2025 (6) TMI 1131 - AT - Income Tax

Short-term capital loss with STT can offset short-term gains without STT under section 70(2)

Schwab Emerging Markets Equity ETF, iShares MSCI India UCITS ETF, iShares MSCI EM UCITS ETF, USD DIST, iShares Core MSCI EM IMI UCITS ETF, iShares India 50 ETF (as a successor to iShares India Mauritius Co. (liquidated), iShares Core MSCI Total International Stock ETF (as as successor to Ishares Core Total International Stock Mauritius Co. (liquidated) Versus DCIT (International Taxation) – 4 (2) (1), Mumbai

ITAT Mumbai held that short-term capital loss (STT paid) can be set off against short-term capital gains (STT not paid) under section 70(2), which doesn't ... Set off of Short-term capital loss (on which STT was paid) against short-term capital gains (on which STT was not paid) - HELD THAT:- As per the provisions of section 70(2) of the Act, the short-term capital loss can be set off against gain from any other capital asset. Section 70(2) of the Act does not make any further classification between the transactions where STT was paid and the transactions where STT was not paid. The emphasis of the AO on the term 'similar computation' also only refers to the computation as provided under sections 48 to 55 of the Act, and therefore, does not support the case of the Revenue. We find that while deciding a similar issue in iShares MSCI EM UCITS ETF USD ACC [2024 (6) TMI 148 - ITAT MUMBAI] following the decision of Rungamatee Trexim (P.) Ltd. [2008 (12) TMI 759 - CALCUTTA HIGH COURT] allowed the set off of short-term capital loss (on which STT was paid) against the short-term capital gains (on which STT was not paid). We direct the AO to accept the methodology adopted by the assessee for the computation of the capital gains. As a result, grounds no.1 to 4 raised in assessee’s appeal are allowed. Short grant of TDS credit - AR submitted that the assessee has also filed a rectification application before the AO on 07/02/2025 in this regard, which is still pending consideration. Accordingly, we deem it appropriate to restore this issue to the file of the AO with the direction to grant the credit of taxes deducted at source, in accordance with the law, after conducting the necessary verification. Set off of the taxable (non-grandfathered) brought forward long-term capital loss against the exempt (grandfathered) long-term capital gains - HELD THAT:- As per the assessee, by setting off the brought forward long-term capital loss against the long-term capital gains, which is exempt from tax in India as per Article 13(4) of the India-Mauritius DTAA, the Revenue has restricted the benefit granted to the assessee under Article 13(4) of the India-Mauritius DTAA read with section 90(2) of the Act. Thus, as per the assessee, the entire amount of long-term capital gains, i.e. Rs. 333,85,21,896, from the sale of shares acquired prior to 01/04/2017 should be treated as non-taxable in India in view of the provisions of Article 13(4) of the India-Mauritius DTAA and the long-term capital loss brought forward from the previous years should be set off only against the net long-term capital gains accrued during the year from the non-grandfathered sale of shares. We find that a similar issue came up before the Co-ordinate Bench of the Tribunal in Bay Capital India Fund Limited [2024 (6) TMI 1459 - ITAT MUMBAI] While deciding the issue in favour of the taxpayer, the Co-ordinate Bench of the Tribunal vide order dated 20/06/2024 held that the entire long-term capital gains earned by the assessee is exempted from taxation in India by virtue of Article 13(4) of the Treaty and long-term capital loss, whether brought forward or not, cannot be adjusted against the same. We find that a similar issue also came up for consideration before another Co-ordinate Bench of the Tribunal in Matrix Partners India Investment Holdings, LLC [2025 (2) TMI 330 - ITAT MUMBAI] held that the capital gains that are already exempt under the provisions of DTAA cannot enter into computation of total income of the assessee in India, and therefore, the loss incurred by the taxpayer from the sale of non-grandfathered shares cannot be set off against the gain, which is exempt from taxation in India, as per Article 13(4) of the India Mauritius DTAA. The Co-ordinate Bench further held that the taxpayer is entitled to carry forward the loss arising from the sale of shares to the subsequent year. As evident that all the submissions of the Revenue, raised in the instant appeal, have already been considered by the Co-ordinate Benches. Thus, long-term capital gains earned by the assessee from the transactions, which are grandfathered as per the provisions of Article 13(4) of the India- Mauritius DTAA, cannot adjusted against the brought forward long-term capital loss incurred by the assessee. Accordingly, the AO is directed to allow the exemption of the entire long-term capital gains earned by the assessee from the transactions which are covered under the provisions of Article 13(4) of the India-Mauritius DTAA. AO is directed to allow the set off of long-term capital loss brought forward from the previous years against the net long-term capital gains accrued during the year from the non-grandfathered sale of shares. Accordingly, the impugned order on this issue is set aside, and grounds no.7- 10 raised in assessee’s appeal are allowed. Core legal questions considered by the