TMI Blog2020 (8) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... profit/gain, it would be exempt under this Section. But dispute is that when assessee incurs Loss on transfer of such long term capital assets , whether same shall be ignored for the purpose of computation of the income of the assessee or shall be considered part of the income computation mechanism and should be allowed to be set-off in accordance with other provisions of the act and shall also be carried forward. This issue has arise in because in this year assessee has incurred long- term capital loss on sale of shares which was subject to securities transaction tax. The assessee wants that this loss should be allowed to enter into the computation of total income of the assessee and if is not set-off against any other capital gain in that year, then it should be allowed to be carried forward in future years. In nutshell, the controversy is exemption provisions u/s 10 (38) that income arising from transfer of a long-term capital asset shall only include positive i.e. Gain or the negative i.e. Losses also. Lower authorities have not committed any error in ignoring the loss incurred by the assessee on sale of shares and securities, on which assessee has paid securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2 That the CIT(A) erred on facts and in law in not appreciating that since source of income arising from transfer of shares held as long term capital asset is not exempt from tax, the appellant is entitled to set off and/or carry forward long term capital loss of ₹ 90,80,571/- on transfer of shares. 03. Appeal of the assessee was filed belatedly by 18 days; he has also moved an application for condonation of the above delay on March 2, 2017. The application states that the applicant is an individual employed with Triveni engineering Ltd and thereafter at Triveni turbine Ltd with effect from 10 May 2011 deriving main source of income as salary, interest income from bank deposits and capital gain/losses. The learned CIT A decided the appeal of the assessee by order, which was received on 14 December 2016 and therefore, was forwarded by the applicant to one of the executives of the employer company who used to look after all tax affairs for taking necessary action. The assessee was not sure where the appeal would be filed as appellate order was passed by CIT A Noida. Subsequently, in the month of January 2017, appellate order was delivered to the counsel for preparat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income. Case of assessee was selected for scrutiny through computer assisted scrutiny system [CASS] and notice u/s 143 (2) was issued on 8/8/2013 by the Asst Commissioner, circle 2, Noida, who was having PAN jurisdiction of the assessee. Subsequently as per order passed u/s 127 of The Income Tax Act, dated 1 July 2010 the case was transferred to the Asst Commissioner of Income Tax, Central Circle, Noida, and the learned AO. 09. During the course of assessment proceedings, AO found that reasons for the revision in return of income shown by assessee is that he has incurred a long-term capital loss of ₹ 1,25,36,949/- which was claimed in the original return. The above loss included a loss of ₹ 9,080,571/- pertaining to the transfer of equity shares and equity oriented mutual funds subject to levy of security transaction tax i.e. u/s 10 (38) of the Act. The balance loss of ₹ 3,456,378 was incurred on transactions other than security transaction tax paid securities. The learned assessing officer found that loss of ₹ 90,80,571/ is a long term capital loss on security transaction tax paid securities, the income from which is exempt u/s 10 (38) of The Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income of the assessee. Therefore exemptions provided u/s 10 (38) will not apply to the transactions generating positive income from transfer of security transaction tax paid securities but also similarly apply to the nature of transactions resulting in negative income or losses. Accordingly, he held that long-term capital loss of ₹ 9,080,571/ is not allowable to the assessee. He also supported his contention stating that since assessee has not claimed such loss in revised return of income furnished by him, no separate addition is required to be made on this account. Accordingly the returned income of the assessee of ₹ 1,67,09,146 was assessed at by order u/s 143 (3) of the act dated 31st of March 2014. 12. Aggrieved by the above assessment order, assessee preferred an appeal before the learned CIT A. On challenge that whether assessee can make a claim by way of a letter but not revising the return of income, the learned CIT A held that the appellant cannot stake claim for carry forward of the long-term capital loss in course of assessment proceedings, if same are not claimed in the return of income or claimed initially but later excluded in the revised return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty oriented mutual fund is, it will be noticed, not includable in the total income of the assessee in certain specified circumstances. The said section is reproduced hereunder for ready reference: 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- . (38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where- (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter: Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB. 6 Explanation.