M/s. United Investments Vs ACIT (ITAT Kolkata)
In this case the assessee had incurred loss on sale of shares after paying STT & these shares were held on investment a/c for period more than 12 months. The assessee claimed that the loss incurred was to be assessed under the head ‘capital gains’ and its set off was permissible against capital gain earned on transfer of other capital assets. The AO however disallowed the assessee’s claim for assessment of long term capital loss on the ground that “income” earned in similar transactions was not chargeable to tax in view of exemption granted by S. 10(38) of the I.T. Act. In the AO’s opinion Sec. 10(38) was applicable equally to all transactions of sale of investment shares involving STT payment & irrespective whether the resultant effect was profit/income or loss. On further appeal this Tribunal relying on the judgment of the Hon’ble Calcutta High Court (supra) held that same considerations did not apply to the income exempt u/s 10 and the loss incurred in similar transactions. The ITAT therefore held that assessee was entitled to get its loss assessed & was also entitled to get such loss set off.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal preferred by the Assessee against the order of the CIT(A) – 12, Kolkata dated 16.12.2016 for Assessment Year 2013-14.
2. The first ground of appeal of the assessee is as under:
“That on the facts and on the circumstances of the case the Ld. CIT(A) had grossly erred in confirming the addition of Rs. 4,48,776/- out of the total addition of Rs. 23,70,602/- made by the AO in the assessment framed u/s 143(3) of the Act by wrongly invoking the provisions of section 40(a)(ia) of the Act and also not appreciating the fact that mere reimbursement of such sum can never be subjected to TDS u/s 194C of the Act and also without prejudice the Learned CIT(A) had further failed to appreciate that the provisions of 40(a)(ia) of the Act could never be invoked by the AO following the decision of the jurisdictional High Court at Calcutta rendered on 23rd August, 2016, in the case of Principal Commissioner of Income Tax vs M/s. Tirupati Construction in ITAT No. 287 of 2016.”
3. Briefly stated facts as noted by the AO are that the assessee company had incurred ‘horse expenses’ of Rs.23,70,600/- against the income derived from horse racing, which was entirely paid to Royal Calcutta Turf Club. The appellant contended that the payment made to M/s Royal Calcutta Turf Club was in the nature of reimbursement of the expenses incurred by the club on their behalf and hence it was not required to withhold tax on these payments. After making enquiry u/s 133(6), the AO observed that the appellant had entered into a works agreement with M/s Royal Calcutta Turf Club for rendering of several services and therefore the payment of Rs.23,70,600/- was made in lieu of the agreement with M/s Royal Calcutta Turf Club. The AO thus held that the appellant was required to withhold tax u/s 194C on the expenditure of Rs.23,70,600/- which it had failed to do so. The AO accordingly disallowed the entire expenditure of Rs.23,70,600/- u/s 40(a)(ia) of the Act. On appeal, the CIT(A), after examining the details of expenses paid to M/s Royal Calcutta Turf Club, noted that expenditure to the tune of Rs.19,21,824/- were not in the nature of ‘works’ and therefore the provisions of Section 194C was held to be not applicable to such payments. The Ld. CIT(A) accordingly deleted disallowance to the extent of Rs.19,21,824/-and confirmed the balance addition of Rs.4,48,776/-. Aggrieved the appellant is now in appeal before us.
4. We have heard rival submissions and gone through the order of the lower authorities. We find that the primary argument of the Ld AR is that the payee i.e. M/s Royal Calcutta Turf Club has duly included the subject mentioned receipts in their return of income and had paid taxes thereon which may be verified by the AO. The Ld DR also fairly agreed for the same. In view of the amendment to second proviso to section 40(a)(ia) read with section 201(1) of the Act, if the payees have included the subject mentioned receipts in their returns and paid taxes thereon, if any, then the disallowance u/s 40(a)(ia) of the Act would not operate in the hands of the payer. Hence in the interest of justice and fairplay, we deem it fit and appropriate, to remand this issue to the file of the AO for denovo adjudication of the issue in the light of second proviso to section 40(a)(ia) of the Act. The assessee is also given liberty to adduce fresh evidences in support of its claim before the AO. Accordingly, Ground No.1 raised by the assessee is allowed for statistical purposes.
