2024 (8) TMI 1567 - AT - Income Tax

Set off short-term capital loss(ST to paid) first against short-term capital gain(non-securities transaction tax) - balance short-term capital loss STT paid) is not sufficient to entirely cover the short-term capital gain (non-STT then the gains are set of against the available brought forward short-term capital loss - AO and DRP did not accept the computation of the assessee for the reason that according to them the short-term capital gain is chargeable to tax at the rate of 15% and short-term capital gain is chargeable to tax at the rate of 30%. HELD THAT - Section 70 (2) qualifies that that computation has to be made under the provisions of section 48 55 in respect of a short-term capital asset. If it results into a loss such loss can be set off against capital gain of any other short-term capital asset if the gain is also computed u/s 48 55 of the Act. There is no restriction of set-off of capital losses and capital gain if both are taxed at a different rate. The word similar computation is with respect to the mode of computation as prescribed under section 48 to section 55 of the act. Sections covered in this bracket are not concerned or prescribing any rate of tax on capital gain. This issue is squarely covered in favour of the assessee by the decision of JS Capital LLC 2024 (4) TMI 834 - ITAT MUMBAI and iShares MSCI EM UCITS ETF 2024 (6) TMI 148 - ITAT MUMBAI further situation may arise that where the assessee has incurred a short term capital loss which is otherwise as again would have been chargeable at the tax rate of 30% and also has a short-term capital gain chargeable to tax at the rate of 15% assessee at his option can claim set off of such short-term capital loss or may also carry forwarded. This is because of the reason that the provisions of section 70 (2) give an entitlement to the assessee thus it is an option. As following the binding judicial precedents we direct the AO to allow set off of short-term capital loss against the short term capital gain though those gains are chargeable to tax at different rates in terms of provisions of section 70 (2) of the act with respect to set off of losses from one source against income from another source under the same head of income. Accordingly ground allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the set-off of short-term capital losses against short-term capital gains taxable at different rates under the Income Tax Act is permissible, specifically when such gains and losses pertain to securities transaction tax (STT) paid and non-STT paid transactions.
• The validity of the assessment order, including challenges on grounds of time-barred proceedings and interest levies under sections 234A, 234B, and 234C, and initiation of penalty proceedings under section 270A (though these were not pressed or were dismissed).
• The correct interpretation and application of section 70(2) of the Income Tax Act regarding set-off of losses against income under the same head, particularly the treatment of short-term capital gains and losses subject to different tax rates under sections 115AD and 111A.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Permissibility and Manner of Set-Off of Short-Term Capital Losses Against Gains Taxable at Different Rates

Relevant Legal Framework and Precedents:

The primary statutory provisions considered are sections 70(2), 111A, 115AD(1)(ii), and sections 48 to 55 of the Income Tax Act. Section 70(2) allows set-off of loss from one source against income from another source under the same head of income, provided the computation is made under similar provisions (sections 48 to 55). Section 111A prescribes a 15% tax rate for short-term capital gains arising from sale of securities on which STT is paid, while section 115AD(1)(ii) prescribes a 30% tax rate for short-term capital gains where STT is not paid. The issue revolves around whether losses incurred on STT-paid transactions (taxed at 15%) can be set off against gains from non-STT transactions (taxed at 30%).

Precedents relied upon by the assessee include decisions from coordinate benches, notably JS Capital LLC v ACIT and iShares MSCI EM UCITS ETF v DCIT, which held in favor of allowing set-off across gains taxable at different rates under section 70(2). The assessee also relied on judicial pronouncements emphasizing the absence of specific statutory restrictions on such set-offs and the principle that the assessee may adopt the most beneficial method of set-off in the absence of explicit provisions to the contrary.

Court's Interpretation and Reasoning:

The Tribunal analyzed the statutory language of section 70(2), emphasizing that the phrase "similar computation" pertains to the mode of computing capital gains and losses under sections 48 to 55, not the tax rates applicable. It observed that sections 48 to 55 govern the computation of capital gains but do not prescribe or restrict the manner of set-off based on differential tax rates. The Tribunal noted that the Income Tax Act does not explicitly prohibit the set-off of losses against gains taxed at different rates.