-For the purposes of this clause,- (a) equity oriented fund means a fund- (i) where the investible funds are invested by way of equity shares in domestic companies to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maceutical business in the Baroda State, which was then an independent state. In respect of the pharmaceutical business, the assessee suffered loss and claimed the same to be set off against business income in British India. The said claim was denied by the assessing officer on the ground that provisions of the then applicable Business Profits Tax Act, 1947 (in short BPT Act ) did not apply to the business carried on in a State outside British India unless the profits of the business in an Indian state were received or deemed to have been received in or brought into India. On further appeal, the first appellate authority decided the issue in favour of assessee. On appeal filed by the Revenue, the order of the assessing officer was restored by the Tribunal. In the aforesaid facts, the question referred before the High Court was whether loss suffered by the assessee in the business at Baroda is allowable to be deducted while computing business income. The said question was answered in favour of the assessee. Considering the aforesaid correctness of the aforesaid decision at the instance of the Revenue, Their Lordships of the Supreme Court took note of the fact that source of income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phraseology of the first and second provisos thereto, which clearly uses the language of excluding the business referred to therein. The third proviso does not use that language and what learned counsel for the appellant is seeking to do is to alter the language of the proviso to make it read as though it excluded business the income, profits or gains of which accrue or arise in an Indian State. The difficulty is that the third proviso does not say so; on the contrary, it uses language, which merely exempts from tax the income, profits or gains unless such income, profits or gains are received in or brought into India. Next, we have to consider what the expression income, profits or gains means. In the context of the third proviso, it cannot include losses because the latter part of the proviso says, Unless such income, profits or gains are received etc. into the taxable territories . Obviously, losses cannot be brought into the taxable territories except in an accounting sense, and the expression income, profits or gains in the context cannot include losses. The expression must have the same meaning throughout the proviso, and cannot have one meaning in the first part and a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tside the ambit of the BPT Act, loss from such source cannot be denied to the assessee. 1.30 Following the aforesaid decision, the Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT: 144 ITR 709 (Cal) held that loss on account of breeding of horses and pigs can be set off, despite the fact that income from these two sources was exempt under section 10(27) of the Act. The pertinent observations of the Court are reproduced hereunder: 6. In this connection, it may not be wholly inappropriate to refer to the provisions of section 24 of the 1922 Act, which provided for set off of loss in computing the aggregate income. Sub-section (1) of section 24 of the 1922 Act stipulates that where any assessee sustained a loss or profits or gains in any year under any of the heads mentioned in section 6, he should not be entitled to have the amount of loss set off against his income, profits or gains under any other head in that year. We are not concerned with the several provisions under the head. Section 71 of the 1961 Act provides for set off of loss from one head against income of another head. Section 72 of the 1961 Act provides for carry forward and set off of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource 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. We may first refer to a decision upon which reliance was placed on behalf of the revenue. Before we do so, we must also notice the definition of the 'total income' as provided in section 2(45) of the Act which stipulates that 'total income' means total income referred to on section 5, computed in the manner laid down in the Act. Section 5 defines scheme of the total income as we have set out hereinbefore. 13. In our opinion, in the context of our present expression the aforesaid observations of the Supreme Court are relevant to the provisions with which we are faced. It appears to us that clause (27) of section 10 excludes only any income derived from business of livestock 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. In that view of the matter, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profits 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 Calcutta Turf Club's case (supra), wherein the Hon'ble H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the action of the CIT (A)/assessing officer in not allowing carry forward of long-term capital loss of ₹ 90,80,571 is erroneous and calls for being deleted. 