TMI Blog2006 (3) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... t which alone loss of a particular source can be set off. Therefore, the contention of the assessee that irrespective of the identity of the source of income, it is possible for the assessee to set off the loss of a particular source against income from another source, both falling under the same head of income is tenable in law. Accordingly, the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law. The CBDT Circular No. 8 of 2002 issued as explanatory notes, is a speaking testimony to the arguments advanced by the learned senior counsel that there is no hitch in the law existed for the assessment years 1988-89 to 2002-03 in selling off long term capital loss against short term capital gain. When the statute provide such a freedom to the assessee, the Assessing Officer is not justified in making a further grouping of sources and to hold that long term capital loss must be set off first against long ten n capital gains. The Assessing Officer is in fact bringing out an order of priority of his own relating to the manner in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses is permissible to compute the amount for taxation under the head 'capital gains'." 3. This Special Bench has been constituted by the Hon'ble President as the relevant question was referred to by the regular Bench of ITAT, H-Bench, Mumbai, while hearing the appeal in ITA Nos. 829/Mum./1999 and 2400/Mum./2000. When the cases were taken up for hearing by the said Division Bench, it was argued on behalf of the assessee that the order of the CIT(A) relating to set off of losses was in accordance with the law applicable for the relevant assessment years 1995-96 and 1996-97. But the Revenue relied on an order of the Tribunal passed in the case or Ravindra K. Mariwala v. Jt. CIT [2003] 86 ITD 35 (Mum.) where it was held as follows: "The learned counsel for the assessee has relied upon circular No. 26(LXXVI-3)(F.No. 4(53)-IT/54), dated 7-7-1955 to support B his contention that option is with the assessee to set off loss in one head against the income in any other head. However, in our opinion, the above circular is not applicable for setting off the loss within the same head. In the above example, the assessee has loss under the head "business", profit under the head "income from house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on set off of short term capital loss against short term capital gain resulting in net short term capital gain which were taxed at the rate prescribed for long term capital gain and short term capital gain under clause (iii) of section 115D of the Income-tax Act, 1961." The grounds raised by the Revenue in I.T.A. No. 2400/Mum/2000 are as under: "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not upholding the levy of tax and additional tax under section 143(1)(a) arising on set off of net long term capital loss against net short term capital gain, resulting in capital gain the nature of Short Term Capital Gain, which was taxed at the rate prescribed for Short Term Capital Gain under clause (iii) of section 115D. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding computation adopted by Assessing Officer for working out the capital gain cannot be upheld and further erred in directing that computation shown by the assessee in respect of the above in the return of income should be accepted." 7. In the above circumstances and in the facts of the case, which are exactly similar, it is suff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be correspondingly increased. The result would be that the low rate taxable amount is less and the higher rate taxable amount is more. The assessee wanted to avoid this marginal liability arising out of the differential tax rate. The assessee, therefore, used the option of setting off to its advantage. 13. But the Assessing Officer was not to agree with the option exercised by assessee. According to the assessing authority, long term capital loss should be first set off against the long term capital gains. Short term capital gains could be disturbed by long term capital loss only if the long-term capital gains were not sufficient to absorb the long term capital loss. Likewise, the assessing authority also held that the short term capital loss must be first set off against short term capital gains. The Assessing Officer did not accept the freedom/option of the assessee to choose the method of set off which suited to it. According to the Assessing Officer long term capital loss shall first be set off against the long term capital gains and if there is a remainder of long term capital loss, the remainder alone shall be set off against the short term capital gains. When the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 22-9-1987 which explained that the purpose of the above amendment was to make the provisions relating to set off and carry forward more simple by doing away with the distinction between short term and long term capital gains. The CIT(A) B also recalled that the principle laid down in the Board's circular No. 26 of 7-7-1955 issued in respect of the corresponding provisions of 1922 Act and also in the light of the decisions of the Tribunal in Meghdoot Enterprises (P.) Ltd. v. IAC [1992] 40 ITD 471 (Delhi) and ITO v. V.R. Nimbkar [1986] 19 ITD 714 (Bom.) it is not appropriate to hold that under the amended provisions of law contained in section 70, setting off is restricted to short term capital loss against short term capital gains and long term capital loss against long term capital gains. In the decisions referred to by the CIT(A) while deciding upon the provisions of law contained in the unamended sections 70 and 71, the Tribunal had held that if an assessee had suffered a loss on short term capital asset and had income from other sources and also from long term capital gains, the assessee would be entitled to set off short term capital loss against income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. Where the language in a statute is plain and unambiguous, there is no question of construction of statute for the reason that the statute speaks for itself. In the case under consideration, the question is how set off of loss is made by way of intra head adjustment. If the statute categorises capital gains in two groups, viz. long term and short term, the intra head adjustment has to be made with reference to each such category separately. If there is any ambiguity in a provision of law, the legislative intent has to be gathered. The legislative intent has to be gathered from the statute itself by looking into the context, contents and other provisions of the statute, which may throw some light on the subject. In the present case, the statute itself categorises, the assets into two classes, viz. long term capital assets and