For brain storming: - Provisions Section 10(38) - vis a vis LTC loss with STT. Such loss can be set off against taxable LTC Gains and carried forward for such set off in future.

[C.A. DEV KUMAR KOTHARI]

Abbreviations used:

LTCG - long-term capital gains.

LTC Loss - long-term capital loss.

STCG - Short-term capital gains.

STC Loss - Short term capital loss.

Act - The Income Tax Act, 1961.

S/o, C/f and B/f means set off, carry forward and 'brought forward and set off' respectively.

STT: Security Transaction tax.

S/E = Stock Exchange

MF =  Mutual Fund Registered with SEBI.

LTCG are taxable:

LTCG on most of transactions of transfer of capital assets (particularly by sale and exchange) is taxable. In case of shares and units we find taxable and non taxable both categories depending on nature and certain events associated with acquisition or transfer etc.

If they are not sold through S/E or , MF as the case may be and STT is not paid then LTCG is taxable. In case of STT payment as specified in Section 10(38) such gains or income is not included in total income. Each transaction has to satisfy test for exemption, then only exemption is allowed.

LTC loss is not a taxable income therefore, there is no meaning of exemption under section10(38).

 LTCG with STT payment is exempted under section 10(38) in some circumstances. Exempted LTCG does not form part of income u/h' capital gains' and does not go in GTI.

LTC GAIN without STT goes in computation of income under the head capital gains. So LTC loss without STT also goes in computations.

LTC Loss transactions in same circumstances (STT paid), does not attract Section 10(38). Section 10 (38) apply only to positive income which is otherwise chargeable to tax. In case of loss exemption is meaningless. Therefore, such transactions falls under computation u/h 'capital gains'.  Hence enter into GTI.  Such LTC Loss (STT paid) can be set off and or / c/f for set off against other LTCG.

It is wrong to say that loss - LTCLOSS (STT paid) are also not allowable. Exemption under Section 10(38) does not affect computation under the head 'capital gains. Only specified transactions are exempted and they do not go into computation at all in the Total income via income from capital gains and then through gross total income (GTI).

It is not that the head 'capital gains' is exempt,  or that the source of gain is exempt. The shares or units involved in transactions that yielded LTCG with STT are a separate source and those which resulted in LTC LOSS with STT are different sources. The positive gain being out of computation u/s capital gains.

Furthermore when a transaction resulting into LTC LOSS without STT is eligible for set off and / or carry forward, then there is no justification in denying same benefit for LTC LOSS with STT. That would mean that by paying STT, one lose benefits of set off and c/f  that is loss from all corners- first loss of money, then loss of STT, the loss of set off, loss of c/f benefit. Yani chotarfa aur Kai guni mar. This cannot even be intention of legislature.

Old provisions Vis a Vis new provisions:

 There is a judgment of the Supreme Court  reported as CIT V Harprasad & Co. P. Ltd [2008 -TMI - 6439 - SUPREME Court] in the context of old provision of Income-tax Act, 1922. At the relevant time there was no tax on capital gains. That means there was no head of taxable income as 'capital gains'. In that case, the assessee sought to carry forward loss under the head `capital gains' for the assessment year 1955-56. In that year, any income falling under the head  `capital gains' was not at all taxable, even in subsequent year  any income falling under the head 'capital gains" were not taxable. The Supreme Court denied the computation of loss and carry forward of the same, because there was no head of taxable income as income from capital gains.

The rational and reasoning was that there must be purpose of computing the loss. The purpose can be to set off the loss or carry forward the loss. If due to head itself being tax free there is no need to compute the loss as it will neither be set off nor carried forward for set off in future, because in subsequent year also the head 'capital gain' was exempt.

