TMI Blog2019 (12) TMI 1038X X X X Extracts X X X X X X X X Extracts X X X X ..... for set-off of Long-Term Capital Losses against aggregate Long-Term Capital Gains and entitled to carry forward unutilized losses. - I.T.A. No.5359/Mum/2017 - - - Dated:- 20-12-2019 - Shri Saktijit Dey, JM And Shri Manoj Kumar Aggarwal, AM For the Appellant : Shri Yogesh Thar-Ld. AR For the Respondent : Ms. Samatha Mullamudi-Ld.Sr.DR ORDER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER): - 1. Aforesaid appeal by assessee for Assessment Year [AY] 2013-14 contest the order of Ld. Commissioner of Income-Tax (Appeals)-17, Mumbai, [in short referred to as CIT(A) ], Appeal No. CIT(A)-17/IT-480/15- 16 dated 02/05/2017 on following sole ground of appeal: - Disallowance of setoff and carry forward of Long-Term Capital Loss of ₹ 3,11,80,559/- On facts and circumstances of the case and in law, the CIT(A)/AO erred in making disallowance of set off and carry forward of Long Term Capital Loss arising out of sale of quoted equity shares (STT paid) of ₹ 3,11,80,559 against Long Term Capital Gain of ₹ 1,27,67,255/- arising on sale of property. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 308); CIT V/s J.H.Gotla (156 ITR 323) and CIT V/s Harprasad Co. (99 ITR 118) , the said submissions were rejected since income would include losses also. Applying the aforesaid logic i.e. income would include losses, Ld. AO formed an opinion that loss would bear the same character and quality as does the positive income. Accordingly, if a particular income was exempt from tax, it would not enter into computation process and the same would equally apply to losses also. Therefore, if the STT paid LTCG was exempt u/s 10(38), so would be the loss from same class of assets. It was further observed that income which would not be chargeable u/s 45, would constitute separate source of income and the said exempt income would not form part of total income. Accordingly, the set-off of the losses against gains earned on sale of property as well as carry forward of balance losses to subsequent year was denied to the assessee. However, LTCG on sale of shares for ₹ 48.94 Lacs was accepted to be exempt u/s 10(38). 3. The learned CIT(A) confirmed the stand of Ld. AO by observing as under: - 4 Decision 1.1 I have carefully consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree on LTCG earned on sale of shares subject to the conditions stipulated in section 10(38) but on another hand, LTCL in similar cases shall be allowed to the assessee being not covered by this section. Such an interpretation of the section in the statute will be totally misplaced. 4.5 Now coming to the ratio laid down in the case of Raptakos Brett Co, Ltd, v, DC1T[2015] 58 taxmann.com 115(Mum-Trib) by relying on the judgement in the case of Royal Turf Club (Calcutta High Court) holding the view that the entire business being the source was not excluded in the provisions of section 10 of the Income Tax Act,1961. This was decided on the basis of the decision of the Hon'ble Supreme Court in the case of Karanchand Premchand [1960] 40 ITR 16 which related to the provisions of Section 5 of the business Profits Act, which at the outset, is not related to the Income Tax Act, 1961. It is important to note the third provisio of Section 5 of the Business Profits Tax Act which reads as under: - ... Provided further that this Act shall not apply to any income, profits or gains of business accruing or arising within any part of India to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r set off of LTCL incurred on sale of equity shares covered under the ambit of sec. 10(38) was dealt in by several courts as discussed herein under and my view also finds support from the decisions below:- (i)In Kishorebhai Bhikhabhai Virani v. ACIT [2015] 55 taxmann.com 91 (Gujarat), the Hon'ble Gujarat High Court has held that - 6. In this context, section 10(38) of the Act becomes relevant. As is well known, section 10 pertains to income not included in the total income. Clause (38) thereof reads as under: 10. In computing the total i ncome 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: Prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd. [1975] 99 ITR 118 (SC) and referring the judgments of Hon'ble Supreme Court in the case of Karamchand Premchand Ltd. [1960] 40 ITR 106 (SC) and of the Hon'ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT [1983] 144 1TR 709 (Cal.), the Hon'ble Mumbai ITAT has held that 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 118 (SC) fail the observations made by the hon'ble high court qua capital gains while distinguishing the said decision by the apex court, i.e., of the income under reference being intrinsically not income, would thus apply with equal force in the instant case, as it did in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing from the transfer of long-term capital asset, being an equity share etc., is exempt from tax if the transaction of sale of such equity share etc. is chargeable to Securities Transaction Tax under Chapter VII of the Finance (No.2) Act, 2004. It is trite that 'Income' covers both positive and negative incomes, that is, gains and losses. The Hon'ble Supreme Court in a celebrated decision in CIT v. Harrprasad Co. (P.) Ltd. [1975] 99 ITR 118 has held 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 simple words, both the positive (gains) and negative (losses) are species of the genus of 'income'. 11. We have noticed that section 10(38) is an exemption provision and not a deduction provision. Income from an exemption provision does not at all enter into computation of total income. If there is a positive income, such income is ignored and thus excluded from taxation and if there is a negative income, namely, loss, then such loss is also ignored and thus neither quali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax and the resultant loss, if any, will equally not qualify for set off and carry forward. Thus, in my view, considering the true intent of the provision of section 10(38) for the reasons enumerated above, the loss arising from the capital asset, income from which do not form part of total income as envisaged in the provisions of section 10(38) placed in Chapter 111 of the Statute cannot enter the computation machinery under the head - Capital Gains and accordingly, shall not be available for set off or carry forward against any other source or head of income under any other provisions of the Act either. In the result, the action of the Assessing Officer in denying the set off and carry forward of long term capital loss of Rs, 3,11,80,559/- arising from the capital asset envisaged u/s, 10(38) is upheld and appeal filed by this appellant is dismissed. Thus the appeal filed by the appellant company is Dismissed u/s. 250 read with section 251 of Income tax Act, 1961. Aggrieved, the assessee is under appeal before us. 4. We have carefully heard the rival submissions and perused relevant material on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the decision of Hon'ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709/12 Taxman 133. In this decision he submitted that similar issue with regard to the losses on account of breeding horses and pigs which are exempt u/s. 10(27) whether can be set off against its income of other source under the head business . The Hon'ble High Court after considering the 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 attention to the various observations and findings of the Hon'ble High Court and also the reliance placed by their Lordships to various decisions of Hon'ble Supreme Court, especially in the case of CIT v. Karamchand Premchand Ltd. [1960] 40 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 subsection (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 tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 the 1961 Act in respect of the total income of the previous year or years or whatever the case may be. The scheme of total income has been explained by s. 5 of the Act which provides that subject to the provisions of the Act, the total income of the previous year of a person who is a resident includes all income from whatever source it is derived. In computing the total income, certain incomes are not included under s. 10 of the Act. It depends on the particular case where certain income, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits 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 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. 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 involves the notion of set- off. Its sole purpose is to set off the loss against the profits of a subsequent year. It presupposes the permissibility and possibility of the carried-forward loss being absorbed or set off against the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 claim loss by indexation for set off against other capital gain chargeable to tax. This decision is slightly distinguishable and secondly, we have already discussed the issue at length and have held that the ratio of Hon'ble Calcutta High Court is applicable in the present case. Lastly, coming to the decision of Hon'ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani ( supra ), we find that the issue involved in the present case was almost the same, wherein the Hon'ble High Court after following the decision of Hon'ble Supreme Court in the case of Hariprasad Company (P.) 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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