SCHWAB FUNDAMENTAL EMERGING MARKETS EQUITY ETY ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION)-4(2)(1), MUMBAI

3. The learned DCIT failed to appreciate that section 70 of the Act does not provide any hierarchy for set-off of losses, the short- term capital loss arising from sale of shares subjected to STT can be first 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. The learned DCIT erred in not following the binding decisions of 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 No. 2: Initiating penalty proceedings under section 270A of the Act.

5. The learned DCIT erred in initiating penalty under section 270A 2 Assessment Year 2022-2023 of the Act alleging under reporting of income by the Appellant.” Ground No.1 to 4: 3. The relevant facts in brief are that the Assessee, a trust organized in the United States of America, is registered with the Securities and Exchange Board of India (SEBI) as a Foreign Portfolio Investor. For the Assessment Year 2022-2023, the Assessee filed return of income on 25/07/2022 declaring total income of INR.6,56,02,95,980/-. In the return of income the Assessee offered to tax the net Short Term Capital Gains (STCG) of INR.7,60,92,324/- [taxable at 15% under Section 111A of the Act] computed in the following manner: Particulars Amount (In INR.) Short-Term Capital Gains 7,18,24,822 [attributable to shares which are subject to STT and taxable as per section 115AD read with Section 111A of the Act at the rate of 15%] Add Short-Term Capital Gains 1,92,80,432 [attributable to shares and securities which are not subject to STT and taxable as per section 115AD of the Act at the rate of 30%] Less. Short-Term Capital Loss (74,75,032) [attributable to shares which are subject to STT] Net Short-Term Capital Gains 8,36,30,222 Less. Brought forward Short-Term Capital Losses (75,37,898) [attributable to shares which are subject to STT] Net Short-Term Capital Gains Chargeable to Tax 7,60,92,324

5. However, the Assessing Officer and DRP did not accept the Assessee’s treatment and recomputed the assessable capital gains. In the final Assessment Order, dated 10/01/2025, the Assessing Officer concluded as under: “12. Conclusion It is well settled that when there are two provisions in an enactment which cannot be reconciled with each other, the doctrine of harmonious construction should be applied and attempt should be so interpret the provisions, if possible, giving effect to both. It is the duty of the courts to avoid "a head on clash between two sections of the same Act and, "whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise." It should not be lightly assumed that "Parliament had given with one hand what it took away with the other. The provisions of one section of a statute cannot be used to defeat those of another "unless it is impossible to effect reconciliation between them". An analysis of the frame work of the Income Tax Act clearly suggests that applicability of tax rate is subsequent to determination of total income, Sec. 111A, 112A, 115A, 115BBE are all contained in Chapter XII Determination of Tax in certain special cases and is an extension of tax rate applicable, modifying the same. Therefore, in the process of determination of income chargeable under the head "Capital Gains" and consequently determination of total income, the applicability of the relevant tax rates has to be brought into play. Proviso' is used to remove the special cases of the general enactment and give them special recognition. It needs no elaboration to hold that Section 115AD, being a special provision for Flls, overrides the general provisions. That means that the fact of a particular capital gain being chargeable to preferential tax treatment depending on the nature of income as per various sections of the 1.T Act has to be considered as per the Doctrine of Harmonious Construction. The same position is applicable to set off of intra head loss as also set off of unabsorbed loss. Therefore, whether a part STCL has arisen from STT transaction or non STT transaction is a material fact in computation of total income. The correct way of computation of STCG is to be aggregate all incomes or losses under the STCG as per the tax prescribed and then find the net capital gain chargeable to tax. It goes without saying, in the absence of any exclusive provision of which loss has to be set off against which income, the method that renders a harmonious construction of the various sections will have to be followed.

