LOSS ON TRANSFER OF LONG-TERM SHARES AND UNITS can be set off against other capital gains, even if ‘profit’ or ‘gain’ would be exempt if transaction of transfer has suffered security transaction tax

[CA DEV KUMAR KOTHARI]

Summary:

On an analysis of the old and new provisions it is noticed that the shares in companies, units of mutual funds, other assets which are held as investment and are not treated or converted into stock-in-trade are considered as ‘capital asset’.

Exemption of  capital gains in certain circumstances is allowed   for ‘any income arising on their transfer’ if certain conditions are satisfied. The language used, and the purpose of the provisions like sub-section (33) and 38  in section 10 of the Act, and taking into consideration that the head of income “capital gains” is not an exempted head of income, the purpose of determination of loss, setoff and carry forward of loss etc. it appears to be a very reasonable view that loss under head capital gains suffered on transfer of  such assets  will be eligible for setoff and carry forward, even if, gain if any, in the same circumstances would be exempt because tax has been imposed in some other manner or scheme for collection of tax in security transactions.

In view of author, and according to explanations from CBDT on introduction of STT, it can be said that STT is a tax in lieu of income-tax, and STT is levied with a view to simplify taxation of income in case of securities.

Long term capital loss is computed after indexation of cost of acquisition and cost of improvement,   and it can be set off against LTCG when some other LTCG is taxable at special rates provided u/s112.

Section 10 is to allow a relief from tax on otherwise taxable income. It is not to make a burden on assessee, in a manner that  loss suffered will not be allowed to be set off or carried forward and set off.

1. Units and shares are capital asset:

Units in this write-up means units issued by the Unit Trust of India under the Unit Scheme, 1964 referred to in Schedule I to the Unit Trust Of India (Transfer of Undertaking and Repeal) Act, 2002 and units issued by other mutual funds also which enjoy similar exemption. Such units are capital asset within the meaning of the tern ‘capital asset’ as defined in section 2(14) of the Income–tax, Act, 1961 ( the Act). Similar is case for shares held in companies or co-operative societies etc. The unit, shares etc.  have not been excluded from the definition of capital asset. We find that there are certain assets which have been excluded from the meaning of ‘capital asset’. In case of an asset which is not a capital asset any computation of capital gain is not required. Whereas shares and unit being capital asset, a computation is required of capital gain on its transfer.

2. Units, shares - capital gain’s computation and taxation:

On transfer of a unit, or shares held as a capital asset (not being stock-in-trade) computation of capital gains is required to be made. In case the unit is a long-term capital asset, then benefit of indexation as per proviso to section 48 with reference to relevant cost inflation index in the year of acquisition and the year of transfer is also required to be made. The computation shall be as per prescribed provisions and the A.O. can ask details of such computation and supporting documents to establish factual and legal position.

3. Section 10 (33)/ 10(38):

By the Finance Act, 2003 a new clause in section 10 has been inserted. Relevant part of the provision including heading, opening words and the clause of section reads as follows:

(Chapter III: “Incomes which do not form part of total income)

S. 10. Incomes not included in total income.

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included:

XXXXX

(33) Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 referred to in Schedule I to the Unit Trust Of India (Transfer of Undertakings and Repeal) Act, 2002 (58 of 2002) and where the transfer of such asset takes place on or after the 1^st day of April, 2002.

Likewise S.10(38) relates to exemption of LTC gain on transfer of shares and units when the sale transaction is in specified circumstances and has been subject matter of payment of security transaction tax.

An analysis would show that:

1. Only capital gain has been exempted. Thus, business profit on sale of units or shares held, as stock-in-trade shall not be exempted.

2. The transfer should take place within prescribed eligible periods for respective transactions.   

3. the transaction at the time of transfer should have been subject to levy of Security Transaction Tax (STT). If STT is not levied, for example in case of off market deals, the gains will not be exempt.

Prior to insertions of these provisions capital gains on transfer of units and shares were taxable and loss was allowed. The purpose is to give a benefit of tax exemption and not to deny the benefit of set off of loss which was earlier available. The exemption is not allowed in case conditions are not met.

