FIDELITY ASIAN VALUES PLC, GURGAON GURGAON vs. DY COMM OF INCOME TAX, (INTL TAXT), CIRCLE-2(3)(1), MUMBAI

The AO was of the view that the Short Term Capital Loss (STCL) chargeable to tax at 15% under section 111A of the Act cannot be set off against the Short Term Capital Gain (STCG) chargeable to tax at 30% under section 115AD of the Act. Accordingly the AO assessed the income at Rs. 14,95,51,380/-. The DRP confirmed the decision of the AO. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO. Ground No.1 and 2 are not pressed during the course of hearing and hence the same are dismissed as not pressed. Ground No.3 which is raised contending the impugned issue on merits is considered first for the purpose of adjudication.

The ld. AR submitted that section 70(2) of the Act does not prevent the set off of STCG against the STCL and wherever the intention of the legislature is to restrict the intra head setoff it has been explicitly provided in the provisions of the Fidelity Asian Values PLC Act. The ld. AR further submitted that the impugned issue is settled by various decisions of the Co-ordinate Bench and that the Hon'ble Calcutta High Court in the case of CIT v. Rungamatee Trexim (Pvt.) Ltd. [2008] (ITA No. 812 of 2008) while considering a similar issue has taken a view in favour of the assessee.

The ld. DR on the other hand relied on the order of the AO.

We heard the parties and perused the material on record. We notice that Hon'ble Calcutta High Court in the case of Rungamatee Trexim Pvt. Ltd. (supra) has considered a similar issue and held that “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 assensee 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.0. 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/- 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 fleet sitting off short term capital gain with STT against short term capital STT and Fidelity Asian Values PLC then allow ofset off of remaining loan of Rs.4,90,096/- against short term capital gain without STT. The mode ofset off adopted by the A.O. shown that be accepted in principle that short term capital loss with STT can be legally set off against short term capital gain without STT. According to the assessee, the chronology for the set off by the A.O. 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 wan 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 cane 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 i 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 law is involved in this appeal. Hence, we dismiss the appeal.”

We notice that the ratio laid down by the Hon'ble High Court is that when there is no specific mode of setoff is provided in the Act, the assessee has the option to setoff that is most beneficial to the assessee. We further notice that in the Fidelity Asian Values PLC case of First State Investments (Hongkong) Ltd. vs ADITIT) [(2011) 8 ITR(T) 315 (Mum-Trib)] under similar situation, the Assessing Officers rejected Assessee's manner of set-off of STCL in category liable to tax at 15% 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 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 result, the appeal of assessee is partly allowed.