M/S. APPOLO TYRES LTD. vs. THE DEPUTY COMMISSIONER OF INCOME-TAX

“C.R.” IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS TUESDAY, THE 3RD DAY OF AUGUST 2021 / 12TH SRAVANA, 1943 ITA NO. 216 OF 2013 AGAINST THE ORDER IN ITA 627/2008 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: M/S. APPOLO TYRES LTD. 6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD, KOCHI-31 (PAN: AAACA 69900). BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/S: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 1(1) ERNAKULAM, KOCHI-682018. BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.P.K.R.MENONSR.COUNSEL GOITAXES JOSE JOSEPH, SC, FOR INCOME TAX CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT OTHER PRESENT: SRI.CHRISTOPHER ABRAHAM, SC - ITA. THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 03.08.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

I.T.A. No.216/2013 -2- J U D G M E N T S.V.Bhatti, J. Heard learned Senior Counsel Mr Joseph Markos and learned Standing Counsel Mr Christopher Abraham for parties. 2. M/s.Apollo Tyres Ltd., Kochi/Assessee is the appellant. The Deputy Commissioner of Income Tax, Ernakulam/Revenue is the respondent. The assessee challenges the order of Income Tax Appellate Tribunal (for short ‘the Tribunal’), Cochin Bench, Cochin in ITA No.627/Coch/2008 dated 08.02.2013. The issues raised in the appeal pertain to the Assessment Year 2005-06. The appeal is admitted on the following substantial questions of law. “1. Whether on the facts and in the circumstances of the case the Tribunal is justified in law in disallowing the

I.T.A. No.216/2013 -3- deduction of Rs.2,76,00,000/- being advances paid to Continental Group of Companies for supply of machinery and written off during the year, holding that the amount is of the nature of capital expenditure? 2. Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the setting off of long term capital loss on sale of shares and units of mutual funds against long term capital gain on sale of land? 3. Substantial question no.1 relates to disallowance of the deduction of Rs.2,76,00,000/- being advances paid to the supplier of machinery and written off on account of failure on the performance of obligations by the supplier. The assessee has filed ITA No.26/2013 for the Assessment Year 2003-04 and question no.4 in the said appeal relates to disallowing the deduction of advances written off by the assessee. The Counsel

I.T.A. No.216/2013 -4- appearing for the parties state that the same reason could be adopted for answering the instant question as well. For the reasons recorded in ITA No.26/2013 in question no.4 therein, the instant question is answered in favour of the Revenue and against the Assessee. 4. Substantial question no.2 deals with the claim of the assessee in setting off long term capital loss on sale of shares and units of mutual funds against the long term capital gain earned on the sale of land. The question presents the application of Section 10(38) of the Income Tax Act, 1961 (for short ‘the Act’) on one hand and on another the extent to which set-off under Section 70(3) read with Sections 48 to 55 of the Act could be claimed by the assessee. The circumstances relevant for examining the question are very briefly stated thus: 4.1 In the previous year, corresponding to Assessment Year 2005-06, the assessee has sold shares and units of mutual

I.T.A. No.216/2013 -5- funds and paid STT (Securities Transaction Tax). In the same previous year, the assessee sold land. In the computation filed by the assessee, the assessee has set off the loss on the sale of shares and mutual funds against the capital gains made from the sale of land and accounted for the net figure for the purpose of capital gain. The case of the assessee is that the assessee is entitled to claim set-off for the loss booked on sale of shares etc., against the income earned from the sale of a long term asset, under Section 70(3) of the Act. The assessee, it is claimed, is entitled to have any loss arising on account of transfer of any long term capital asset set-off against income, if any, arising on account of transfer of any other long term capital asset in the same Assessment Year. In other words, the case of the assessee is that the assessee is entitled to set off the loss booked against the income earned on the sale of a long term capital asset. The Assessing Officer disallowed the set-off claimed by the assessee

I.T.A. No.216/2013 -6- under Sec 70 (3) of the Act. 4.2 The reasoning of the Assessing Officer is that whatever income is exempt under different clauses of Section 10, such income shall be removed from the purview of income before computation of the total income of an assessee. Hence, an income that includes loss as well is exempt and computation is not done in respect of such excluded item i.e., loss. Further, the applicability of Section 70(3) arises only upon computation of income as per the provisions of Sections 48 to 55 has been made by the assessee. Comparing the details of the case on hand, the receipt in the form of sale proceeds on the sale of long term capital assets is suffering a loss at the hands of the assessee. In the view of the Assessing Officer, the loss is not computed under Sections 48 to 55 of the Act and, for all purposes, the entry is ignored both by the assessee and the Department. Therefore, the loss suffered by the assessee on the