16. Mrs Rakhi Vimal, Senior Departmental Representative also submitted a written synopsis of her argument as under:- A) In addition to the arguments/reasoning as held in the Assessment Order and Order of The CIT (A) following arguments/points may kindly be considered- (i) Section 2(14),45,47,70,74 needs to be read together with section 10(38) of the IT Act. Section 2(45) defines total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. As per the charging section 4, income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act 45] in respect of the total income of the previous year of every person. As total income is to be charged and computed in accordance with provisions of the Act, if particular income is excluded from total income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot enter into the computation at all. (iv) Loss is only negative income, and that the definition of 'income' under section 2(24) of the Act includes 'loss'. In other words, it bears the same character and quality as does the positive income. Accordingly, if a particular income is exempt from tax, so that it does not enter the computation process (for and toward determination of total income u/s. 2(45)), it would be so for such income whether positive or negative, i.e., loss. In fact, in the case of Harprasad Co. (P.) Ltd. (as cited below), the apex court clarified that the assessee is not obliged to disclose loss from such a source of income. 17. The learned authorised representative in response read in detail the decision of the honourable Supreme Court in CIT versus Karamchand Premchand Ltd and various other tribunal decisions mentioned in his synopsis. 18. After hearing the parties, the bench raised a specific query to the learned authorised representative that is there any decision against the proposition raised by him to which he feigned ignorance. Thereafter, the bench quoted the decision of the honourable Gujarat High Court of Kishorbhai Virani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. Meaning thereby, the Court noticed the fundamental fact that the capital loss related to the period when the source/ head of income, viz. capital gains is, per se, not liable to tax at all. In the aforesaid facts, the argument on behalf of the assessee was that even though the source was not taxable, the relevant section continued to be part of the statute and consequently, the assessee is entitled to claim carry forward of capital loss. Rejecting this contention of the assessee, the Court observed as under [refer @pg.17/ CL-PB]: Now, capital gains would be covered by the definition of income in sub-section (6C) of section 2, only if they were chargeable under section 12B. As noticed already, section 12B as modified by the Finance Act, 1949, did not charge any capital gains arising between April 1,1948, and April 1, 1957. Indeed section 12B was not operative in these years (1948- 57). During this period, capital gains , whether on the positive or the negative side, could not be computed and charged under section 12B or any other provisions of the Act. In the instant case, the second condition, namely, the manner of computation laid down in the Act which- to use th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h set-off 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. (Emphasis supplied) iii. On perusal of the aforesaid, particularly the highlighted portions, it will kindly be appreciated that the Court repeatedly emphasized the fact that the source/ head of income itself, i.e., capital gains, being not chargeable to tax, the assessee was not entitled to carry forward of loss. In coming to that conclusion, the Court, in fact, took note of the decision in the case of Karamchand Premchand (supra) and applied the same [refer @pg.16 - last para/ CL-PB]. iv. The aforesaid decisions of the apex Court, thus, lays down a fundamental law of the land, binding on all, be it the High Courts and the Tribunal, that if the source/ head of income itself is not excluded from taxation of the provisions of the Act, loss from the said source is availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss of ₹ 28,662. The Supreme Court further held that if the loss was from a 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 ITO under any 5 obligation to compute or assess it much less for the purpose of 'carry forward'. The Supreme Court noted that during the long period section 12B did not make income under the head 'Capital gains' chargeable, an assessee was neither required to show income under that head in his return, nor entitled to file return showing 'capital losses' merely for the purpose of getting the same computed and carried forward. Sub-section (2A) of section 22 would not give him such right because the operation of that subsection is, in terms, confined to (i) a loss which is sustained under the head 'Profits and gains of business, profession or vocation' and would ordinarily have been carried forward under sub-section (2) of section 24, and (ii) to income which falls within the definition of 'total income'. The Supreme Court observed as follows: From the charging provisions of the Act, it is discer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the apex Court in the case of Karamchand Premchand (supra) was not even referred to nor considered; (b) Secondly, the decision of the Calcutta High Court in Royal Calcutta (supra), which considered the decisions in Karamchand and Harprasad (supra), was not referred nor considered; (c) Thirdly, the decision in the case of Harprasad (supra) was relied upon and referred to only for the proposition that income includes loss. The fundamental facts and the legal proposition laid down (as elaborately discussed supra) that during the relevant period capital loss, per se, was not liable to tax and hence loss was held to be not allowable by the apex Court, was not even brought to the notice of the Court. (d) In para 4, the Court noted that the assessee s primary reliance was only on section 74; (e) The fundamental legal position that unless the source, per se, is exempt/ excluded, the loss cannot be ignored, was not even argued nor considered. ix. Having regard to the aforesaid, it will kindly be appreciated that the decision in Kishorebhai (supra) cannot be given preference over the decisions of apex Court in the cases of Karamchand Premchand (supra) and Harprasad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which no securities transaction tax is paid and accordingly, confirmed levy of penalty under section 271(1)(c) of the Act. In that case, the assessee, a non-resident, was a company incorporated in and a tax resident of Luxembourg, carrying on investment activity in Indian securities market. In return of income, the assessee claimed set off of STT paid long-term capital loss, which was denied. Most importantly, the assessee did not prefer any appeal. The appeal before the Tribunal was against imposition of penalty under section 271(1)(c) of the Act. xii. The aforesaid decision of the Tribunal in the case of Asia Pacific (supra), cannot, it is submitted, be applied in preference to the other binding decisions referred above, more so, since the decision is sub-silentio and per-incuriam, for the following reasons: (a) The entire thrust of the decision of the Tribunal was on the concept that income includes loss and therefore, since income is exempt, loss cannot be allowed; (b) The decision of the Supreme Court in Karamchand Premchand (supra) was not even referred to nor has been considered by the Tribunal; (c) The decision in Harprasad (supra) was only referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from transfer of shares, per se, is not excluded from capital gains taxation and therefore, the aforesaid observations that source is exempt, is not correct. (e) The Tribunal has not considered the fundamental proposition of law that when the source of income, per se, is not exempt from tax, loss arising from such source cannot be denied. (f) The Tribunal has not at all applied and analyzed the principle and ratio laid down by the Courts in judgments rendered in the case of Karamchand Premchand Ltd (supra) and Royal Calcutta Turf Club (supra). (g) Lastly, the issue before the Tribunal was that of penalty and not the merits of the loss being allowable. Doctrine of per-incuriam/ sub-silentio judicial precedents. xiii. It is respectfully submitted that it is trite law that a judgment loses its binding force, if it was rendered without consideration of the earlier binding judgment (per incuriam) or has not been fully argued (sub-silentio). xiv. Kind attention, in this regard is invited to the following extracts from Salmond on Jurisprudence, 12th Edition by P.J. Fitzgerald, wherein at pages 148-158 various circumstances destroying or weakening the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 19. It cannot be overemphasized that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law, inconsistency of rulings and comity of courts would become a costly casualty. A decision or judgment can be per incuriam any provision in a statute, rule or regulation, 11 which was not brought to the notice of the court. A decision or judgment can be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a co-equal or larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. (emphasis supplied) xv. The Supreme Court in the case of Bharat Sanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is trite law that even in case of ambiguity, the view favourable to the assessee must be adopted as has been held in the following decisions: - CIT V. Vegetable Products: [ 1972] 88 ITR 192 (SC) - ACIT V. Vireet Investment (P) Ltd: [2017] 165 ITD 27 (Del) (SB) xviii. Most importantly, the Supreme Court in Karamchand Premchand (supra), apart from deciding the issue on merit in favour of the assessee that loss of Baroda business are allowable since source of income is not outside the purview of taxation, also held the aforesaid principle to be equally applicable in case of ambiguity. The pertinent observations are as under [refer pg.10/ CL-PB]: The appellant relies on the third proviso to section 5 of the Act in support of the contention that it excludes the Baroda business of the assessee and the losses of that business cannot be set off against the profits of the business in India, and the appellant can succeed only on establishing that the proviso clearly and without any ambiguity excludes the Baroda business. We agree with the High Court that if there is any ambiguity of language, the benefit of that ambiguity must be given to the assessee. However, the conclusion at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration The contention of the learned counsel for the assessee that for the purpose of section 