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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA&
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD [CONDUCTED THROUGH VIRTUAL AT AHMEDABAD] BEFORE SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER& Ms. MADHUMITA ROY, JUDICIAL MEMBER I.T.A. No. 1546/Ahd/2019 (Assessment Year: 2016-17) Mrs. Sikha Sanjaya Sharma Vs. DCIT 4402, South Tower, The Imperial, Circle-1(1)(1), B B. Nakashe Marg, Ahmedabad Mumbai-400034 [PAN No.ALFPS9244J] (Appellant) .. (Respondent) Assessee by : Shri S. N. Soparkar, Sr. Adv., & Shri Parin Shah, AR Revenue by : Shri Purushottam Kumar, Sr. DR Date of Hearing 12.01.2022 13.04.2022 Date of Pronouncement O R D E R PER Ms. MADHUMITA ROY - JM:
The instant appeal filed by the assessee is directed against the order dated 28.08.2019 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad arising out of the order dated 13.12.2018 passed by the DCIT, Circle-1(1)(1), Ahmedabad under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for A.Y. 2016-17.
The assessee has raised following Grounds:
“1) The learned Commissioner of income tax erred in upholding the order of the Assessing Officer setting off the long term capital loss aggregating to Rs. 15,41,625/- arising on sale of shares not subject to STT against long term capital gain arising from sale of Shares subjected to STT and accordingly exempt under section 10(38) of the Income Tax Act, 1961 the conclusion arrived at by the learned lower authorities is contrary to law.
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 2 - 2) The learned Commissioner of income tax erred to upholding the order of the Assessing Officer setting of the short term capital loss amounting to Rs. 2,46,64,662/- arising on sale of shares not subjected to STT against long term capital gains subjected to STT and accordingly exempt from tax under section 10(38) of the Act, 1961 the conclusion arrived at by the learned lower authorities is contrary to law. 3) The appellant reserve the right to add, to alter or amend the Grounds of Appeal.” 3. Precisely stated the facts are such that the assessee submitted Return of Income on 26.07.2016, declaring a total income of Rs. 17,25,67,630/- alongwith the following incomes:
Long-Term Capital Gain (STT Paid) and exempt u/s 10(38) – Rs. 2,62,06,472/- Long-Term Capital Loss (STT not paid) – Rs. 15,41,625/- Short-Term Capital Loss -- Rs. 5,06,74,578/- As the Long-Term Capital Gain (STT paid)of Rs. 2,62,06,472/- is exempted u/s 10(38), the assessee claimed carry forward of Long-Term Capital Loss (STT not paid) of Rs. 15,41,625/- and Short-Term Capital Loss of Rs. 5,06,74,578/-.
The Ld. AO completed assessment u/s 143(3) and assessed the Total Income at the same amount of Rs. 17,25,67,630/- as declared by the assessee, but made set-off of Long-Term Capital Loss (STT not paid) of Rs.15,41,625/- and Short-Term Capital Loss of Rs. 2,46,64,662/- against the Long-Term Capital Gain of Rs. 2,62,06,472/- exempted u/s 10(38) and thus reduced the quantum of carried-forward losses. Being aggrieved, the assessee preferred appeal to Ld. CIT(A).The Ld. CIT(A) upheld the action of Ld. AO and dismissed the appeal of assessee by observing as under: “The Assessing Officer in the assessment-order has noted that the Section 70 nowhere mentions that short term capital loss and long-term capital loss cannot be set off against the exempted long-term capital gain. The appellant has relied upon the
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 3 - decision of Hon’ble Mumbai ITAT in the case of G.K. RammurthyVs. JCIT (2010) 2 ITR (T) 139 (Mumbai). It is seen that the Hon’ble ITAT in the later decision in the case of Raptakos Brett & Co. Ltd. Mumbai in ITA No. 3317 / Mum / 2009 & 1692 / Mum / 2010 dated 10/06/2015 on allowability of set off against long-term capital gain has held that section 10(38) excludes in express terms only the income arising from transfer of long-term assets being equity shares 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 assets or short term capital assets being shares. Following the above arguments, the Assessing Officer was justified to set off short-term capital loss on long-term capital gain. Similar view has been held by Hon’ble Gujrat High Court in the case of KishorbhaiBhikhabhai Virani Vs. ACIT (2014) 367 ITR 261. In view of the above, the computation made by Assessing Officer is upheld.” 5. Being aggrieved by the order of Ld. CIT(A), the assessee has preferred this appeal and now before us.
