Emerging Markets Index Non-Lendable Fund Vs DCIT (ITAT Mumbai)
Income Tax Appellate Tribunal (ITAT) Mumbai bench has ruled in favor of Emerging Markets Index Nonlendable Fund (the appellant), a US-based Foreign Portfolio Investor (FPI) registered with SEBI, regarding a dispute over the set-off of short-term capital losses against capital gains with differential tax rates. The ITAT’s decision, delivered on August 5, 2024, allows the FPI to reduce its taxable income, overturning the assessment made by the Deputy Commissioner of Income Tax and upheld by the Dispute Resolution Panel (DRP).
The case for assessment year 2021-22 centered on the appellant’s method of setting off short-term capital losses against various short-term capital gains. The FPI had declared a total income of Rs. 923,071,640, which the Assessing Officer (AO) subsequently increased to Rs. 992,154,207. The core of the disagreement lay in the treatment of short-term capital gains (STCG) and short-term capital losses (STCL) subject to different tax rates under the Income Tax Act, 1961.
The Assessee’s Stance:
The FPI had reported short-term capital gains that were not subject to Securities Transaction Tax (STT), taxable at 30% under Section 115AD of the Act, amounting to Rs. 70,782,605. Simultaneously, it incurred short-term capital losses subject to STT of Rs. 85,341,255, which, if they had been gains, would have been taxable at 15% under Section 111A. The assessee’s computation involved first setting off the total current year’s short-term capital loss (STT paid) against the STCG (non-STT), and then, if any balance remained, against STCG (STT paid). This approach resulted in a net short-term capital gain of nil after accounting for brought-forward losses.
The appellant’s counsel argued that Section 70 of the Income Tax Act, which deals with set-off of losses from one source against income from another source under the same head of income, does not specify a hierarchy or manner for setting off losses when gains are subject to differential tax rates. In the absence of such specific stipulation, the assessee maintained that it had the choice to adopt the most beneficial approach to reduce its overall tax liability. The counsel emphasized that the differential tax rates do not restrict the set-off of short-term capital losses against short-term capital gains, regardless of the applicable tax rate.
Revenue’s Contention:
The Department, represented by the learned Departmental Representative, vehemently opposed the assessee’s method. The revenue contended that the FPI was attempting to avoid tax liability at the 30% rate by setting off losses from a category taxable at 15%. They argued that this was contrary to the intention and spirit of the law, asserting that short-term capital loss on which STT is paid should first be set off against short-term capital gain on which STT is paid. Any remaining loss, according to the Department, should be carried forward and not set off against short-term capital gain not subject to STT, which is taxable at 30%.
Judicial Precedents and ITAT’s Analysis:
The ITAT, after considering the arguments and perusing the records, found merit in the appellant’s submissions. The bench highlighted that Section 70(2) of the Act permits the set-off of a loss from any short-term capital asset against income from any other capital asset, provided the computation for both is made under Sections 48 to 55 of the Act. The ITAT emphasized that Sections 48 to 55 pertain to the mode of computing capital gains and losses, and do not prescribe or concern themselves with the rate of tax applicable to such gains.
Crucially, the ITAT noted the absence of any restriction in Section 70(2) that would prevent the set-off of capital losses against capital gains merely because they are taxed at different rates. The phrase “similar computation” in Section 70(2) was interpreted by the Tribunal to refer to the method of computation as per Sections 48-55, not the tax rate.
The ITAT’s decision heavily relied on previous judicial precedents from coordinate benches, specifically citing:
