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Raptakos Brett & Co. Ltd. Versus The DCIT Cen. Cir 46, Mumbai

2015 (6) TMI 529 - ITAT MUMBAI

Disallowance of claim of set off of Long term Capital Loss on sale of shares - Security Transaction Tax (“STT”) was deducted against the Long Term Capital Gain arising on sale of land at Chennai- Held that:- section 10(38) excludes in expressed terms only the income arising 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 comput .....

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R> Disallowance of expenses u/s. 14A made after applying Rule 8D - Held that:- On perusal of the impugned orders, we find that the assessee had made the claim before the Assessing Officer that no expenditure can be said to be attributable in relation to the earning of dividend income. Once such a claim has been made, the Assessing Officer was required under the statute to satisfy himself having regard to the accounts of the assessee about the correctness of the claim of the assessee. There has .....

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ssue may consider the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT). - Decided in favour of assessee for statistical purposes.

Penalty u/s. 271(1)(c) levied on account of disallowance for assessee’s claim for set off of loss and disallowance made u/s. 14A in the quantum appeal have no legs to stand. Accordingly, the penalty levied is deleted and the appeal is allowed. - Decided in favour of assessee - ITA Nos.33 .....

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(1)(c) for the assessment year 2007-08. 2. We will first take up the quantum appeal in ITA No. 3317/Mum/2009, vide which, following grounds have been raised. 1.1 On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) - Central II, Mumbai [ the CIT(A) ] erred in confirming the action of Deputy Commissioner of Income Tax (the A.O) by not allowing the claim of set off of Long term Capital Loss on sale of shares where Security Transaction Tax ( STT ) .....

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D in as much as the said rule was ultravires and void; 2.3 the CIT(A) further erred confirming the action of the A.O. in applying Rule 8D retrospectively in as much as the said rules would be applicable with effect from A.Y. 2008-09; 2.4 the CIT(A) further erred in confirming the action of the A.O. in disallowing the expenses proportionately against the dividend income earned so exempt u/s. 10(38) of the Act. 2.5 the Appellant prays that the said disallowance of expenses be deleted. 2.6 Without .....

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amounting to ₹ 2,61,655/-. The said Long term capital loss has been set off against the Long term capital gains of ₹ 94,12,00,000/- arising from sale of land at Chennai. The Assessing Officer held that the losses claimed cannot be allowed since the income from Long term capital gain on sale of shares and mutual funds are exempt u/s. 10(38). That apart, of the Long term capital loss in respect of shares where securities transaction tax has been deducted, would have been exempt from L .....

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able income and, therefore, the Assessing Officer has rightly disallowed the claim of losses from shares to be set off against the Long term capital gain from sale of land. 5. Before us the learned senior counsel, Shri Soli Dastur, submitted that what is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section. The set off of Long term capital loss has been clearly provided in sections 70 and 71. The Legislation has not put an .....

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ection 47 to those transactions which are not regarded as transfer. Nothing has been mentioned in sections 45 to 48 that capital gain or loss on sale of shares are to be excluded as section 10(38) exempts the income arising from the transfer of long term capital asset being an equity share or unit. Legislature has given exemption to income arising from transfer of Long term capital asset being an equity share in company or unit of equity oriented fund, which is chargeable to STT. Section 10(38) .....

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relevant provisions of section 10(27) and section 70, held that section 10(27) excludes in expressed terms only any income derived from business of livestock breeding, poultry or dairy farming. It does not exclude the business of livestock breeding, poultry or dairy farming from the operation of the Act. The losses suffered by the assessee in respect of livestock, breeding were held to be admissible for deduction and were allowed to be set off against other business income. He drew our attentio .....

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o pointed out before us that there is a decision of Hon ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj), which has decided this issue against the assessee. However, he submitted that in the said decision, the decision of Hon ble Calcutta High Court has not been referred at all. Therefore, this decision does not have precedence value as compared to the Calcutta High Court decision, which is based on Supreme Court decision on this point. H .....

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ch sale of shares will also not form part of the total income and therefore, there is no question of set off against other income or Long term capital gain on different capital asset. Secondly, the decisions of Hon ble Gujarat High Court and ITAT Mumbai Tribunal should be followed. He further submitted that it is quite a settled law that income includes loss also and, therefore, if the income from sale of shares does not form part of the total income, then the losses from such shares also will n .....

