Capital loss set-off and treaty-exempt gains: tribunal accepted STT-neutral short-term loss adjustment and full grandfathered gain exemption.

Section 70(2) permits set-off of short-term capital loss against short-term capital gains without creating any distinction based on whether securities transaction tax was paid, because the computation provisions govern the set-off mechanism and the rate provisions do not alter it; the assessee's set-off method was therefore accepted. Treaty-exempt grandfathered gains under Article 13(4) of the India-Mauritius DTAA do not enter total-income computation and cannot be reduced by brought forward long-term capital loss under section 90(2); the exemption was therefore allowed in full, with carried-forward losses available only against taxable non-grandfathered gains.

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Issues: (i) Whether short-term capital loss arising from shares on which securities transaction tax was paid could be set off against short-term capital gains on transactions not subject to securities transaction tax. (ii) Whether brought forward long-term capital loss could be adjusted against long-term capital gains exempt under Article 13(4) of the India-Mauritius DTAA in respect of grandfathered shares.

Issue (i): Whether short-term capital loss arising from shares on which securities transaction tax was paid could be set off against short-term capital gains on transactions not subject to securities transaction tax.

Analysis: Section 70(2) permits set-off of short-term capital loss against income arrived at under a similar computation for any other capital asset. The provision does not create a hierarchy based on whether securities transaction tax was paid or not. The computation provisions in sections 48 to 55 govern the manner of computation of capital gains, while the rate provisions in sections 111A and 115AD do not alter the set-off mechanism. The Court followed prior coordinate bench decisions applying the same interpretation.

Conclusion: The issue was decided in favour of the assessee. The Assessing Officer was directed to accept the assessee's methodology for set-off of short-term capital loss.

Issue (ii): Whether brought forward long-term capital loss could be adjusted against long-term capital gains exempt under Article 13(4) of the India-Mauritius DTAA in respect of grandfathered shares.

Analysis: Income that is exempt under the applicable treaty does not enter the computation of total income for the purpose of set-off against losses. Applying section 90(2), the assessee is entitled to the more beneficial treaty treatment, and exempt grandfathered gains cannot be diminished by brought forward losses. The Court relied on prior coordinate bench rulings holding that treaty-exempt gains cannot be used to absorb carried-forward capital losses, while losses remain available for set-off against taxable non-grandfathered gains.

Conclusion: The issue was decided in favour of the assessee. The Assessing Officer was directed to allow exemption of the full grandfathered gains and to permit set-off of brought forward long-term capital loss only against taxable non-grandfathered gains.

Final Conclusion: The common legal effect is that the assessees succeeded on both substantive tax issues, while the remaining grounds relating to computation, TDS credit, interest and penalty were either consequential, restored, or dismissed, resulting in the appeals being allowed only to the extent indicated by the Tribunal.

Ratio Decidendi: Section 70(2) permits set-off of short-term capital loss without regard to securities transaction tax classification, and treaty-exempt capital gains under Article 13(4) cannot be reduced by brought forward losses because exempt income does not enter the total-income computation under section 90(2).

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