TS-326-ITAT-2015 (Mum),  58 taxmann.com 115 (Mumbai – Trib.)
Facts of the case and Question of law:
Assessee is a pharmaceutical company, engaged in manufacturing and sale of pharmaceuticals, formulations, dietetic specialties and animal husbandry. Assessee in its computation on income has shown;
|Long Term Capital Loss on Sale of Equity Shares (STT paid)||Rs.57,32,835/-|
|Long Term Capital Loss on Sale of Mutual Funds (STT paid)||Rs.2,61,655/-|
|Long Term Capital Gain on Sale of Land at Chennai||Rs.94,12,00,000/-|
Assessee has set off such long term capital loss on sale of equity shares and mutual funds against long term capital gains on sale of land. Now the question is whether Long term capital loss on sale of equity shares can be set off against Long term capital gain arising on sale of land or not, as the income from Long term capital gain on sale of such shares are exempt u/s.10(38).
Contention of the Assessee:
Assessee is not satisfied with the decision of CIT(A) and its contention is;
1. Section 10(38) exempts only the positive income and thus losses will not come within the purview of the said section.
2. Section 70 does 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.
3. Nothing has been mentioned in sections 45 to 48 that capital gain or loss on sale of shares are to be excluded as section 10(38) exempts the income arising from the transfer of long term capital asset being an equity share or unit.
4. Specific exemption is given only to the income arising from transfer of long term capital asset being an equity share in company or unit of equity oriented fund, which is chargeable to STT. Thus, only income from such long term capital asset would not form part of computation and not losses.
Contention of the Revenue:
Learned DR strongly relied upon the order of the AO and CIT(A) and submitted that,
1. Income includes loss also.
2. 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.
After hearing both the parties’ submissions, perusing the relevant findings and from the conjoint reading and plain understanding of relevant sections of the legislature namely Section 2(14), 2(39A), 45, 47, 48 to 55, 70(3) and 71, concluded that;
1. Shares in the company are treated as capital asset and no exception has been carved out in section 2(14), for excluding the equity shares and unit of equity oriented funds that they are not treated as capital asset.
2. Any gains arising from transfer of long term capital asset is treated as capital gain which is chargeable u/s.45. Section 47 does not enlist any such exception that transfer of long term equity shares/funds are not treated as transfer for the purpose of section 45.
3. Section 70 & 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been made / carved out with regard to Long term capital gain arising on sale of equity shares.
4. 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 it cannot be held that the entire source will not enter into computation of total income.
5. 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 such equity share or unit is entered into on or after the date on which chapter VII of Finance (No.2) Act 2004 comes into force. If such conditions are not fulfilled then exemption is not given.
Thus it is upheld that;
A distinction to be drawn whether the entire source of income is exempt or only a part of source is exempt. 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. 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 accordance with section 70(3).
Compiled and Analysed by our Team Member CA Namita Gad