I.T.A. No.216/2013 -7- sale of a long term capital asset covered by Section 10(38) cannot be set off under Section 70(3) of the Act, unless the computation of such income or loss is made under Sections 48 to 55 of the Act. The Assessing Officer thus rejected the claim of set-off made by the assessee. The CIT (Appeals) examined the rival assertions, and, on being satisfied with the view taken by the Assessing Officer, confirmed the view taken by the Assessing Officer. The assessee carried the matter in appeal before the Tribunal. The Tribunal confirmed the view taken by the Assessing Officer and the CIT (Appeals). Hence the Appeal. 5. Senior Advocate Mr Joseph Markos, while reiterating the arguments put forward by the assessee before the statutory authorities and the Tribunal, expanded the contention by arguing that the view taken by the Tribunal and the authorities could negate the statutory deduction allowed to the assessee. According to him, the criteria for attracting Section 10(38) is

I.T.A. No.216/2013 -8- that income arising from the transfer of a long term capital asset, being an equity share in a company or a unit of an equity- oriented fund, the transaction is chargeable to STT. In the case on hand, the twin requirements are attracted, however, instead of earning income, the transaction resulted in a loss to the assessee. The loss is from a long term asset, and, hence, could be set off in terms of Section 70(3) of the Act. Therefore, the income derived from the sale of shares even is exempt from the computation of the total income of the assessee, the loss from the sale of a long term share is set off against income from the sale of a long term asset. According to him, Section 70(3), if plainly read, does not prohibit the assessee from availing the loss otherwise incurred by the assessee in respect of the sale of a long term capital asset that has been subjected to STT. Therefore, he argues that the Tribunal and the authorities ought to have allowed the claim of set-off made by the assessee

I.T.A. No.216/2013 -9- under Sec 70 (3) of the Act. In support of his argument, he relied on the judgments reported in Royal Calcutta Truf Club v. CIT1; CIT v. Karamchand Premchand Ltd2; CIT v. Harprasad & Co.3 and Kishorebhai Virani v. ACIT4. 6. Mr Christopher Abraham, learned Standing Counsel for the Department, contends that computation of the total income is dealt with by Section 14 of the Act and Section 14 classifies income under five heads, namely (i) salaries, (ii) income from house property, (iii) income from business profession (iv) income from capital gains, and (v) income from other sources. Each one of these heads of income is capable of having more than one source of income. The case on hand deals with income under the head ‘capital gains’. The assessee under this head has two sources of income; firstly, from the sale of equity shares and units in mutual funds which are long term 1 (1982) 144 ITR 100 (Ker.) 2 (1960) 40 ITR 106 (SC) 3 (1975) 99 ITR 118 (SC) 4 (2014) 367 ITR 261 (Guj.)

I.T.A. No.216/2013 -10- capital assets and the sale was subjected to STT; secondly, sale of land held for more than three years and is in the nature of long term capital gain. The sources now clubbed together are distinct and separate. The first source, namely income from the sale of shares/units in mutual funds is a non-taxable source in view of Section 10(38) of the Act and excluded from computation for arriving at income. Therefore, the loss from these non-taxable sources is not available for set-off against any of the incomes from the second source i.e., a source computed under Sections 48 to 55 of the Act. 6.1 Therefore, the first contention is that the assessee is mixing up heterogeneous heads as homogeneous heads and claiming the set-off. He further contends that the decisions in Royal Calcutta Truf Club case and Netesoft India v. DCIT5 are distinguishable both in law and in fact. The ratio of the Supreme Court in Harprasad & Co. case that the words ‘income’ 5 ITA No.5359/Mum/2017 (Mumbai Tribunal)

I.T.A. No.216/2013 -11- 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, the 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. Therefore, the effect from the perspective of the Act is that both the income and the loss are excluded from computation under Sections 48 to 55 of the Act. 6.2 By inviting our attention to the view taken by the Supreme Court in Harprasad & Co. case it is argued that income includes profit as well as loss. In one sense, ‘profits and gains’ represent plus income whereas ‘losses’ represent minus income. According to him, what is important in all these cases is loss is negative profit. Both positive and negative profits are of a

I.T.A. No.216/2013 -12- revenue character and enter into computation wherever it becomes material in the same mode of the taxable income of the assessee. By laying emphasis on the above view of the apex Court, he argues that what is excluded by Section 10(38) of the Act, does not come within the mode of computation under Sections 48 to 55 of the Act. The inclusion of an excluded income, as well as loss for set-off under Section 10(38), would completely change the meaning of Section 70(3) of the Act. He argues that the substantial question of law framed has to be answered in the negative, in favour of the Revenue and against the Assessee. He relies on the judgment of Gujarat High Court in Kishorebhai Virani case with considerable force and submits that the facts in Kishorebhai Virani case, the application of the decision in Harprasad & Co. case of the Supreme Court and the conclusions recorded by the Gujarat High Court would apply to the case on hand in entirety and by following the said judgment

I.T.A. No.216/2013 -13- the appeal has to be dismissed. 7. We have taken note of the rival contentions and perused the record. 7.1 The question of law framed deals with the claim of the assessee to set off the loss suffered by the assessee from the sale of long term capital assets i.e., shares against the income earned from the sale of a long term capital asset. Section 10(38) reads as follows: “10(38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust 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:” Chapter III of the Act deals with incomes that do not form part of total income. Sections 10 to 13 are various incomes that are

