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Facts
The assessee, an FPI, incurred both short-term capital gains (STCG) and short-term capital losses (STCL) from transactions, some taxable at 15% (under Section 111A read with Section 115AD) and others at 30% (under Section 115AD). The assessee chose to set off the STCL taxable at 15% against STCG taxable at the higher rate of 30%, which the Assessing Officer (AO) and Dispute Resolution Panel (DRP) rejected, leading to an appeal before the Tribunal.
Held
The Tribunal held that Section 70(2) of the Income Tax Act does not prescribe a specific hierarchy for setting off short-term capital losses against gains with differential tax rates, thereby allowing the assessee to choose the most beneficial method. It affirmed that the mere difference in tax rates cannot be a ground to disallow a legitimate set-off, relying on previous coordinate bench decisions and High Court rulings.
Key Issues
Whether short-term capital losses taxable at a lower rate can be set off against short-term capital gains taxable at a higher rate when the Income Tax Act does not specify a hierarchy for such set-off, and whether penal proceedings are warranted for such action.
Sections Cited
45, 48, 55A, 70, 70(2), 110, 111A, 115A, 115AD, 115BC, 143(3), 144C(5), 144C(13), 270A, 274
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SMT. RENU JAUHRI
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the assessee arises out of final assessment order dated 15/01/2025 passed by Ld.DCIT A.Y. 2022-23 Ishana Capital Master Fund International Tax Circle - 2(2)(1), Mumbai for assessment year 2022-23 on following grounds of appeal : “ On the facts and circumstances of the case, the Appellant craves leave to prefer an appeal against the order under section 143(3) read with section 144C(13) of the Act dated
15. January 2025 issued by the Deputy Commissioner of Income Tax (International Taxation)-2(2)(1), Mumbai ['the learned AO'] in pursuance of the directions under section 144C(5) of the Act issued by the Hon'ble DRP - 1, Mumbai dated
5. December 2024 on the following grounds, each of which is without prejudice to and independent of the others: On the facts and in the circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP has erred: Grounds of Appeal 1-4: Arguments on merits of the Appellant's claim of set-off of short-term capital loss
1. Erred in rejecting the hierarchy of set-off of short-term capital losses adopted by the Appellant and thereby, taxing the gross short-term capital gains in respect of transactions on the sale of shares not chargeable to Securities Transaction Tax (STT);
2. Failed to appreciate that income under the head 'Capital Gains' is determined as per sections 45 to 55A of the Act whilst sections 111A and 115AD only provide for determination of tax in certain cases and therefore, gains arising on transactions subjected to STT and those not subjected to STT are no different and satisfy the 'similar computation' condition specified in section 70(2) of the Act;
3. Failed to appreciate that since section 70 of the Act does not provide any hierarchy for set-off, the short-term capital loss arising from sale of shares subjected to STT can first be set-off against the short-term capital gains arising from sale of securities not subjected to STT instead of short-term capital gains arising from sale of shares subjected to STT;
4. Erred in not following binding decisions passed by the Jurisdictional Tribunal and rejecting the set-off merely because the Department has preferred an appeal before the Jurisdictional High Court against one of the orders of the Jurisdictional Tribunal. Ground of Appeal
5: Initiation of penal proceedings under section 270A of the Act A.Y. 2022-23 Ishana Capital Master Fund
5. Erred in initiating penalty under section 274 r.w.s. 270A of the Act alleging misreporting of income by the Appellant” Brief facts of the case are as under:
The assessee is a company incorporated in Cayman Islands and registered with Securities Exchange Board of India (SEBI) as Category I Foreign Portfolio Investors (FPI). The assessee invested in the Indian capital market in accordance with SEBI FPI regulations, 2019. During the year under consideration the assessee made investment that resulted in short term capital gain and short term capital loss on which STT was paid and were taxable u/s. 111A r.w. 115AD of the Act at the rate of 15%, the details are as under :
Short-term capital gains/(loss) Amounts (in INR) Amounts (in INR) Short-term capital gains [attributable 1,958,720,409 to shares which are subject to STT and taxable as per section 111A read with section 115AD of the Act at the rate of 15% Less: Short-term capital loss (305,142,759) [attributable to shares which are subject to STT and taxable as per section 111A read with section 115AD of the Act at the rate of 15% 2.1 The Ld.AO noted that, the short term capital gains and short term capital loss, was also earned by the assessee attributed to the shares on which were STT was paid, and was taxable as per section 115AD of the Act at the rate of 30%, the details which are as under :
Short-term capital gains [attributable to 1,745,946,258 securities which are subject to STT, however, taxable as per Section 115AD A.Y. 2022-23 Ishana Capital Master Fund of the Act at the rate of 30%] Less: Short-term capital loss (1,597,446,483) [attributable to securities which are subject to STT, however, taxable as per section 115AD of the Act at the rate of 30%] Net short-term capital gains for the 1,802,077,425 current year.
