TEACHER RETIREMENT SYSTEM OF TEXAS,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION )-4(1)(2), MUMBAI

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a resident of the United States of America, and is registered as a Foreign Portfolio Investor with the Securities and Exchange Board of India. For the year under consideration, assessee filed its return of income on 26/07/2022, declaring a total income of INR 1,392,97,42,630. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee computed the net short-term capital gains amounting to INR 312,17,86,831, which is chargeable to tax as follows: – Particulars Amounts (in INR) Short-term capital gains on transaction not subject 77,740,748 to STT (30%) (A) Short-term capital gain on transaction subject to 4,406,838,283 STT (15%) (B) Less : Short-term capital loss on transaction subject 1,362,792,200 to STT © Net Short-term capital loss on transaction subject to 3,121,786,831 STT [D=(A+B)-C)] Total short-term capital gains chargeable to tax 3,121,786,831

Thus, it was observed that the assessee set off the short-term capital loss (on which STT was paid), which is taxable at 15% under section 111A of the Act, against the short-term capital gains (on which STT was not paid), which is taxable at 30% under section 115AD of the Act, and thereafter, set off the balance loss against the short-term capital gains earned on the transaction of sale of share subjected to STT. Accordingly, the assessee was asked to show cause as to why such an adjustment of short-term capital loss with short-term capital gains having a differential rate of taxation should not be rejected and an adjustment be made accordingly. In response, the assessee submitted that section 70(2) of the Act provides for set off of short- term capital loss against the income arising under similar computation from any other capital asset. The assessee further submitted that the reference to “a similar computation” in respect of any other capital asset could only connote a computation of capital gains as per the provisions of sections 45 to 55 of the Act without any reference to the provisions of the Act relating to the rate of tax applicable to the taxation of such gains. In support of its submission, the assessee placed reliance upon the decisions of the Court/Tribunal, wherein a similar issue was decided in favour of the taxpayer. Thus, the assessee submitted that in the absence of a specific stipulation for set off, the assessee has the choice to choose the set off approach which is beneficial to it.

The Assessing Officer (“AO”), vide draft assessment order dated 14/03/2024 passed under section 144C(1) of the Act, disagreed with the submissions of the assessee and held that section 111A and section 115AD of the Act provides different rate of taxes, and therefore, these two sections are distinct and work in different spheres. The AO further held that section 115AD of the Act, being a special provision for Foreign Institutional Investors, overrides the general provision, namely section 111A of the Act. Therefore, the set off of short-term capital loss has to be adjusted according to the differential rates contemplated in the said sections. Thus, the assessee’s manner of setting off its short-term capital loss, taxable at 15%, first against the short-term capital gains, taxable at 30%, and the balance set off against the short-term capital gains taxable at 15% was disallowed. Accordingly, the short-term capital gain was computed by first setting off 15% loss against 15% gains, and thereafter, set off with other gains, as follows: – Particulars Amount (INR) Tax (INR) Short term capital gain on 77,740,748 2,33,22,225 transaction not subject to STT (30%) (Taxable @ 30%) (A) Short term capital gain on 4,406,838,283 transaction subject to STT (15%) (B) Less : Short term capital loss on (1,362,792,200) transaction subject to STT (15%) (C) Net Short-term capital gain (15%) 304,40,46,083 45,66,06,913 (B-C) Short term capital loss carried Nil forward

Accordingly, the AO computed the net short-term capital gains amounting to INR 47,99,29,138, as compared to the net short-term capital gains amounting to INR 46,82,68,025 offered by the assessee.

The assessee filed detailed objections against the addition made by the AO. Vide directions dated 29/11/2024, issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee and upheld the computation of capital gains made by the AO vide draft assessment order. The learned DRP further noted that this issue is pending consideration before the Hon’ble Bombay High Court in the case of DIT vs. M/s. DWS India Equity Fund, in of 2012, and there is no judicial finality on this issue.

In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order under section 143(3) r.w. section 144C(13) of the Act computed the net short-term capital gains of INR 47,99,29,138. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorized Representative (“learned AR”) submitted that this issue is covered in favour of the assessee by various decisions of the Co-ordinate Bench of the Tribunal.

On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the order passed by the lower authorities and submitted that under section 70(2) of the Act the short-term capital loss can only be set off against the short-term capital gains which is computed in a similar manner as the short-term capital loss. Thus, it was submitted that the short-term capital loss, which is taxable at 15%, can only be set off against the short-term capital gain, which is taxable at 15%.

