Set-off of LTCL on sale of quoted equity shares allowable against LTCG on sale of properties

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Case Law Details

Case Name : Netesoft India Limited Vs DCIT (ITAT Mumbai)

Appeal Number : I.T.A. No.5359/Mum/2017

Date of Judgement/Order : 20/12/2019

Related Assessment Year : 2013-14

Courts : All ITAT ITAT Mumbai

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Netesoft India Limited Vs DCIT (ITAT Mumbai)

The short question to the adjudicated by us is whether set-off of LTCL on sale of quoted equity shares would be allowable to the assessee against LTCG earned on sale of properties keeping in view the fact that LTCG on similar transactions of sale of quoted equity shares were exempt from tax u/s 10(38)? We find that this issue has been dealt with by the Tribunal in the case of Raptakos Brett & Co. Ltd. V/s DCIT (58 com 115), which took a view favorable to the assessee by observing as under:-

7. We have heard rival submissions and perused the relevant findings given in the impugned orders. The main issue before us 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). The nature of income here in this case is from sale of Long term capital asset, which are equity shares in a company and unit of an equity oriented fund which is chargeable to STT. First of all, Long term capital gain has been defined under section 2(39A), as capital gains arising from transfer of a Long term capital asset. Section 2(14) defines “Capital asset” and various exceptions and exclusions have been provided which are not treated as capital asset. Section 45 is the charging section for any profits or gain arising from a transfer of a capital asset in the previous year i.e. taxability of capital gains. Section 47 enlists various exceptions and transactions which are not treated as transfer for the purpose of capital gain u/s. 45. The mode of computation to arrive at capital gain or loss has been enumerated from sections 48 to 55. Further subsection (3) of section 70 and section 71 provides for set off of loss in respect of capital gain.

8. From the conjoint reading and plain understanding of all these sections it can be seen that, firstly, 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. Secondly, any gains arising from transfer of Long term capital asset is treated as capital gain which is chargeable u/s. 45; thirdly, 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 and section 48 provides for computation of capital gain, which is arrived at after deducting cost of acquisition i.e. cost of any improvement and expenditure incurred in connection with transfer of capital asset, even for arriving of gain in transfer of equity shares; lastly, sections 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. 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 in our considered view it cannot be held that the entire source will not enter into computation of total income. In our view, 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, the income contemplated in section 10(38) is only a part of the source of capital gain on shares and only a limited portion of source is treated as exempt and not the entire capital gain (on sale of shares). If an equity share is sold within the period of twelve months then it is chargeable to tax and only if it falls within the definition of Long term capital asset and, further fulfils the conditions mentioned in sub-section (38) of section 10 then only such portion of income is treated as exempt. There are further instances like debt oriented securities and equity shares where STT is not paid, then gain or profit from such shares are taxable. Section 10 provides that certain income are not to be included while computing the total income of the assessee and in such a case the profit or loss resulting from such a source of income do not enter into computation at all. However, a distinction has been drawn where the entire source of income is exempt or only a part of source is exempt. Here it needs to be seen whether section 10(38) is source of income which does not enter into computation at all or is a part of the source, the income in respect of which is excluded in the computation of total income. For instance, if the assessee has income from Short term capital gain on sale of shares; Long term capital gain on debt funds; and Long term capital gain from sale of equity shares, then while computing the taxable income, the whole of income would be computed in the total income and only the portion of Long term capital gain on sale of equity shares would be removed from the taxable income as the same is exempt u/s 10(38). This precise issue had come up for consideration before the Hon’ble Calcutta High Court in Royal Calcutta Turf Club’s case (supra), wherein the Hon’ble High Court observed that “under the Income tax Act, 1961 there are certain incomes which do not enter into the computation of the total income at all. In computing the total income of a resident assessee, certain incomes are not included under s.10 of the Act. It depends on the particular case; where the Act is made inapplicable to income from a certain source under the scheme of the Act, the profit and loss resulting from such a source will not enter into the computation at all. But there are other sources which, for certain economic reasons, are not included or excluded by the will of the Legislature. In such a case, one must look to the specific exclusion that has been made.”