During the course of assessment proceedings, it was submitted that, the Act does not specify manner and hierarchy to set-off short-term capital losses against short-term capital gains, that are subjected to a differential tax rate. Consequently, in the absence of a specific stipulation in the Act, the short-term capital losses (whether incurred from transaction on which STT is paid or otherwise) was first set-off against short-term capital gains taxable at the normal rate being 30% and the balance (if any) has been set-off against short-term capital gains taxable at the rate of 15%. The said approach of set-off of losses was disclosed in the notes to computation of taxable income which was furnished before the AO vide submission dated 12 June 2023.
2.2 The Ld.AO after considering the submissions of the assessee rejected the same and passed draft assessment order, wherein short term capital gain taxable under normal provisions was determined at Rs. 1,65,35,77,650/- and the short term capital gains taxable under provisions other than 111A was determined at Rs. 14,84,99,775/-. Aggrieved by the draft assessment order assessee preferred objection before the Ld.DRP.
3. The DRP vide its direction dated 05/12/2024 rejected the contention of the assessee by holding that STCG/STCL cannot be A.Y. 2022-23 Ishana Capital Master Fund set off intra head without considering the rate of tax applicable to each category. 3.1 On receipt of the draft assessment order the Ld.AO passed the impugned order by making addition/disallowance in the hands of the assessee and rejecting the objection of set off as carried out by the assessee. Aggrieved by the order of the Ld.AO the assessee is in appeal before this Tribunal.
The Ld.AR submitted that, only issue alleged in the present appeal is regarding off of STCL taxable at the rate of 15% u/s.115AD of the Act, against STCG taxable at the rate of 30% u/s.111A r.w. 115AD of the Act. 4.1 He submitted that the provisions of u/s. 70 of the Act, does not provide for bifurcation of STCL under different categories on the basis of tax rate applicable. The Ld.AR filed paper book containing plethora of decision that support this preposition assessee :
CIT v. Rungamatee Trexim (Pvt) Ltd. - of 2008 (Kol. HC) (2008) 2. First State Investments (Hongkong) Ltd. v. ADIT (International Taxation)
GSB Capital Markets Ltd. V. DCIT ITA No.307/Mum/2014 4. ADIT (International Taxation) v. Legg Mason Asia (Ex Japan) Analyst Fund ITA No. 7625/Mum/2011 5. VEMF -A, LP V. DCIT ITA No. 6727/Mum/2016 6. M/s. JS Capital LLC, v. ACIT (International Taxation) ITA No. 3396/Mum/2023 7. East Bridge Capital Master Fund I Ltd. V. DCIT (IT) ITA No. 2976/Mum/2023 A.Y. 2022-23 Ishana Capital Master Fund 4.2 On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advance by both sides in the light of record placed before us.