4 Assessment Year 2022-2023 Further, it is seen that the substantial question of law "Whether short term capital loss from a STT paid transaction can be set off against short term capital gains arising from non STT paid transaction in terms of section 70(2) of the Income tax Act?" has been admitted by the Hon'ble Bombay High Court in the case of Goldman Sachs Fund-ITXA/1554/2013 and DWS India Equity Fund-ITXA/633/2013. In view of the above discussion, the assessee manner of setting off its STCG taxable @30% against STCL taxable @15% is not allowed as the same is done to reduce the STCG to be taxed at 30%. Penalty proceedings u/s 270A of the Act are initiated separately for all the issues of addition discussed above for under-reporting of income.

13. Assessee filed objection against the aforesaid Draft Assessment Order dated 23.03.2024 before Hon'ble DRP-2, Mumbai. The Hon'ble DRP-2, Mumbai, vide its order dated05.12.2024, dismissed the objections raised by the assessee against draft order dated 23.03.2024. The operative part of the direction of Hon'ble DRP-2, Mumbai is reproduced as under: "The core issue pertains to rejection of manner of set-off of Short-Term Capital Losses(STCL) adopted by the Applicant Assessee. The applicant has adopted a method of set-off of short-term capital loss from share transaction subject to Securities Transaction Tax (STT) and taxable at rate of 15%, against short-term capital gains earned on the transaction of sale of shares not subject to Securities Transaction Tax (STT) and therefore, taxable at 30% rate; and thereafter, set-off of the balance loss against short-term capital gains earned on the transactions of sale of shares subject to STT. The applicant has averred that section 70 is the instrumental provision for allowability of intra-head set off of Capital gains and differential rates of taxation as per section 111A do not impact the operation of sub-section 70(2) of the Income Tax Act, 1961. .....5.3.3. Directions of the Panel: As the issues raised in above grounds of objection is pending for decision by higher judicial forum, based on discussion made by us; we are constrained not to accept the grounds of objections raised by the Applicant. Accordingly, the final assessment order u/s 143(3) r.w.s 144C(13) is being passed in conformity with the directions issued by the Hon'ble DRP.

5 Assessment Year 2022-2023 Short-Term Capital Gains 1,92,80,432 Taxable at 30% (non STT paid) (Non-STT paid) Short-Term Capital Gains 7,18,24,822 (STT paid) Short-Term Capital Loss 74,75,032 (STT paid) Short-Term Capital Gains 75,37,898 (STT paid) (b/f) Net Short-Term Capital Gains 5,68,11,892 Taxable @ 15% Long Term Capital Gain 5,24,02,19,366 Taxable @ 10% Income from Other sources 1,24,38,93,370 Taxable @ 20% (Dividend income) Income from Other sources 1,90,920 Taxable @ 30% (interest from company) Total Taxable income 6,56,03,95,980 15. Assessed under section 143(3) rw.s. 144C(13) of the Income Tax Act, 1961. Give due credit for prepaid taxes, if any, after proper verification. Charge interest u/s. 234A for late filing of return of income interest u/s. 2348 and u/s. 234C of the Income Tax Act, 1961 for default in payment of advance tax, if and as due. Issue demand notice and challan, in regards to dues as per enclosed IT.NS.

“In Ground Nos.5 and 6 the assessee has objected to the mode of set off adopted by the Assessing Officer in assessing income from short term capital cases. During the year under consideration the assessee earned short term capital gain of Rs.7,29,584/- in transaction in shares where security transaction tax was not paid and income was subject to tax at normal rate. The assessee also earned short term capital gain of Rs.2,27,564/ in transaction in shares where security transaction tax was paid and income was eligible for concessional rate of tax under section 111A. The assessee also suffered short term capital loss of Rs.7.17,660/- in transactions in shares involving payment of security transaction tax. In the impugned order the A.O. computed the capital gain in the following manner without discussing any reasons for adopting such mode of computation.

