2021 (1) TMI 474 - AT - Income Tax

Non setting off the short term capital gain against long term capital loss brought forward - HELD THAT - Since the law regarding losses under the head Capital gains has undergone changes from time to time, a question often arises whether the law that should prevail is the law pertaining to the year in which loss was suffered or the year in which set off is claimed. The answer is where a right for more liberal treatment is already earned cannot be lost because of subsequent restriction, since vested right cannot be divested, unless specifically withdrawn either explicitly or by implication. In other words, existing rights of set off cannot be treated as withdrawn. In the instant case, the appellant acquired depreciation plant in AY 1996-97, being electric meters which were disposed off during the year giving rise to capital gain taxable u/s 50. There is merit in the contentions of the appellant that prior to amendment to section 70 74 by the Finance Act, 2002, the carry forward capital loss was not bifurcated between short term capital loss and long term capital loss. As mentioned earlier, in Kotak Mahindra Capital Co. Ltd. 2012 (8) TMI 339 - ITAT MUMBAI held inter alia (i) that provisions of section 74(1) as amended w.e.f. 01.04.2003, would apply only to long term capital loss relating to assessment year 2003-04 and onwards and (ii) that restriction imposed therein in terms of setting off long term capital loss only against long term capital gains and not against short term capital gain is applicable only in relation to long term capital loss incurred by assessee in assessment year 2003-04 and subsequent years and same is not applicable to long term capital loss relating to and brought forward from period prior to assessment year 2003-04 which shall be governed by provisions of section 74(1) - prior to amendment made w.e.f. 01.04.2003. We direct the AO to allow set off of capital loss carried forward from AY 2001-02 against capital gains earned by the appellant during the year under consideration. In the submissions filed before the Tribunal dated 30.11.2020, the appellant claims carry forward capital loss of AY 2001-02 at ₹ 90,12,331, whereas in the written submission filed before the Ld. CIT(A) dated 03.09.2016, it claims ₹ 88,61,301/- as balance of AY 2001-02 available for set off against the capital gains of the year under consideration. The AO is directed to verify the above. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Determination of the nature of capital gain on the sale of depreciable assets.
2. Applicability of pre-amended versus post-amended provisions of Section 74 of the Income Tax Act for set-off of capital losses.
3. Verification of the acquisition date of assets sold to determine their classification as long-term or short-term capital assets.
4. Set-off of carried forward capital losses against current year capital gains.

Issue-wise Detailed Analysis:

1. Determination of the nature of capital gain on the sale of depreciable assets:

The appellant contended that the gain from the sale of depreciable assets should be treated as long-term capital gain since the assets were held for more than three years. The CIT(A) initially held that the appellant failed to establish that the assets were held for more than three years. The Tribunal directed the CIT(A) to re-examine the applicability of relevant case laws, including the Bombay High Court decision in Ace Builders P. Ltd., which allowed exemption under Section 54E for gains on depreciable assets treated as short-term under Section 50.

2. Applicability of pre-amended versus post-amended provisions of Section 74 of the Income Tax Act for set-off of capital losses:

The appellant argued that the provisions of Section 74 prior to the amendment by the Finance Act, 2002, should apply, allowing the set-off of long-term capital loss against short-term capital gain. The CIT(A) rejected this, stating the amendment effective from 01.04.2003 restricted such set-offs. However, the Tribunal referred to the Special Bench decision in Kotak Mahindra Capital Co. Ltd., which held that the amended provisions apply only to losses incurred from AY 2003-04 onwards. Thus, the appellant's claim was valid under the pre-amended provisions.

3. Verification of the acquisition date of assets sold to determine their classification as long-term or short-term capital assets:

The CIT(A) doubted the appellant's claim regarding the acquisition date of the assets sold. However, the Tribunal found merit in the appellant's submissions, supported by the letter dated 19.10.2007, which explained the acquisition and sale details. The Tribunal directed the CIT(A) to verify the acquisition date and consider the assets as long-term if the claim was substantiated.

4. Set-off of carried forward capital losses against current year capital gains:

The appellant sought to set off the carried forward long-term capital loss from AY 2001-02 against the current year's capital gain. The Tribunal upheld this request based on the pre-amended provisions of Section 74, allowing such set-offs. The Tribunal directed the AO to verify the exact amount of carried forward loss available for set-off, as there was a discrepancy in the amounts claimed in different submissions.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to verify the correct amount of carried forward loss and to allow the set-off against the current year's capital gains. The judgment emphasized the applicability of pre-amended provisions for losses incurred before AY 2003-04 and the need for proper verification of asset acquisition dates to determine their classification.