It is evident that the coordinate bench, after elaborate discussion and upon due consideration of various judicial pronouncements, came to a conclusion that concept of income including losses would apply only when the entire source was exempt from tax and not in cases were only one particular stream of income was falling in exempt provisions. The income contemplated u/s 10(38) was only a part of the source of capital gains on shares and only a limited portion of source was treated as exempt and not the entire capital gains.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. Aforesaid appeal by assessee for Assessment Year [AY] 2013-14 contest the order of Ld. Commissioner of Income-Tax (Appeals)-17, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-17/IT-480/15-16 dated 02/05/2017 on following sole ground of appeal: –

Disallowance of setoff and carry forward of Long-Term Capital Loss of Rs.3,11,80,559/-On facts and circumstances of the case and in law, the CIT(A)/AO erred in making disallowance of set off and carry forward of Long Term Capital Loss arising out of sale of quoted equity shares (STT paid) of Rs.3,11,80,559 against Long Term Capital Gain of Rs.1,27,67,255/- arising on sale of property.

2.1 Facts on record would reveal that the assessee being resident corporate assessee stated to be engaged in the business of software development was assessed for year under consideration u/s 143(3) on 09/02/2016 wherein the income of the assessee was determined at Rs.162.39 Lacs after certain adjustments as against returned income of Rs.34.72 Lacs e-filed by the assessee on 27/11/2013.

2.2 During assessment proceedings, it transpired that the assessee earned long-term capital gains (LTCG) of Rs.127.67 Lacs on sale of certain properties. The Assessee had also reflected LTCG on sale of quoted equity shares for Rs.48.94 Lacs which was claimed exempt u/s 10(38) since the sale transactions were charged to Securities Transaction Tax (STT). At the same time, it was noted that the assessee suffered long-term capital loss (LTCL) of Rs.311.80 Lacs on similar sale of quoted equity shares transactions which were also subjected to payment of STT. The assessee, in its computation of income, claimed set-off of this loss against LTCG aggregating to Rs.176.62 Lacs earned on properties & equity shares. The balance amount of Rs.135.18 Lacs was carried forward to subsequent year. The Ld. AO denied the set-off and carry forward of stated losses on the ground that since long-term capital gains were exempt from tax, losses of similar nature would not be available for such adjustment. The correctness of aforesaid set-off and carry forward of losses is the sole subject matter of present appeal before us.

2.3 During the course of assessment proceedings, the assessee, in defense, submitted that the provisions of Sec. 10(38) were applicable only to income and not to losses. What was sought to be excluded was the income which was in the nature of LTCG on transfer of shares and not the entire income from the source as STCG and gains from sale of unlisted shares would be taxable. It was submitted that the provisions of set-off of Long-Term Capital Loss as contained in Sections 70 & 71 do not put any embargo on set-off of the same from gain arising on other capital assets. Further, Section 10(38) could not be read into Section 70 or 71 or Section 45 to 48.

2.4 However, placing reliance on the decision of Hon’ble Supreme Court in CIT V/s Gold Coin Health Food P. Ltd. (2008 304 ITR 308); CIT V/s J.H.Gotla (156 ITR 323) and CIT V/s Harprasad & Co. (99 ITR 118), the said submissions were rejected since income would include losses also. Applying the aforesaid logic i.e. income would include losses, Ld. AO formed an opinion that loss would bear the same character and quality as does the positive income. Accordingly, if a particular income was exempt from tax, it would not enter into computation process and the same would equally apply to losses also. Therefore, if the STT paid LTCG was exempt u/s 10(38), so would be the loss from same class of assets. It was further observed that income which would not be chargeable u/s 45, would constitute separate source of income and the said exempt income would not form part of total income. Accordingly, the set-off of the losses against gains earned on sale of property as well as carry forward of balance losses to subsequent year was denied to the assessee. However, LTCG on sale of shares for Rs.48.94 Lacs was accepted to be exempt u/s 10(38).

