NOMURA INDIA INVESTMENT FUND,MUMBAI vs. ADDL DIT (IT) RG 4, MUMBAI

shall be considered as the fair market value. It is noticed from the order of learned Commissioner (Appeals), on the date immediately preceding the date

8 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund of advice i.e. 10.04.2006, the closing price of shares of Bajaj Hindustan Ltd. on the Bombay Stock Exchange was quoted at Rs 518.80. Therefore, in our considered opinion, what ideally should have been taken as the cost of acquisition/FMV of shares of Bajaj Hindustan Ltd., for computing the Short term capital gain/loss is the aforesaid price. However, considering the fact that the revenue authorities have agreed with the assessee with regard to the applicable date for cost of acquisition as 12.04.2006, we do not want to indulge much into that aspect of the issue. Therefore, considering all relevant factors, we are of the view that share opening price of Rs 523.95 as considered by the assessee is closest to the closing price of the very same shares as on 10.04.2006, wherein, the shares were last traded prior to 12.04.2006. Therefore, in our view, the assessee was justified in adopting the cost of acquisition of shares at Rs 523.95. The allegation of the revenue authorities that the assessee has chosen the price of share which is more suitable to him, in our view, is not a correct finding of fact as the assessee has not taken the highest price of the share quoted during the date at Rs 525. After considering pros and cons of the issue, we hold that adoption of share opening price of Rs 523.95 as cost of acquisition is the most appropriate and rational in the given facts and circumstances of the case. Accordingly, we direct the Assessing Officer to accept the short term capital loss computed by the assessee. Consequently, the addition made in this regard is deleted.

9 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund

This ground is allowed.

Therefore, he called upon the assessee to explain why such long term capital loss should not be set off against long term capital gain and carry forward of loss to such extent should not be disallowed. In response, it was submitted by the assessee that as per section 10(38) of the Act, only income arising from long term capital gain on sale of shares subjected to STT is exempt u/s. 10(38) of the Act. Thus, it does not include loss arising out of sale of shares.

The Assessing Officer however, did not find merit in the submissions of the assessee. He observed, the term income as used in section 10(38) refers to the entire receipts arising from transfer of long term capital asset and also includes loss. Accordingly, he set off the long term capital loss against the 10 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund exempt long term capital gain, which resulted in part disallowance of carry forward of long term capital loss. The aforesaid decision of the Assessing Officer was also upheld by learned Commissioner (Appeals).

Therefore, the income is otherwise taxable. He submitted, each share transaction is a distinct source of income. Hence, the observation of the Assessing Officer and learned Commissioner (Appeals) that the entire receipts arising from transfer of shares is to be treated as income is completely wrong. The learned senior counsel submitted, the issue otherwise stands covered in favour of the assessee by number of decisions of different Benches of the Tribunal. In this context he drew out attention to the following decisions:

• The Pr. CIT vs. Raptakos Brett and Co. Ltd. [Income Tax Appeal no.

357 of 2016 dated 09.10.2018]

11 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund • Raptakos Brett & Co. Ltd. vs. DCIT [2015] 58 taxmann.com 115 • JCIT vs. Montgomery Emerging Markets Funds [2006] 100 ITD 217

(Mum) (SB) • United Investments vs. ACIT (ITA No. 511/Kol/2017 for A.Y. 2013-14 order dated 01.07.2019) • ACIT vs. Shri Somnath Vaijanath Sakre (ITA No.2986/Pun/2016 for A.Y.

2012-13, order dated 08.03.2019)

The issue arising for consideration is, whether long term capital loss arising on sale of shares can be set off against long term capital gain arising on sale of shares claimed to be exempt u/s. 10(38) of the Act. It is the case of the 12 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund Revenue that the expression “income” as used in section 10(38) of the Act also includes loss. However, on a reading of section 10(38) of the Act, it becomes clear that the exemption in respect of income derived from sale of shares is exempt in a case where STT has been paid. Therefore, it cannot be said that capital gain on sale of shares is generally exempt. Only on fulfillment of certain conditions, gain derived from sale of shares is exempt u/s. 10(38) of the Act. Thus, the income derived from sale of shares is not exempt at the source itself. The aforesaid view has been expressed by ITAT, Mumbai Bench in the case of Raptakos Brett & Co. Ltd. vs. DCIT (supra).

The observations of the Bench in this regard is reproduced hereunder for ease of reference:

7. We have heard rival submissions and perused the relevant findings given in the impugned orders. The main issue before us is, whether Long term capital loss on sale of equity shares can be set off against Long term capital gain arising on sale of land or not, as the income from Long term capital gain on sale of such shares are exempt u/s. 10(38). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines “Capital asset and various exceptions and exclusions have been provided which are not treated as capital asset. Section 45 is the charging section for any profits or gain arising from a transfer of a capital asset in the previous year i.e. taxability of capital gains. Section 47 enlists various exceptions and transactions which are not treated as transfer for the purpose of capital gain u/s.