The empirical studies shows that in most of the cases the investors who held units for long time and particularly who have purchased  units at higher price suffered heavy  losses due to sale / redemption  price being lower than the cost and inflated cost as per inflation Index. Considering the purpose of insertion of Section 10(33) there cannot be assumption of any intention to deny the benefit of loss. Furthermore the units resulting in to loss, if  such units were purchased prior to insertion of S. 10(33), denial of loss adjustment will not be in right spirit. Similarly in case of shares and other units a benefit by way of exemption is given when specified conditions are met. The purpose of exemption to allow a relief to assessee from payment of tax. This relief cannot be made a burden on assessee by denying benefit of set off and carry forward and set off of loss arising from such units and shares even if conditions for exemption are met.

In this regard it is also important to notice that security transaction tax has been levied, as a measure to simplify taxation on income arising from transactions in securities. The exemption is allowed only if STT is levied on transaction in securities. If the transaction is out of purview of levy of STT, then such exemption is not allowed. Taxing income by way of STT and then claiming that the income is exempt so set off cannot be allowed  will be contrary to the simplified scheme  of taxation of income arising from securities.

Similarly, dividend is taxed at distribution stage, and as a consequence, exemption is allowed to shareholders on dividend received. Though the obligation has been case on companies and mutual funds to pay dividend distribution tax, but fact remains that dividend has been subject to levy of income-tax. The exemption allowed to shareholders, in such circumstances should not be taken as a tool to deny allowability of expenditure incurred by shareholders for making investment, holding and carrying investments.  However, unfortunately, the revenue authorities are taking stand and disallowing expenses.  

4. The expression ‘any income arising from transfer’:

The above expression is very important for the purpose of this write-up. The expression ‘any income arising’ in the context of exemption from taxation can mean only profit or gain that is something more than the cost of acquisition or the indexed cost of acquisition in case of long-term capital gain. A loss cannot be brought within the expression ‘any income arising’. A loss is not at all chargeable to tax, therefore there is no question of taxes on loss and hence there need not be any exemption and the provisions of exemption cannot be rationally extended to loss. 

Furthermore , from the heading of the chapter III, heading and the opening wordings used in section 10 also it is clear that what is to be excluded from inclusion in total income is certain incomes specified in the chapter. The items are in nature of receipts of money, profits, and gains generally covering positive figures. The exemption is only for positive figures, for negative figures no exemption is required.

5. The words income and loss are opposites:

1. The words income and loss are opposite words. The expressions like, profit gains etc have been defined in dictionaries just to mean some positive profit or gain. For example:

Oxford Dictionary:

Income: periodical receipts (usually total annual) from one’s business, lands, works, investments etc.

Profit: advantage, benefit, pecuniary gains, excess of returns over outlay.

Gain: increase of possessions etc; profit, advance, improvement, acquisition of wealth, sums acquired by trade etc; emoluments, winnings; increase in amount … 

Black’s Law Dictionary:

Income: The return in money from one’s business, labor, or capital invested; gains, profits, salary, wages, etc.

 ‘Income’ - section 2 (24) of the Income-tax Act, 1961 clearly shows that income includes only positive incomes arising in form of some receipts or profits or gains computed as per relevant provisions of the Act. None of the clauses can, by any stretch of imagination suggests that income includes loss.

Therefore, when we speak of income, and particularly chargeable income, we can envisage only a positive income and not a loss as a negative income. The concept income includes loss is a concept in the context of determination of taxable income of a period of time by taking into account incomes and losses and that concept is not applicable in charging sections.

6. Principle that `Profit includes loss’ has no application in context of S.10 (33):

As noted earlier, in the context of section 10(33) the principle that profit includes loss or that loss is a negative profit is not applicable. Because first of all this provision is applicable to a capital asset and not to an item which is not at all capital asset, then it is applicable to ‘any income arising from transfer of such capital asset. In case the cost of acquisition or the indexed cost of acquisition of Unit is more than the consideration accruing on sale or transfer, then there is no case of ‘income arising’ so section 10(33) will not apply.

7. The principle decided by the Supreme Court and statutory provision:

It was decided by the Supreme Court that for computing gross total income and total income, losses couldn’t be ignored. For that purpose, income includes loss. Thus, loss suffered has to be taken into account as negative incomes for the purpose of computing chargeable income. Similarly when income of any other person is required to be clubbed in the income of assessee, the loss of such other person will also have to be clubbed. In the case of CIT V J.H. Gotla [1985 (8) TMI 5 - SUPREME Court], it was held that for the purpose of section 16(3) of the Income-tax Act, 1962 (clubbing  provisions corresponding to section 64 of the 1961 Act) the term income shall include loss.