Tribunal in these consolidated appeals primarily involve the following issues:1. Whether short-term capital losses arising from sale of shares on which Securities Transaction Tax (STT) was paid can be set off against short-term capital gains arising from sale of shares not subjected to STT, given the provisions of section 70(2) of the Income Tax Act, 1961 ('the Act').2. Whether the hierarchy of set-off of short-term capital losses adopted by the assessee, which involves intermixing losses and gains taxable at different rates (15% under section 111A and 30% under section 115AD), is permissible under the Act and judicial precedents.3. Whether long-term capital gains exempt under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) can be included in total income for set-off against brought forward long-term capital losses arising from non-exempt transactions.4. The correct application of section 90(2) of the Act regarding the interplay between domestic law and DTAA provisions in determining total income and set-off of losses.5. Treatment of arithmetical errors in computation sheets, grant of TDS credit, levy of interest under various sections (234A, 234B, 234C, 234D), and initiation of penalty proceedings under section 270A of the Act.Issue-wise Detailed Analysis1. Set-off of Short-Term Capital Losses Against Gains Taxable at Different Rates (STT vs Non-STT Transactions)Legal Framework and Precedents: Section 70(2) of the Act allows set-off of short-term capital loss against income from any other capital asset computed under sections 48 to 55. Sections 111A and 115AD specify tax rates on capital gains but do not affect the computation of capital gains or losses. The Act does not prescribe any hierarchy or restriction on set-off between gains and losses taxable at different rates or arising from transactions with or without STT.Judicial precedents, including decisions by Co-ordinate Benches of the Tribunal, have held that short-term capital losses on which STT has been paid can be set off against short-term capital gains on which STT was not paid. The Tribunal relied notably on the decision of the Hon'ble Calcutta High Court in CIT vs. Rungamatee Trexim (P.) Ltd. and its own earlier rulings in cases involving similar facts.Court's Interpretation and Reasoning: The Tribunal emphasized that the phrase 'similar computation' in section 70(2) refers to the method of computing capital gains and losses under sections 48 to 55, which is uniform regardless of STT applicability or tax rate. The Tribunal rejected the Assessing Officer's (AO) contention that set-off must be restricted within columns segregated by tax rates as per IT Rules, noting that the rules do not override the statutory provisions.The Tribunal further observed that the mere fact that the Department had preferred appeals against certain Tribunal decisions before the High Court does not diminish the binding effect of those Tribunal rulings.Key Evidence and Findings: The assessee's computation method involved first setting off short-term capital loss taxable at 15% against short-term capital gains taxable at 30%, and then balancing losses against gains taxable at 15%. The AO's contrary approach was to restrict set-off within the same tax rate category.Application of Law to Facts: The Tribunal found that the assessee's approach was consistent with section 70(2) and relevant judicial precedents. The AO's approach was held to be erroneous and contrary to law.Treatment of Competing Arguments: The Tribunal gave due consideration to the AO and Departmental Representative's submissions but found them unpersuasive in light of statutory provisions and binding precedents.Conclusion: The Tribunal directed the AO to accept the assessee's methodology for set-off of short-term capital losses against gains irrespective of STT applicability or tax rate.2. Set-off of Long-Term Capital Losses Against Long-Term Capital Gains Exempt under India-Mauritius DTAALegal Framework and Precedents: Article 13(4) of the India-Mauritius DTAA exempts long-term capital gains arising from sale of shares acquired before 1 April 2017 ('grandfathered shares') from tax in India. Section 90(2) of the Act mandates that domestic law provisions apply to the extent they are more beneficial to the assessee. Sections 2(24), 4, and 5 define 'total income' and chargeability of income under the Act.Several Tribunal decisions, including Bay Capital India Fund Limited vs. ACIT and Matrix Partners India Investment Holdings, LLC vs. DCIT, have held that exempt long-term capital gains under DTAA do not form part of total income and hence cannot be set off against brought forward long-term capital losses arising from taxable (non-grandfathered) transactions. The losses are to be carried forward for set-off against taxable gains only.Court's Interpretation and Reasoning: The Tribunal analyzed the scheme of the Act and the DTAA, relying on the Hon'ble Bombay High Court's ruling in CIT vs. M. N. Raigi, which clarified that exempt income does not enter the computation of total income unless expressly provided. The Tribunal held that including exempt gains in total income for set-off purposes would defeat the exemption granted by the DTAA and violate Article 13(4).The Tribunal also referred to the Vienna Convention on the Law of Treaties principles, emphasizing that treaties must be interpreted in good faith and in light of their object and