short term capital assets and, therefore, "source of income" in the above context means the source of either long term capital asset or short term capital asset. (5) The reliance placed by the CIT(A) and the assessee on the decision of the Bombay Tribunal in the case of V.R. Nimbkar's is again on the wrong footing. It was held in that case by the Tribunal tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction between long term capital gain and short term capital gains. The said circular states that to ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long term capital gain would be treated as any other losses so that they could be set off against income under any other head in the same year and if not fully set off, may be carried forward. The distinction between short term capital losses and long term capital losses has also been removed and all capital losses could be carried forward for eight succeeding years and set off only against capital gains, if any, in those years. It is apparent from the above circular that the distinction between long term and short term capital gains has been obliterated only for the purpose of inter-head adjustments by way of carry forward and set off and not for intra-head adjustments. 17. The learned Commissioner, therefore, summarized that capital assets are of two categories, viz. long term assets and short term assets and gains arising therefrom are of two distinct categories of income separately defined in the Act as long term capital gains and short term capital gains. All transfers which give rise to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Commissioner of Income-tax. The learned senior counsel stated that these sections are not relevant in deciding the subject matter of these appeals. On the other hand, the learned senior counsel submitted that the provisions of law contained in sections 70,71 and 72 are the relevant provisions of law to be looked into. He explained that section 45 is the charging section in respect of capital gains and not sections 112 and 115AD. He explained that each asset has to be considered separately while construing the source of income F for the purpose of section 70. Capital gains are to be computed under the provisions of section 48 and the computation has to be made with reference to individual asset and not with reference to any class of assets falling under the head 'capital gains'. The gain or loss, as the case may be, arising on transfer of any asset needs to be understood and computed on asset to asset basis. An asset by itself is a source for capital gains or capital loss. 21. The learned senior counsel explained that the law relating to set off and carry forward of capital gains have undergone changes as a result of legislative amendments by which the law upto the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss has been re-instated in the statute. 26. The learned senior counsel submitted that as the law relating to the period for the assessment year 1988-89 to assessment year 2002-03, as reflected by the amendment brought in by the Finance Act, 1987 is the law applicable for the impugned assessment years under consideration, viz. assessment years 1995-96 and 1996-97, the crucial question to be adjudicated is "what is a source of income?" The learned senior counsel explained that this is because the benefit of set off is provided in section 70 for the relevant period with reference to any source falling under any head of income; the result being that a loss from any source could be set off against income out of any other source. Obviously, source is the most important aspect to be considered herein. 27. Following are the summary of the contentions made by the learned senior counsel in this regard: (1) The importance of the concept "the source of income" is apparent from the heading itself, given to section 70 which read "....... set off of loss from one source against income from any other source under the same head of income". Upto assessment year 1987-88, as already stated, short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion has been upheld. (3) The decision of Bombay High Court in the case of Fort Properties (P.) Ltd v. CIT [1994] 208 ITR 232 where the court has held that a transfer of a property by itself is a source. 29. The learned senior counsel further invited our attention to circular No. 495 dated 22-9-1987 issued by the CBDT by way of explanatory notes to the amendments brought in by the Finance Act, 1987. In section 70 of the Act, the circular has stated that the distinction between short term and long term capital assets, though conforming to the principle of equity of taxation, has led to complications. To make the provisions simpler, this distinction has been done away with by insertion of sub-clauses (29A), (29B) and (42B) in section 2 of the Income-tax Act, 1961, substitution of sections 71 and 74 and amendments of sections 70 and 72. To ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long term capital assets would be treated as any other loss so that they can be set off against income under any other head in the same year and if not fully set off, may be carried forward. The distinction between the carry forward of short term capital loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y much clear from the statute itself that during the interregnum period of assessment years 1988-89 to 2002-03, an assessee had the option to set off a loss incurred in a source of income against the income arising out of any other source. 32. The learned senior counsel explained that the amendments brought in by the Finance Act, 1987 which continued upto assessment year 2002-03 until reversed by the Finance Act, 2002 with effect from 1-4-2003 have granted the assessee an option to choose the method of computation with least tax burden, as far as the question of set off of loss arising under the head "capital gains" is concerned. The learned counsel further explained that such option given to an assessee is beneficial in character and in such circumstances, the benefit should go to the assessee even if two views are possible on the issue. On this legal proposition, the learned senior counsel relied on the following decisions: (1) CIT v. Bosotto Bros. Ltd. [1940] 8 ITR 41 where the Madras High Court has held that the Income-tax Act, being a taxing statute, should receive a strict construction, that is, construction in favour of the subject and not in favour of the crown. (2) J.C. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner submitted that the facts of the case, considered by the Bombay High Court in the case of Fort Properties (P.) Ltd. are distinguishable on the face of the statutory amendments brought in the Act relating to the carry forward and set off of long term and short term capital gains. He, therefore, submitted that the Tribunal may hold the decision of the Bombay Bench in Ravindra K. Mariwala's case as the correct decision and allow the appeals filed by the Revenue. 