2024 (12) TMI 1575 - AT - Income Tax

Set-off of short-term capital loss in respect of sale of shares subjected to securities transaction tax (STT) first against short-term capital gains earned on the sale of shares not subject to STT - HELD THAT - It is true that different rates of taxes have been provided u/s 115AD and 111A of the Act in respect of gains on non-STT paid shares and STT paid shares but it is also a fact that u/s 70 of the Act no chronology has been mentioned in respect of set off of losses nor there is any provision in the Act that losses of non-STT paid shares cannot be set off against the gains on STT paid shares. As relying on RUNGAMATEE TREXIM (PVT) LTD 2008 (12) TMI 759 - CALCUTTA HIGH COURT as held in provision of section 70 there is no prohibition nor the Act compels the assessee to first set off short term capital gain with STT against short term capital loss with STT and then allows set off against short term capital gain without STT. In absence of any specific mode of set off provided in the Act and in absence of any prohibition and in absence of any specific chronology for set off prescribed in the Act the assessee was entitled to exercise his option with regard to the chronology of set off which was most beneficial to the assessee. It is settled proposition of law that when a provision of the Act gives option to the assessee such option should be exercised which will favour the assessee and not the revenue. Thus no merits in the computation done by the AO. We accordingly direct the AO to accept the computation of the assessee. Ground of assessee allowed.

Summary

The primary legal issues considered by the Tribunal revolve around the validity and jurisdiction of assessment proceedings, the correctness of the order issuance and withdrawal under specified sections of the Income-tax Act, the appropriate manner of setting off short-term capital losses against short-term capital gains with differing tax treatments, computational errors relating to surcharge and interest, and the initiation of penalty proceedings.

One core issue concerns the jurisdictional validity of assessment proceedings initiated by a non-jurisdictional officer under section 143(2) of the Income-tax Act. The assessee contended that the notice issued by the Assistant Commissioner of Income-Tax/Deputy Commissioner of Income-Tax (International Taxation) - 1(1)(1), Delhi, was invalid as it was outside the jurisdictional authority, rendering the subsequent assessment order void. This issue implicates the procedural safeguards and territorial limits prescribed under the Act for issuance of notices and completion of assessments.

Another significant cluster of issues relates to the issuance and subsequent withdrawal of an order under section 143(3) read with section 144C(3) of the Act by the Deputy Commissioner of Income-tax (International Tax) - 4(1)(1). The assessee challenged the propriety of passing such an order despite timely filing of objections to the draft order under section 144C(2), and further contended that the withdrawal of the order lacked statutory sanction. These contentions engage the procedural framework governing dispute resolution panels and the finality of assessment orders under the Act.

The most substantive legal question pertains to the manner of setting off short-term capital losses against short-term capital gains where gains are subject to different tax rates due to applicability of Securities Transaction Tax (STT). The assessee adopted a method of first setting off short-term capital losses (both current and brought forward) arising from shares subjected to STT against short-term capital gains on shares not subjected to STT, thereby reducing the taxable short-term capital gains on non-STT shares. The Assessing Officer (AO) rejected this approach, asserting that the Act implicitly requires losses and gains subjected to concessional tax rates under sections 111A (15%) and 115AD (30%) to be matched separately, disallowing cross set-off, and recomputed the gains accordingly. This issue raises interpretative questions on the application of sections 45 to 55A (governing capital gains computation), section 70 (set-off and carry forward of losses), and the specific tax provisions in sections 111A and 115AD.

Additional issues include alleged computational errors in levy of surcharge and health & education cess, incorrect imposition of interest under section 234A despite timely filing of returns, and initiation of penalty proceedings under sections 274 and 270A for alleged under-reporting of income.

Regarding the jurisdictional issue, the Tribunal did not adjudicate it extensively as it became academic following the resolution of substantive issues. Similarly, the challenges to the issuance and withdrawal of orders under sections 143(3) and 144C(3) were not addressed in detail due to their academic nature post resolution of the primary dispute.