10(38) of the Act the term income would not include loss , cannot be accepted and rightly rejected by the Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off The Tribunal rightly relied on the decision in the case of Harprasad Co. (P.) Ltd. (supra) to come to a conclusion that the term income under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off It postulates permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains 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 was held that if such set off is not permissible or possible owing to the income or profits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard this, as aforenoted, it stands abundantly clarified by the apex court time and again that both the positive and negative incomes have the same character. Both must, therefore, either enter the computation (of income) or not. It cannot but be otherwise, unless of course specifically provided otherwise. The same also accords with the common notion of the term as well as equity. In the instant case, while the positive income from specified assets is admittedly exempt under section 10(38), the negative income therefrom is taken to form part of the total income under Chapter IV(E), i.e., chargeable under the head Capital gains . What could be a more patent and blatant misreading or, rather, misapplication of the law, which stands explained by the apex court over a series of decisions, so as to be considered as a part of the settled law in the matter, in view whereof, the said argument is consider false and, in any case, fails. c) CIT vs. Harprasad Co. (P.) Ltd. [1975] 99 ITR 118 (SC), In this case Hon ble Apex Court held that; Whether if loss arising in previous year was under head not chargeable to tax, it could not be allowed to be carried forward and absorbed agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (Page 8/8) d) Schrader Duncan Ltd. Vs Additional Commissioner of Income-tax, Spl. Rg. 10(300, 18 Taxmann.com287(Mumbai Tribunal)- As per provisions of section 10(33), source viz., transfer of capital asset being units of US 64 Scheme itself has been excluded and not capital gain arising on said transfer alone; as held by the ITAT in the above quoted decision. While discussing the issue ITAT held that- Income which does not form part of the total income under Chapter-III of the Act, do not enter the computation of total income at all. Sec. 4 of the Act creates charge of income-tax and it provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. If income includes loss and if income on transfer of units of US 64 Scheme does not form part of the total income under the Act by virtue of provisions of section 10(33) contained in Chapter III of the Act, then neither the gain nor loss on transfer would be considered for computation of total income. [Para 17] 34. We are of the view that the aforesaid decision of the Hon'ble Calcutta High Court and the reasoning contained therein would not be applicable to the facts of the Assessee's case. The Hon'ble Calcutta High Court distinguished the decision of the Hon'ble Supreme Court in the case of Harprasad Co. (P.) Ltd.'s case (supra) because that case related to AY 55-56 and as per the law applicable for that AY, capital gain was not regarded as income at all. It is no doubt true that in AY 04-05, the Assessment year with which we are concerned in this appeal, capital gain is income as per Sec. 2(24)(vi) of the Act. It is by virtue of Sec. 10(33) of the Act that any income arising from the transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss from a source, the income from which is liable to tax. If income from a source is altogether exempt from tax, loss from that source cannot be set off against income from a different source or income under a different head. The result of our foregoing discussion is that the receipt of income referable to the activity of racing and betting would be income from other sources but it is of a casual and non- recurring nature and, therefore, exempt under s. 10(3). Since the income is not taxable the loss incurred in such activity also could not be set off against income from other heads of income. f) Commissioner of Income-tax, Ahmedabad Vs. Gold Coin Health Food (P.) Ltd ,304 ITR 308 (SC)(2008) In this case The Apex Court held that - Section 2(24) defines 'income' which is an inclusive definition and includes losses, i.e., negative profit. The position has been elaborately dealt with by the Supreme Court in CIT v. Harprasad Co. Ltd. [1975] 99 ITR118. The Court held with reference to the charging provisions of the statute that the expression 'income' should be understood to include losses. The expression 'profits and gains' refers to positiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arising from transfer of a long-term capital asset shall only include positive i.e. Gain or the negative i.e. Losses also. 28. Precisely the provisions of the section speaks like this:- CHAPTER III INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME Incomes not included in total income. 10. 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- (38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where- (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force3; and (b) such transaction is chargeable to securities transaction tax under that Chapter : 4[Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB.] Explanation.