Before us, the Ld. A/R submitted that the Long-Term Capital Gain of Rs. 2,62,06,472/- was exempted u/s 10(38) of the Act and therefore did not form part of Total Income at all under the Scheme of the Act. The Ld. A/R further argued that since the exempted Long-Term Capital Gain of Rs. 2,62,06,472/- did not form part of Total Income at all, the assessee was legally entitled to carry forward the full amount of losses suffered by him without setting off against the aforesaid exempted Long-Term Capital Gain of Rs. 2,62,06,472/-. The Ld. A/R relied upon the following decisions:
(i) G.K. Ramaswamy 37 SOT 345 (ITAT Mumbai)
(ii) NikilSawhney 119 taxmann.com 372 (Delhi High Court)
(iii) KishorebhaiBhikhbhai Virani 367 ITR 261 (Gujrat High Court)
(iv) ANG Securities Ltd. 37 taxmann.com 210 (P&H High Court)
(v) Apollo Tyres Ltd. 130 taxmann.com 295 (Kerala High Court)
(vi) Inductotherm (India) Pvt. Ltd. 83 taxmann.com (ITAT Ahmedabad)
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 4 - With this submission, the Ld. A/R claimed that both the Ld. AO and Ld. CIT(A) are wrong in setting off losses against the exempted Long-term Capital Gain and thereby reduce the losses available for carry forward.
Per contra, the Ld. D/R supported the orders of lower authorities.
The short and exact controversy before us is whether the assessee was legally correct in claiming carry forward of full amount of losses without setting of such losses against the Long-Term Capital Gain exempted u/s 10(38)? To resolve this, we briefly look into the scheme of Income-tax Act, 1961, which is as under:
(i) Section 4 of the act creates charge of tax on “Total Income” of a person.
(ii) Section 2(45) defines “Total Income” as under:
“Total Income” means the total amount of income referred to in section 5, computed in the manner laid down in the Act.”
(iii) Chapter-III of the Act bears the title “Income which do not form part of Total Income”. Section 10 is the first section in this Chapter. The opening language of section 10 reads as under:
“In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included”.
Thereafter several clauses beginning with Clause No. (1)are prescribed in section 10. One such clause is clause No. (38). The Long-Term Capital Gain of Rs. 2,62,06,472/-earned by the
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 5 - assessee is covered under this Clause (38) of section 10 and therefore it is not to be included in the Total Income.
(iv) Thereafter, Chapter IV prescribes “Computation of Total Income”. Section 14 is the opening section of this Chapter, which prescribes:
“Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:- A. Salaries B. XXX C. Income from house property D. Profits and gains of business or profession E. Capital Gains F. Income from other sources”
(v) Thereafter section 15 to section 59 prescribe detailed provisions for the computation of taxable income under the various heads enumerated in S. No. A to F of section 14 noted above. When we compute incomes under these heads, sometimes we arrive at negative incomes (i.e. losses) and sometimes at positive income (i.e. profit).
(vi) Thereafter, section 70 to 80 falling within Chapter VI prescribe the scheme of set-off and carry-forward of negative incomes (i.e. losses) against positive incomes (i.e. profits).
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 6 - The interpretation coming out of above provisions can be understood in a very simple manner. The tax is payable on Total Income. The Total Income has to be computed in the manner laid down in this Act. Chapter- III prescribes incomes which are not to be included in Total Income. Chapter–IV mandatesclassification of incomes under various heads for the purposes of charge of income-tax and “computation of Total Income”. The clear effect of section 14 is that only those incomes which form part of Total Income, can only be classified and computed under various heads. In other words, the incomes which do not form of Total Income (obviously such incomes are the incomes covered under Chapter-III, practically called “exempted incomes”), are out of consideration of section 14 as well as the computational scheme of various heads prescribed in section 15 to 59. Thereafter the scheme of set-off and carry- forward of losses prescribed in section 70 to 80 trigger only for those losses or incomes which have been computed under various heads as prescribed. From this scheme as prescribed in Income-tax Act, it is very much clear that the exempted incomes falling under Chapter-III do not enter into the computation of Total Income itself and hence such incomes are not available for set-off of any loss under section 70 to 80. This understanding of law is well-established and well-understood over the years and this is the essence of submissions made by Ld. A/R.