3. The learned CIT(A) confirmed the stand of Ld. AO by observing as under: –

4 Decision

1.1 I have carefully considered the submissions and contentions of the AR of the appellant company and also gone through the Assessment Order. The case laws relied by the appellant company and other relevant case laws have been perused and considered.

1.2 Section 10(38) of the Income Tax Act, 1961 provides that the income earned by way of long term capital gains on sale of equity shares on the stock exchange subject to payment of securities transaction tax [STT) shall not be included in the total income. This Section is placed in Chapter 111- “Income which do not form part of total income” which does provides the list of incomes that does not form part of total income i.e. not includible in the total income.

1.3 It is a trite law that income includes loses. In the case of CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC), it has been held as under :-

“From changing provisions of the Act, it is discernible that the words “income” or “profit and gains”should be understood as including loses also, so that, in one sense “profits and gains” represent plus income whereas loses represent “minus income”. In other words, toss is negative profit. Both must enter into computation, whereas it becomes material, in the same mode of the taxable income of the assessee. Although section 6 classifies income under s/jv heads, the main charging provision in section 3 which levies income tax, as only one tax , on the “total income” of the assessee as defined in section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the “total amount of income, profits and gains referred to in section 4(1)”. Secondly, it must be “computed in the manner laid down in the Act”. If either of these conditions fails, the income will not be a part of the total income that can be brought to change.”

4.4 In view of the above itself, it is amply clear that where the income from a particular source itself is out of the computation machinery while computing the total income there shall be no reason as to why the losses of the same very source shall be given a different treatment or to be allowed or to be included therein, in fact, even on the logical front, this is devoid of the intention of the legislature. If it is interpreted that it allows the assessee to go tax free on LTCG earned on sale of shares subject to the conditions stipulated in section 10(38) but on another hand, LTCL in similar cases shall be allowed to the assessee being not covered by this section. Such an interpretation of the section in the statute will be totally misplaced.

4.5 Now coming to the ratio laid down in the case of Raptakos Brett & Co, Ltd, v, DC1T[2015] 58 taxmann.com 115(Mum-Trib) by relying on the judgement in the case of Royal Turf Club (Calcutta High Court) holding the view that the entire business being the source was not excluded in the provisions of section 10 of the Income Tax Act,1961. This was decided on the basis of the decision of the Hon’ble Supreme Court in the case of Karanchand Premchand [1960] 40 ITR 16 which related to the provisions of Section 5 of the business Profits Act, which at the outset, is not related to the Income Tax Act, 1961. It is important to note the third provisio of Section 5 of the Business Profits Tax Act which reads as under: –

“… Provided further that this Act shall not apply to any income, profits or gains of business accruing or arising within any part of India to which this Act does not extend unless such income, profits or gains are received —in or brought into the taxable territory in any chargeable accounting period, or are assessable under section 42 of that Act–“

The said third proviso meant to, say that the Act should not apply to any income, profits and gains of business accruing or arising in an Indian State, etc. unless it is received or brought into the taxable territories which are quite unambiguously clarifies that the loses i.e. the negative income shall not form part of ‘income’ in the context of the provision.

In this regard, the Hon’ble Supreme Court in the case of Karamchand Premchand (supra) had noted in the context of third proviso that, income cannot include losses here because the latter part of the proviso says. ‘unless such income, profits or gains are received, etc.. into the taxable territories’. This shows, that obviously losses cannot be brought into the taxable territories except in an accounting sense and the expression ‘income, profits or gains’ in the context therefore cannot include losses. It is this vital reasoning which needs to be appreciated that the Hon’ble Supreme Court in the said case did not apply the principle of income includes losses or negative incomes as the language of the third proviso did not permit.

Further, the question of exclusion of business altogether, comes only when the well settled principle of expression ‘income includes loss” fails.

Moreover the genre of the source of long term capital loss incurred in present facts of the case is same as that referred to in the provisions of section 10(38) and it is only a matter of a negative income rather than positive income for which no different treatment can be given. In CIT v. S.S. Thiagarajan [1981] 129 ITR 115, the Hon’ble Madras High Court held that if Income from a source was “altogether exempt from tax, loss from that very source could not be set off against income from a different source or income under a different head.

