2010 (4) TMI 211 - HC - Income Tax

Computation of capital gains sale of shares indexation section 112(1) - the assessee entered into eight sale transactions involving the shares of four companies. Of the sale transactions the shares of Infosys Technologies comprised entirely of bonus shares where the cost of acquisition was nil. The bonus shares of Infosys Technologies were sold for a consideration of Rs.6.13 Crores. There being no cost of acquisition the long term capital gains were computed at Rs.6.13 Crores. Out of the remaining seven transactions one sale resulted in a long term capital gain of Rs.9.47 lacs with indexation whereas in the remaining transactions the assessee reported a loss of Rs.2.78 Crores with indexation. The assessee set off the long term capital loss of Rs.2.68 Crores from the long term capital gains of Rs.6.13 Crores and paid a tax of 10% on the net long term capital gain of Rs.3.45 Crores. AO denied the benefit of indexation Held that Tribunal was justified in coming to the conclusion that the assessee s claim of computation of long term capital gains on the sale of shares other than the bonus shares of Infosys Technologies after giving the benefit of indexation was in consonance with the proviso to Section 112(1) and that the assessee was assessable to net long term capital gain of Rs.3.45 Crores.

Summary

Issues:
1. Computation of long term capital gains on the sale of shares, including bonus shares of Infosys Technologies, with indexation.
2. Entitlement to set off losses against capital gains under Section 70.
3. Interpretation of Section 112 regarding tax on long term capital gains and benefit of indexation.

Analysis:
1. The appeal raised the issue of computing long term capital gains on the sale of shares, specifically bonus shares of Infosys Technologies, with indexation as per the proviso to Section 112(1) of the Income Tax Act, 1961. The Tribunal concluded that each transfer constituted a separate capital asset, and the assessee's claim for indexation on shares other than bonus shares was valid. The Tribunal allowed the appeal filed by the assessee on this ground, leading to a net long term capital gain of Rs.3.45 Crores.

2. Section 70 allows for the set off of losses from one source against income from another source under the same head of income. In this case, the assessee was entitled to set off the loss from certain share transactions against the capital gains realized from the sale of bonus shares of Infosys Technologies, resulting in the reported net capital gain of Rs.3.45 Crores.

3. Section 112 deals with the tax on long term capital gains, specifying the tax rate and provisions for listed securities. The proviso to Section 112 states that if the tax payable on long term capital gains from listed securities exceeds 10% before indexation, the excess shall be ignored. The Tribunal's interpretation aligned with the provisions of Section 112, allowing the assessee to benefit from indexation and set off losses against gains, resulting in the net capital gain of Rs.3.45 Crores. The Revenue's contention that indexation should be denied was dismissed based on the legislative intent and circulars issued by the Central Board of Direct Taxes.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee regarding the computation of long term capital gains on the sale of shares, the entitlement to set off losses under Section 70, and the application of Section 112 in allowing indexation benefits. The appeal by the Revenue was dismissed, and no costs were awarded in this matter.