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capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines 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 .....

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hares 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 purpose of section 45 .....

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der 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 sour .....

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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 t .....

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come 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 asses .....

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urf Club, wherein the Hon ble High Court observed that under the Income tax Act 1961 there are certain incomes which do not enter into the computation of the total income at all. In computing the total income of a resident assessee, certain incomes are not included under s.10 of the Act. It depends on the particular case; where the Act is made inapplicable to income from a certain source under the scheme of the Act, the profit and loss resulting from such a source will not enter into the computa .....

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d Business Their Lordships after analysing the provisions of section 70 and 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 .....

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f 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 charging section which provides that the incomes shall be charged and s. 4 of the Act provides that the Central Act enacts that the incomes shall be charged for any assessment year and in accordance with and subject to the provisions of t .....

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ncome, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look to the specific exclusion that has been made. The question is in this case whether s. 10(27) is a source which does not enter into the computation at all o .....

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ived from a business of live-stock 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. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissible deductions in computing its total income Thus, the ratio laid down by the Hon ble Calcutta High Court is clearly applicable and accordingly we follow the same in the present case. 9. Now coming to the .....

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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 .....

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finition 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." While concluding the issue their Lordships observed that it may be remembered that the concept of carry forward of loss does not stand in vacuo. It in .....

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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. The ratio and the principle laid down by the Hon ble Apex Court would not apply here in this case, because the concept of income includes loss will apply only when ent .....

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ave discussed the aforesaid decision of the Hon ble Supreme Court and held that the same will not apply in such cases. Thus, in our conclusion, we hold that section 10(38) excludes in expressed terms only the income arising 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 .....

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sequent 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 US64 scheme the Tribunal held that the provisions were not meant to enable the assessee to c .....

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ng the decision of Hon ble Supreme Court in the case of Harprasad & Company Pvt. Ltd. (supra), had decided the issue against the assessee. Since we have already noted down the ratio of Hon ble Calcutta High Court, wherein the Hon ble High Court has discussed this issue in detail after relying upon series of decisions of Hon ble Supreme Court and have reached to a conclusion as discussed above, and, therefore, we are respectfully following the ratio of the decision of the Calcutta High Court. .....

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come of ₹ 5,15,28,242/- which was claimed as exempt u/s. 10(34). In response to the show cause notice, the assessee submitted that investments have been made out of its own capital and internal accruals and, therefore, no disallowance u/s. 14A is called for. However, the learned Assessing Officer without examining the assessee s claim and the accounts of the assessee, proceeded to apply Rule 8D thereby making the disallowance of ₹ 39,80,215/- even though such Rule has been made appli .....

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06, w.e.f. 01.04.2007. The said subsection provided mechanism for determination /quantification of amount of expenditure incurred in relation to exempt income. Such quantification/determination was to be done as per the method prescribed if the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. He submitted that though subsection (2) was brought in the assessment year 2007-08, however .....

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for quantification/determination of the disallowance as per the method prescribed but the said method was not there in the statute or rules. Therefore, no disallowance can be made because there can be no determination of expenditure. He referred to the decision of Hon ble Supreme Court in the case of Chandra Kishore Jha vs. Mahavir Prasad and Others (1999) 8 SCC 266, wherein has been laid down that if a statute provides for a thing to be done in a particular manner, then it has to be done in th .....

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ed the determination of amount of expenditure in terms of subsection (2), then even if Rule 8D has been brought w.e.f. 24.03.2008, then it has to be implied that same rule is applicable in this year also and, accordingly, disallowance can be determined in accordance with Rule 8D. 14. We have heard the rival submissions and also perused the material placed on record. On perusal of the impugned orders, we find that the assessee had made the claim before the Assessing Officer that no expenditure ca .....

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ion 14A is not fulfilled then, needless to say, that the Assessing Officer cannot proceed to disallow the expenditure. There has to be some finding of the Assessing Officer that the assessee s claim is prima facie not tenable. The assessee has pointed out that entire investments have been made out of its own capital and internal accruals, therefore, no expenses can be said to be attributable. This claim of the assessee required examination by the AO having regard to the accounts of the assessee .....

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