2025 (9) TMI 1113 - AT - Income Tax

Assessee allowed set-off of short-term capital loss against higher-taxed short-term capital gain; AO's disallowance reversed

ITAT MUMBAI held that the assessing officer erred in denying set-off of short-term capital loss (STCL) taxed at 15% against short-term capital gain (STCG) ... Set off of STCG against the STCL - AO was of the view that the Short Term Capital Loss (STCL) chargeable to tax at 15% under section 111A of the Act cannot be set off against the Short Term Capital Gain (STCG) chargeable to tax at 30% u/s 115AD - HELD THAT:- As decided in Rungamatee Trexim Pvt. Ltd. [2008 (12) TMI 759 - CALCUTTA HIGH COURT] when there is no specific mode of setoff is provided in the Act, the assessee has the option to setoff that is most beneficial to the assessee. In the case of First State Investments (Hongkong) Ltd [2009 (7) TMI 908 - ITAT MUMBAI] under similar situation, the AO rejected Assessee's manner of set-off of STCL in category liable to tax at 15% against STCG taxable at 30%. The Revenue made similar argument as is made in the instant case with regard to expression used in section 70(2), i.e., 'under similar computation'. We also noticed similar view has been expressed in many other of decisions of the co-ordinate bench, copies of which are submitted by the ld. AR in the legal Paper Book. The facts in assessee's case are similar and we hold that the AO is not correct in denying the set off of STCL against the STCG to the assessee for the reason that they are taxed at different rates. Accordingly the ground raised by the assessee in this regard is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether short-term capital loss (STCL) chargeable at 15% under section 111A can be set off against short-term capital gain (STCG) chargeable at 30% under section 115AD, in the absence of any specific statutory prohibition or prescribed mode of set-off. 2. Whether the phrase 'under similar computation' in section 70(2) restricts intra-head set-off between categories of short-term capital gains taxed at different rates. 3. Consequential: Whether a without-prejudice contention as to error in determining demand remains relevant if the primary set-off issue is decided in favour of the assessee. ISSUE-WISE DETAILED ANALYSIS Issue 1: Permissibility of setting off STCL (s.111A) against STCG (s.115AD) Legal framework: Section 70 allows set-off of losses against income of the same head; sections 45-55A (notably section 48) govern computation of capital gains; sections 111A and 115AD prescribe special rates of tax for specified capital gains but do not themselves prescribe modes of computation or inter-category set-off. Precedent Treatment: The Court relied on the reasoning of the Calcutta High Court in Rungamatee Trexim (as applied by the Tribunal) and on coordinate-bench Tribunal decisions (including First State Investments) which permitted an assessee to choose the chronology of set-off where the Act does not prescribe a mode. Those authorities rejected Revenue's contention that rate-differentials preclude set-off. Interpretation and reasoning: The Court distinguished computation of income from the application of tax rates - computation under section 48 is antecedent and separate from the rates fixed in sections 111A/115AD. Because the statute does not provide a specific sequence or prohibition for intra-head set-off of capital gains/losses, the assessee is entitled to adopt the set-off chronology most beneficial to it. The statutory silence yields an implied option to the assessee rather than an implicit restriction favoring Revenue. The Court rejected an interpretation that would conflate computation with rate application and thereby bar set-off solely because different rates apply. Ratio vs. Obiter: Ratio - Where the Act prescribes no specific mode or prohibition for intra-head set-off of capital gains and losses, losses from one sub-category of capital gains (taxable at a concessional rate) may be set off against gains in another sub-category (taxable at a different rate), and the assessee may elect the chronology that is most beneficial. Obiter - incidental remarks on policy or on the comparative merits of alternate computation sequences. Conclusion: The AO erred in denying set-off of STCL (s.111A category) against STCG (s.115AD category). The assessee's mode of set-off must be accepted where it conforms to computation rules under section 48 and no statutory bar exists. Issue 2: Scope of 'under similar computation' in section 70(2) Legal framework: Section 70(2) uses the phrase 'under similar computation' in context of set-off of losses; the question is whether those words restrict set-off to losses/gains computed under identical tax-rate regimes. Precedent Treatment: Coordinate bench decisions and the cited High Court decision interpret 'under similar computation' as referring to the computation methodology for determining capital gains (i.e., the mechanics under section 48), not the later application of distinct tax rates under special provisions. Interpretation and reasoning: The Court held that computation (how capital gain/loss is calculated) and the rate of tax applied are distinct concepts. 'Under similar computation' therefore does not mean 'subject to the same tax rate' but that the amounts concerned are computed under the same head (capital gains) following the same mode of computation. Consequently, differences in applicable tax rates (arising under sections like 111A or 115AD) do not, by themselves, prevent set-off where computation is similar. Ratio vs. Obiter: Ratio - The words 'under similar computation' in section 70(2) do not preclude set-off between capital gains/losses that are computed under the same capital gains computation rules merely because different rates of tax later apply. Conclusion: The textual phrase does not justify denying intra-head set-off between STCL and STCG categories taxed at different rates; therefore the Revenue's reliance on that phrase is unsustainable. Issue 3: Consequential challenge to demand and other grounds Legal framework: Grounds relating to calculation of demand and consequential relief are derivative of the primary tax computation outcome. Interpretation and reasoning: Once the primary set-off issue is decided in favour of the assessee, the without-prejudice contention regarding demand calculation becomes infructuous; other consequential grounds require no separate adjudication. Ratio vs. Obiter: Ratio - When a primary substantive issue is decided in favour of a taxpayer, related without-prejudice challenges to demand that arise solely from the adverse result are rendered moot and need not be separately decided. Conclusion: The without-prejudice ground on demand is rendered infructuous by the decision on set-off; remaining grounds are consequential. Overall Conclusion The Tribunal followed binding and persuasive precedent that distinguished computation of capital gains (section 48) from the later application of differing tax rates and held that, in the absence of any statutory prohibition or prescribed sequence, the assessee may set off short-term capital losses chargeable under section 111A against short-term capital gains chargeable under section 115AD by adopting the chronology most beneficial to it. The assessment order denying that set-off was therefore set aside; the appeal was partly allowed and consequential grounds rendered infructuous.