2015 (2) TMI 807 - HC - Income Tax

High Court affirms Tribunal's decision on capital gains treatment, citing Income-tax Act

KISHOREBHAI BHIKHABHAI VIRANI Versus ASSISTANT COMMISSIONER OF INCOME-TAX

The High Court upheld the Tribunal's decision to disallow the set off and carried forward of long-term capital loss against long-term capital gain, citing ... Set off and carried forward of long-term capital loss against the long-term capital gain - Loss on shares where were exempted u/s 10(38) as long term capital gain - Tribunal disallowed claim basing reliance on the provisions contained in section 10(38) of the Act - Held that:- The fact that the capital asset in question, namely, the shares of Suashish Diamond Ltd. was covered under section 10(38) of the Act was not in dispute, thus by virtue of section 10(38) in computing the total income of the previous year, any income covered under such clause shall not be included. If that be so, the loss also arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration. The contention of the learned counsel for the assessee that for the purpose of section 10(38) of the Act the term 'income' would not include 'loss', cannot be accepted and rightly rejected by the Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off. The Tribunal rightly relied on the decision in the case of Harprasad (1975 (2) TMI 2 - SUPREME Court) to come to a conclusion that the term 'income' under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off. It postulates permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It was held that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing loss to be 'carried forward'. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source. - Decided against assessee. Issues:1. Disallowance of set off and carried forward of long-term capital loss against long-term capital gain.2. Applicability of provisions of section 10(38) of the Income-tax Act.3. Validity of Tribunal's decision and application of relevant provisions.Issue 1: Disallowance of set off and carried forward of long-term capital loss against long-term capital gain:The appellant-assessee appealed against the Income-tax Appellate Tribunal's decision disallowing the claim of set off and carried forward of long-term capital loss against long-term capital gain. The appellant sold shares in Suashish Diamond Ltd., incurring a capital loss of Rs. 1.44 crores and earned a long-term capital gain of Rs. 1.03 crores on shares of Karp Diamond Ltd. The Assessing Officer disallowed the set off claim, stating that loss from an exempt source cannot be set off or carried forward. The Tribunal upheld the disallowance, citing section 10(38) of the Act and the decision in CIT v. Harprasad and Co. P. Ltd. The High Court noted that section 74(1)(b) allows for the carry forward and set off of capital losses, but in this case, the provisions were not applicable as the loss was not set off against gains of the subsequent year. Section 70(3) allows set off of losses from any capital asset against income from another capital asset. The Court found no error in the Tribunal's decision, dismissing the appeal.Issue 2: Applicability of provisions of section 10(38) of the Income-tax Act:Section 10(38) of the Act deals with income not included in the total income, specifically income arising from the transfer of a long-term capital asset like equity shares. The Court noted that the shares of Suashish Diamond Ltd. fell under section 10(38), meaning any income or loss from such assets would not be included in the total income calculation. The Court rejected the argument that loss should not be considered as income under this section, citing the decision in Harprasad, which emphasized the concept of set off and carry forward of losses against taxable profits. The Court agreed with the Tribunal's interpretation that loss is included in the term 'income' under section 10(38), leading to the conclusion that losses from such assets cannot be set off.Issue 3: Validity of Tribunal's decision and application of relevant provisions:The Tribunal's decision was based on the provisions of section 10(38) and section 70(3) of the Act, along with the precedent set by the decision in Harprasad. The Court found no legal error in the Tribunal's ruling, emphasizing that losses from assets covered under section 10(38) cannot be set off against gains. The Court highlighted the importance of understanding the interplay between different sections of the Act to determine the applicability of set off and carry forward provisions. Ultimately, the Court dismissed the appeal, concluding that no legal question arose from the Tribunal's decision.In summary, the High Court upheld the Tribunal's decision to disallow the set off and carried forward of long-term capital loss against long-term capital gain, citing the provisions of section 10(38) of the Income-tax Act and relevant legal precedents. The Court clarified the applicability of different sections of the Act in determining the treatment of losses from specific capital assets, ultimately dismissing the appeal on the grounds that no legal question arose from the Tribunal's decision.