8. From the conjoint reading and plain understanding of all these sections it can be seen that, firstly, shares in the company are treated as capital

13 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset. Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable u/s. 45; thirdly, section 47 does not enlist any such exception that transfer of long term equity shares/funds are not treated as transfer for the purpose of section 45 and section 48 provides for computation of capital gain, which is arrived at after deducting cost of acquisition i.e. cost of any improvement and expenditure incurred in connection with transfer of capital asset, even for arriving of gain in transfer of equity shares; lastly, section 70 & 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been made/ carved out with regard to Long term capital gain arising on sale of equity shares. The whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular “provision” of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, the concept of income including loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions. Section 10(38) provides exemption of income only from transfer of Long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e. payment of security transaction tax and whether the transaction on sale of such equity share or unit is entered into on or after the date on which chapter VII of Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given. Thus, the income contemplated in section 10(38) is only a part of the source of capital gain on shares and only a limited portion of source is treated as exempt and not the entire capital gain (on sale of shares). If an equity share is sold within the period of twelve months then it is chargeable to tax and only if it falls within the definition of Long term capital asset and, further fulfils the conditions mentioned in subsection (38) of section 10 then only such portion of income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit from such shares are taxable. Section 10 provides that certain income are not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income do not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which does not enter into computation at all or is a part of the source, the income in respect of which is 14 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund excluded in the computation of total income. For instance, if the assessee has income from Short term capital gain on sale of shares; Long term capital gain on debt funds; and Long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of Long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon’ble Calcutta High Court in Royal Turf Club, wherein the Hon’ble High Court observed that “under the Income tax Act 1961 there are certain incomes which do not enter into the computation of the total income at all. In computing the total income of a resident assessee, certain incomes are not included under s.10 of the Act. It depends on the particular case; where the Act is made inapplicable to income from a certain source under the scheme of the Act, the profit and loss resulting from such a source will not enter into the computation at all. But there are other sources which, for certain economic reasons, are not included or excluded by the will of the Legislature. In such a case, one must look to the specific exclusion that has been made.” The Hon’ble High Court was besieged with the following question “Whether under s.10(27) read with s.70 of the I.T.Act, 1961, was the assessee entitled to set off the loss on the two heads, namely, Broodmares Account and the Pig Account, against its income of other sources under the head “Business” ” Their Lordships after analysing the provisions of section 70 and section 10(27) observed in the following manner: “In this case it is important to bear in mind that set-off is being claimed under Section 70 of the 1961 Act which permits set off of any income falling under any head of income other than the capital gain which is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. We have noticed that in the instant case the exclusion has been conceded in computing the business income or the source of income from the head of business and in computing that business income, the loss from one particular source, that is, broodmares account and the pig account, had been excluded contrary to the submission of the assessee. The assessee wanted these losses to be set off. The Revenue contends that as the sources of the income are not to be included in view of the provisions of Clause (27) of s. 10 of the 1961 Act, the loss suffered from this source could also not merit the exclusion. Under the I.T. Act, there are certain incomes which do not enter into the computation of the total income at all. In this connection we have to bear in mind the scheme of the charging section which provides that the incomes shall be charged and s. 4 of the Act provides that the Central Act enacts

15 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund that the incomes shall be charged for any assessment year and in accordance with and subject to the provisions of the 1961 Act in respect of the total income of the previous year or years or whatever the case may be. The scheme of " total income " has been explained by s. 5 of the Act which provides that subject to the provisions of the Act, the total income of the previous year of a person who is a resident includes all income from whatever source it is derived. In computing the total income, certain incomes are not included under s. 10 of the Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look to the specific exclusion that has been made. The question is in this case whether s. 10(27) is a source which does not enter into the computation at all or is a source the income in respect of which is excluded in the computation of total income. How this question will have to be viewed, has been looked into by the Supreme Court in several decisions to some of which our attention was drawn.” After discussing the various decisions of the Hon’ble Supreme Court specifically the decision of in the case of Karamchand Premchand (supra), the Hon’ble High Court came to the following conclusion: “cl.(27) of s.10 excludes in express terms only “any income derived from a business of live-stock breeding or poultry or dairy farming. It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissible deductions in computing its total income” Thus, the ratio laid down by the Hon’ble Calcutta High Court is clearly applicable and accordingly we follow the same in the present case.

9. Now coming to the argument of the learned DR and learned CIT(A) that income includes loss and if income is exempt then loss will also not be taken into computation of the income, and such an argument is with reference to the decision of Hon’ble Supreme Court in the case of CIT vs. Hariprasad & Company Pvt. Ltd. (1975) 99 ITR 118 . The Hon’ble Supreme Court, opined that, if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward. Further, the Hon’ble Supreme Court observed that "From the charging provisions of the Act, it is discernible

16 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund that the words ' income ' or ' profits and gains' should be understood as including losses also, so that, in one sense 'profits and gains' represent ' plus income ' whereas losses represent 'minus income'. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although Section 6 classifies income under six heads, the main charging provision is Section 3 which levies income-tax, as only one tax, on the 'total income ' of the assessee as defined in Section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the ' total amount of income, profits and gains referred to in Section 4(1)'. Secondly, it must be 'computed in the manner laid down in the Act'. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge." While concluding the issue their Lordships observed that “it may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set- off. Its sole purpose is to set off the loss against the profits of a subsequent year. It pre-supposes the permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It follows that if such setoff is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be “carried forward”. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source.” The ratio and the principle laid down by the Hon’ble Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon’ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon’ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon’ble Supreme Court and held that the same will not apply in such cases. Thus, in our conclusion, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3).”

17 ITA 8140/Mum/2010 Nomura India Investment Fund Mother Fund

Ground nos. 2 & 3 raised by the assessee are allowed.

Order pronounced in the open court on this 24th day of December, 2019.