-For the purposes of this clause, equity oriented fund means a fund- (i) where the investible funds are invested by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sub-section (38) of section 10 then only such portion of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 chargi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of the income, and such an argument is with reference to the decision of Hon'ble Supreme Court in the case of Hariprasad Co. (P.) 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rits. The issue, as would be apparent from the foregoing, is the validity in law of the set off of loss on transactions (of transfer) of long-term capital assets specified under section 10(38), on which securities transaction tax is paid, against the income under the head Long- term capital gains , on which no securities transaction tax being paid in its respect. The assessee's case is along the following lines : (a) the only condition in law (per section 70(3)) is that long-term capital loss (LTCL) is to be set off against the long-term capital gain and not short-term capital gain ; (b) there has been no amendment in law, i.e., post section 10(38), according exemption to income arising on transfer of long-term capital assets (LTCAs), being equity shares, etc., on or after October 1, 2004, on which securities transaction tax is chargeable in law, either under section 70 or under any other section. That is, the exemption provided by section 10(38) is absolute. Accordingly, long-term capital loss could be set off against the long- term capital gain, irrespective of whether security transaction tax in its respect has paid or not, so that the assessee can at its option c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evies 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. (Emphasis Supplied) In CIT v. J.H. Gotla [1985] 156 ITR 323 (SC), the apex court, after examining the scheme of the Act, including as to the carry forward of loss, held that in computing the assessee's income, the income of his wife or minor children, which is liable to be added under section 16(3) (of the 1922 Act), would include profit or loss from the business of the assessee's spouse or minor children and, accordingly, upheld the set off of brought forward business loss from such business. The premise on which the said decision rests is again that income includes loss. In CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 (SC), the issue before the hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d quality as does the positive income. Accordingly, if a particular income is exempt from tax, so that it does not enter the computation process (for and toward determination of total income under section 2(45)), it would be so for such income whether positive or negative, i.e., loss. In fact, in the case of CIT (Central) v. Harprasad and Co. (P.) Ltd. [1975] 99 ITR 118 (SC), the apex court clarified that the assessee is not obliged to disclose loss from a source of income in its return where the income from that source is tax exempt, nor the Income-tax Officer under an obligation to compute or assess the same. Even ignoring for a moment the defining or machinery provisions of the Act, and looking fairly at the concept or notion of income from a common perception/standpoint, what, one may ask, is loss, if not negative income? How could it (loss) have a character other than that of income, being only the result of the same computation process which yields a positive income? Further, if construed to bear a character or nature different from income, how could the same be adjusted or set off against income? In fact, it is only its computation that yields or reveals a loss. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be taken into account in computing the book profit and income-tax payable under section 115JB. Explanation. - For the purposes of this clause, 'equity oriented fund' means a fund Now, if securities transaction tax paid long-term capital gain is exempt under section 10(38), so is the loss from the same class of assets, i.e., long-term capital assets, being equity shares, etc., specified under section 10(38), where securities transaction tax paid. The same, as clarified during the hearing itself, is thus considered as a separate source of income, and the quantum of income therefrom being exempt becomes irrelevant for the purposes of the Act. In fact, one only needs to consider the proposition as to the exact status of income, if so, arising on the on-market transactions, i.e., instead of loss. If the income, were it to be so, falls under section 10(38), how could the loss, which is distinguishable only by the arithmetical result, be of a different nature. The same is, therefore, to be ignored. Rather, the assessee having income from the said source, i.e., the assets specified in section 10(38) (at ₹ 1,660.41 lakhs), the loss (₹ 106.49 lakhs) would st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer of a capital asset, is income under the Act only if and to the extent it is chargeable under section 45 of the Act. As such, the Act classifies all capital gains arising as from two sources, one which bears the character of the income for the purposes of the Act and the other which does not. Section 2(45), which defines the term 'total income' under the Act, reads as under : '2. Definitions.