The assessee incurred short term capital loss/gain on sale of shares liable to be taxed at 15% and at the same time the assessee earned short term capital loss/gains that were liable to be taxed at 30%. It is noted that the assessee had gains as well as loss in the category of shares taxable at 15% as well as 30%. The assessee set off STCL from the STCG liable to be taxed at higher rate (30%). At this juncture we refer to the provision of 70(2) of the Act, that does not provide any restriction to such kind of set off. 5.1 On perusal of the provisions clearly shows that, if there is a short term capital loss, the assessee entitled to set off the same against any other short term capital gain. As there is no restriction, the assessee is free to choose as to how the set off of short term capital loss has to be claimed. 5.2 In the present facts of the case we know that, the assessee claimed set off in such manner that it resulted in the payment of low tax. It is noted that, the mere difference in the rate of taxation cannot be a reason to disallow the set off. Coordinate bench of the Tribunal in case of M/s. JS Capital LLC (Supra) while considering identical issue observed and held as under :
“8. We have also gone through the decision of ITAT, Mumbai in the case of VEMF-A, LP (supra) wherein on identical issue and similar fact the ITAT has decided the issue in favour of the assessee. The relevant extract of the decision is reproduced as under:
A.Y. 2022-23 Ishana Capital Master Fund "7. We have heard the rival submissions and perused the relevant material on record. We begin with the decisions cited before us. In First State Investments (Honkong) Ltd. (supra), the assessee earned STCG on sale of shares in the A.Y. 2005-06. It bifurcated such STCG into two periods Le. upto 30.09.2004 (in which tax was chargeable @ 30% and transactions were not chargeable to STT) and period post 30.09.2004 (in which case the reduced rate of 10% was applicable on STCG where transactions were chargeable to STT in view of section 115A). As against this, the assessee had also suffered STCL of Rs. 8.14 lacs upto 30.09.2004 and Rs. 169.23 lacs in post 30.09.2004 period. The assessee claimed that STCL in later period be allowed to be set off against STCG of former period to the extent of excess of STCG over STCL upto cut off date i.e. 30.09.2004. However, revenue authorities held that STCL suffered by the assessee in the period before cut off date should be set off against STCG of that period and remaining amount be taxed @30%. The Tribunal held that (i) in view of provision of section 70(2), the assessee had a choice in taking decision about setting off of STCL from one transaction against any other STCG, whether within or outside the cut off date i.e. 30.09.2004 and (ii) the assessee was justified in setting off STCL of later period against STCG of former period to the extent of excess STCG over STCL upto cut off date i.e. 30.09.2004. The above order has been followed by the Co-ordinate Bench in Fidelity Investment Trust Fidelity Overseas Fund (supra) and DWS India Equity Ltd (supra). The decision in DWS India Equity Ltd. has been followed in Capital International Emerging Markets Fund (supra). In Rungamatee Trexim (P) Ltd. (supra), Hon'ble Calcutta High Court held as under: "On perusal of the provision of section 70, I find that 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 A.Y. 2022-23 Ishana Capital Master Fund option to the assessee, such option should be exercised which will favour the assessee and not the revenue.
To sum up, under the provisions of section 70(2), STCL arising from any asset can be set off against STCG arising from any other asset under a similar computation made. Merely because the two set of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. Therefore, STCL arising from STT paid transactions can be set off against STCG arising from non-STT transactions.
It is clearly held in the finding of the co-ordinate Bench of the Tribunal as referred above that under the provisions of section 70(2), STCL arising from any asset can be set off against STCG arising from any other asset under a similar computation made irrespective of different rate of tax. Therefore, the issue in appeal in the case of the assessee is squarely covered by the decision of the ITAT as referred above. Therefore following the decision of ITAT (supra), we allow the appeal of the assessee.”