Hence, the judgement of Karamchand Premchand (supra), judgement of Hon’ble Calcutta High Court in Royal Turf Club and decision of the Mumbai Tribunal(supra) are not applicable to the facts of the present case.

4.6 On the contrary, similar issue of claim of carry forward or set off of LTCL incurred on sale of equity shares covered under the ambit of sec. 10(38) was dealt in by several courts as discussed herein under and my view also finds support from the decisions below:-

(i) In Kishorebhai Bhikhabhai Virani v. ACIT [2015] 55 taxmann.com 91 (Gujarat), the Hon’ble Gujarat High Court has held that –

“6. In this context, section 10(38) of the Act becomes relevant. As is well known, section 10 pertains to income not included in the total income. Clause (38) thereof reads as under:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included -,..

(38) any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where-

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004, comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter:

Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB.”

7. The fact that the capital asset in question, namely, the shares of Suashish Diamond Ltd. was covered under section 10(38) of the Act was not in dispute. That being the position, by virtue of section 10(38) of the Act, in computing the total income of the previous year, any income covered under such clause shall not be included. If that be so, the loss also arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration The contention of the learned counsel for the assessee that for the purpose of section 10(38) of the Act the term “income” would not include “loss”, cannot be accepted and rightly rejected by the Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off The Tribunal rightly relied on the decision in the case of Harprasad & Co. (P.) Ltd. (supra) to come to a conclusion that the term “income” under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vaccum. It involves the notion of set off. It postulates permissibility and possibility of the carried forward toss being absorbed or set off against the profits and gains of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It was held that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing loss to be “carried forward”. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year, from a taxable source.”

(ii) In DCIT (International Taxation) v. Asia Pacific Performance SICAV [2015] 55 taxmann.com 333 (Mum. -Trib.) considering the decision of Hon’ble Apex Court in the case of CIT(Central) v. Harprasad and Co. (P.) Ltd. [1975] 99 ITR 118 (SC) and referring the judgments of Hon’ble Supreme Court in the case of Karamchand Premchand Ltd. [1960] 40 ITR 106 (SC) and of the Hon’ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT [1983] 144 1TR 709 (Cal.), the Hon’ble Mumbai ITAT has held that –

“The income by way of capital gains in the instant case is, by virtue of being exempt under section 10(38) not chargeable under section 45 and, consequently, outside the scope of the total income. Accordingly, it may be seen that, firstly, the relevant capital assets, income from which is not chargeable under section 45, constitutes a separate source of income and, two, being so, i.e., tax exempt under section 10(38), would thus not go to form part of the total income. Both conditions as stated by the apex court in CIT (Central) v. Harprasad and Co. (P.) Ltd. [1975] 99 ITR 118 (SC) fail the observations made by the hon’ble high court qua capital gains while distinguishing the said decision by the apex court, i.e., of the income under reference being intrinsically not income, would thus apply with equal force in the instant case, as it did in the case of Harprasad & Co. (P.) Ltd. It is this that led us to state of the reliance by the assessee on the decision in the case of Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709 (Cal.) as completely misplaced.

(iii) In G.K. Ramamurthy v. JCIT [2010] 2 ITR(T) 139 (Mum.), the Hon’ble Mumbai 1TAT has after considering the intent of the introduction of provisions of section 10(38) has held as under:-

