TaxTMI 
TaxTMI 
2019 (12) TMI 1038
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....orate assessee stated to be engaged in the business of software development was assessed for year under consideration u/s 143(3) on 09/02/2016 wherein the income of the assessee was determined at Rs. 162.39 Lacs after certain adjustments as against returned income of Rs. 34.72 Lacs e-filed by the assessee on 27/11/2013. 2.2 During assessment proceedings, it transpired that the assessee earned long-term capital gains (LTCG) of Rs. 127.67 Lacs on sale of certain properties. The Assessee had also reflected LTCG on sale of quoted equity shares for Rs. 48.94 Lacs which was claimed exempt u/s 10(38) since the sale transactions were charged to Securities Transaction Tax (STT). At the same time, it was noted that the assessee suffered long-term capital loss (LTCL) of Rs. 311.80 Lacs on similar sale of quoted equity shares transactions which were also subjected to payment of STT. The assessee, in its computation of income, claimed set-off of this loss against LTCG aggregating to Rs. 176.62 Lacs earned on properties & equity shares. The balance amount of Rs. 135.18 Lacs was carried forward to subsequent year. The Ld. AO denied the set-off and carry forward of stated losses on the groun....
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....erused and considered. 1.2 Section 10(38) of the Income Tax Act, 1961 provides that the income earned by way of long term capital gains on sale of equity shares on the stock exchange subject to payment of securities transaction tax [STT) shall not be included in the total income. This Section is placed in Chapter 111- "Income which do not form part of total income" which does provides the list of incomes that does not form part of total income i.e. not includible in the total income. 1.3 It is a trite law that income includes loses. In the case of CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC), it has been held as under :- "From changing provisions of the Act, it is discernible that the words "income" or "profit and gains"should be understood as including loses also, so that, in one sense "profits and gains" represent plus income whereas loses represent "minus income". In other words, toss is negative profit. Both must enter into computation, whereas it becomes material, in the same mode of the taxable income of the assessee. Although section 6 classifies income under s/jv heads, the main charging provision in section 3 which levies inco....
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.... Act should not apply to any income, profits and gains of business accruing or arising in an Indian State, etc. unless it is received or brought into the taxable territories which are quite unambiguously clarifies that the loses i.e. the negative income shall not form part of 'income' in the context of the provision. In this regard, the Hon'ble Supreme Court in the case of Karamchand Premchand (supra) had noted in the context of third proviso that, income cannot include losses here because the latter part of the proviso says. 'unless such income, profits or gains are received, etc.. into the taxable territories'. This shows, that obviously losses cannot be brought into the taxable territories except in an accounting sense and the expression 'income, profits or gains' in the context therefore cannot include losses. It is this vital reasoning which needs to be appreciated that the Hon'ble Supreme Court in the said case did not apply the principle of income includes losses or negative incomes as the language of the third proviso did not permit. Further, the question of exclusion of business altogether, comes only when the well settled principle of....
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....the position, by virtue of section 10(38) of the Act, in computing the total income of the previous year, any income covered under such clause shall not be included. If that be so, the loss also arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration The contention of the learned counsel for the assessee that for the purpose of section 10(38) of the Act the term "income" would not include "loss", cannot be accepted and rightly rejected by the Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off The Tribunal rightly relied on the decision in the case of Harprasad & Co. (P.) Ltd. (supra) to come to a conclusion that the term "income" under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vaccum. It involves the notion of set off. It postulates permissibility and possibility of the carried forward toss being absorbed or set off against the profits and gains ....
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.... " ...With a view to simplify the tax regime on securities transactions; it was proposed to levy a tax at the rate of 15 per cent on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax was to be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The above provisions relating to the proposed tax were contained in Chapter VII of the Finance (No. 2) Bill, 2004, and took effect from 1-10-2004. Further, it was proposed to insert clause (38) in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. Thus section 10(38) has been inserted with a particular object to grant exemption to such income as tax has already been levied on some different footings. If we accept the contention of the revenue to adjust long term capital loss against exempt income (long-term capital gain) that will be contrary to law and contrary to the intention, object and purpose of the Legislature in introducing clause (38) to section 10 of the Act. Further, on acceptance of revenue's view on the issue....