Having understood the scheme of the Act, now we proceed to anlayse some of the decisions relied upon by the Ld. A/R appearing on behalf of assessee:
(i) G.K. RammurthyVs. JCIT (2010) 2 ITR (T) 139 (ITAT- Mumbai):
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 7 - In this case the assessee claimed carry-forward of capital loss of Rs. 9,23,55,945/- but the lower authorities adjusted loss against Long term capital gain of Rs. 33,01,57,200/- exempt u/s 10(38) and did not allow carry forward. On appeal by assessee, the Hon’ble ITAT examined the scheme of Income-tax Act extensively and allowed the claim of assesse by concluding thus:
“In the light of the above discussion, we are not in agreement with the view of the revenue that long term capital loss is to set off against exempt income (long term capital gains) after 1.10.2004. We, therefore, set aside the orders of the revenue authorities and allow the claim of the assessee.” The facts of this case are exactly same as of the present appeal and therefore the decision is squarely applicable.
(ii) NikhilSawhney 119 taxmann.com 372 (Delhi High Court): In this case, the assessee claimed set-off of exempted long term capital loss u/s 10 (38) against taxable income. The revenue did not allow claim of assessee. On appeal by assessee, the Hon’ble High Court held:
“39. In view of the above facts, judicial precedents as well as the authoritative commentary on The Income Tax Law And Practice, we are of the view that the lower authorities have not committed any error in ignoring the loss incurred by the assessee on sale of shares and securities, on which assessee has paid securities transaction tax, holding that when the income is exempt, then both positive income as well as the negative loss, both, do not enter into the regular computation of the assessee. Accordingly, the orders of the lower authorities are upheld wherein the assessee has been denied the set of and or carry forward of long-term capital loss of Rs. 90,80,571/- on transfer of shares on which the assessee has paid securities transaction tax and are covered by the provisions of Section 10 (38) of the Act.”
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 8 -
In this decision, the Hon’ble High Court has held that the exempted long-term capital loss cannot be set off against taxable income.
Other decisions relied upon by the Ld. A/R also hold the same proposition that neither taxable loss can be set off against exempted income nor exempted loss can be set off against taxable income.
Now we turn to the decision of Hon’ble Jurisdictional High Court of Gujrat in Kishorbhai Bhikhabhai Virani Vs. ACIT (2014) 367 ITR 261. In this case, the assessee was having exempted long-term capital loss u/s 10(38) and claimed set off of the same against the taxable capital gain. On appeal by assessee, the Hon’ble Jurisdictional High Court of Gujrat did not allow the claim of assessee holding as under: “6. In this context, section 10(38) of the Act becomes relevant. As is well-known, section 10 pertains to income not included in the total income. Sub- section (38) thereof reads as under: “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included: xxxxxxxxx (38): any income arising from the transfer of along term capital asset, being an equity share in a company or a unit of equity oriented fund where: (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter: Provided that the income by way of long-term capital gain of a company a company shall be taken into account in computing the book-profit and income-tax payable under section 115JB”
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 9 -
The fact that the capital asset in question, namely, the shares of Suashish Diamond Ltd. was covered under section 10(38) of the Act was not in dispute. That being the position, by virtue of section 10(38) of the Act, in computing the total income of previous year, any income covered under such clause shall not be included. If that be so, the loss arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assesse for the year under consideration ….”.
Interestingly, the Ld. CIT(A) has relied upon this decision and dismissed the claim of assessee. At the same time, the Ld. A/R appearing on behalf of assessee has also relied upon this decision to support the claim of assessee. On a careful consideration of the decision, we observe that it holds the proposition that the exempted long-term capital loss u/s 10(38) does not enter into computation of total income and therefore such loss cannot be set off against taxable income. Likewise the exempted long-term capital gain u/s 10(38) does not enter into computation of total income and therefore a taxable loss cannot be set off against such exempt income. Hence the reliance of Ld. CIT(A) on this decision is totally mis-placed. This decision is clearly in favour of assessee and rightly relied upon by Ld. A/R.