It was not ruled that for all purposes income include loss.

Now the principle has found statutory recognition by way of insertion of an explanation to section 64 of the Income-tax Act, 1961 as follows:

Explanation 2: For the purpose of this section, “income” includes loss.  

Thus, it is clear that the principle that income includes loss is limited in its application to section 64 only. This principle cannot be applied to other provisions including chapter III as there is no such Explanation.

8. In the context of charging section  the principal that ‘income includes loss’ will result in absurdity:

It would be wrong to say that income includes loss is a general or universal rule as it will be totally absurd and result into anomalous results. If loss of ₹ 100 is a negative income and profit of ₹ 100 is positive income the out come may be of two types:

The revenue may have to pay the assessee ₹ 35 because the income is negative ₹ 100 so tax will also be negative ₹ 35 – a lottery indeed for loss maker.

Or

Tax loss of Rs. (100) the same way as profit of ₹ 100 say ₹ 35 as income tax and increase after tax loss of assessee to ₹ 135/-.                            

Let us take other case an individual has suffered loss of Rs one lakh, he is not required to file return of income, he can do so if he wants that the loss should be carried forward. If the loss of Rs. one lakh is called to be negative income, he may be required to file the return.

Thus, it is clear that income includes loss cannot be applied as general rule; it applies only in the context of clubbing provisions of section 64. Even for set off of loss the rule has no general application because set off is permitted by specific provisions and not by the general rule that income included loss.

Old provisions Vis a Vis new provisions:

In the case CIT V Harprasad & Co. P. Ltd [1975 (2) TMI 2 - SUPREME Court], 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 under the old provision of Income-tax Act, 1922. In that case the rational and reasoning was that there must be purpose of computing the loss (under the head capital gains). 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. So the assessee was denied the benefit of computation of loss and carry forward of the same under the head ‘capital gains’.

In view of these reasoning it was also held that the concept of carry forward of loss does not stand in VACUUM, it involves the notion of set-off, its sole purpose is to set off the loss against the profits (of the year) or of a subsequent year. 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. Set-off implies that the tax is exigible and the assessee wants to adjust the loss against profits to reduce the tax demand. 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”. 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.

In the Income-tax act, 1961 any head of income is not exempt. Exemption is of certain types of incomes or receipts, which may fall in one, or the other head of income. The assessee may have taxable income from other type of source falling under any head.  Restrictions, which the legislatures wanted to place on set-off or carry forward and set-off have been specifically provided by way of specific provisions in the Act. Therefore, unless there is a specific prohibition for set off or carry forward and set off in future, loss will have to be computed and it can be set-off in the same year or can be carried forward and set off in future.

There is purpose of computing loss on transfer of Units:

The assessee who makes profit or gain on transfer of units can claim exemption u/s 10 (33). However, for that purpose, the assessee will have to give a computation and prove that the income has accrued but it is exempt, for that purpose the Assessing Officer may ask for evidence to prove the date of acquisition, cost of acquisition, calculation of inflated cost of acquisition and sale price of unit to satisfy himself that the assessee has correctly computed exempted income and has not overstated the same. Now suppose an assessee suffers loss of profit on sale of Units, he can claim the loss to be set off against his other capital gains, and can also seek carry forward and set-off in future. This is so because:

(a) The head ‘capital gains’, is not an exempted head of income,

(b) There is no specific bar on set off or carry forward of such loss, and

(c) The expression `any income arising’, as used in section 10(34) covers only positive income and loss is not covered by the same.

(d) There is purpose of set off of loss – to set off against other capital gains in 

The same year or in subsequent years.

Therefore, applying the rules laid down in the case of Harprasad (supra.), it can be said that the loss on transfer of Units should be computed and allowed for set off against other capital gain as per law. The carry forward for set off against other capital gains in future will be subject to fulfillment of other conditions like filing of the return on loss within due date u/s 139(3) read with section 139(1).

Two  decisions of ITAT

In Vipul A. Shah v. ACIT  2011 (4) TMI 721 - ITAT MUMBAI the facts were as follows:

The taxpayer was engaged in investment. During the assessment year 2004-05, the taxpayer had set off the indexed long term capital loss against non-indexed long term capital gains. The Assessing Officer did not allow the set off of indexed long term capital loss against non-indexed long term capital gains.

Issue for consideration by the Tribunal was  - Whether the indexed long term capital loss can be set off against non-indexed long term capital gains?

Observations and Ruling of the Tribunal

Computation provisions:  The provisions of section 48 to 55 of the Income-tax Act (“ITA”) refer to the mode of computation of capital gains including short-term as well as long term capital gains.

Set off provisions:  section 70(3) of the Act refers to setting of long term capital loss against the long term capital gains arrived at under a similar computation. The Tribunal observed that the above provisions relating to set off of long term capital loss against the long term capital gains existed much prior to the mode of computation of capital gain without applying the benefit of indexation.

   A plain reading of the provisions of section 70(3) of the Act shows that the first part of the provision refers to a loss as computed under section 48 to 55 of the Income-tax Act in respect of any capital asset.

   The second part of the provisions of section 70(3) of the ITA refers to income if any as arrived at under “similar computation”. Thus, the second part refers only to the mode of computation under section 48 to 55 of the Income-tax Act and that would be the correct interpretation.

That it cannot be said that the second part of the provisions by using the expression “similar computation”, refers to a similar computation under either the second proviso to section 48 relating to indexed capital gains or proviso to section 112(1) relating to non-indexed capital gains.

The Tribunal accordingly held that indexed long term capital loss can be set off against non-indexed long term capital gains.

Authors point of view:

Computation of capital gain is to be made separately for each capital asset (or batch of capital asset bought at the same time and sold at the same time).

For example suppose assets a,b,c,d, and e were bought on same day and sold on the same day then computation can be made at on go, though preferably computation should be separate because assets are different. However, if there are different days of buying or selling then computation is to be made in respect of each asset according to days of acquisition and transfer.

Section 112 is a provision only for computing and levying tax at special rate. For applying such special rate it has been laid down that LTCG can be imposed at prescribed concessional rate, where specified circumstances exist, without inflating the cost of acquisition with CII.

As per computation provision one has to compute capital gains / loss after indexation. Suppose in some transactions there is loss after considering indexation, such loss shall be kept apart for set off and/or carry forward. The transactions which have resulted into LTCG even after applying CII, can only be considered u/s 112 and assessee can pay tax at prescribed rate on capital gains computed without applying CII. Suppose assessee has loss after indexation in some other transactions, such loss can be set off against income before indexation.

The ruling of Tribunal correctly lays down that indexed long term capital loss can be set off against non-indexed long term capital gains. It is hoped that the revenue shall accept the decision of Tribunal and will not indulge into unnecessary litigation by preferring appeal before the High Court.

In another case namely Raptakos Brett & Co. Ltd. Versus The DCIT Cen. Cir 46, Mumbai ,ITA Nos.3317/Mum/2009 & 1692/Mum/2010  2015 (6) TMI 529 - ITAT MUMBAI decided vide order Dated - 10 June 2015 the issue arose against disallowance of claim of set off of Long term Capital Loss on sale of shares - Security Transaction Tax (“STT”) was deducted against the Long Term Capital Gain arising on sale of land at Chennai- Held that:- section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3). We allow the assessee’s ground no.1 and direct the Assessing Officer to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land.  Hence the issue was decided in favour of assessee.

The honourable Tribunal considered several judgments of the Supreme court and High Courts and came to conclusion that exemption u/s 10 was exemption from inclusion of income in taxable income, subject to fulfilment of various conditions.  The head or source of capital gains was not exempted source. The expression income will not be extended to loss in such a case.  Therefore, the loss on sale of shares / units was allowed to be set off against capital gains. The relevant portion from the  order of the Tribunal is reproduced below with highlights provided by the author for easy analysis.

Judgment / Order

Shri B R Baskaran and Shri Amit Shukla, JJ.

For The Appellant : S/Shri Soli Dastur & Madhur Agarwal

For The Respondent : Shri Ravi Sawana

ORDER

Per Amit Shukla, Judicial Member

The aforesaid appeals have been filed by the assessee against order dated 08.03.2009 passed by the CIT(A) Central – II, Mumbai, for the quantum of assessment u/s. 143(3) for A.Y. 2007-08 and against order dated 12.01.2010 in relation to the penalty proceedings u/s. 271(1)(c) for the assessment year 2007-08.

2. We will first take up the quantum appeal in ITA No. 3317/Mum/2009, vide which, following grounds have been raised.

“1.1 On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) – Central II, Mumbai [“the CIT(A)”] erred in confirming the action of Deputy Commissioner of Income Tax (the A.O) by not allowing the claim of set off of Long term Capital Loss on sale of shares where Security Transaction Tax (“STT”) was deducted against the Long Term Capital Gain arising on sale of land at Chennai;

1.2 The appellant prays that such set off of the said Long Term Capital Loss be allowed

3. The brief facts of the case, qua the issue raised in ground no.1 are that the assessee is a pharmaceutical company, engaged in manufacturing and sale of pharmaceuticals, formulations, dietetic specialities and animal husbandry. The assessee in the computation of income had shown Long term capital loss on sale of shares amounting to ₹ 57,32,835/- and loss on sale of mutual funds units amounting to ₹ 2,61,655/-. The said Long term capital loss has been set off against the Long term capital gains of ₹ 94,12,00,000/- arising from sale of land at Chennai. The Assessing Officer held that the losses claimed cannot be allowed since the income from Long term capital gain on sale of shares and mutual funds are exempt u/s. 10(38). That apart, of the Long term capital loss in respect of shares where securities transaction tax has been deducted, would have been exempt from Long term capital gain had there been profits, therefore, Long term capital loss from sale of shares cannot be set off against the Long term capital gain arising out of the sale of land.

4. The learned CIT(A) too has confirmed the action of the Assessing Officer on the ground that exempt profit or loss construes separate species of income or loss and such exempt species of income or loss cannot be set off against the taxable species of income or loss. Tax exempt losses cannot be deducted from taxable income and, therefore, the Assessing Officer has rightly disallowed the claim of losses from shares to be set off against the Long term capital gain from sale of land.

5. Before us the learned senior counsel, Shri Soli Dastur, submitted that what is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section. The set off of Long term capital loss has been clearly provided in sections 70 and 71. The Legislation has not put any embargo to exclude Long term capital loss from sale of shares to be set off against Long term capital gain arising on account of sale of other capital asset. Even in the definition of capital asset u/s. 2(14), no exception or exclusion has been provided to equity shares the profit/gain of which are treated as exempt u/s. 10(38). Capital gain is chargeable on transfer of a capital asset u/s. 45 and mode of computation has been elaborated in section 48. Certain exceptions have been provided in section 47 to those transactions which are not regarded as transfer. Nothing has been mentioned in sections 45 to 48 that capital gain or loss on sale of shares are to be excluded as section 10(38) exempts the income arising from the transfer of long term capital asset being an equity share or unit. Legislature has given exemption to income arising from transfer of Long term capital asset being an equity share in company or unit of equity oriented fund, which is chargeable to STT. Section 10(38) cannot be read into section 70 or71 or sections 45 to 48. In support of his contention, he strongly relied upon the decision of Hon’ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT (1983) 144 ITR 709 (Cal). In this decision he submitted that similar issue with regard to the losses on account of breeding horses and pigs which are exempt u/s. 10(27) whether can be set off against its income of other source under the head “business”. The Hon’ble High Court after considering the relevant provisions of section 10(27) and section 70, held that section 10(27) excludes in expressed terms only any income derived from business of livestock breeding, poultry or dairy farming. It does not exclude the business of livestock breeding, poultry or dairy farming from the operation of the Act. The losses suffered by the assessee in respect of livestock, breeding were held to be admissible for deduction and were allowed to be set off against other business income. He drew our attention to the various observations and findings of the Hon’ble High Court and also the reliance placed by their Lordships to various decisions of Hon’ble Supreme Court, especially in the case of CIT vs. Karamchand Premchand Ltd. (1960) 40 ITR 106. He also referred to various observations of Hon’ble Supreme Court from the said decision. Thus, he submitted that the losses on account of sale of shares should be allowed to be set off against Long term capital gain on sale of land. In his fairness, he also pointed out before us that there is a decision of Hon’ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj), which has decided this issue against the assessee. However, he submitted that in the said decision, the decision of Hon’ble Calcutta High Court has not been referred at all. Therefore, this decision does not have precedence value as compared to the Calcutta High Court decision, which is based on Supreme Court decision on this point. He also pointed out that ITAT Mumbai Bench also in the case of Schrader Duncan Ltd. Vs. Addl. CIT (2012) 50 SOT 68 has decided somewhat similar issue against the assessee. However, he distinguished the said decision and highlighted the points as to why said decision cannot be followed.