5. The next ground of appeal raised by the appellant is against the Ld. CIT(A)’s action denying the claim for carry forward of long term capital loss of Rs.6,05,425/- incurred on sale of listed securities. Briefly states facts of the case are that the appellant is engaged in the business of horse racing and also acts as commission agent. The appellant had deployed its surplus funds by way of investments in listed shares & securities. During the relevant year the appellant had sold its holdings in different listed companies. The appellant derived long term capital gain of Rs.77,330/- and incurred long term capital loss of Rs.6,05,425/-. Before the AO the appellant was unable to furnish proper details and therefore the AO did not allow the carry forward of long term capital loss. On appeal however the Ld. CIT(A) noted that the aggregate long term capital gain of Rs.77,330/- derived on sale of listed shares fulfilled the conditions prescribed in Section 10(38) and therefore held it to be exempt from income-tax. With regard to claim of long term capital loss of Rs.6,04,425/-; the Ld. CIT(A) held that since the gain derived from sale of long term listed shares was exempt then any loss incurred there from was to be ignored. He accordingly denied the appellant’s claim for carry forward of long term capital loss of Rs.6,04,425/-u/s 74 of the Act. Being aggrieved by Ld. CIT(A)’s order, the assessee is now in appeal before us.
6. We have heard the rival submissions of both the parties. Assailing the order of the Ld. CIT(A), the Ld. AR appearing on behalf of the appellant submitted that the lower authorities erred on facts and in law in treating the long term capital loss incurred on sale of listed shares on the same footing as that of long term capital gain and thereby denying the carry forward of long term capital loss since long term capital gain was exempt u/s 10(38) of the Act. According to Ld. AR what is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section. Inviting our attention to the provisions of Section 70 & 71 wherein the Legislature has laid down the manner in which the Long term capital loss is to be set-off and carried forward to subsequent years, the Ld. AR submitted that the Legislature 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. The Ld. AR submitted that it is not a case where the source of income itself is exempt from tax and therefore any gain/loss derived in any manner there from is to be ignored for tax purposes. He submitted that capital asset is defined in Section 2(14) which inter alia includes shares & securities. The levy of income-tax on capital gain arising upon transfer of a capital asset has been provided in Section 45 and mode of computation has been elaborated in section 48. Certain exceptions have been provided in section 47 to those transactions which are not regarded as transfer. It is only if upon sale of shares which are listed on stock exchange, the assesse derives a positive income and fulfill the prescribed conditions set out in Section 10(38) that such gain is exempt from tax. According to Ld. AR there is nothing provided in Section 10(38) or for that matter Section 45 to 48 to state that long term capital loss on sale of shares are to be ignored as section 10(38) exempts the income arising from the transfer of long term capital asset being an equity share or unit. He submitted that the scope of this specific exemption provision is meant from a particular specie of positive income cannot be enlarged and read into section 70 or 71 or sections 45 to 48 so as to draw an inference that long term capital loss on sale of shares are to be ignored for the purposes of the Act. In support of his contention, the Ld. AR strongly relied upon the decision of Hon’ble jurisdictional Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709/12 Taxman 133 and the coordinate Bench of this Tribunal in the case of Raptakos Brett & Co. Ltd Vs DCIT (69 SOT 383). Per contra the Ld. DR relied on the order of the lower authorities. He submitted that the term ‘income’ is understood to include negative income i.e. loss as well and therefore he submitted that when the profits arises from transfer of shares of listed companies on which security transaction is paid is exempt u/s 10(38) of the Act, then as a corollary even the loss arising from such source also cannot be set off against any other income which is chargeable to tax. The Ld. DR accordingly pleaded that the orders of the lower authorities be confirmed.
7. After giving a thoughtful consideration to the facts of the case and the provisions of law; we find that the main issue to be decided in this ground is whether the long term capital loss arising on sale of long term listed shares can be assessed in terms of Section 45 of the Act and thereafter be permitted to be carried forward to be set off. It is the contention of the lower authorities that when the gain arising sale of long term listed shares is exempt from tax u/s 10(38) of the Act then by equal measure any loss arising in the hands of the assessee from transfer of listed securities sold on payment of STT should also remain outside the ambit of charging provisions of the Act. It is true that the judicial authorities including the Hon’ble Supreme Court in the case of CIT Vs J.H. Gotla (156 ITR 323) held that the expression ‘income’ shall include loss because the loss is nothing but negative income. It is cardinal principle of interpretation of statutes that the observations and findings of the Court must be understood in the context of the facts involved in the case decided by the Court. It is not proper to divorce the observation of the Court from the facts involved in the case. It is well laid down that the text of the statute must be understood in the context in which it is used and therefore any particular observation of the Court in the judgement cannot be considered or applied in its isolation or divorced from the context in which it was rendered. In the case of CIT Vs J.H. Gotla (supra), the issue before the Apex Court was assessee’s claim in the context of aggregation of income. Section 64 of the Act requires clubbing of income of the minor children or of the spouse and accordingly in the given circumstances the tax is required to be paid on aggregate income after clubbing. In this instant case it was the assessee’s case that if the income accruing to the minor child or spouse was liable to be taxed on aggregate basis in the hands of the assessee then by equal measure the loss incurred by the minor and which was rightfully assessable under the Act was required to be included in the hands of the parent in terms of Section 64 of the Act. It is in this context that the Hon’ble Apex Court held that if the income assessable in the hands of the minor is required to be clubbed with the income of the parent then even the loss legally assessable in the hands of the minor was required to be clubbed in the hands of the parent and only thereafter the total income of the parent was required to be assessed. We thus note that in the decided case the Revenue had not proved that the any source from which the minor earned income or incurred loss was outside the purview of tax provisions. Admittedly the source of income in the hands of the minor was such which was liable to tax and if there had been any income then the same would have been included in the hands of the parent. In the light of this factual and legal position, the Hon’ble Supreme Court held that if the income was liable for clubbing in the hands of the parent then equally the same principle will apply with respect to loss which was negative income.