In view of the above reasoning  it was  held by the  Supreme Court:	Examined with reference to income exempted under Section 10 (38) vis a vis loss under head ' capital gains', for set off and / or carry forward.
(a)    That the concept of carry forward of loss does not stand in VACUO.	(a)    Similarly concept of exemption under Section 10 does not stand in VACUO. When there is exemption of any income there is no need to compute the same. It will not go in 'total income' via gross total income and via head 'capital gains'.
(b)   It involves the notion of set-off.	(b)    (i) Exemption involves as precondition of a taxable income that is positive income. (ii) The loss is not a taxable income so exemption is not applicable.
(c)    Its sole purpose is to set off the loss against the profits ( of the year ) or of a subsequent year.	(c)Sole purpose of exemption is to allow relief to assessee from otherwise tax payable. So such exemption does not apply to loss because thank god, loss is not exigible to tax.
(d)   It presupposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits or gains, if any of the subsequent year.	(e)    (i) Exemption under Section 10(38) presupposes taxable LTC Gain (income) which is exempted. (ii) The loss is not subject to exemption so it full fills precondition for possible set off  in same year or in future , because the head 'capital gains', is not exempt as was the case before the Supreme Court.
(f)     Set-off implies that the tax is exigible and the assessee wants to adjust the loss against profits to reduce the tax demand.	(e) (i) Exemption implies that tax is payable and assessee want to claim the exemption. The assessee has to satisfy conditions for exemption. (ii) When the loss can be set off because the head is not exempt, the loss under similar circumstances will be eligible for set off and also carry forward as per law.
(g)    That if such set-off is not permissible or possible owing to the income or profit of the subsequent year being from a non-taxable source, there would be no point in allowing loss to be "carried forward".	(f) this is not applicable because now certain types of income are exempt, that too subject to compliance of conditions. It is not a case that the income falling under the head capital gains are not at all taxable.
(h)    Conversely, if the loss arising in the previous year was under the head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source.	(i)      This is also not applicable. As the head 'capital gains' is taxable whereas at the relevant time concerned with the Supreme Court ruling the head it self was exempt in the relevant year as well as in future.

Thus, on a proper analysis it is found that the above judgment fully supports the contention that loss on sale of shares, even if STT is paid, can be computed, and set off and carried forward. This is so because the head 'capital gains' is not exempt and the assessee can set off the loss in the same year or in subsequent years because he may have taxable capital gains on sale of unquoted shares, or even quoted shares in off market deals, or other capital assets.

If the LTC loss with STT is considered as negative income and covered with exemption under Section 10(38) the whole purpose of exemption shall fail. The exemption is allowed because STT is paid. A relief is allowed not to pay further tax by way of income-tax. A relief, benefit or advantage cannot be made burden on assessee. If LTC Loss is not allowed to be set off or carry forward and set off the relief allowed shall become a burden and that cannot be a logical conclusion and that cannot be intention of legislature also.

Readers are requested to send their feed back to further improve the case.

Discussions to this article

[Vikash Agarwal]

Hi, Pls. clarifiy that if I have LTC Loss (with STT paid) and in the subsequent year I make LTC Gain of R. 170000/- (with STT paid and with no other income), then my total income before any set-off would also be Rs. 170000/-. Now, would it be compulsory for me to set-off the loss first before calculation of total income and before exhausting the Basic exemption limit?

[DEV KUMAR KOTHARI]

LTCG with STT in subsequent year, if exempt u/s 10, will not go into computation of 'capital gains' and GTI. So LTC LOSS c/f ( though with STT payment)will not be setoff. There is nopurpsoe of set off when LTCG with STT is exempt in subsequent year also. Therefore, LTC LOSS (with STT) c/f can be set off against other taxable LTCG.

[DARSHAN JAIN]

In my humble opinion the LTCL with STT c/n be set off against taxable LTCG in view of provisions of s.14A and the decision of Supreme Court in Rajasthan Warehousing Corporation v/s. CIT (2000) 242 ITR 450 - distinguished. Although I had made a point to c/f the loss to subsequent year for set-off against LTCG with STT, for use in case if the exemption u/s.10(38) is removed. Definitely there is a dilemma on the matter, however if your argument was to be accepted even agricultural loss should be available for set-off from other business income as what is exempt u/s. 10(1) is only agricultural income and as such provision thereof are inapplicable in case of agricultural loss... But yes certainly, a good food for thought.

[DEV KUMAR KOTHARI]

REF: comment of mr.DARSHAN JAIN Loss is not an expenditure so S. 14A is not applicable. Loss is different from expenses. Set off and C/f are not govenred by S. 14A. Agricultural income is a source of income which is exempt. Whereas LTCG with STTis not such a source. The sale of capital asset may result into different situations- STCG / STCG with STT/ SRC loss/ LTCG with STT/ LTCG without STT/ LTC loss etc. When LTCG is with STT then only it is exempt, and not the source itself. Exemption u/s 10.38 can be considered as a privilege and it cannot be made a burden on assessee to deny set of and c/f of loss , merely becasue STT has been paid. Agricultural loss can be set off against agricultural income as per state legislation about agricultural income.