I.T.A. No.216/2013 -14- treated as not forming part of the income of the assessee. Chapter IV deals with the computation of total income. Section 14 deals with heads of income. Sections 45 to 55 deal with computation of capital gains. Chapter VI deals with aggregation of income and set-off or carry forward of loss. Set-off of loss from one source against income from another source under the same head of income. Section 70 reads thus: “(1) xxxxx (2) xxxxx (3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set-off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short- term capital asset.” 7.2 There is no quarrel between the assessee and the Revenue that the shares and units of mutual funds sold by the

I.T.A. No.216/2013 -15- assessee would come under Section 10(38) of the Act. Thus had there been income such income is excluded from the computation of income of the assessee. Sections 48 to 55 deal with the computation of long term capital gains by the assessee. The principle laid down by the Supreme Court in Harprasad & Co. case is to the effect that income is inclusive of profit and loss i.e., both positive and negative effects of the transaction. Hence, it is legal and correct not to introduce the entry of sale of shares in the computation of income under Sections 48 to 55. The set- off of loss etc is dealt with by Section 70(3) of the Act. 7.3 Let us understand Sec 70 (3) as follows: Set-off of loss from one source against income from another source, important words are under the same head of income. Next, Section 70(3) is applicable or attracted, viz:- (a) the result of the computation made for the assessment year, important words are viz. under Sections 48 to 55 in respect of any capital asset, being a

I.T.A. No.216/2013 -16- short term capital asset, in a loss; (b) enables the assessee to have the amount of such loss set off against the income if any; (c) as arrived at under similar computations i.e., Sections 48 to 55 made for the assessment year for same assessment year in respect of the same capital asset not being a short term capital asset. Under Section 70(3) of the Act, the first requirement is that the result of the computation made for any assessment year under Sections 48 to 55 in respect of any capital asset excluding a short term capital asset results in a loss. Then, the assessee shall be entitled to have such loss set-off against the income, if any as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short term capital asset. Therefore, to merit an adjustment under Section 70(3), the assessee is required to first establish that the loss arrived at by the assessee is on the computation

I.T.A. No.216/2013 -17- under Sections 48 to 55, in respect of a long term capital asset. And the loss can be set off only against the income arrived at under a similar computation i.e., Sections 48 to 55 made for the very assessment year. The literal meaning of Section 70(3) clearly shows that both for including the loss against set-off and setting of loss against income the computation must have been made under Sections 48 to 55 of the Act. The language of Section 70(3) is clear and unambiguous. In the understanding of this Court, the Parliament intended homogeneous entries to adjust the loss or profit against one another and not introduce heterogeneous elements or entries. Hence, the interpretation adopted by the assessee would give benefits not otherwise intended by the Section. 7.4 The effort of the assessee, in our view, includes an excluded claim, i.e., a heterogeneous claim under Section 70(3) of the Act, by claiming that the homogeneity of long term

I.T.A. No.216/2013 -18- capital gain is satisfied by the assessee. We are of the view that the application of Section 70(3) by the assessee is incorrect and illegal. The Assessing Officer has very clearly appreciated the objection, applied the law to the circumstances of the case, and recorded the findings. As we have noted supra the CIT (Appeals) and the Tribunal have merely adopted the conclusions recorded by the Assessing Officer. After independently examining the implication of each one of the Sections and the principle laid down by the Supreme Court in Harprasad & Co. case, we are of the view that no exception to the view taken by the Assessing Officer, as confirmed by the CIT (Appeals) and Tribunal could be taken by us as well. 8. The decisions relied on by the assessee are distinguishable on facts. Therefore, we won’t burden the judgment by stating how these decisions are distinguishable both in fact and law. We have perused the judgment of the

I.T.A. No.216/2013 -19- Gujarat High Court in Kishorebhai Virani case and are in agreement with the view taken by the Gujarat High Court. The question of law in the appeal, upon our independent consideration and also by following the principle laid down in Harprasad & Co. case as applied in Kishorebhai Virani case, will be answered in favour of the Revenue, and against the assessee. For the above discussion and reasons the appeal fails, accordingly dismissed. No order as to costs. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE jjj

I.T.A. No.216/2013 -20- APPENDIX OF ITA 216/2013 PETITIONER ANNEXURE ANNEXURE A1 TRUE COPY OF ASSESSMENT ORDER DATED 31/12/2007 OF THE RESPONDENT. ANNEXURE A2 TRUE COPY OF APPELLATE ORDER DATED 26/03/2008 OF THE COMMISSIONER OF INCOME TAX (APPEALS)II, KOCHI. ANNEXURE A3 TRUE COPY OF ORDER DATED 08/02/2013 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN ITA NO.627/COCH/2008.