2015 (6) TMI 529 - AT - Income Tax

Tribunal Permits Setting Off Long Term Capital Loss on Shares Against Land Gain; Remands Section 14A Issue to AO.

The Tribunal allowed the appeal for setting off Long Term Capital Loss on shares against Long Term Capital Gain on land, overruling the AO and CIT(A). It ... Set-off of capital losses - exemption under section 10(38) - distinction between source exemption and partial exemption - mechanism of set-off under section 70 and 71 - disallowance of expenditure attributable to exempt income under section 14A(2) - applicability of Rule 8D for quantification of disallowance - penalty under section 271(1)(c) contingent on quantum additionsSet-off of capital losses - exemption under section 10(38) - mechanism of set-off under section 70 and 71 - distinction between source exemption and partial exemption - Long-term capital loss on sale of equity shares (where gains are exempt under section 10(38)) is allowable for set-off against long-term capital gain from sale of land. - HELD THAT: - The Tribunal held that shares and units remain capital assets under the Act and sections dealing with chargeability and computation of capital gains (sections 45, 47, 48 and related provisions) and the set-off mechanism in sections 70 and 71 apply. Section 10(38) exempts only the income arising from transfer of long-term equity shares/units subject to conditions (e.g., STT); it does not exclude the entire source of capital gains from computation. The principle that 'income includes loss' applies where the entire source is congenitally exempt; it does not apply where only a part or stream of the source is exempt. Relying on the ratio of the Calcutta High Court in Royal Calcutta Turf Club, the Tribunal concluded that losses arising from the sale of equity shares are not excluded from computation merely because profits from certain transfers are exempt under section 10(38), and therefore such long-term capital losses can be set off against long-term capital gains from other assets in accordance with section 70(3). [Paras 9, 10]Allow set-off of the long-term capital loss on sale of shares against the long-term capital gain on sale of land; Assessing Officer to give effect accordingly.Disallowance of expenditure attributable to exempt income under section 14A(2) - applicability of Rule 8D for quantification of disallowance - Disallowance under section 14A was set aside for fresh examination because Rule 8D (the prescribed method of quantification) was not applicable to A.Y. 2007-08 and the Assessing Officer had not recorded the required satisfaction under section 14A(2). - HELD THAT: - Section 14A(2) requires the Assessing Officer, having regard to the accounts, to be satisfied before determining/quantifying expenditure attributable to exempt income. Rule 8D, which prescribes a formula for quantification, came into force after the impugned year and therefore could not be applied retrospectively for A.Y. 2007-08. The AO's order is silent on any satisfaction recorded after examining the assessee's accounts and claim that investments were out of own capital/internal accruals; hence the statutory pre-condition for making the disallowance was not shown to have been fulfilled. The Tribunal directed restoration of the issue to the AO to examine the assessee's claim, record satisfaction under section 14A(2) if appropriate, and quantify disallowance without resorting to Rule 8D for the impugned year, affording the assessee a hearing and considering relevant precedent. [Paras 11, 14]Matter remitted to the Assessing Officer to examine and decide the section 14A(2) claim afresh (without applying Rule 8D for A.Y. 2007-08), after giving the assessee an opportunity of hearing.Penalty under section 271(1)(c) - penalty contingent on disallowance - Penalty under section 271(1)(c) deleted because the additions on which the penalty was based were either deleted or remitted for fresh adjudication. - HELD THAT: - The penalty proceedings were founded on the disallowances that the Tribunal has either allowed (set-off of loss) or set aside for fresh consideration (section 14A disallowance). As those disallowances have no legs to stand in the present order, the Tribunal deleted the penalty levied under section 271(1)(c). [Paras 16]Penalty imposed under section 271(1)(c) deleted.Final Conclusion: The assessee's appeal on quantum is partly allowed: set-off of long-term capital loss on sale of equity shares against long-term capital gain on sale of land is allowed; the section 14A disallowance is remitted to the Assessing Officer for fresh examination without applying Rule 8D for A.Y. 2007-08. The penalty under section 271(1)(c) is deleted. Issues Involved:1. Set off of Long Term Capital Loss on sale of shares against Long Term Capital Gain on sale of land.2. Disallowance of expenses under Section 14A of the Income Tax Act by applying Rule 8D.3. Penalty proceedings under Section 271(1)(c) related to the above issues.Issue-wise Detailed Analysis:1. Set off of Long Term Capital Loss on sale of shares against Long Term Capital Gain on sale of land:The assessee, a pharmaceutical company, claimed a set off of Long Term Capital Loss on the sale of shares and mutual funds against Long Term Capital Gain from the sale of land. The Assessing Officer (AO) disallowed the claim, stating that the losses from shares, where Securities Transaction Tax (STT) was deducted, are exempt under Section 10(38) and cannot be set off against taxable income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that exempt losses cannot be set off against taxable income.The assessee's counsel argued that Section 10(38) exempts only positive income and not losses, and that Sections 70 and 71 allow for the set off of Long Term Capital Loss against Long Term Capital Gain. The counsel cited the Calcutta High Court's decision in Royal Calcutta Turf Club v. CIT, which allowed the set off of losses from exempt sources against taxable income.The Tribunal held that shares are considered capital assets and no exceptions are carved out in Section 2(14). The Tribunal concluded that Section 10(38) exempts only the income from the transfer of Long Term Capital Assets being equity shares or units of equity-oriented funds, and not the entire source of income from capital gains. Therefore, the Long Term Capital Loss on the sale of shares can be set off against Long Term Capital Gain from the sale of land.2. Disallowance of expenses under Section 14A by applying Rule 8D:The AO disallowed Rs. 39,80,215/- of expenses under Section 14A by applying Rule 8D, which was applicable from the Assessment Year (AY) 2008-09. The CIT(A) confirmed the disallowance based on the Mumbai Special Bench decision in ITO vs. Daga Capital Management (P.) Ltd.The assessee argued that Rule 8D was not applicable for AY 2007-08 and that the AO did not examine the accounts to determine the correctness of the claim that no expenditure was attributable to earning exempt income. The Tribunal noted that the AO must be satisfied with the correctness of the assessee's claim before making any disallowance under Section 14A(2). Since the AO did not examine the accounts or provide satisfaction, the Tribunal remanded the matter back to the AO to re-examine the claim without applying Rule 8D.3. Penalty proceedings under Section 271(1)(c):The penalty was levied due to disallowances related to the set off of losses and expenses under Section 14A. Since the Tribunal allowed the assessee's appeal on the set off of losses and remanded the Section 14A disallowance for re-examination, the penalty had no basis. Consequently, the Tribunal deleted the penalty.Conclusion:The appeal regarding the set off of Long Term Capital Loss against Long Term Capital Gain was allowed. The disallowance under Section 14A was remanded to the AO for re-examination. The penalty under Section 271(1)(c) was deleted. The Tribunal's decision was pronounced on June 10, 2015.