-In this Act, unless the context otherwise requires,- (45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act; The income by way of capital gains in the instant case is, by virtue of being exempt under section 10(38), not chargeable under section 45 and, consequently, outside the scope of the total income. Accordingly, it may be seen that, firstly, the relevant capital assets, income from which is not chargeable under section 45, constitutes a separate source of income and, two, being so, i.e., tax exempt under section 10(38), would thus not go to form part of the total income. Both conditions as stated by the apex court in CIT (Central) v. Harprasad and Co. (P.) Ltd. [1975] 99 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,44,73,463 against the long-term capital gain of ₹ 1,03,00,809 for the same assessment year ? B. Whether, on the facts and in the circumstances of the case, the appellant's claim with regard to set off and carried forward of long-term capital loss of ₹ 1,44,73,463 can be disallowed on the basis of the decisions of the horible apex court in the case of CIT v. Harprasad and Co. P. Ltd. [1975] 99 ITR 118 (SC) and the Madras High Court in the case of CIT v. S.S. Thiagarajan[1981] 129 ITR 115 (Mad.), especially when neither the facts nor the provisions of law discussed in the said decisions are comparable to the facts of the appellant's case and the provisions of law applicable to the appellant's case ? C. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in invoking the provisions of section 10(38) of the Act, especially when the appellant's case is governed by the provisions contained in section 74(1)(b) of the Act ? 33. The honourable Gujarat High Court answered these questions after recording the facts as Under:- 2. Briefly stated the facts are that for the assessment year 2006-07 the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said provision, what is necessary is that there should be a loss suffered by the assessee under the head of Capital gains . In such a situation, if such loss relates to long-term capital asset, it is permitted to be carried forward for the following assessment year and be set off against income, if any, under the head of Capital gains assessable for that assessment year in respect of any other capital asset other than a short-term capital asset. For the reasons mentioned hereinafter, in view of the facts of this case, it was not open for the assessee to claim set off of the loss in sale of shares of Sua-shish Diamond Ltd. Perhaps section 74 of the Act may have otherwise also no applicability because it refers to carry forward of the capital loss set off against capital gain of the subsequent year, which is not the case in the present case. Section 70 of the Act refers to income from any other source under the said head of Income . Sub-section (3) thereof which is relevant for our perspective reads as under : 70. (3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off The Tribunal rightly relied on the decision in the case of Harprasad Co. (P.) Ltd. (supra) to come to a conclusion that the term income under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off It postulates permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains 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 was held that if such set off 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 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 sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat High Court should have dealt with the decision of the honourable supreme court in case of 40 ITR 18 and non consideration of that decision forces us to not to follow it. The decision of the honourable Supreme Court in case of Karamchand Premchand Ltd was first dealt with by the honourable Supreme Court itself in CIT V Chunilal Mongaram (1961) 43 ITR 01 wherein it has held as Under:- We consider that these contentions are correct. As to the first ground, it seems clear to us that under the third proviso to section 5 of the Excess Profits Tax Act, 1940, where the profits etc., of a part of the firm's business accrued or arose at Bhatinda, that part of the business shall for the purpose of the said section be deemed to be a separate business. If that is so the losses which arose art Bhatinda must also be the losses of a separate business. We may here read section 5 and the third proviso thereto: 5. This Act shall apply to every business of which any part of the profits made during the chargeable accounting period is chargeable to income-tax by virtue of the provisions of sub- clause (i) or sub-clause (ii) of clause (b) of sub-section (1) of section 4 of the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding losses also, so that, in one sense profits and gains represent plus income whereas losses represent minus income CIT v. Karamchand Prem Chand Ltd. [1960] 40 ITR 106 ; [1960] 3 SCR 72. 