2025 (6) TMI 650 - AT - Income Tax

Rejecting the hierarchy of set-off of Short-Term Capital losses adopted by the Appellant - manner of set off of short-term capital loss which was incurred by the assessee from the transaction in shares on which Securities Transaction Tax ( STT ) was paid Whether the short-term capital loss (on which STT was paid) can be set off against short-term capital gains (on which STT was not paid)? - HELD THAT - We find that while deciding a similar issue the Co-ordinate Bench of the Tribunal in iShares MSCI EM UCITS ETF USD ACC 2024 (6) TMI 148 - ITAT MUMBAI following the decision of Rungamatee Trexim (P.) Ltd. 2008 (12) TMI 759 - CALCUTTA HIGH COURT allowed the set off of short-term capital loss (on which STT was paid) against the short-term capital gains (on which STT was not paid). Short credit of the taxes deducted at source - HELD THAT - During the hearing AR submitted that the assessee has also filed a rectification application before the AO in this regard which is still pending consideration. Accordingly we deem it appropriate to restore this issue to the file of the AO with the direction to grant the credit of taxes deducted at source in accordance with the law after conducting the necessary verification. We order accordingly. As a result ground raised in assessee s appeal is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal across the consolidated appeals pertain primarily to the tax treatment and set-off of short-term capital losses arising from transactions in shares on which Securities Transaction Tax (STT) was paid, against short-term capital gains arising from shares not subjected to STT. Specifically, the issues include:

• Whether short-term capital losses on shares subjected to STT can be set off against short-term capital gains on shares not subjected to STT, given the differential tax rates applicable under sections 111A and 115AD of the Income Tax Act, 1961 ("the Act").
• Whether section 70(2) of the Act permits such cross-set-off without any prescribed hierarchy or restriction.
• The validity of the Assessing Officer's (AO) rejection of the assessee's method of set-off based on the Income Tax Rules and separate columns for set-off and carry-forward of losses.
• Whether the AO erred in not following binding decisions of the Jurisdictional Tribunal and other judicial precedents favoring the assessee's approach.
• Arithmetical errors in the computation sheets of income and capital gains.
• Grant of credit for taxes deducted at source (TDS) claimed by the assessee but not allowed.
• Initiation of penalty proceedings under section 270A of the Act alleging misreporting or underreporting of income.
• Levy of interest under sections 234B, 234C, and 234D of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Set-off of Short-Term Capital Losses on Shares Subjected to STT Against Gains Not Subjected to STT

Relevant Legal Framework and Precedents:

The key statutory provision is section 70(2) of the Act, which allows set-off of short-term capital losses against income from any other capital asset computed under sections 48 to 55 of the Act. Sections 111A and 115AD specify tax rates applicable to short-term capital gains arising from transactions in securities subjected to STT (15%) and those not subjected to STT (30%), respectively. The Income Tax Rules provide separate columns for set-off and carry-forward of losses based on the tax rate applicable.

Judicial precedents relied upon include the decision of the Calcutta High Court in CIT vs. Rungamatee Trexim (P.) Ltd., which held that there is no statutory provision compelling the set-off of short-term capital gains and losses in a particular hierarchical order based on STT applicability. Additionally, co-ordinate benches of the Tribunal have consistently allowed set-off of short-term capital losses on shares with STT against short-term capital gains on shares without STT, emphasizing the "similar computation" condition in section 70(2).

Court's Interpretation and Reasoning:

The Tribunal observed that section 70(2) does not distinguish between capital gains arising from transactions subjected to STT and those not subjected to STT. The phrase "similar computation" refers to the method prescribed under sections 48 to 55 for computing capital gains and losses, which is identical irrespective of STT applicability. Therefore, the AO's insistence on separate treatment based on tax rates and rejection of the assessee's set-off method was found to be erroneous.

The Tribunal reviewed the AO's approach, which first set off losses taxed at 15% against gains taxed at 15%, and separately treated gains taxed at 30%, as inconsistent with the statutory provisions and judicial precedents. The Tribunal noted that the AO's reliance on the Income Tax Rules' separate columns does not override the statutory mandate under section 70(2).