8. In our considered opinion 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. Accordingly in a case where the source of income is otherwise chargeable to tax but only a specific specie of income derived from such source is granted exemption, then in such case the proposition that the term ‘income’ includes loss will not be applicable. It is only when the source which produces ‘income’ is outside the ambit of taxing provisions of the Act, in such case alone the ‘income’ including negative income can be said to be outside the ambit of taxing provisions and therefore the negative income is also required to be ignored for taxation purposes. As a corollary therefore where only one of the streams of income from the ‘source’ is granted exemption by the Legislature upon fulfillment of specified conditions, then the concept of ‘income’ includes ‘loss’ will not apply. In this background it is necessary to examine now as to whether the ‘source’ of long term capital gain i.e. long term capital asset being equity shares is completely outside the charging provisions or not. On reference to Section 2(14) of the Act which defines the term ‘capital asset’, it is noted that there is no specific exception carved on in respect of equity shares or securities like in the case of agricultural land or personal effect. Further Section 45 which lays down the charge of tax on gain arising on transfer of ‘capital asset’ covers the long term capital gain derived on sale of equity shares whether or not they are listed on stock exchange and whether or not they are transferred on payment of STT. The manner and mode of computation of long term capital gain on sale of shares is uniformly laid down in Section 48 of the Act. In case the resultant figure is a long term capital loss, the manner for claiming its set off / carry forward has been set out in Section 74 of the Act. Therefore, on conjoint reading of all the applicable Sections, we find that nowhere any exception has been made with regard to long-term capital gain/loss arising on sale of equity shares and it is liable to income-tax like any other item of capital asset. In our considered view therefore it cannot be said that the source viz., transfer of long term capital asset being equity shares by itself is exempt from tax so as to say that any ‘income’ from such source shall include ‘loss’ as well.
9. We find that the exemption in respect of long term capital gain accruing on transfer of listed securities on payment of STT is granted under Section 10(38) of the Act. The said provision is part of Chapter III of the Income-tax Act, 1961 which bears the title ‘Income which do not form part of the total income’. If one carefully analyzes various sub-sections of Section 10 then it is evident that each sub-section enlists specific specie of receipt to which exemption from tax is granted if certain conditions are fulfilled. We therefore find that Section 10 enlists various species of receipts which are otherwise revenue in nature but they are granted exemption from income-tax by the Legislature. The Legislature can grant exemption only when there is a positive income and not where there is a ‘loss’ or negative income on which admittedly there cannot be any charge of income-tax. In this regard one may gainfully refer to the CBDT Circular No.7/2013 dated 16.07.2013 issued in the context of Section 10A of the Act which also falls within Chapter III of the Act and grants exemption in respect of profits derived by undertaking located in SEZ/ FZE. In the said Circular the CBDT clarified follows:
“4. Sub-section (6) of sections 10A and 10B were amended by Finance Act, 2003 with retrospective effect from 1-4-2001. Circular No. 7/2003, dated 5-9-2003 explains the amendments brought by Finance Act, 2003. The relevant paragraph is reproduced below:
“20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100% Export Oriented Units.
20.1 Under the existing provisions of sections 10A and 10B, the undertakings operating in a Special Economic Zone (under section 10A) and 100% Export Oriented Units (EOU’s) (under section 10B) are not permitted to carry forward their business losses and unabsorbed depreciation.
20.2 With a view to rationalize the existing tax incentives in respect of such units, sub-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation.
20.3 The amendments have been brought into effect retrospectively from 1-4-2001 and have been made applicable to business losses or unabsorbed depreciation arising in the assessment year 2001-02 and subsequent years.”
5. From the above it is evident that irrespective of their continued placement in Chapter III, sections 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article or thing or computer software. The deduction is to be allowed from the total income of the assessee. The term ‘total income’ has been defined in section 2 (45) of the IT Act and it means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act.
5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and computed in accordance with the provisions of Chapter IV of the Act-