Now, there remains one more decision in Raptakos Brett & Co. Ltd., ITA No. 3317 / Mum / 2009 & 1692 / Mum / 2010 dated 10/06/2015 (ITAT- Mumbai)relied upon by the Revenue, which we would certainly like to discuss. In this case, the assessee claimed set off of exempted Long term capital loss u/s 10(38) against the taxable Long term capital gains of Rs. 94,12,00,000/- and paid tax on balance taxable Long-term Capital Gain. Ld. AO did not allow set off with the reasoning that the loss from exempted source does not enter into the computation of total income at all. However, on appeal, the Hon’ble ITAT allowed the claim of assessee. Thus, this decision goes to conclude that the exempted long-term capital loss u/s 10(38) can be set off against taxable capital gain. In a way, this decision supports the revenue’s contention that the
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 10 -
loss from taxable source can be set off against exempted long-term capital gain u/s 10(38) and only remaining loss shall be carried forward. But if we look deeply into this decision, we observe that Hon’ble co-ordinate bench of ITAT has taken such a view by observing as under:
“10. …… Lastly, coming to the decision of Hon'ble Gujarat High Court in the case of KishorebhaiBhikhabhai Virani (supra), we find that the issue involved in the present case was almost the same, wherein the Hon'ble High Court after following the decision of Hon'ble Supreme Court in the case of Harprasad& Company Pvt. Ltd. (supra), had decided the issue against the assessee. Since we have already noted down the ratio of Hon'ble Calcutta High Court, wherein the Hon'ble High Court has discussed this issue in detail after relying upon series of decisions of Hon'ble Supreme Court and have reached to a conclusion as discussed above, and, therefore, we are respectfully following the ratio of the decision of the Calcutta High Court. Further the said decision have not been referred or distinguished by the Hon'ble Gujarat High Court. Accordingly, we allow the assessee's ground no.1 and direct the Assessing Officer to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land.” From this reproduced paragraph, we find that the Hon’ble co-ordinate bench of ITAT was persuaded to follow the decision of Hon’ble Calcutta High Court in preference to the decision rendered by Hon’ble Gujarat High Court in Kishorebhai Bhikhabhai Virani (Supra). But this Bench located at Ahmedabad falls within the jurisdiction of Hon’ble Gujarat High Court and we are abide to follow respectfully the decision of Hon’ble Jurisdictional High Court. Hence we are not in a position to adopt, with due respect, the decision of Hon’ble co- ordinate bench. As discussed earlier in detail, the decision of Hon’ble Jurisdictional High Court of Gujarat in Kishorebhai Bhikhabhai Virani (Supra)is in favour of assessee and does not help the Revenue.
Having considered the scheme of law as also the interpretation taken in various legal precedents discussed above including the binding decision of Hon’ble Jurisdictional High Court of Gujarat in Kishorbhai Bhikhabhai Virani (Supra), we are inclined to hold that the assessee has rightly claimed the carry
ITA No.1546/Ahd/2019 Mrs. Shikha Sanjaya Sharma vs. DCIT Asst.Year –2016-17 - 11 - forward of Long-Term Capital Loss (STT not paid) of Rs. 15,41,625/- and Short-Term Capital Loss of Rs. 5,06,74,578/- without setting off against the exempted Long-Term Capital Gain (STT paid) of Rs. 2,62,06,472/- u/s 10(38).
At this stage we would also like to make an additional mention that even if assume, without accepting, that the revenue’s contention is correct in setting off losses against exempt income [long term capital gain u/s 10(38)], there would be an absurd outcome.
In view of foregoing discussion, we find that the lower authorities are not justified in setting off losses against the exempted long-term capital gain thereby reducing the quantum of carry forward of losses claimed by the assessee. We therefore direct the Ld. AO to allow full carry-forward of losses as claimed by the assessee without set-off against exempted long-term capital gain.
In the result, this appeal of assessee is allowed. This Order pronounced in Open Court on 13/04/2022
Sd/- Sd/- (ANNAPURNA GUPTA) (Ms. MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 13 /04/2022 TRUE COPY TANMAY, Sr. PS