains and short term capital gains. It was within the legitimate right of the assessee to choose the option which is more favourable to it so that it could avail the benefit of concessional rate of tax on the long term capital gains. Therefore the question is answered in favour of the assessee and against the Revenue. Therefore we find that the orders of the CIT(A) are just and in accordance with law and the ground raised by the Revenue in both the appeals are liable to be dismissed. In result both the appeals filed by the Revenue are dismissed.

Issues Involved:
1. Whether setting off short-term capital gains against long-term capital losses is permissible under the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Permissibility of Setting Off Short-Term Capital Gains Against Long-Term Capital Losses

Background and Facts:
The appeals pertain to the assessment years 1995-96 and 1996-97, filed by the Revenue against the CIT(A) orders. The central issue is whether short-term capital gains can be set off against long-term capital losses for computing taxable capital gains. The assessee, a non-resident FII, set off both short-term and long-term capital losses against short-term capital gains, seeking to benefit from the concessional tax rate on long-term capital gains.

Arguments by Revenue:
1. Long-term capital losses should be set off only against long-term capital gains, and short-term capital losses against short-term capital gains.
2. The interpretation of section 70 should consider long-term and short-term assets as separate sources of income.
3. Reliance on older circulars and case law by the assessee is misplaced, as the provisions of section 70 have changed over time.
4. The distinction between long-term and short-term capital gains should be maintained for intra-head adjustments, supported by sections 2(29A), 2(42B), 70, 112, and 115AD of the Act.

Arguments by Assessee:
1. Sections 112 and 115AD are not charging provisions but provide special tax rates for long-term capital gains and FIIs.
2. Section 45 is the charging section for capital gains, and the computation should be asset-specific.
3. The law from assessment years 1988-89 to 2002-03 allowed set off of losses from any source under the same head, without distinguishing between long-term and short-term capital gains.
4. The amendments brought by the Finance Act, 1987, simplified the provisions by removing the distinction between short-term and long-term capital gains for set off purposes.

Tribunal's Analysis and Conclusion:
1. Interpretation of Section 70: The Tribunal noted that section 70 deals with intra-head adjustments of income and loss, allowing set off of losses from one source against income from any other source under the same head. The law applicable for the relevant assessment years (1988-89 to 2002-03) allowed such set off without distinguishing between long-term and short-term capital gains.
2. Source of Income: The Tribunal emphasized that each transaction of an asset is a separate source of income. The head of income "capital gains" encompasses various sources, including both short-term and long-term capital gains.
3. Judicial Precedents: The Tribunal referred to several judicial decisions, including those by the Madhya Pradesh High Court and the Supreme Court, which supported the view that each asset or transaction is a distinct source of income.
4. CBDT Circulars: The Tribunal considered the explanatory notes in CBDT Circular No. 495 (1987) and Circular No. 8 (2002), which clarified that the distinction between short-term and long-term capital gains was removed for set off purposes during the relevant period.
5. Legislative Intent: The Tribunal highlighted that the amendments brought by the Finance Act, 1987, intended to simplify the provisions and allow uniform treatment of capital losses and gains. The reintroduction of the distinction by the Finance Act, 2002, was to rectify the perceived anomaly.

Decision:
The Tribunal concluded that the assessee was entitled to set off long-term capital losses against short-term capital gains, as the law during the relevant assessment years allowed such set off. The computation method adopted by the assessee was in accordance with the law, and the adjustments made by the Assessing Officer were not justified. The Tribunal upheld the orders of the CIT(A) and dismissed the appeals filed by the Revenue.

Summary:
The Tribunal ruled in favor of the assessee, allowing the set off of long-term capital losses against short-term capital gains for the assessment years 1995-96 and 1996-97. The decision was based on the interpretation of section 70, judicial precedents, and the legislative intent behind the amendments brought by the Finance Act, 1987. The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s orders.

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