2024 (6) TMI 331 - AT - Income Tax

Set off of loss arising out of quoted securities with STT paid against the long term capital gain on sale of unquoted shares - Assessee contended before us that the provisions of Section 10(38) of the Act provide for exemption of long term capital gain resulting from sale of shares / securities subject to fulfillment of certain conditions as enumerated in that section and the entire source has not been exempted - HELD THAT - Nowhere any exclusion or exception has been provided to the long term capital gain resulting from sale of equity shares. In our opinion, its only the long term capital gain resulting from sale of shares/securities which was granted exemption u/s 10(38) subject to the fulfillment of certain conditions and not the entire source which was excluded from the aforesaid sections . Therefore we are of the considered view that when the entire source is not excluded from the charging section and only special type of income is excluded then the interpretation of law has to be made strictly and cannot be deemed to include the any other income or loss resulting or falling within the same source. The case of the assessee is squarely covered by the decision of Royal Calcutta Turf Club vs. CIT 1982 (6) TMI 21 - CALCUTTA HIGH COURT wherein Hon ble High Court held that Section 10(27) of the Act excluded term only the income derived from a business of livestock breeding or poultry or dairy farming. The said section did not exclude the business of livestock breeding or poultry or dairy farming out rightly from the operation of the Act and therefore the loss suffered by the assessee was admissible deduction in computing the total income. If the source which produce the income is outside the ambit of charging provisions of the section in such case negative income or loss can be said to be outside the ambit of taxing provisions Consequently the negative income is also required to be ignored for tax purpose. In other words, where only one of the streams of income from a source is granted exemption by the legislature upon fulfillment of specified conditions then the concept of income includes loss would not be applicable. Thus, we are of the view that the loss incurred on the sale of shares on stock exchange platform, where STT was duly paid, is eligible to be set of against the long term capital gain earned by the assessee from sale of unlisted shares. Accordingly we set aside the appellate order and direct the AO to allow the set off of the loss against the long term capital gain as claimed by the assessee. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Legality of the set-off of long-term capital loss from quoted securities with STT paid against long-term capital gain on unquoted shares.

Summary:

Issue: Set-off of Long-Term Capital Loss Against Long-Term Capital Gain

The appeal concerns the order of the Ld. Commissioner of Income Tax (Appeals)-26, Kolkata, which upheld the assessment order rejecting the claim of set-off of a long-term capital loss amounting to Rs. 47,90,616/- from quoted securities with STT paid against the long-term capital gain on unquoted shares.

During the assessment, the AO disallowed the set-off on the grounds that the long-term capital gain on quoted shares is exempt u/s 10(38) of the Act, and thus, the corresponding loss cannot be set off against other taxable income. The Ld. CIT(A) upheld this view, relying on multiple judicial precedents, including Harprasad & Co. Pvt. Ltd. [99 ITR 118] and CIT vs. J. H Gotla [156 ITR 323].

The assessee argued that Section 2(14) defines capital assets, including shares and securities, and no specific exclusion for long-term capital loss on quoted shares is provided in Sections 45 to 48. The Ld. A.R contended that the exemption u/s 10(38) applies only to positive income and does not exclude the source itself from the charging provisions. The Ld. A.R cited decisions from the Co-ordinate Bench, including United Investments vs. ACIT [TS-379-ITAT-2019 (Kol)], which supported the set-off of such losses.

The Ld. D.R countered, asserting that allowing the set-off would reduce taxable income, contrary to legislative intent. The D.R emphasized that a conjoint reading of Sections 2(14), 45, 47, 48, 70, and 71 supports the non-allowance of such set-off.

Upon review, the Tribunal noted that the provisions of Section 2(14) do not exclude shares/securities from being considered capital assets. Sections 45 and 48 provide for the computation and taxation of capital gains, without excluding losses from quoted shares. The Tribunal found that the exemption u/s 10(38) pertains only to specific positive income and does not exclude the source from the Act's charging provisions. The Tribunal cited the jurisdictional High Court's decision in Royal Calcutta Turf Club vs. CIT [144 ITR 709 (Cal)], which allowed the set-off of losses from exempt income sources.

The Tribunal also referenced the Co-ordinate Bench's decision in United Investments vs. ACIT, which supported the assessee's position. The Tribunal distinguished contrary decisions, noting that they did not consider the full scope of applicable sections or relevant precedents.

In conclusion, the Tribunal directed the AO to allow the set-off of the long-term capital loss from quoted shares against the long-term capital gain from unquoted shares, setting aside the appellate order.

Order pronounced in the open court on 6th June, 2024.