Vanguard Total International Stock Index Fund Vs ACIT (ITAT Mumbai)
Income-tax Appellate Tribunal (ITAT), Mumbai Bench, in a recent decision, ruled in favor of Vanguard Total International Stock Index Fund, a U.S.-based Foreign Portfolio Investor (FPI), regarding the set-off of short-term capital losses against short-term capital gains. The Tribunal’s order, dated December 13, 2024, for the Assessment Year 2021-22, overturned the assessment framed by the Assistant Commissioner of Income-tax (ACIT) and upheld the assessee’s method of loss adjustment.
The core dispute revolved around how the assessee, Vanguard, adjusted its short-term capital losses against different categories of short-term capital gains. Vanguard had incurred short-term capital gains and losses on shares where Securities Transaction Tax (STT) was paid, as well as on shares where STT was not paid.
Assessee’s Stance on Loss Set-Off: Vanguard, in its return of income filed on March 12, 2022, had adopted a specific approach for setting off its short-term capital losses. The fund first utilized its STT-paid losses against non-STT paid short-term capital gains. Subsequently, any remaining STT-paid losses were set off against STT-paid gains. This method resulted in a lower overall tax liability for the assessee, as it maximized the benefit of the concessional tax rate applicable to STT-paid gains under Section 111A of the Income-tax Act, 1961 (the Act), while setting off losses against gains taxable at a higher rate.
Vanguard argued that Section 70 of the Act, which deals with the set-off of losses, does not prescribe any specific hierarchy or order for setting off short-term capital losses against short-term capital gains, especially when these gains are subject to different tax rates. It contended that gains arising from STT-paid transactions and non-STT-paid transactions are fundamentally similar under the “Capital gains” head, and thus, losses can be set off against either, allowing the assessee to choose the most beneficial method.
Revenue’s Contention and Re-computation: The Assessing Officer (AO) disagreed with Vanguard’s approach. The AO’s primary argument was that since Section 111A of the Act provides for a concessional tax rate of 15% on short-term capital gains from STT-paid shares, and Section 115AD taxes non-STT gains at 30%, it inherently implies that losses from STT-paid transactions should first be set off against gains from STT-paid transactions. The AO believed that creating such “special categories” under the Act meant that losses within those categories should be adjusted first. Consequently, the AO recomputed Vanguard’s short-term capital gains, leading to a higher tax demand of INR 24,004,036.
The assessee’s objections to this re-computation before the Dispute Resolution Panel (DRP) were dismissed, prompting the appeal to the ITAT.
Judicial Precedents and Tribunal’s Reasoning: The ITAT, after considering arguments from both sides, found merit in Vanguard’s submissions. The Tribunal highlighted that while the Act provides for different tax rates under Sections 115AD and 111A, Section 70, which governs the set-off of losses, does not specify any particular order or restriction for setting off losses against gains based on whether STT has been paid or not. The Tribunal observed that there is no provision in the Act prohibiting the set-off of losses from non-STT paid shares against gains from STT-paid shares.
Crucially, the ITAT relied heavily on a binding decision of the Calcutta High Court in ITA No. 812 of 2008 (judgment dated December 19, 2008). In that case, the Calcutta High Court had affirmed that in the absence of any specific mode of set-off prescribed by the Act, or any prohibition, the assessee is entitled to exercise the option regarding the chronology of set-off in a manner most beneficial to them. The High Court had noted that the Assessing Officer’s practice of first setting off STT-paid short-term capital losses against STT-paid short-term capital gains lacked statutory backing and was contrary to the principle that when an option is available, it should favor the assessee.
The ITAT also noted that this view had been consistently followed by its own Co-ordinate Benches in several cases, including JS Capital LLC (ITA No. 3396/Mum/2023), East Bridge Capital Master Fund I Ltd. (ITA No. 2976/Mum/2023), DWS India Equity Fund (ITA No. 5055/Mum/2010), and M/s. T. Rowe Price International Discovery Fund (ITA No. 7627/Mum/2011). These precedents further strengthened Vanguard’s position, indicating a consistent judicial interpretation on the matter.
Tribunal’s Ruling: Based on the Calcutta High Court’s decision and the consistent stance of its Co-ordinate Benches, the ITAT concluded that the re-computation of short-term capital gains by the AO lacked legal basis. The Tribunal directed the AO to accept the computation of income as submitted by Vanguard.
In light of the primary issue being decided in favor of the assessee, other procedural grounds raised by Vanguard, such as the validity of assessment proceedings initiated by a non-jurisdictional officer and the withdrawal of an assessment order by the Deputy Commissioner of Income-tax (DCIT), were deemed academic and not adjudicated.
Regarding other computational errors raised by the assessee, such as the levy of surcharge and interest under Section 234A of the Act, the Tribunal instructed the AO to review these computations and levy surcharge and interest strictly as per the provisions of law, considering any extended periods for filing returns due to the Covid-19 pandemic.
The ITAT’s decision underscores the principle that in the absence of explicit statutory provisions dictating a specific hierarchy for loss set-off, taxpayers are entitled to arrange their affairs in a manner that is most beneficial to them, provided it is within the confines of the law. This ruling provides clarity and relief to foreign portfolio investors operating in India regarding the treatment of capital gains and losses.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
