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Facts
The assessee, India Acorn Fund Ltd., is a non-resident entity engaged in investment activities. The case involves the set-off of short-term capital losses (STCL) against short-term capital gains (STCG) taxed at different rates. The Assessing Officer (AO) denied this set-off, arguing that losses from transactions taxed at 15% could not be set off against gains taxed at 30%. The assessee contended that Section 70 of the Income Tax Act allows for such set-off and relied on various judicial precedents.
Held
The Tribunal held that Section 70 of the Income Tax Act does not prohibit the set-off of short-term capital losses against capital gains arising from different sources under the same head, irrespective of their tax rates. The assessee is entitled to choose the manner of set-off that is most beneficial. The Tribunal found that the AO's denial of set-off based on different tax rates was not in line with the law and judicial pronouncements.
Key Issues
Whether short-term capital losses taxed at a lower rate can be set off against short-term capital gains taxed at a higher rate, considering Section 70 of the Income Tax Act and relevant judicial precedents.
Sections Cited
143(3), 144C(13), 153, 143(2), 144C(5), 70, 111A, 112A, 270A, 234A, 234C, 154
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SMT KAVITHA RAJAGOPAL, JM &
Per contra, the Ld. A.O. has held that payment/non-payment of STT and taxability at 15%/30% leads to difference classes of Capital Gains which are not "similar" in nature and cannot be set off/adjusted against one another under provision of section 70. On the other hand, the Applicant has relied on its interpretation of provisions of section 70 and has cited a plethora of decisions of Hon'ble Income Tax Appellate Tribunal and has claimed that section 111A/112A are provisions that mandate "tax rates only and do not go to create a distinct set of capital gains from different sources. Hence, as per the applicant assessee, the recourse of section 111A/112A India Acron Fund Ltd. will not impinge upon the application of section 70 to the capital gains arising from difference sources, under the same head (STCG/LTCG). This Panel has given anxious consideration to the matter and finds that it is a legal issue which awaits resolution before the Hon'ble jurisdiction High Court of Bombay.”
The ld. AR further submitted that the issue is settled by various decisions of the co-ordinate bench which has been consistently holding the issue in favour of the assessee. The ld. AR in this regard placed reliance on the decision of the co- ordinate bench in the case of East Bridge Capital Master Fund (I) Ltd. Vs. DCIT (ITA No. 2976/Mum/2023 dated 10.04.2024). The ld. AR also drew our attention to the decision of the Hon'ble Calcutta High Court in the case of Rungamatee Trexim Pvt. Ltd. [2008] (ITA No. 812 of 2008 dated 19.12.2008) to submit that the similar issue has been considered by the Hon'ble High Court and the issue is decided in favour of the assessee.
The ld. DR on the other hand submitted that the wordings used in section 70(2) which contains provisions with regard to set off of STCL states that the set off should be allowed for 'similar computations' which would mean that the computations which are subject to similar tax. The ld. DR therefore, argued that the STCL which is taxed at 15% cannot be allowed to be set off against the Capital Gain which is taxed at 30%.
