Taxability of LTCG and LTC, Income Tax

[DEV KUMAR KOTHARI]

Provisions S. 10(38) - vis a vis LTC loss with STT. LTCG is taxable.LTC loss is not taxable. LTCG with STT payment is exempted u/s 10(38) in some circumstances. Exempted LTCG does not form part of income u/s capital gains and does not go in GTI. Each transaction has to satisfy test for exemption, then only exemption is allowed. 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 S. 10(38). S. 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 u/s 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. 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 LTCLOSS with STT are different sources. The gain being out of computation u/s capital gains. Furthermore when a transaction resulting into LTCLOSS 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 chortafa aur Kai guni mar. Readers views are expected.

Posts / Replies

[Surender Gupta]

What I understand from the basic concept of Income Tax that the benefit of carry forward of loss is allowed when the same or similar source of transaction is subject to the part of taxable income. I am not talking here about the legal provisions or technicalities involved in the issue. I am talking about the concept as a layman. If there is some gain, I am eligible to claim exemption from tax. But if there is loss, I am demanding set off from other income whether in the same year or carry forward and set off. We have seen in the past that sometime a clever tax planning has resulted into a substantial change in the law which is more harsh than it should be. For an example see the amendment in the scope of income chargeable to tax under section 56. Deemed income where transactions are being done below the fair market value. Gift in Kind are also taxable now. What I believe that your arguments are correct that exemption under section 10(38) is conditional one. Once the conditions is not fulfilled, exemption is not available. If I say that for LTC Loss condition of exemption is not fulfilled, the benefit of carry forward of loss should be allowed and once there are some favorable decisions from the appropriate forum (tribunal or HC or SC), central government may amend the law retrospectively because the intention of the government can not be to grant exemption on the one side and allow benefit of loss on the other side. We should not forget the introduction of section 14A inserted by Finance Act, 2001 with retrospective effect i.e. 1.4.1962. Further, how would you say that transaction resulting into loss was not subject to STT??

[DEV KUMAR KOTHARI]

Mr.Surendra Gupta. I appreciate that you have touched fundamental principal in these words "when the same or similar source of transaction is subject to the part of taxable income”. I add to this that set off or c/f is permissible and intended when the head of income to which the loss belongs is not exempt. Neither the head "capital gains" is exempt nor the source that is investment or trading in shares or units is exempt. Case of 'agricultural income' , is different as GOI cannot tax it.Exemption from tax payable on LTCG with STT is because of STT is paid and STT is in lieu of IT ,to provide incentive to investment in equities to collect tax easily by way of STT instead of IT. STT has reduced number of tax collection points now only S/E and MF are required to pay STT whereas in case of IT monitoring was required of all investors. In fact the revenue authorities are not taking a proper view in change of method of collection of tax by way of STT. They want STT and IT both to be collected for the same transaction. The purpose of S. 10(38) is to confer a benefit and not to take away other benefits. A privilege granted cannot be made a burden on assessee. 6.Off course the best course is to sell shares, if market price is less than cost, by way of 'spot delivery transactions'. In fact, the share brokers must have a SPV to purchase such shares on spot delivery basis instead of through S/E. When STT is not paid loss is allowed so there is no justification to deny benefit of set off and c/f when STT is collected. The GOI must adopt such policies that promote simple policies that can be complied with honesty in a simple manner. Disputes and sometimes dishonesty may arise as taxpayer because the provisions are not based on practical reality – low capital base of tax payer yet higher rate of tax, complex provisions, many unreasonable conditions to avail a petty benefit. Revenue officers high handed ness and having prenotion that tax payer is dishonest etc.