Calculation of income/loss from capital gain Short term capital loss with STT (-)7.17,660/- Short term capital gain with STT 2,27,564/- Net Short Term capital loss with STT (-) 4,90,096/- 7 Assessment Year 2022-2023 Short term capital gain without STT 7,29,584/- Net Short term capital gain 2,39,488/- Less Brokerage 5,914/- Taxable short term capital gain of normal rate 2,33,574/- Long term capital gain at 10% rate (as per computation) 1,49,431/- I have perused the assessment order and have considered submissions of the A/R. In the impugned order the A.O. has not given any reasons for first sitting off short term capital gain with STT against short term capital STT and then allow of set off of remaining loss of Rs.4,90,096/ against short term capital gain without STT. The mode of set off adopted by the A.O. shown that be accepted in principle that short term capital loss with STT can be legally set oft against short term capital gain without STT. According to the assessee, the chronology for the set off by the A.0. was contrary to chronology adopted by the assessee, only because the assessee's mode resulted in concessional rate of the tax being applied to higher amount of short term capital gain which resulted more tax benefit to an assessee. 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 option to the assessee, such option should be exercised which will favour the assessee and not the revenue. The A/R for the assessee was well justified in relying on the decision of the Calcutta High Court and the Circular of the Board dated 7.7.1955 since the principles laid down therein appeared to be fully applicable. The Commissioner of Income Tax (Appeals) therefore came to the conclusion in favour of the assessee. He further came to the conclusion that the disallowance has been made on presumption. In these circumstances, the order passed by the Commissioner of Income Tax and subsequent thereto, the Commissioner of Income Tax (Appeals) had already considered the case of the department and upheld the order passed by it. We have carefully considered the said question and in our considered opinion, there is no illegality or irregularity in respect of the order so passed by the learned Tribunal. We, accordingly, find that there is no reason to interfere with the 8 Assessment Year 2022-2023 order so passed by the learned Tribunal and further the order so passed by the learned Tribunal does not suffer from any illegality or irregularity and we find that no substantial question of law is involved in this appeal. Hence, we dismiss the appeal. All parties concerned are to act on a xerox signed copy of the minutes of this order on the usual undertakings. Urgent Xerox certified copy of this, if applied for, be supplied to the parties subject to compliance with all requisite formalities.” (Emphasis Supplied)

10. The above judgment was followed by the Co-ordinate Bench of the Mumbai Tribunal in the case of Vanguard Total International Stock Index Fund1 wherein it was held as under:

“3. At the very outset, the ld. Counsel for the assessee argued the appeal on the issues raised vide Ground No.5.

4. Representatives of both the sides were heard at length. Case records carefully perused and the relevant documentary evidence brought on record duly considered.

xx xx 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 option to the assessee, such option should be exercised which will favour the assessee and not the revenue. The A/R for the assessee was well justified in relying on the decision of the Calcutta High Court and the Circular of the Board dated 7.7.1955 since the principles laid down therein appeared to be fully applicable." The Commissioner of Income Tax (Appeals) therefore 10 Assessment Year 2022-2023 came to the conclusion in favour of the assessee. He further came to the conclusion that the disallowance has been made on presumption. In these circumstances, the order passed by the Commissioner of Income Tax and subsequent thereto, the Commissioner of Income Tax (Appeals) had already considered the case of the department and upheld the order passed by it. We have carefully considered the said question and in our considered opinion, there is no illegality or irregularity in respect of the order so passed by the learned Tribunal We, accordingly, find that there is no reason to interfere with the order so passed by the learned Tribunal and further the order so passed by the learned Tribunal does not suffer from any illegality or irregularity and we find that no substantial question of late is involved in this appeal. Hence, we dismiss the appeal.”

Thus, admittedly, identical issue is pending adjudication before Hon’ble Bombay High Court in appeals preferred by the Revenue against the decisions of the Co-ordinate Benches of Tribunal in the case of Goldman Sachs Fund [ITXA/1554/2013] and DWS India Equity Fund [ITXA/633/2013].

Ground No.5: 14. Ground No.5 raised by the Assessee pertains to initiation of penalty proceedings under Section 270A of the Act and the same is dismissed as being premature in nature.