6. On the other hand, the learned DR strongly relied upon the order of the AO and CIT(A) and submitted that, firstly, if the income from the Long term capital gain on sale of shares is exempt, then the loss from such sale of shares will also not form part of the total income and therefore, there is no question of set off against other income or Long term capital gain on different capital asset. Secondly, the decisions of Hon’ble Gujarat High Court and ITAT Mumbai Tribunal should be followed. He further submitted that it is quite a settled law that income includes loss also and, therefore, if the income from sale of shares does not form part of the total income, then the losses from such shares also will not form part of the total income. Thus, the order of the CIT(A) should be confirmed.

7. We have heard rival submissions and perused the relevant findings given in the impugned orders. The main issue before us is, whether Long term capital loss on sale of equity shares can be set off against Long term capital gain arising on sale of land or not, as the income from Long term capital gain on sale of such shares are exempt u/s. 10(38). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines “Capital asset” and various exceptions and exclusions have been provided which are not treated as capital asset. Section 45 is the charging section for any profits or gain arising from a transfer of a capital asset in the previous year i.e. taxability of capital gains. Section 47 enlists various exceptions and transactions which are not treated as transfer for the purpose of capital gain u/s. 45. The mode of computation to arrive at capital gain or loss has been enumerated from sections 48 to 55. Further sub section (3) of section 70 and section 71 provides for set off of loss in respect of capital gain.

8. From the conjoint reading and plain understanding of all these sections it can be seen that, firstly, shares in the company are treated as capital asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset. Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable u/s. 45; thirdly, section 47 does not enlist any such exception that transfer of long term equity shares/funds are not treated as transfer for the purpose of section 45 and section 48 provides for computation of capital gain, which is arrived at after deducting cost of acquisition i.e. cost of any improvement and expenditure incurred in connection with transfer of capital asset, even for arriving of gain in transfer of equity shares; lastly, section 70 & 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been made/ carved out with regard to Long term capital gain arising on sale of equity shares. The whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular “provision” of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, the concept of income including loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions. Section 10(38) provides exemption of income only from transfer of Long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e. payment of security transaction tax and whether the transaction on sale of such equity share or unit is entered into on or after the date on which chapter VII of Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given. Thus, the income contemplated in section 10(38) is only a part of the source of capital gain on shares and only a limited portion of source is treated as exempt and not the entire capital gain (on sale of shares). If an equity share is sold within the period of twelve months then it is chargeable to tax and only if it falls within the definition of Long term capital asset and, further fulfils the conditions mentioned in subsection (38) of section 10 then only such portion of income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit from such shares are taxable. Section 10 provides that certain income are not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income do not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which does not enter into computation at all or is a part of the source, the income in respect of which is excluded in the computation of total income. For instance, if the assessee has income from Short term capital gain on sale of shares; Long term capital gain on debt funds; and Long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of Long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon’ble Calcutta High Court in Royal Turf Club, wherein the Hon’ble High Court observed that “under the Income tax Act 1961 there are certain incomes which do not enter into the computation of the total income at all. In computing the total income of a resident assessee, certain incomes are not included under s.10 of the Act. It depends on the particular case; where the Act is made inapplicable to income from a certain source under the scheme of the Act, the profit and loss resulting from such a source will not enter into the computation at all. But there are other sources which, for certain economic reasons, are not included or excluded by the will of the Legislature. In such a case, one must look to the specific exclusion that has been made.”

The Hon’ble High Court was besieged with the following question

“Whether under s.10(27) read with s.70 of the I.T.Act, 1961, was the assessee entitled to set off the loss on the two heads, namely, Broodmares Account and the Pig Account, against its income of other sources under the head “Business””

Their Lordships after analysing the provisions of section 70 and section 10(27) observed in the following manner:

“In this case it is important to bear in mind that set-off is being claimed under Section 70 of the 1961 Act which permits set off of any income falling under any head of income other than the capital gain which is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. We have noticed that in the instant case the exclusion has been conceded in computing the business income or the source of income from the head of business and in computing that business income, the loss from one particular source, that is, broodmares account and the pig account, had been excluded contrary to the submission of the assessee. The assessee wanted these losses to be set off. The Revenue contends that as the sources of the income are not to be included in view of the provisions of Clause (27) of s. 10 of the 1961 Act, the loss suffered from this source could also not merit the exclusion. Under the I.T. Act, there are certain incomes which do not enter into the computation of the total income at all. In this connection we have to bear in mind the scheme of the charging section which provides that the incomes shall be charged and s. 4 of the Act provides that the Central Act enacts that the incomes shall be charged for any assessment year and in accordance with and subject to the provisions of the 1961 Act in respect of the total income of the previous year or years or whatever the case may be. The scheme of " total income " has been explained by s. 5 of the Act which provides that subject to the provisions of the Act, the total income of the previous year of a person who is a resident includes all income from whatever source it is derived. In computing the total income, certain incomes are not included under s. 10 of the Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look to the specific exclusion that has been made. The question is in this case whether s. 10(27) is a source which does not enter into the computation at all or is a source the income in respect of which is excluded in the computation of total income. How this question will have to be viewed, has been looked into by the Supreme Court in several decisions to some of which our attention was drawn. ”

After discussing the various decisions of the Hon’ble Supreme Court specifically the decision of in the case of Karamchand Premchand (supra), the Hon’ble High Court came to the following conclusion:

“cl.(27) of s.10 excludes in express terms only “any income derived from a business of live-stock breeding or poultry or dairy farming. It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissible deductions in computing its total income”

Thus, the ratio laid down by the Hon’ble Calcutta High Court is clearly applicable and accordingly we follow the same in the present case.

9. Now coming to the argument of the learned DR and learned CIT(A) that income includes loss and if income is exempt then loss will also not be taken into computation of the income, and such an argument is with reference to the decision of Hon’ble Supreme Court in the case of CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118 . The Hon’ble Supreme Court, opined that, if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward. Further, the Hon’ble Supreme Court observed that "From the charging provisions of the Act, it is discernible that the words ' income ' or ' profits and gains' should be understood as including losses also, so that, in one sense 'profits and gains' represent ' plus income ' whereas losses represent 'minus income'. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although Section 6 classifies income under six heads, the main charging provision is Section 3 which levies income-tax, as only one tax, on the 'total income ' of the assessee as defined in Section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the ' total amount of income, profits and gains referred to in Section 4(1)'. Secondly, it must be 'computed in the manner laid down in the Act'. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge."

While concluding the issue their Lordships observed that “it may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set- off. Its sole purpose is to set off the loss against the profits of a subsequent year. It pre-supposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It follows that if such setoff is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be “carried forward”. Conversely, if the loss arising in the previous year was under a 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.” The ratio and the principle laid down by the Hon’ble Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon’ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon’ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon’ble Supreme Court and held that the same will not apply in such cases. Thus, in our conclusion, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3)

10. Coming to the decision of the ITAT Mumbai Bench in the case of Schrader Duncan Ltd.(supra), the issue involved there was, whether the loss on transfer of capital asset being units US 64 Scheme of Unit Trust of India can be allowed and entitled to carry forward the same for set off of in subsequent assessment years, when the income arising from such transfer of unit is exempt u/s. 10(33). The Tribunal held that the source both capital gain and capital loss on sale of units of US64 is itself excluded and not only the income arising out of capital gain. The Hon’ble Tribunal have noted the history of US64 Scheme and the purpose for which such scheme was launched. In this context of transfer of US64 scheme the Tribunal held that the provisions were not meant to enable the assessee to claim loss by indexation for set off against other capital gain chargeable to tax. This decision is slightly distinguishable and secondly, we have already discussed the issue at length and have held that the ratio of Hon’ble Calcutta is applicable in the present case. Lastly, coming to the decision of Hon’ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani (supra), we find that the issue involved in the present case was almost the same, wherein the Hon’ble High Court after following the decision of Hon’ble Supreme Court in the case of Harprasad & Company Pvt. Ltd. (supra), had decided the issue against the assessee. Since we have already noted down the ratio of Hon’ble Calcutta High Court, wherein the Hon’ble High Court has discussed this issue in detail after relying upon series of decisions of Hon’ble Supreme Court and have reached to a conclusion as discussed above, and, therefore, we are respectfully following the ratio of the decision of the Calcutta High Court. Further the said decision have not been referred or distinguished by the Hon’ble Gujarat High Court. Accordingly, we allow the assessee’s ground no.1 and direct the Assessing Officer to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land.