5.3 Further in case of East Bridge Capital Master Fund I Ltd. Vs. DCIT (Supra), Coordinate Bench of this Tribunal categorically held has and has observed as under :
“7. We have heard rival sides and have examined orders of the authorities below. We have also considered the decisions cited before us by the Counsel for the Assessee. The Assessee has suffered STCL on assets liable to tax at 15% at the same time the Assessee has earned STCG liable to tax at 30%. Though the Assessee had gains in category taxable of 15% yet the Assessee set-off STCL from the said category against STCG liable to tax at higher rate, i.e., at 30%. We find that similar controversy has been considered by the Co-ordinate Bench in the case of ACIT Vs. Mac Charles India Ltd. (supra). In the said case in identical transactions, the Assessee had set-off losses arising on sale of shares which are liable to tax at 10% against STCG arising on other assets taxable at 30%. The Assessing Officer rejected Assessee's method of set-off of STCLs. The Assessee carried the issue before the CIT(A). The First Appellate Authority accepted Assessee's method of computation and reversed the findings of Assessing Officer. The Department carried the issue in appeal before the Tribunal. The Co- ordinate Bench dismissed the appeal of Revenue holding as under:
A.Y. 2022-23 Ishana Capital Master Fund "13. We have considered his submissions and are of the view that the same are not acceptable. A perusal of the provisions of section 70(2) clearly shows that if there a short term capital loss, the assessee is entitled to have the said capital loss set off against any other short term capital gain. This right given to the assessee is unqualified and therefore the assessee is free to choose as to how the set of short term capital loss has to be claimed. The assessee has claimed the set off in such a manner that it results in payment of low taxes. That cannot be a ground to deny a legitimate right which the assessee has in law. This is the principle adopted by the CIT(A) in allowing relief to the assessee. We are of the view that the reasoning adopted by the CIT(A) is just and proper and calls for no interference. In view of the above conclusions on a plain reading of the relevant provisions of section 70(2) and section 111A of the Act, we do not wish to refer to the case laws to which a reference has been made by the CIT(A) in his order. For the reasons given above, we confirm the order of the CIT(A) and dismiss ground No.2 raised by the Revenue." (Emphasized by us) 8. In the case of First State Investments (Hongkong) Ltd. (supra) under similar situation, the Assessing Officers rejected Assessee's manner of set-off of STCL in category liable to tax at 10% against STCG taxable at 30%. The Revenue made similar argument as is made in the instant case with regard to expression used in section 70(2), i.e., 'under similar computation'. The Co-ordinate Bench rejected arguments of the Department by holding as under: "12. A lot of emphasis has been laid by the learned CIT(A) on the words "under similar computation made" as used in sub-section (2). He has opined that there are two different categories of the transactions resulting into short-term capital gain, viz., those taxable in the first period at the rate of 30 per cent and those taxable in the second period at the rate of 10 per cent and "similar computation made" refers to either of the two. In our considered opinion, there is a basic fallacy in the view adopted by the learned CIT(A) on this issue. Sections 111A and 115AD fall in Chapter XII, which provides for determination of tax in certain special cases. Thus, it is clear that all these sections from 110 to 115BC provide for a particular rate of tax to be applied on the incomes covered under these sections individually. Hence, these sections do not deal with the computation of income but only provide for the rate of tax applicable on the income. It is simple and plain that the matter of computation of income is a subject which comes anterior to the application of the rate of tax. Only when the income is computed as per the provisions of the Act, that the question of the applicability of the correct rate of income-tax comes into being, Income under the head Capital gains' is determined as per sections 45 to 55A. Section 48 with A.Y. 2022-23 Ishana Capital Master Fund the heading "Mode of computation provides that the income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset along with the cost of any improvement, if any. Thus, the computation of capital gain, which is prescribed under section 48, cannot be confused with the rate of tax liable to be charged on the income under the head 'Capital gain' so computed. Whereas, computation of capital gain is governed by section 48, but the rates of tax, insofar as we are concerned in the present appeal, are governed by sections 111A and 115AD.
In view of the foregoing discussion, we hold that the authorities below erred in negating the assessee's computation of short-term capital gain We, therefore, overturn the impugned order and allow this ground of appeal
." (Emphasized by us)
9. In the case of JP Morgan Fund (supra), the Tribunal had dealt with similar controversy. The Co-ordinate Bench after placing reliance on the decision of Special Bench in the case of Montgomery Emerging Markets Fund [(2006)100 ITD 217/Mum/SB) dismissed Revenue's appeal. Thus, in light of un-disputed facts of the case and the decision referred above, we have no hesitation in accepting Assessee's manner of set-off of STCL category liable to tax at the rate of 15%, against STCG taxable at the rate of 30%. Thus, the Assessee succeeds on ground no.1 to 4 of appeal.”
6. Thus, based on undisputed facts and the legal position applicable to such facts, we do not have any hesitation in accepting assessee’s manner to set off the STCL liable to be taxed at 15% against STCG liable to be taxed at 30%. Accordingly the ground No. 1 to 4 raised by the assessee stands allowed.
7. Ground No. 5 is consequential in nature and therefore do not require adjudication. In the result the appeal filed by the assessee stands allowed.