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Income Tax Appellate Tribunal, MUMBAI BENCHES “F” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner (Appeals) – 58, Mumbai and arises out of order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:
The learned CIT(A) erred in upholding the order of the AO and in disposing the appeal of the appellant on the following grounds : i. In denying the appellant the ability to offset short-term capital losses (‘STCLs’) first towards short-term capital gains (‘STCGs’) generated from transactions in derivatives and then subsequently towards STCGs from sale of equity shares which were subject to securities transaction tax (‘STT’). ii. In adopting a mechanism to offset STCLs, which is not in accordance with the rights of the appellant and contrary to the learned CIT(A)’s own comments in the order. iii. In holding that the provisions of sections 70 and 71 of the Act have no role to play in determining computation of tax due on STCGs under section 115AD of the Act. iv. In failing to recognise that computation of income and computation of tax are linked and only once computation of income is completed can tax be computed and hence in order to determine the tax due under section 115AD, it is imperative that the quantum of income to which tax applies has to be determined after applying sections 70 and 71 of the Act. v. In holding that while there is no distinction between STCLs from different sources, still proceeding to differentiate between STCLs on which STT has been paid and other STCLs. vi. In not adjudicating the ground no 4 raised by the appellant that surcharge on income-tax was inapplicable in the appellant’s case for A.Y. 2012-13.
Briefly stated, the facts are that the assessee filed its return of income for the A.Y. 2012-13 reporting total income of Rs. 7,24,36,816/-. During the year, the assessee had earned Short Term Capital Gains (STCG) of Rs. 3,45,80,444/- from sale of shares which were subject to STT taxable at 15%. The assessee had suffered losses of Rs. 1,44,23,525/- from similar transactions. The assessee had also earned STCG of Rs. 14,15,08,175/- from transactions in derivatives which are taxable at 30%. The assessee had incurred losses on similar transactions at Rs. 8,92,28,278/-. It has computed its total loss at Rs. 10,36,51,803/-. While computing its taxable income, the assessee had first set off all its losses from the STCG of Rs. 14,15,08,175/- from transactions in derivatives. It has a taxable income of Rs. 7,24,36,816/- comprising of Rs. 3,45,80,444/- from sale of equity shares which are subject to STT and Rs. 3,78,56,372/- from transactions in derivatives.
3.1 The Assessing Officer (AO) accepted the total income of the assessee of Rs. 7,24,36,816/- as disclosed in its return of income. The AO has set off Short Term Capital Loss (STCL) of Rs. 14,423,525/- arising on sale of shares on which STT has been paid (which are taxable @ 15%) against the STCG of Rs. 34,580,444/- arising on sale of shares on which STT has been paid, resulting in net STCG of Rs. 20,156,919/-. Further the AO has set off STCL of Rs. 89,228,278/- arising from transactions in derivatives (which are taxable @ 30%) against the STCG of Rs. 141,508,175/- arising on transactions in derivatives resulting in net STCG of Rs. 52,279,897/-.
Aggrieved by the order of the AO, the assessee filed an appeal before the learned CIT(A). We find that the learned CIT(A) has held that the computation of tax has to be done in accordance with section 115AD, while the gross total income is to be decided in accordance with other provisions of the Act. This section clearly divides the total STCG received by the assessee into two portions i.e. one wherein section 111A is applicable and another where section 111A is not applicable. The tax in respect of the amounts covered by section 115AD r.w.s. 111A will have to be computed separately while tax in respect of the remaining amounts has to be computed separately. This computation has nothing to do with section 70 / 71 as relied on by the assessee. The learned CIT(A) held that it is incorrect to introduce the ratio of setting off as contemplated u/s 70 / 71 while computing tax u/s 115AD wherein no such mandate has been given.
Therefore, the learned CIT(A) upheld the action of the AO and dismissed the appeal filed by the assessee.
Before us, learned counsel of the assessee relies on the decision in the case of First State Investments (Honkong) Ltd. vs. ADIT (2009) (132 TTJ 218); Fidelity Investment Trust Fidelity Overseas Fund vs. ADIT (2010) (36 SOT 22) (ITAT – Mum); DDIT vs. DWS India Equity Ltd. (2010) (ITA No 5055/Mum/2010) (AT – Mum) (Unreported); Capital International Emerging Markets Fund vs. DDIT (2013) (145 ITD 491) and CIT vs. Rungamatee Trexim (P) Ltd. (2008) (ITA No 812 of 208) (Calcutta High Court) (Unreported).
On the other hand, the learned DR relies on the order of the learned CIT(A).
We have heard the rival submissions and perused the relevant material on record. We begin with the decisions cited before us. In First State Investments (Honkong) Ltd. (supra), the assessee earned STCG on sale of shares in the A.Y. 2005-06. It bifurcated such STCG into two periods i.e. upto 30.09.2004 (in which tax was chargeable @ 30% and transactions were not chargeable to STT) and period post 30.09.2004 (in which case the reduced rate of 10% was applicable on STCG where transactions were chargeable to STT in view of section 115A). As against this, the assessee had also suffered STCL of Rs. 8.14 lacs upto 30.09.2004 and Rs. 169.23 lacs in post 30.09.2004 period. The assessee claimed that STCL in later period be allowed to be set off against STCG of former period to the extent of excess of STCG over STCL upto cut off date i.e. 30.09.2004. However, revenue authorities held that STCL suffered by the assessee in the period before cut off date should be set off against STCG of that period and remaining amount be taxed @ 30%. The Tribunal held that (i) in view of provision of section 70(2), the assessee had a choice in taking decision about setting off of STCL from one transaction against any other STCG, whether within or outside the cut off date i.e. 30.09.2004 and (ii) the assessee was justified in setting off STCL of later period against STCG of former period to the extent of excess STCG over STCL upto cut off date i.e. 30.09.2004.
The above order has been followed by the Co-ordinate Bench in Fidelity Investment Trust Fidelity Overseas Fund (supra) and DWS India Equity Ltd. (supra). The decision in DWS India Equity Ltd. has been followed in Capital International Emerging Markets Fund (supra).
In Rungamatee Trexim (P) Ltd. (supra), Hon'ble Calcutta High Court held as under:
“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 was 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 which will favour the assessee and not the revenue. ´ 8. To sum up, under the provisions of section 70(2), STCL arising from any asset can be set off against STCG arising from any other asset under a similar computation made. Merely because the two set of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. Therefore, STCL arising from STT paid transactions can be set off against STCG arising from non-STT transactions.
As the facts are similar, we follow the decisions enumerated at para 7 here-in-above and allow the appeal filed by the assessee.
Order pronounced in the open Court on 10/04/2017