” …With a view to simplify the tax regime on securities transactions; it was proposed to levy a tax at the rate of 15 per cent on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax was to be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The above provisions relating to the proposed tax were contained in Chapter VII of the Finance (No. 2) Bill, 2004, and took effect from 1-10-2004. Further, it was proposed to insert clause (38) in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. Thus section 10(38) has been inserted with a particular object to grant exemption to such income as tax has already been levied on some different footings. If we accept the contention of the revenue to adjust long term capital loss against exempt income (long-term capital gain) that will be contrary to law and contrary to the intention, object and purpose of the Legislature in introducing clause (38) to section 10 of the Act. Further, on acceptance of revenue’s view on the issue, there is absurd outcome of interpretation if the facts are reversed, then, longterm capital loss from taxable assets will have to be adjusted against the longterm capital gains exempt under section 10(38) of the Act. Suppose in the case on hand if there is taxable long-term capital gain before 1-10-2004 of Rs. 33,01,57,200 and long-term capital loss of Rs. 9,23,55,945, which may be exempt under section 10(38) after 1-10-2004 then the loss from exempt source would be set off against taxable gain, such set off is contrary to law.

(iv) In Mridu Hari Dalmia Parivar Trust v. AO [2016] 68 taxmann.com 376 (Delhi-Trib.), it has been held that –

“10. A perusal of sub-section (38) reveals that any income arising from the transfer of long-term capital asset, being an equity share etc., is exempt from tax if the transaction of sale of such equity share etc. is chargeable to Securities Transaction Tax under Chapter VII of the Finance (No.2) Act, 2004. It is trite that ‘Income’ covers both positive and negative incomes, that is, gains and losses. The Hon’ble Supreme Court in a celebrated decision in CIT v. Harrprasad & Co. (P.) Ltd. [1975] 99 ITR 118 has held that the words “income” or “profits and gains” should be understood as including losses also, so that, in one sense “profits and gains” represent “plus income”, whereas losses represent “minus income”. In simple words, both the positive (gains) and negative (losses) are species of the genus of ‘income’.

11. We have noticed that section 10(38) is an exemption provision and not a deduction provision. Income from an exemption provision does not at all enter into computation of total income. If there is a positive income, such income is ignored and thus excluded from taxation and if there is a negative income, namely, loss, then such loss is also ignored and thus neither qualifies for set off against other chargeable incomes nor can be carried forward for a future set off against any other income chargeable to tax. This is on the principle of equality that if positive income from a source is not to be taxed, then on parity, the negative income from the same source should also not get an advantage of set off or carry forward. On the other hand, in the case of a deduction provision, the positive income from the designated source first enters into computation of income, but is then deducted in terms of the eligibility of deduction. In the like manner, if there is a negative income from that designated source, then such loss after entering into computation of income becomes eligible for set off against the other positive incomes subject to other relevant provisions. Here again the principle of equality applies. The essential difference between an exemption and a deduction provision thus lies in the fact that whereas income (both positive and negative) from an exemption provision does not enter into computation of income at all and is totally ignored, income (both positive and negative) from a deduction provision enters into computation of income and is first chargeable to tax and then deductible to the extent provided. The Hon’ble Bombay High Court in Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102/191 Taxman 119 quashed the reopening of an assessment on the ground that the loss of eligible unit was wrongly set off against the normal business income of the assessee by noticing that section 10B, as it now stands, is not a provision in the nature of an exemption but provides for a deduction and the loss sustained by the unit eligible for deduction under section 10B could be set off against the normal business income.

12. Coming back to our context, we find that section 10(38) is an exemption provision. This exemption provision states that any income arising from transfer of equity shares etc., held as long-term capital asset on which STT is paid, will be exempt from taxation. As income includes losses also, this provision applies to both positive and negative income. In other words, if the conditions stipulated under this provision are fulfilled, namely, there is a transfer equity shares etc., held as long term capital asset on which STT is paid, then the resultant gain will not be chargeable to tax and the resultant loss, if any, will equally not qualify for set off and carry forward.”

Thus, in my view, considering the true intent of the provision of section 10(38) for the reasons enumerated above, the loss arising from the capital asset, income from which do not form part of total income as envisaged in the provisions of section 10(38) placed in Chapter 111 of the Statute cannot enter the computation machinery under the head – “Capital Gains” and accordingly, shall not be available for set off or carry forward against any other source or head of income under any other provisions of the Act either. In the result, the action of the Assessing Officer in denying the set off and carry forward of long term capital loss of Rs, 3,11,80,559/- arising from the capital asset envisaged u/s, 10(38) is upheld and appeal filed by this appellant is dismissed.