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....e, but is then deducted in terms of the eligibility of deduction. In the like manner, if there is a negative income from that designated source, then such loss after entering into computation of income becomes eligible for set off against the other positive incomes subject to other relevant provisions. Here again the principle of equality applies. The essential difference between an exemption and a deduction provision thus lies in the fact that whereas income (both positive and negative) from an exemption provision does not enter into computation of income at all and is totally ignored, income (both positive and negative) from a deduction provision enters into computation of income and is first chargeable to tax and then deductible to the extent provided. The Hon'ble Bombay High Court in Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102/191 Taxman 119 quashed the reopening of an assessment on the ground that the loss of eligible unit was wrongly set off against the normal business income of the assessee by noticing that section 10B, as it now stands, is not a provision in the nature of an exemption but provides for a deduction and the loss sustained by the unit eligible for....
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....ein coordinate bench, after considering various judicial pronouncements including contrary decisions of Hon'ble Gujarat High Court in Kishorebhai Bhikhabhai Virani V/s ACIT (367 ITR 261) and Hon'ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT (1983 144 ITR 709/12 Taxman 133), took a view favorable to the assessee by observing as under:- 5. Before us the learned senior counsel, Shri Soli Dastur, submitted that what is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section. The set off of Long term capital loss has been clearly provided in sections 70 and 71. The Legislation has not put any embargo to exclude Long term capital loss from sale of shares to be set off against Long term capital gain arising on account of sale of other capital asset. Even in the definition of capital asset u/s. 2(14), no exception or exclusion has been provided to equity shares the profit/gain of which are treated as exempt u/s. 10(38). Capital gain is chargeable on transfer of a capital asset u/s. 45 and mode of computation has been elaborated in section 48. Certain exceptions have been provided in....
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.... been referred at all. Therefore, this decision does not have precedence value as compared to the Calcutta High Court decision, which is based on Supreme Court decision on this point. He also pointed out that ITAT Mumbai Bench also in the case of Schrader Duncan Ltd. v. Addl. CIT [2012] 50 SOT 68/18 taxmann.com 287 has decided somewhat similar issue against the assessee. However, he distinguished the said decision and highlighted the points as to why said decision cannot be followed. 6. On the other hand, the learned DR strongly relied upon the order of the AO and CIT(A) and submitted that, firstly, if the income from the Long term capital gain on sale of shares is exempt, then the loss from such sale of shares will also not form part of the total income and therefore, there is no question of set off against other income or Long term capital gain on different capital asset. Secondly, the decisions of Hon'ble Gujarat High Court and ITAT Mumbai Tribunal should be followed. He further submitted that it is quite a settled law that income includes loss also and, therefore, if the income from sale of shares does not form part of the total income, then the losses from such sh....
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....ption has been made/ carved out with regard to Long term capital gain arising on sale of equity shares. The whole genre of income under the head 'capital gain' on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular "provision" of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, the concept of income including loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions. Section 10(38) provides exemption of income only from transfer of Long term equity shares and equity oriented fund and not only that, there are certain conditions stipulated for exempting such income i.e. payment of security transaction tax and whether the transaction on sale of ....
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.... of the Act, the profit and loss resulting from such a source will not enter into the computation at all. But there are other sources which, for certain economic reasons, are not included or excluded by the will of the Legislature. In such a case, one must look to the specific exclusion that has been made." The Hon'ble High Court was besieged with the following question "Whether under s.10(27) read with s.70 of the I.T. Act, 1961, was the assessee entitled to set off the loss on the two heads, namely, Broodmares Account and the Pig Account, against its income of other sources under the head "Business"" Their Lordships after analysing the provisions of section 70 and section 10(27) observed in the following manner: "In this case it is important to bear in mind that set-off is being claimed under Section 70 of the 1961 Act which permits set off of any income falling under any head of income other than the capital gain which is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. We have noticed that in the instant case the exclusion has been conceded in comp....
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.... "cl.(27) of s.10 excludes in express terms only "any income derived from a business of live-stock breeding or poultry or dairy farming. It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissible deductions in computing its total income" Thus, the ratio laid down by the Hon'ble Calcutta High Court is clearly applicable and accordingly we follow the same in the present case. 9. Now coming to the argument of the learned DR and learned CIT(A) that income includes loss and if income is exempt then loss will also not be taken into computation of the income, and such an argument is with reference to the decision of Hon'ble Supreme Court in the case of Hariprasad & Co. (P.) Ltd. [1975] 99 ITR 118. The Hon'ble Supreme Court, opined that, if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the p....
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....hen entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon'ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon'ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon'ble Supreme Court and held that the same will not apply in such cases. Thus, in our conclusion, we hold that section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accord....