purpose, which in DTAA is to avoid double taxation and provide tax relief.Key Evidence and Findings: The assessee claimed exemption on long-term capital gains from grandfathered shares and sought to set off brought forward long-term capital losses against only taxable gains from non-grandfathered shares. The AO's contrary approach was to allow set-off of losses against exempt gains, thereby reducing exempt income.Application of Law to Facts: The Tribunal found that the AO's approach was contrary to the DTAA and relevant judicial precedents. The Tribunal held that exempt gains must be excluded from total income and losses cannot be set off against them.Treatment of Competing Arguments: The Tribunal considered the Revenue's argument that exempt gains form part of total income for set-off but rejected it based on statutory interpretation, treaty provisions, and binding precedents.Conclusion: The Tribunal directed the AO to exclude exempt long-term capital gains from total income and allow set-off of brought forward long-term capital losses only against taxable gains from non-grandfathered shares.3. Application of Section 90(2) of the Act and Interaction Between Domestic Law and DTAALegal Framework and Precedents: Section 90(2) provides that domestic law provisions apply to the extent they are more beneficial to the assessee, creating a choice between domestic law and treaty provisions. The Tribunal relied on various precedents, including decisions of the Hon'ble Supreme Court and coordinate benches of the Tribunal, which affirm that the tax treaty cannot be thrust upon the assessee and the assessee may opt for the more beneficial regime each year.Court's Interpretation and Reasoning: The Tribunal emphasized that the assessee's choice to claim exemption under the DTAA or to be governed by the Act must be respected. The Tribunal noted that the tax treaty grants relief but does not impose liability and that each assessment year is an independent unit for such choice.Application of Law to Facts: The Tribunal held that the assessee's approach to claim exemption on grandfathered gains under DTAA and set off losses under the Act was permissible and beneficial.Conclusion: The Tribunal upheld the principle that the assessee can choose the more beneficial provisions of the Act or DTAA for each assessment year.4. Arithmetical Errors, TDS Credit, Interest and Penalty ProceedingsLegal Framework and Precedents: Rectification applications filed by the assessee for arithmetical errors and short grant of TDS credit were pending before the AO. Interest under sections 234A, 234B, 234C, and 234D is consequential and linked to the correctness of income assessment. Penalty proceedings under section 270A are premature where assessment is under dispute.Court's Interpretation and Reasoning: The Tribunal directed the AO to consider rectification applications and compute income correctly in accordance with law and the Tribunal's directions. The Tribunal restored issues relating to TDS credit to the AO for verification and grant of credit as per law.The Tribunal dismissed grounds challenging initiation of penalty proceedings as premature, noting that penalty cannot be imposed before final adjudication of disputed income.Conclusion: The Tribunal allowed grounds relating to rectification and TDS credit for statistical purposes and dismissed penalty-related grounds.Significant Holdings and Core Principles Established'Section 70(2) of the Income Tax Act allows the set-off of short-term capital loss against income from any other capital asset computed under sections 48 to 55, without any restriction or hierarchy based on the rate of tax or applicability of Securities Transaction Tax.''Income exempt under Article 13(4) of the India-Mauritius DTAA does not form part of the total income under the Income Tax Act and therefore cannot be set off against brought forward losses arising from taxable transactions; such exempt income is to be excluded from the computation of total income.''Section 90(2) of the Income Tax Act provides that the provisions of the Act or the DTAA shall apply to the extent they are more beneficial to the assessee, allowing the assessee to choose the more beneficial regime for each assessment year independently.''The initiation of penalty proceedings under section 270A of the Act is premature when the assessment itself is under dispute and not finally adjudicated.''Rectification applications for arithmetical errors and short grant of TDS credit must be considered by the Assessing Officer in accordance with law, and consequential interest computations must be adjusted accordingly.'Final Determinations1. The Tribunal allowed the appeals on the issue of set-off of short-term capital losses against gains taxable at different rates, directing the AO to accept the assessee's methodology.2. The Tribunal allowed the appeals on the issue of set-off of long-term capital losses against exempt long-term capital gains under DTAA, directing the AO to exclude exempt gains from total income and allow set-off only against taxable gains.3. The Tribunal directed the AO to consider rectification applications and grant TDS credit after verification.4. The Tribunal dismissed the penalty proceedings as premature.5. The appeals were partly allowed for statistical purposes, with directions to the AO to recompute income and tax liability in accordance with the Tribunal's findings.