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Tribunal holds that long-term capital loss, on STT paid sale of listed shares, is eligible for carry forward and set-off
July 29, 2019
In brief
The Kolkata bench of the Income-tax Appellate Tribunal (Tribunal) in the case1 of the taxpayer held that long-term capital loss (LTCL) on sale of listed shares [securities transaction tax (STT) paid] is eligible to be carried forward notwithstanding that gains on sale of such shares are exempt under section 10(38) of the Income-tax Act, 1961 (the Act) as per the erstwhile law.
In detail
Facts
The taxpayer is engaged in the business of
horseracing. It also acts as a commission agent.
The taxpayer had deployed its surplus funds by investments in listed shares and securities.
The taxpayer sold its holdings in various listed companies in India. It derived a long-term capital gain (LTCG) and also incurred LTCL on such sale.
The taxpayer claimed exemption under section 10(38) of the Act for the LTCG and carried forward the entire LTCL to
subsequent years, under section 74 of the Act.
1 I.T.A. No. 511/ Kol/ 2017
The Tax Officer (TO) disallowed the carry forward of LTCL as the taxpayer was unable to furnish the necessary information.
Issue before the Tribunal Whether LTCL arising on sale of listed shares (gains from which are exempt from tax) can be carried forward and set- off in subsequent years?
Taxpayer’s contentions
Sections 70 and 71 of the Act lays down the manner of setting-off and carry forward of LTCL to subsequent years. The Act does not implement any embargo to exclude LTCL from sale of shares to be set-off against LTCGs arising on the sale of other capital assets.
This is not a case where the source of income itself is exempt from tax.
Therefore, any gain/ loss derived in any manner therefrom is to be ignored for tax purposes.
Only gains arising from the sale of listed shares on a stock exchange are exempt from tax under section 10(38) of the Act. Sections 10(38), 45 and 48 of the Act do not state that LTCL on sale of shares is to be ignored for the purposes of the Act.
Revenue’s contention The term “income” is
understood to include negative income, i.e., loss. Hence, when profits from the transfer of listed company shares on which STT is paid are exempt under section 10(38) of the Act, then as a corollary, even
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the loss arising from such source cannot be set-off against any other income that is chargeable to tax.
Tribunal’s ruling
The Supreme Court in the case of J.H. Gotla2 held that the expression “income” shall include “loss” because the loss is nothing but negative income.
A cardinal principal of interpretation is that the text of the statute must be understood in the context in which it is used. Therefore, any particular observation of the court in a judgment should be understood in the context of its use and should not be considered or applied in isolation or divorced from the context in which it was rendered.
The judicial concept that the term “income” includes loss can be applied only when the entire source of such income falls within the charging provisions of the Act.
When the source of income is otherwise chargeable to tax but only specific specie of income derived from such source is granted exemption, in such cases, the proposition that the term “income”
includes loss will not be
2 CIT v. J.H. Gotla [1985] 156 ITR 323 (SC)
applicable.
Only when the source that produced “income” was beyond the taxing provisions of the Act, could it be held that the “income” (including negative income) can be outside the ambit of the taxing provisions. As a corollary, when only one of the streams of income from the “source” was granted exemption by the Legislature upon fulfilment of the specified conditions—the concept of “income” includes
“loss” would not apply.
A conjoint reading of all applicable provisions nowhere specifies any exception with regard to LTCG/ LTCL arising on sale of equity shares. This is liable to income-tax as any other item of capital asset.
Therefore, it cannot be said that the source viz., transfer of long-term capital asset being equity shares by itself is exempt from tax, to say that any “income” from such source shall also include
“loss.”
Section 10(38) of the Act is part of Chapter III – “Income which do not form part of the total income.” It enlists different types of receipts that
are otherwise revenue in nature but they are granted exemption from income-tax by the Legislature. The statute can grant exemption only when there is positive income and not a “loss” or negative income, on which admittedly, there cannot be any charge of income-tax.
Thus the TO was directed to allow LTCL to be carried forward.
The takeaways
The judgement reaffirms the position that LTCL on listed securities (which if income will be exempt under section 10(38) of the Act) should be allowed to be set-off against other capital gains and/ or to be carried forward.
The Tribunal reiterates the principle that if a source of income is completely exempt from tax, the set-off and carry forward of loss shall not be available. However, if the exemption applies only to a part of the source of income and/ or is subject to fulfilment of some conditions, the loss from such source of income will be allowed to be set-off and carried forward.
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