SKP Tax Alert
22 June 2015 | Volume 8 Issue 10
Set-off of long term capital loss arising from sale of equity shares (STT paid) against long term capital gain on the sale of land.

Background
It is a settled law that income includes loss and hence, when a particular income is exempt from tax, loss from the said source is not allowed to be set off against any other income of the assessee. The Mumbai Tribunal in the recent case of Raptakos Brett & Co. Ltd[1] has re-analysed this aspect.     


Facts of the Case
  • The assessee filed return of income, wherein set-off of long term capital loss arising from sale of shares (security transaction tax (STT) paid) was claimed against the long term capital gain arising from the sale of land.
  • The Assessing Officer (AO) denied the set-off of such loss by relying on the decision of the Apex Court in the case of Commissioner of Income Tax (CIT) vs. Hariprasad & Company Pvt Ltd (1975) 99 ITR 118. This was based on the view that income includes loss and if the long term capital gain arising from sale of shares (STT paid) does not form part of the total income as per section 10(38), then the loss arising from such shares also cannot be set off against the other long term capital gains
  • The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the order of the AO. Aggrieved by the order, assessee preferred the appeal to the Income Tax Appellate Tribunal (ITAT).
 
Taxpayer’s Contention
  • Section 10(38) exempts only the positive income and hence, losses are not under its purview.
  • Section 70 does not put any embargo to exclude long term capital loss from the sale of shares to be set off against long term capital gain arising on account of the sale of other capital assets.
  • There is no mention in sections 45 to 48 whether capital gain or loss on the sale of shares that are exempted under section 10 (38) are to be excluded.
Revenue’s Contention
  • Income includes loss (relying on the Apex Court's judgment in the case of Hariprasad & Company Pvt Ltd[2]).
  • If the income from the long term capital gain on the sale of shares is exempt, then the loss from such a sale of shares should not form part of the total income and therefore, there is no question of set-off against other income or long term capital gain on a different capital asset.
Mumbai Tribunal Ruling
  • The ratio and principle laid down by the Apex Court in the case of Hariprasad (Supra) would not apply in the instant case, as the concept that 'income will include loss' would only apply when the entire source of income is exempt from tax and not when only one of the incomes falling within such source is exempt.
  • Section 10(38) provides for exemption only with respect to long term capital gains on account of transfer of equity shares with certain conditions, wherein one of the conditions of exemption was payment of security transaction tax. Thus, the income contemplated under section 10(38) is only a part of the source of capital gain and only a limited portion of such a source is treated as exempt.
  • Based on the relevant laws, the ITAT observed that:
    • Shares in the company are treated as capital assets and no exception has been carved out for excluding the equity shares and unit of equity oriented funds for not being treated as capital assets;
    • Any gains arising from the transfer of a long term capital asset is treated as a capital gain which is chargeable to tax;
    • Further, the law does not state that the transfer of long term equity shares/funds are not treated as transfers;
    • Lastly, the mechanism for set-off of capital gain is provided under the law and it does not exclude long term capital gain arising on the sale of equity shares from such a set-off.
Thus, a whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as 'not to be included' in computing the total income then in such a case, the profit or loss resulting from such a source would not enter the computation at all.
  • However, if a part of the source is exempt by virtue of a particular "provision" of the Act to benefit the assessee, then it cannot be held that the entire source will not enter into computation of total income.
  • Hence, long term capital loss on the sale of shares is to be set off against long term capital gain on sale of land.
[1] (2015) 58 Taxmann.com 115
[2] (1975) 99 ITR 118
SKP's Comments
This ruling has unsettled the settled position of law that income includes loss. It has held that this principle, of income includes loss, will only apply for whole source of income and not for a particular income of the source. The Tribunal has ruled based on a strict reading of the provisions, ignoring the intention of the overall law. We believe that revenue will further contest this ruling and the High Court would have to test this aspect.

SKP
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