The Tribunal further reasoned that the assessee's approach of first setting off the entire short-term capital loss (including those on which STT was paid) against short-term capital gains taxable at 30%, and then against gains taxable at 15%, is permissible. This method results in a net loss, which can then be carried forward or set off against other gains. The Tribunal rejected the Revenue's contention that such set-off amounts to tax avoidance by mixing gains and losses subject to different tax rates, holding that the legislative intent and statutory provisions do not support this restrictive interpretation.

Key Evidence and Findings:

The Tribunal examined the factual matrix where the assessee had:

• Short-term capital gains of Rs. 70,782,605 taxable at 30% (non-STT transactions).
• Short-term capital gains of Rs. 52,075,459 taxable at 15% (STT transactions).
• Short-term capital losses of Rs. 85,341,255 on which STT was paid.

The assessee set off the short-term capital loss first against gains taxable at 30%, resulting in a net loss, and then set off the remaining loss against gains taxable at 15%. The Revenue disallowed this set-off, contending that losses on STT-paid transactions could only be set off against gains taxable at 15%, not against gains taxable at 30%.

Application of Law to Facts:

The Tribunal applied section 70(2) and the judicial precedents to hold that the assessee's method of set-off is valid. The absence of any express statutory bar to set-off across different tax rates, combined with the principle that losses and gains computed under sections 48 to 55 are eligible for set-off, supported the assessee's position. The Tribunal noted that the assessee's approach is an exercise of the option granted under the law and is not precluded by any provision.

Treatment of Competing Arguments:

The Revenue's argument rested on the premise that the legislative intent was to prevent set-off of losses taxed at a lower rate against gains taxed at a higher rate, thereby avoiding the higher tax liability. The Tribunal, however, found no explicit provision or judicial authority supporting this restrictive interpretation. It emphasized that the Revenue's view would amount to reading into the statute restrictions that do not exist. The Tribunal also distinguished the issue from cases involving different heads of income or different assessment years, focusing on the same head of income and the same assessment year.

Conclusions:

The Tribunal concluded that the assessee is entitled to set off short-term capital losses against short-term capital gains taxable at different rates under section 70(2), provided the computation of gains and losses is made under sections 48 to 55. The assessee's method of set-off, which maximizes tax benefit, is permissible and consistent with the statutory scheme and judicial precedents.

Issue: Validity of Assessment Order and Interest Levy Grounds

The assessee raised grounds challenging the validity of the assessment order on the basis that it was time-barred and invalid, as well as grounds against interest levies under sections 234A, 234B, and 234C, and initiation of penalty proceedings under section 270A.

The Tribunal noted that grounds relating to validity of assessment (grounds 2 and 3) were not pressed by the assessee. Grounds relating to interest levies (grounds 9 to 11) were consequential and not independently argued, and the ground relating to penalty proceedings (ground 12) was premature and dismissed. Thus, these issues were not substantively considered or decided by the Tribunal.

3. SIGNIFICANT HOLDINGS

The Tribunal's key legal findings are encapsulated in the following verbatim excerpts:

"Section 70(2) qualifies that the computation has to be made under the provisions of section 48 - 55 in respect of a short-term capital asset. If it results into a loss, such loss can be set off against capital gain of any other short-term capital asset, if the gain is also computed under section 48 - 55 of the Act. There is no restriction of set-off of capital losses and capital gain if both are taxed at a different rate. The word 'similar computation' is with respect to the mode of computation as prescribed under section 48 to section 55 of the act. Sections covered in this bracket are not concerned or prescribing any rate of tax on capital gain."

"In view of above facts and discussion, following the binding judicial precedents, we direct the learned assessing officer to allow set off of short-term capital loss of Rs. 85,341,255 against the short term capital gain of Rs. 70,782,605/- though those gains are chargeable to tax at different rates in terms of provisions of section 70 (2) of the act with respect to set off of losses from one source against income from another source under the same head of income."

Core principles established include:

• The set-off of capital losses against capital gains under section 70(2) is governed by the mode of computation under sections 48 to 55, not by the tax rates applicable to such gains or losses.
• There is no statutory bar to setting off short-term capital losses arising from STT-paid transactions against short-term capital gains arising from non-STT transactions, even though they are taxable at different rates (15% and 30%, respectively).
• The assessee has the option to adopt the method of set-off most beneficial to it in the absence of any express statutory prohibition.

Final determinations on the main issue resulted in allowing the assessee's appeal on grounds 4 to 8, directing the assessing officer to permit the set-off as claimed by the assessee. Other grounds related to validity, interest, and penalty were either not pressed or dismissed.