Thus the appeal filed by the appellant company is Dismissed u/s. 250 read with section 251 of Income tax Act, 1961.

Set-off of LTCL on sale of quoted equity shares allowable against LTCG on sale of properties

Aggrieved, the assessee is under appeal before us.

4. We have carefully heard the rival submissions and perused relevant material on record and deliberated on various judicial pronouncements as cited before us.

5. The basic factual matrix is not under dispute. The short question to the adjudicated by us is whether set-off of LTCL on sale of quoted equity shares would be allowable to the assessee against LTCG earned on sale of properties keeping in view the fact that LTCG on similar transactions of sale of quoted equity shares were exempt from tax u/s 10(38)? We find that this issue has been dealt with by the Tribunal in the case of Raptakos Brett & Co. Ltd. V/s DCIT (58 com 115) wherein coordinate bench, after considering various judicial pronouncements including contrary decisions of Hon’ble Gujarat High Court in Kishorebhai Bhikhabhai Virani V/s ACIT (367 ITR 261) and Hon’ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT (1983 144 ITR 709/12 Taxman 133), took a view favorable to the assessee by observing as under:-

5. Before us the learned senior counsel, Shri Soli Dastur, submitted that what is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section. The set off of Long term capital loss has been clearly provided in sections 70 and 71. The Legislation 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. Even in the definition of capital asset u/s. 2(14), no exception or exclusion has been provided to equity shares the profit/gain of which are treated as exempt u/s. 10(38). Capital gain is chargeable on transfer of a capital asset u/s. 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. 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. Legislature has given exemption to 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. Section 10(38) cannot be read into section 70 or 71 or sections 45 to 48. In support of his contention, he strongly relied upon the decision of Hon’ble Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709/12 Taxman 133. In this decision he submitted that similar issue with regard to the losses on account of breeding horses and pigs which are exempt u/s. 10(27) whether can be set off against its income of other source under the head “business”. The Hon’ble High Court after considering the relevant provisions of section 10(27) and section 70, held that section 10(27) excludes in expressed terms only any income derived from business of livestock breeding, poultry or dairy farming. It does not exclude the business of livestock breeding, poultry or dairy farming from the operation of the Act. The losses suffered by the assessee in respect of livestock, breeding were held to be admissible for deduction and were allowed to be set off against other business income. He drew our attention to the various observations and findings of the Hon’ble High Court and also the reliance placed by their Lordships to various decisions of Hon’ble Supreme Court, especially in the case of CIT v. Karamchand Premchand Ltd. [1960] 40 ITR 106. He also referred to various observations of Hon’ble Supreme Court from the said decision. Thus, he submitted that the losses on account of sale of shares should be allowed to be set off against Long term capital gain on sale of land. In his fairness, he also pointed out before us that there is a decision of Hon’ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani v. Asstt. CIT [2014] 367 ITR 261/[2015] 55 taxmann.com 91, which has decided this issue against the assessee. However, he submitted that in the said decision, the decision of Hon’ble Calcutta High Court has not been referred at all. Therefore, this decision does not have precedence value as compared to the Calcutta High Court decision, which is based on Supreme Court decision on this point. He also pointed out that ITAT Mumbai Bench also in the case of Schrader Duncan Ltd. v. Addl. CIT [2012] 50 SOT 68/18 taxmann.com 287 has decided somewhat similar issue against the assessee. However, he distinguished the said decision and highlighted the points as to why said decision cannot be followed.

6. On the other hand, the learned DR strongly relied upon the order of the AO and CIT(A) and submitted that, firstly, 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. Secondly, the decisions of Hon’ble Gujarat High Court and ITAT Mumbai Tribunal should be followed. He further submitted that it is quite a settled law that income includes loss also and, therefore, if the income from sale of shares does not form part of the total income, then the losses from such shares also will not form part of the total income. Thus, the order of the CIT(A) should be confirmed.