We have heard the parties and perused the material available 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
India Acron Fund Ltd. 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 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
India Acron Fund Ltd. 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 further notice that the co-ordinate bench has considered the similar issue in the case of East Bridge Capital Master Fund (I) Ltd. (supra) and held that:
“7. We have heard rival sides and have examined orders of the authorities below. We have also considered the decisions cited before us by the Counsel for the Assessee. The Assessee has suffered STCL on assets liable to tax at 15% at the same time the Assessee has earned STCG liable to tax at 30%. Though the Assessee had gains in category taxable of 15% yet the Assessee set-off STCL from the said category against STCG liable to tax at higher rate, i.e., at 30%. We find that similar controversy has been considered by the Co- ordinate Bench in the case of ACIT Vs. Mac Charles India Ltd. (supra). In the said case in identical transactions, the Assessee had set-off losses arising on sale of shares which are liable to tax at 10% against STCG arising on other assets taxable at 30%. The Assessing Officer rejected Assessee's method of set-off of STCLs. The Assessee carried the issue before the CIT(A). The First Appellate Authority accepted Assessee's method of computation and reversed the findings of Assessing Officer. The Department carried the issue in appeal before the Tribunal. The Co-ordinate Bench dismissed the appeal of Revenue holding as under:
India Acron Fund Ltd. "13. We have considered his submissions and are of the view that the same are not acceptable. A perusal of the provisions of section 70(2) clearly shows that if there a short term capital loss, the assessee is entitled to have the said capital loss set off against any other short term capital gain. This right given to the assessee is unqualified and therefore the assessee is free to choose as to how the set of short term capital loss has to be claimed. The assessee has claimed the set off in such a manner that it results in payment of low taxes. That cannot be a ground to deny a legitimate right which the assessee has in law. This is the principle adopted by the CIT(A) in allowing relief to the assessee. We are of the view that the reasoning adopted by the CIT(A) is just and proper and calls for no interference. In view of the above conclusions on a plain reading of the relevant provisions of section 70(2) and section 111A of the Act, we do not wish to refer to the case laws to which a reference has been made by the CIT(A) in his order. For the reasons given above, we confirm the order of the CIT(A) and dismiss ground No.2 raised by the Revenue." (Emphasized by us) 8. In the case of First State Investments (Hongkong) Ltd. (supra) under similar situation, the Assessing Officers rejected Assessee's manner of set-off of STCL in category liable to tax at 10% 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 India Acron Fund Ltd. 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 view of the foregoing discussion, we hold that the authorities below erred in negating the assessee's computation of short-term capital gain We, therefore, overturn the impugned order and allow this ground of appeal
." (Emphasized by us)
9. In the case of JP Morgan Fund (supra), the Tribunal had dealt with similar controversy. The Co-ordinate Bench after placing reliance on the decision of Special Bench in the case of Montgomery Emerging Markets Fund [(2006)100 ITD 217/Mum/SB] dismissed Revenue's appeal. Thus, in light of un-disputed facts of the case and the decision referred above, we have no hesitation in accepting Assessee's manner of set-off of STCL category liable to tax at the rate of 15%, against STCG taxable at the rate of 30%. Thus, the Assessee succeeds on ground no.1 to 4 of appeal.”
11. We also noticed similar view has been expressed in many other of decisions of the co-ordinate bench, copies of which are submitted by the ld. AR in the legal Paper Book. In assessee’s case, the STCL which is taxable @ 30% has been set off against STCG taxable @ 15% and in our considered view the principle laid down in decision of the Hon’ble High Court and the co-ordinate bench is applicable to assessee also. Therefore, respectfully following the decision of the co-ordinate bench we hold that the AO is not correct in denying the set off of STCL against the STCG to the assessee for the reason that they are taxed at different rates. Accordingly the order of the AO is set-aside and Ground No.5 to 7 are allowed.
12. Through Ground No.4 assessee is contending the validity of the order passed without following DRP directions. In view of our decision with regard to the issue of setting off STCL against STCG which are taxed at different rates this ground has become in fructuous and does not warrant any separate adjudication.
13. Ground No.8 is regarding the erroneous addition to Income from Other Sources. The ld. AR submitted that there are certain errors in the computation sheet with regard to the income from other sources considered by the AO and that the assessee has filed a petition under section 154 of the Act requesting for rectification of the errors before the AO. The ld. AR drew our attention to the petition filed under section 154 dated 15.11.2023 before the AO in this regard and the copy of the same is placed on records. The ld. AR prayed for direction to dispose of the petition rectifying the mistakes apparent on record.
After hearing the ld. DR we direct the AO to consider the petition seeking rectification filed under section 154 of the Act by the assessee and dispose of the same in accordance with law. The AO is further directed to give an opportunity of being heard to the assessee.
In Ground No.9 the assessee has raised ground contending the issue of levy of interest under section 234A. In this regard the ld. AR submitted that there is no delay in filing the return of income in this case since the last date for filing the return of income is extended due to Covid. Therefore, the ld. AR submitted that the AO is not correct in levying the interest under section 234A of the Act.
We have heard the ld. DR. From the perusal of the above facts and the material on record we see merit in the contention that there no delay in filing the India Acron Fund Ltd. return of income. We therefore, direct the AO to examine the evidences / materials on record and give relief to the assessee in accordance with law.
Ground No.10 with regard to levy of interest under section 234C where the assessee is contending that the interest ought to be levied on the returned income and not on assessed income. In this regard we direct the AO consider the issue while giving effect to the other directions in this order and decide in accordance with law. It is ordered accordingly.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 29-05-2024.