Capital loss set-off rules permit cross-adjustment for short-term gains, but treaty-exempt grandfathered gains cannot absorb prior losses.

Short-term capital loss on STT-paid transactions could be set off against short-term capital gains on non-STT transactions under section 70(2), because the computation rules do not impose any rate-based hierarchy between transaction types; the assessee's method was accepted. Brought forward long-term capital loss could not be adjusted against grandfathered share-sale gains exempt in India under Article 13(4) of the India-Mauritius DTAA, because treaty-exempt income does not enter the taxable computation and taxable income is required for loss set-off; the exempt gains remained fully exempt.

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Issues: (i) Whether short-term capital loss on securities transaction tax paid transactions could be set off against short-term capital gains on non-STT transactions without insisting on a hierarchy based on differential tax rates; (ii) Whether brought forward long-term capital loss could be adjusted against long-term capital gains that were exempt in India under Article 13(4) of the India-Mauritius DTAA on grandfathered share sales.

Issue (i): Whether short-term capital loss on securities transaction tax paid transactions could be set off against short-term capital gains on non-STT transactions without insisting on a hierarchy based on differential tax rates.

Analysis: Section 70(2) permits set-off of short-term capital loss against income from any other capital asset computed in a similar manner under sections 48 to 55. The provision does not create any further distinction between STT-paid and non-STT transactions, and the computation provisions do not deal with rate of tax. The same issue had been decided in favour of the assessee in earlier tribunal decisions, which were followed.

Conclusion: The set-off methodology adopted by the assessee was accepted and the issue was decided in favour of the assessee.

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

Analysis: Income that is exempt under the treaty does not enter the computation of total income, and a taxable income is a precondition for adjustment of brought forward losses. The exempt grandfathered gains could not be reduced by prior-year long-term capital loss. The loss could be set off only against taxable non-grandfathered long-term capital gains, while the exempt gains had to remain fully exempt under the treaty.

Conclusion: The adjustment against exempt grandfathered gains was disallowed and the issue was decided in favour of the assessee.

Final Conclusion: The substantive disputes were resolved in favour of the assessee on both capital-loss set-off issues, while the remaining grounds were either consequential, not pressed, premature, or allowed only for statistical purposes.

Ratio Decidendi: For capital gains computation, the Income-tax Act does not permit a rate-based hierarchy for set-off of short-term capital loss under section 70(2), and treaty-exempt gains cannot be treated as taxable income for the purpose of setting off brought forward losses.

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