Saturday, June 13, 2015

ITAT unsettles the settled law; allows set-off of long term capital loss arising from sale of STT paid equity shares


a)Assessee filed its return of income wherein it claimed set-off of long term capital loss arising from sale of shares (STT paid) against the long term capital gain arising from sale of land.

b)The Assessing Officer (AO) denied setting off of such loss by relying upon the verdict of Apex Court in case of CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118. He was of the view that income includes loss and, therefore, if the long-term capital gain arising from sale of shares (STT paid) does not form part of the total income as per section 10(38), then the loss arising from such shares would also not form part of the total income.

c)The CIT(A) confirmed the order of the AO. Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour as assessee as under:

1)The ratio and the principle laid down by the Hon’ble Apex Court in the case of Hariprasad (Supra) would not apply in the instant case, as the concept that ‘income will include loss’ would apply only when entire source is exempt from tax and not when only one of the income falling within such source is exempt.

2)Section 10(38) provides for exemption from capital gains only on transfer of Long term equity shares with certain conditions, wherein one of conditions of exemption was payment of security transaction tax (STT). Thus, the income contemplated under section 10(38) is only a part of the source of capital gain and only a limited portion of such source is treated as exempt.

3)From the conjoint reading and plain understanding of sections 2(14), 45, 47, 70 and 71 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;

-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.

Thus, 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. Hence, Long term capital loss on sale of shares could be set off against Long term capital gain on sale of land- RAPTAKOS BRETT & CO. LTD. V. DCIT [2015] 58 115 (Mumbai - Trib.)