Key Evidence and Findings:

Evidence included the computation sheets filed by the assessee, showing net short-term capital gains after set-off of losses across STT and non-STT transactions. The Tribunal also considered the earlier decisions of the Jurisdictional Tribunal and High Courts on identical issues, which favored the assessee's approach.

Application of Law to Facts:

The Tribunal applied section 70(2) and relevant precedents to the facts, concluding that the assessee's set-off of short-term capital losses from STT transactions against gains from non-STT transactions is permissible. It directed the AO to accept the assessee's computation methodology for capital gains.

Treatment of Competing Arguments:

The Revenue's argument that the Income Tax Rules prescribe a hierarchy and separate columns for set-off was rejected as not overriding the statutory provisions. The Revenue's reliance on pending appeals before the High Court was also not considered sufficient to deny relief to the assessee, given the binding precedents in favor of the assessee.

Conclusion:

The Tribunal allowed the grounds challenging the AO's rejection of the set-off hierarchy, directing acceptance of the assessee's method of set-off of short-term capital losses against gains irrespective of STT applicability.

Issue: Arithmetical Errors in Computation Sheets

Relevant Legal Framework:

The AO is required to compute income accurately in accordance with the Act and judicial directions.

Court's Interpretation and Reasoning:

The Tribunal found discrepancies in the computation sheets submitted by the AO, which were not aligned with the directions issued by the Dispute Resolution Panel (DRP) and the Tribunal's findings on set-off. The AO was directed to correct these errors and recompute the income accordingly.

Conclusion:

Grounds relating to arithmetical errors were allowed for statistical purposes, with directions to the AO for rectification.

Issue: Credit for Taxes Deducted at Source (TDS)

Relevant Legal Framework:

Section 199 and related provisions of the Act provide for credit of TDS against tax liability.

Court's Interpretation and Reasoning:

The assessee claimed credit for TDS amounting to Rs. 1,492,492 (and similar amounts in other appeals) that was not granted by the AO. The assessee had filed rectification applications which were pending. The Tribunal considered it appropriate to restore the issue to the AO for verification and grant of credit in accordance with law.

Conclusion:

The Tribunal allowed the grounds relating to TDS credit for statistical purposes and remanded the matter to the AO.

Issue: Initiation of Penalty Proceedings under Section 270A of the Act

Relevant Legal Framework:

Section 270A deals with penalty for underreporting or misreporting of income.

Court's Interpretation and Reasoning:

The Tribunal found the initiation of penalty proceedings premature, given that the substantive issues relating to computation of income and set-off were under adjudication. The Tribunal dismissed the penalty grounds raised by the assessee.

Conclusion:

Penalty proceedings under section 270A were dismissed as premature.

Issue: Levy of Interest under Sections 234B, 234C, and 234D

Relevant Legal Framework:

Sections 234B, 234C, and 234D provide for interest on default in payment of advance tax, deferment of advance tax, and delay in furnishing return of income, respectively.

Court's Interpretation and Reasoning:

The Tribunal noted that these issues were consequential to the final determination of income and tax liability and did not require separate adjudication in the appeals.

Conclusion:

No separate adjudication was made on interest levies; they remain subject to adjustment based on final income computation.

3. SIGNIFICANT HOLDINGS

"Section 70(2) of the Income Tax Act, 1961, permits the set-off of short-term capital losses against short-term capital gains arising from any other capital asset, computed under sections 48 to 55, without distinction based on the applicability of Securities Transaction Tax."

"The Income Tax Rules prescribing separate columns for set-off and carry-forward of losses based on differential tax rates do not override the statutory provisions of section 70(2), nor do they impose a hierarchy restricting set-off of losses against gains on the basis of STT applicability."

"Short-term capital losses arising from sale of shares on which STT was paid can be set off against short-term capital gains arising from sale of shares not subjected to STT, notwithstanding the difference in applicable tax rates under sections 111A and 115AD."

"Pending appeals before higher courts do not preclude the Tribunal from following binding precedents and granting relief to the assessee where the law is settled."

"Initiation of penalty proceedings under section 270A is premature where the substantive issues relating to income computation are under adjudication."

"The Assessing Officer is directed to recompute the income and capital gains correctly in conformity with the Tribunal's directions, grant credit for taxes deducted at source after due verification, and adjust consequential interest liabilities accordingly."