DCIT (IT) 4(3)(1), MUMBAI vs. VANGUARD EMERGING MARKET INDEX FUND, A SERID OS VANGUARD INVESTMENT SERVICE PLC(VEMSIF), MUMBAI

Brief facts of the case are that the assessee filed its return of income declaring total income of Rs. 84,07,085/-. The return was selected for scrutiny 2 Assessment Year: 2007-08 and order under section 143(3) was completed. Later on notice under section 148 of the Act was issued, however, no fresh return was filed in response thereof. Accordingly, the original return was treated as the return in response to the notice under section 148. Thereafter, in response to notice under section 143 (2) of the Act the authorised representative of the assessee attended the proceedings and filed the details called for. It was noticed that the assessee had set off losses arising from certain transaction chargeable to security transaction tax (STT) (STCG under section 111A) against share transaction not chargeable to STT (STCG others) instead of first setting off such losses against short term capital gain accrued under section 111A of the Act. The assessee instead of offering tax at the rate of 10% on STCG eligible under section 111A and at the rate of 30% on short term capital gain (others) calculated the tax at the discounted rate of 10% u/s 11A and normal rate of 30% on the reduced amount mentioned in the assessment order.

The AO rejecting the contention of the assessee that the Act does not specify the manner and hierarchy of set off of short term capital losses against short term capital gains where the gains are subjected to a differential tax rate and that section 70(2) of the Act expressly provides for set off of a short-term capital loss against the income arising under similar computation from any other capital asset, held that if the net result of all STT chargeable transaction is gain then the individual transactions resulting into loss are not available for set of against STCG (others). Therefore, the act of the assessee of setting off losses resulting from transactions chargeable under section 111A against STCG (others) is contrary to the provisions of law. Accordingly, the AO determined the total income of the assessee at Rs. 84,07,085/-, details of which are as under:

Short-term capital gain u/s 111A 87,42,664/- 3 Assessment Year: 2007-08 Less: short-term capital loss (applicable u/s 111A) 54,51,754/- Add: disallowance u/s 94(7) 18,740/- Short term capital gain (others) 50,97,431/- Total taxable capital gains 84,07,085/-

The assessee challenged the assessment order before the Ld. CIT(A). The Ld. CIT(A) after hearing the assessee set aside the findings of AO and allowed the appeal of the assessee.

Aggrieved by the order of Ld. CIT (Appeal), the revenue preferred this appeal before us on the following effective grounds:-

“Whether on the facts and in the circumstances of the case in law, the ld. CIT (A) was right in allowing the set off of short term capital losses on Security Transaction Tax (STT) paid transactions (taxable @ 10%) against the short term capital gain on off market transactions (taxable @ 30%) ignoring the fact that such loss was from different activity taxable at discontinued rates?”

The assessee also moved an application on 15.2.2017 under rule 27 of the income tax (appellate tribunal rules 1963) to allow the assessee to support the order passed by the Ld. CIT(A) inter alia on the ground that reopening of assessment proceedings under section 148 of the Act is void ab initio hence bad in law and that mere change of opinion and audit objection cannot form the basis of reopening the assessment and that the assessee was not given a reasonable opportunity of being heard which is contrary to the principle of natural Justice.

After hearing both the sides, we allowed the application in the interest of justice and permitted the assessee to argue on the issues raised vide the aforesaid application.

Before us, Ld. departmental representative (DR) relying on the findings of the AO submitted that the Ld CIT(A) has wrongly allowed the set off of short- term capital losses on Security transaction tax (taxable at the rate of 10%) against the short-term capital gain on of market projections (taxable at the rate of 30%), which resulted into a shortfall of tax liability amounting to Rs. 10.65 lacs. Therefore, the impugned order is liable to be set aside.

On the other hand the Ld. counsel for the assessee submitted that the assessee’s case is covered by the decision of Mumbai Bench of the terminal rendered in First State investment (Hong Kong) Ltd versus ADIT(2009)(TIOL-547- ITAT Mum) in which the similar issue has been decided in favour of the assessee. Since the Ld. CIT(A) has decided the issue following the decision of Mumbai tribunal passed in the aforesaid case, there is no merit in the appeal of the revenue. Therefore, the appeal is liable to be dismissed. The Ld. counsel further submitted that the AO had no jurisdiction to reopened the assessment already concluded u/s 143(3) of the Act. Moreover, the assessee was not given a reasonable opportunity of being heard and the proceedings were completed resorting to section 144(C)(3) of the Act.

We have heard the rival submissions and also perused the material placed before us. We notice that the learned CIT (A) has decided the issue involved in this case by following the decision of Mumbai tribunal rendered in the case of First State investment (Hong Kong) Ltd.(supra). The relevant portion of the order reads as under:

In the same context, the jurisdictional Mumbai bench of the Tribune in the case of first State investments (Hong Kong) Ltd versus ADIT(2009)(TIOL-547-ITAT Mum), has noted that- “Sections 111A and 115AD fall in chapter XII and provides for determination of tax in certain special cases. Thus, it is clear that all these sections from 110 to 115 BC provide for a particular date of tax to be applied on the incomes covered under these sections individually. Hence, these sections do not deal with 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, the question of applicability of the correct rate of income tax comes into being.”

There being no mandated order of preference in the relevant statute for the set of against the particular against any particular short term capital gains, descriptions exercised by the assessee that resulted in a lower tax liability to it cannot be faulted. The view adopted by the AO is how to have no sport in the relevant provisions of the act. The modification to the tax liability made by the AO in the reassessment is hereby directed to be deleted and the appeal filed by the assessee on this issue is, accordingly, allowed.”

The Ld. CIT(A) has passed the impugned order in accordance with the decision of the coordinate Bench of the Tribunal rendered in the case of First State investment (Hong Kong) Ltd (supra). The view taken in the said case has also been followed by the coordinate Bench of the Tribunal in DWS India Equity Fund and Capital International Emerging Markets Fund vs. Deputy Director of Income Tax (2013) 37 Taxmann.com 45(Mumbai- Trib.) Hence, we do not find any infirmity in the impugned order to interfere with the same. We, therefore, respectfully following the view taken by the coordinate Bench in aforesaid cases, uphold the findings of the Ld. CIT(A) and dismiss the appeal of the revenue.

Since, we have dismissed the appeal of the revenue on merits, the issues raised vide application under section 27 of the Income Tax Appellate Tribunal Rules, have become infructuous. Hence, we do not consider it necessary to adjudicate the same separately. In the result, appeal filed by the revenue for assessment year 2007-2008 is dismissed.