We have considered the submissions of both sides and perused the material available on record. The sole issue which arises for our consideration in the present appeal is whether the short-term capital loss (on which STT was paid) can be set off against short-term capital gains (on which STT was not paid). Before proceeding further, it is relevant to note the provisions of section 70(2) of the Act, which deals with the set off of short-term capital loss, and the same reads as follows: -

Thus, as per the provisions of section 70(2) of the Act, the short-term capital loss can be set off against gain from any other capital asset. Section 70(2) of the Act does not make any further classification between the transactions where STT was paid and the transactions where STT was not paid.

We find that while deciding a similar issue, the Co-ordinate Bench of the Tribunal in iShares MSCI EM UCITS ETF USD ACC vs. DCIT, reported in [2024] 164 taxmann.com 56 (Mum.-Trib.), following the decision of the Hon’ble Calcutta High Court in CIT vs. Rungamatee Trexim (P.) Ltd. [IT Appeal number 812 of 2008, dated 19.12.2008], allowed the set off of short-term capital loss (on which STT was paid) against the short-term capital gains (on which STT was not paid). The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are as follows: - “016. This Leaves us with the only grounds relating to computation of short- term capital gain and set off of short-term capital loss. The only issue in this appeal is that assessee has earned short-term capital gain of 7 791,221/- which is chargeable to tax at the rate of 30%. Assessee claims that it has short-term capital loss on which securities transaction taxes are paid, and therefore such loss should be set-off against the short-term capital gain irrespective of the tax bracket of such gain and losses.

Short-term capital loss was Short-term capital loss should be set off against the net short- first set of against short-term term capital gain on which no capital gain on which securities securities transaction taxes transaction tax is paid paid 2. Balance short-term capital If short-term capital loss still loss shall be first set of remains it is to be carried against short-term capital forward and not that of against gain on which securities short-term capital gain on which transaction taxes paid no securities transaction tax is paid and consequently short- term capital gain on which no securities transaction tax is paid is to be taxed at the rate of 30% 3. If short-term capital gain on One short-term capital gain on which securities transaction which no securities transaction tax is paid still remains, such tax is paid is proposed to be gains are set of against taxed at the rate of 30% the available brought forward brought forward short-term short-term capital loss capital loss allowed to be carried forward without utilizing such brought forward short-term capital loss was set off

Therefore, we do not find any reason to deprive the assessee from set- off of short-term capital losses suffered by the assessee for the same year against the short-term capital gains earned by the assessee. Such claim is in accordance with the provisions of section 70 (2) of the act.

We find that several judicial precedents relied upon by the assessee also supports the case of the assessee. The honourable Calcutta High Court in Rungamatee Trexim ITA number 812 of 2008 dated 19 December 2008 held that there is no provision nor the act compels the assessee to lst set of short- term capital gain which STT against short-term capital loss with STT and then allows set of against short-term capital gain without STT. Therefore, without multiplying judicial precedents, following the decision of the honourable Calcutta High Court, and several other judicial precedents of the coordinate benches relied upon before us, we allow ground number 4 - 10 of the appeal of the assessee and direct the assessing officer to allow set-off of short-term capital loss suffered by the assessee against short-term capital gain of Rs. 791,221/-.”

Further, in light of the findings of the coordinate bench in the aforesaid decision, we do not find any merit in the submissions of the learned DR. It is also pertinent to note that the emphasis on the term "similar computation" in section 70(2) of the Act only refers to the computation as provided under sections 48 to 55 of the Act.

We find that similar findings have been rendered by the Co-ordinate Benches of the Tribunal in favour of the taxpayer in the following decisions: - 1. Emerging Markets Index Non-Lendable Fund vs. DCIT, Mumbai, in order dated 05.08.2024.

The learned DR could not show us any cogent reason to deviate from the aforesaid judicial precedents. Therefore, respectfully following the aforesaid decisions, we direct the AO to accept the methodology adopted by the assessee for the computation of the capital gains. As a result, grounds no.1 to 4 raised in assessee’s appeal are allowed.

Ground no.6, raised in assessee’s appeal, pertains to the initiation of penalty proceedings under section 270A of the Act, which is premature in nature. Therefore, the said ground is dismissed.

In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 23/05/2025