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. (iii) Honourable Supreme Court also considered the above decision in case of Karamchand Premchand (supra) and CIT versus Hari Prassad (supra) in IPCA laboratories Ltd versus Deputy Commissioner of income tax (2004) 266 ITR 521 in para number 16 as Under:- 16. Faced with this situation, it was submitted that even a loss is a negative profit. In support of the submission, reliance was placed upon the authority of this Court in the case of CIT v. Harprasad Co. (P.) Ltd. [1975] 99 ITR 118. In this case the meaning of loss was being considered in the context of capital gains made from sale of shares. The question was whether the loss could be carried forward and set off against capital gains in a subsequent year. While considering this question, it was held as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.' 11. This judgment has subsequently been followed in several judgments. The fairly recent judgment of this Court in Jt. CIT v. Saheli Leasing Industries Ltd. [2010] 324 ITR 170/191 Taxman 165 (SC) referred to the aforesaid judgment and held as follows:- '23. In the aforesaid decision in Gold Coin case [(2008) 9 SCC 622 : (2008) 304 ITR 308] , the expression income in the statute appearing in Section 2(24) of the Act has been clarified to mean that it is an inclusive definition and includes losses, that is, negative profit. This has been held so on the strength of earlier judgments of this Court in CIT v. Harprasad and Co. (P.) Ltd. [(1975) 3 SCC 868 : 1975 SCC (Tax) 158 : (1975) 99 ITR 118] and followed in Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67 : (1979) 120 ITR 921] . After an elaborate and detailed discussion, this Court held with reference to the charging provisions of the statute that the expression income should be understood to include losses. The expression profits and gains refers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue and against the assessee.' (v) Therefore, from all the above decision of the honourable Supreme Court which considered the decision of Hariprasad co (supra) as well as Karamchand Premchand and Co private limited (supra) and has held that the word income includes loss also as the word income is comprising of positive income as well as negative income. In view of this according to us the controversy before us is not whether any source is excluded or included. But the controversy is whether the provisions of Section 10 (38) starts with any income would include both positive income/surpluses or negative income/losses. According to us, all the decisions of the honourable Supreme Court also held that the word income also includes losses. Therefore both the decision of Honourable supreme court in case of Karamchand Premchand and Haripsad co P ltd ( supra) lay down the same law as held by Honorable Supreme court in series of its decisions. Thus, to say that Honourable Gujarat High court should have considered Karamchand Premchand ( supra) and not Harisprasad co P Ltd (supra) is not correct. (b) Secondly, the decision of the Calcutta High Court in Royal Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve is also rejected. (d) In para 4, the Court noted that the assessee s primary reliance was only on section 74; we find that this is an unnecessary argument advanced by the assessee whether the issue is covered u/s 74 or u/s 70 of the income tax act as we have held that u/s 10 (38), even the losses are to be thrown out from the computation itself at the threshold and therefore this argument does not survive. (e) The fundamental legal position that unless the source, per se, is exempt/ excluded, the loss cannot be ignored, was not even argued nor considered In view of our finding while interpreting the provisions of Section 10 (38) of the income tax act we do not find that if the source is excluded or included it will give any other result. Therefore, this argument of the learned authorised representative is rejected. 38. Now we come to the authoritative commentary of Kanga Palkhivala s The law and Practice of Income tax 11 Th Edition at page no 531-532 of Vol I which deals with the issue of losses of income u/s 10 as under :- 2. Losses from Incomes covered under Section 10.- A thorny issue that arises under s 10 is the question of what happen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not apply, the judgments discussed above will now imply that any losses will also not be included in the computation of total income. [Bold and underline supplied by us] 39. In view of the above facts, judicial precedents as well as the authoritative commentary on The Income Tax Law And Practice, we are of the view that the lower authorities have not committed any error in ignoring the loss incurred by the assessee on sale of shares and securities, on which assessee has paid securities transaction tax, holding that when the income is exempt, then both positive income as well as the negative loss , both, do not enter into the regular computation of the assessee. Accordingly, the orders of the lower authorities are upheld wherein the assessee has been denied the set of and or carry forward of long-term capital loss of ₹ 9 080 571/ on transfer of shares on which the assessee has paid securities transaction tax and are covered by the provisions of Section 10 (38) of the Act 40. Assessee has also slipped in its written submission that when there are two views on an issue, the opinion which is favourable to the assessee should be adopted. We have given our thoughtf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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