The Hon’ble High Court was besieged with the following question

“Whether under s.10(27) read with s.70 of the I.T. Act, 1961, was the assessee entitled to set off the loss on the two heads, namely, Broodmares Account and the Pig Account, against its income of other sources under the head “Business””

Their Lordships after analysing the provisions of section 70 and section 10(27) observed in the following manner:

“In this case it is important to bear in mind that set-off is being claimed under Section 70 of the 1961 Act which permits set off of any income falling under any head of income other than the capital gain which is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. We have noticed that in the instant case the exclusion has been conceded in computing the business income or the source of income from the head of business and in computing that business income, the loss from one particular source, that is, broodmares account and the pig account, had been excluded contrary to the submission of the assessee. The assessee wanted these losses to be set off. The Revenue contends that as the sources of the income are not to be included in view of the provisions of Clause (27) of s. 10 of the 1961 Act, the loss suffered from this source could also not merit the exclusion. Under the I.T. Act, there are certain incomes which do not enter into the computation of the total income at all. In this connection we have to bear in mind the scheme of the charging section which provides that the incomes shall be charged and s. 4 of the Act provides that the Central Act enacts that the incomes shall be charged for any assessment year and in accordance with and subject to the provisions of the 1961 Act in respect of the total income of the previous year or years or whatever the case may be. The scheme of ” total income ” has been explained by s. 5 of the Act which provides that subject to the provisions of the Act, the total income of the previous year of a person who is a resident includes all income from whatever source it is derived. In computing the total income, certain incomes are not included under s. 10 of the Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look to the specific exclusion that has been made. The question is in this case whether s. 10(27) is a source which does not enter into the computation at all or is a source the income in respect of which is excluded in the computation of total income. How this question will have to be viewed, has been looked into by the Supreme Court in several decisions to some of which our attention was drawn.”

After discussing the various decisions of the Hon’ble Supreme Court specifically the decision of in the case of Karamchand Premchand Ltd. (supra), the Hon’ble High Court came to the following conclusion:

“cl.(27) of s.10 excludes in express terms only “any income derived from a business of live-stock breeding or poultry or dairy farming. It does not exclude the business of livestock breeding or poultry or dairy farming from the operation of the Act. Therefore, the losses suffered by the assessee in the broodmares account and in the pig account were admissible deductions in computing its total income”

Thus, the ratio laid down by the Hon’ble Calcutta High Court is clearly applicable and accordingly we follow the same in the present case.

9. Now coming to the argument of the learned DR and learned CIT(A) that income includes loss and if income is exempt then loss will also not be taken into computation of the income, and such an argument is with reference to the decision of Hon’ble Supreme Court in the case of Hariprasad & Co. (P.) Ltd. [1975] 99 ITR 118. The Hon’ble Supreme Court, opined that, if loss was from the source or head of income not liable to tax or congenitally exempt from income tax, neither the assessee was required to show the same in the return nor was the Assessing Officer under any obligation to compute or assess it much less for the purpose of carry forward. Further, the Hon’ble Supreme Court observed that “From the charging provisions of the Act, it is discernible that the words ‘ income ‘ or ‘ profits and gains’ should be understood as including losses also, so that, in one sense ‘profits and gains’ represent ‘ plus income ‘ whereas losses represent ‘minus income’. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee. Although Section 6 classifies income under six heads, the main charging provision is Section 3 which levies income-tax, as only one tax, on the ‘total income ‘ of the assessee as defined in Section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the ‘ total amount of income, profits and gains referred to in Section 4(1)’. Secondly, it must be ‘computed in the manner laid down in the Act’. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge.”