The Tribunal's detailed analysis focused predominantly on the issue of set-off of short-term capital losses and gains with differing STT implications. The relevant legal framework includes sections 45 to 55A of the Income-tax Act, which govern the computation of capital gains, and section 70 which permits set-off of losses against income of the same or other heads without prescribing a hierarchy or sequence. Sections 111A and 115AD specify concessional tax rates applicable to short-term capital gains arising from securities transactions where STT is paid and those where it is not, respectively.

The AO's interpretation was that the concessional tax rates under sections 111A and 115AD create distinct categories of gains and losses that must be matched separately, precluding cross set-off. The AO reasoned that the absence of explicit provisions allowing such cross set-off and the existence of different tax rates implied a legislative intention to restrict set-off within the same category.

The assessee contended that the Act does not specify any hierarchy or restriction on the manner of set-off under section 70, and that income under the head 'Capital gains' is determined as per sections 45 to 55A, with sections 111A and 115AD merely prescribing tax rates and not altering the computation of capital gains or the set-off mechanism. The assessee's approach was to utilize the option available under section 70 to adopt the most beneficial sequence of set-off, first offsetting STT-related losses against non-STT gains, thereby minimizing taxable income.

The Tribunal relied heavily on binding precedents, notably a decision of the Hon'ble Calcutta High Court, which held that in the absence of any statutory prohibition or prescribed chronology for set-off under section 70, the assessee is entitled to exercise the option most beneficial to it. The Court emphasized that when the statute confers an option, it must be exercised in favor of the assessee rather than the revenue. The Calcutta High Court's reasoning explicitly rejected the AO's approach of segregating gains and losses based on tax rates and upheld the legality of cross set-off between STT and non-STT transactions.

The Tribunal further noted that the Assessing Officer's computation was not supported by any statutory provision or rationale and was contrary to established judicial precedents. It also referenced consistent decisions by coordinate Benches of the Tribunal, which had followed the Calcutta High Court's view in similar contexts, thereby reinforcing the principle that the manner of set-off under section 70 is not constrained by differing tax rates under sections 111A and 115AD.

Applying these principles to the facts, the Tribunal found that the assessee's computation of net short-term capital gains, allowing cross set-off of losses and gains irrespective of STT applicability, was correct and should be accepted. The Tribunal explicitly directed the Assessing Officer to accept the assessee's method of computation and disallowed the demand raised on account of the AO's contrary approach.

Regarding the computational errors in surcharge and interest, the Tribunal directed the AO to correct the surcharge levy in accordance with the provisions of law. It further instructed that if the return of income was filed within the extended period of limitation, especially considering the Covid period extensions, no interest under section 234A should be levied. This reflects the Tribunal's adherence to procedural fairness and statutory compliance in levy of interest and surcharge.

The Tribunal did not delve into the penalty proceedings initiated under section 270A, as the primary grounds of appeal were disposed of in favor of the assessee, rendering the penalty issue less significant in the present context.

In conclusion, the Tribunal held that there was no illegality or irregularity in accepting the assessee's manner of set-off of short-term capital losses against gains, notwithstanding differing tax rates due to STT applicability. The Tribunal affirmed the principle that in the absence of explicit statutory restrictions, the assessee is entitled to exercise the option most beneficial to it under section 70. The Tribunal's reasoning preserves the integrity of the computation of capital gains under sections 45 to 55A and clarifies the limited role of sections 111A and 115AD as tax rate provisions rather than provisions governing set-off.

Verbatim from the Calcutta High Court decision cited by the Tribunal encapsulates the core principle: "In absence of any specific mode of set off provided in the Act and in absence of any prohibition and in absence of any specific chronology for set off prescribed in the Act, the assessee was entitled to exercise his option with regard to the chronology of set off which was most beneficial to the assessee. It is settled proposition of law that when a provision of the Act gives option to the assessee, such option should be exercised which will favour the assessee and not the revenue."

The Tribunal's final determination allowed Ground No. 5 relating to set-off of losses, directed correction of computational errors under Ground No. 6, and rendered other grounds academic or unadjudicated. The appeal was allowed accordingly.