35. We heard both sides in detail. Section 70 of the Income-tax Act, 1961 deals with the law relating to set off of loss from one source of income against another source of income under the F same head of income. As pointed out by the learned senior counsel, the heading given to the section is self-explanatory and provides for specific law relating to intra-head adjustment of income and loss. This is for the purpose of arriving at the net outcome of income or loss under a particular head of income. The law relating to inter-head set off is provided in section 71 of the Income-tax Act. The heading given to section 71 is again a clear statement for set off of loss under one head against income from another head. 36. The relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular reads as under:- "13.2 The distinction between short-term and long-term capital assets though conforming to the principle of equity of taxation has led to complications. To make the provisions simpler, this distinction has been done away with by insertion of sub-clauses (29A), (29B) and (42D) in section 2 of the Income-tax Act, 1961, substitution of sections 71 and 74 and amendment of sections 70 and 72. To ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long-term capital assets (after they are scaled down by the same percentage of deduction as long-term capital gains) would be treated as any other losses so that they can be set off against income under any other head in the same year and if not fully set-off may be carried forward. The distinction between the carry forward of short-term capital losses and long-term capital losses has also been removed and all capital losses would be carried forward for 8 succeeding years and set off only against capital gains, if any, in those years." 39. It is very clear from the above explanatory note that by the amendment brought in by the Finance Act, 1987 the law provided in section 70 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e source and assessee may earn income from other source. There can be a bundle of sources under a particular head of income. Out of that particular head of income, the assessee is free to set off loss against income from another source. There is no distinction between short term capital asset or long term capital asset as far as the head of income "capital gains" is concerned. The Allahabad High Court in the case of Seth Shivprasad has held that a source of income may be described as the spring or fount from which a clearly definite channel of income flows. It is that which by nature and incidents constitute a distinct and separate origin of income capable of consideration as such in isolation from other source of income and which by the manner of dealing adopted by the assessee can be treated so. As per the above judgment, any definite channel through which income flows is to be treated as a source of income. That is why in fact section 70 recognises that there can be a number of sources of income under a particular head of income. The Madhya Pradesh High Court in the case of Lady Kanchanbai's had an occasion to consider source of income for the purpose of section 2(11) of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It will in no way affect the previous year in which income from such source is assessable ...... In the instant case, the source of income is the transfer of the property....." 43. When we consider the relevant decisions of the courts of law rendered in Seth Shivprasad's case, Lady Kanchanbai's case and Fort Properties (P.) Ltd.'s case, we find that every spring of income is a different source of income for an assessee and for that matter, the transfer of one property may be one source of income different from the transfer of another property which would be again another source of income. 44. Therefore, it is very apparent that source of income does not mean head of income. The Assessing Officer has proceeded on a hypothesis as if the source of income is the head of income itself. This is not a proper construction of law provided in section 70. Short term capital gains/loss as well as long term capital gains/loss both are computed under the head "capital gains" for the aggregation of income culminating into total income which is taxable under the Income-tax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the sources could be transfer of short-term capital asset as well as transfer of long term capital assets and transfer of different assets will be different sources of income. There is no further identification or qualification with respect to any source so that the law would presume any sort of restriction on set off of loss arising from one source against income arising from any other source. Therefore, the contention of the assessee that irrespective of the identity of the source of income, it is possible for the assessee to set off the loss of a particular source against income from another source, both falling under the same head of income is tenable in law. Accordingly, the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law. 46. This position is highlighted by the CBDT Circular No. 8 of 2002 dated 28-7-2002 issued as explanatory notes on provisions relating to direct taxes brought in by the Finance Act, 2002. At paragraph 40.1 of the circular, modifications relating to set off of long term capital loss brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only be an extreme case of logical argument. Such an argument cannot find support from the provisions of law contained in section 70 as it stood for the relevant time. 48. The ITAT, Bombay Bench "E" in the case of V.R. Nimbkar had considered the priority of set off of losses. The Tribunal, after examining the provisions of law held that when the assessee has been given two options without any restrictions, it is open to the assessee to exercise the option of his choice. The Tribunal held that if the assessee claimed that he should be allowed to set off the short term capital loss against a head of income other than capital gains, instead of against the long term capital gains, the claim was rightfully made and was according to law. We think the present case under consideration is abundantly supported by this decision of the Tribunal. 49. A similar view was taken by ITAT, A-Bench, Delhi Meghdoot Enterprises (P.) Ltd.'s case. 50. Above all, if two reasonable interpretations are possible, that interpretation, which is more beneficial to the assessee has to be adopted as argued by the learned senior counsel in the light of the decisions reported in CIT v. Bosotto Bros. Ltd.'s case, J.C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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