While concluding the issue their Lordships observed that “it may be remembered that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set- off. Its sole purpose is to set off the loss against the profits of a subsequent year. It presupposes the permissibility and possibility of the carried-forward loss being absorbed or set off against the profits and gains, if any, of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It follows that if such set-off is not permissible or possible owing to the income or profits of the subsequent year being from a non-taxable source, there would be no point in allowing the loss to be “carried forward”. Conversely, if the loss arising in the previous year was under a head not chargeable to tax, it could not be allowed to be carried forward and absorbed against income in a subsequent year from a taxable source.” The ratio and the principle laid down by the Hon’ble Apex Court would not apply here in this case, because the concept of income includes loss will apply only when entire source is exempt or is not liable to tax and not in the case where only one of the income falling within such source is treated as exempt. The Hon’ble Apex Court on the other hand, itself has stated that if loss from the source or head of income is not liable for tax or congenitally exempt from income tax, then it need not be computed or shown in the return and Assessing Officer also need not assess it. This distinction has to be kept in mind. Hon’ble Calcutta High Court in Royal Turf Club have discussed the aforesaid decision of the Hon’ble Supreme Court and held that the same will not apply in such cases. Thus, in our conclusion, we hold that 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. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being 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).

10. Coming to the decision of the ITAT Mumbai Bench in the case of Schrader Duncan Ltd. (supra), the issue involved there was, whether the loss on transfer of capital asset being units US 64 Scheme of Unit Trust of India can be allowed and entitled to carry forward the same for set off of in subsequent assessment years, when the income arising from such transfer of unit is exempt u/s. 10(33). The Tribunal held that the source both capital gain and capital loss on sale of units of US64 is itself excluded and not only the income arising out of capital gain. The Hon’ble Tribunal have noted the history of US64 Scheme and the purpose for which such scheme was launched. In this context of transfer of US64 scheme the Tribunal held that the provisions were not meant to enable the assessee to claim loss by indexation for set off against other capital gain chargeable to tax. This decision is slightly distinguishable and secondly, we have already discussed the issue at length and have held that the ratio of Hon’ble Calcutta High Court is applicable in the present case. Lastly, coming to the decision of Hon’ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani (supra), we find that the issue involved in the present case was almost the same, wherein the Hon’ble High Court after following the decision of Hon’ble Supreme Court in the case of Hariprasad & Company (P.) Ltd. (supra), had decided the issue against the assessee. Since we have already noted down the ratio of Hon’ble Calcutta High Court, wherein the Hon’ble High Court has discussed this issue in detail after relying upon series of decisions of Hon’ble Supreme Court and have reached to a conclusion as discussed above, and, therefore, we are respectfully following the ratio of the decision of the Calcutta High Court. Further the said decision have not been referred or distinguished by the Hon’ble Gujarat High Court. Accordingly, we allow the assessee’s ground no.1 and direct the Assessing Officer to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land.

Proceeding further, we find that although the revenue preferred further appeal against the aforesaid order before Hon’ble Bombay High Court vide ITA No. 357 of 2016, however, the same was dismissed by Hon’ble Court for want of non-prosecution vide order dated 09/08/2018 with following observations: –

1. When this appeal was called out earlier, none appeared in support of the appeal. Therefore, the appeal was kept back. On being called the second time also none appeared in support of the appeal.

2. It appears that the appellant is not interested in prosecuting the present appeal.

3. Accordingly, the appeal is dismissed for non-prosecution.

6. The aforesaid order of the Tribunal has subsequently been followed by Pune Tribunal in ACIT V/s Shri Somnath Vaijanath Sakre (ITA No.2986/Pun/2016 & ors. order dated 08/03/2019) drawing analogy from the decision of Hon’ble Supreme Court rendered in CIT V/s Vegetable products Ltd. (1972 88 ITR 192). Similar favorable view has recently been taken by Kolkata Tribunal in M/s United Investments V/s ACIT (ITA No.511/Kol/2017 order dated 01/07/2019).

7. In the above background, we find that various coordinate benches of Tribunal has chosen to take a view favorable to the assessee and therefore, respectfully following the same, we prefer to take similar view. Accordingly, we hold that the assessee would be entitled for set-off of Long-Term Capital Losses of Rs.311.80 Lacs against aggregate Long-Term Capital Gains of Rs.176.62 Lacs and entitled to carry forward unutilized losses of Rs.135.18 Lacs.

8. The appeal stands allowed in terms of our above order.

Order pronounced in the open court on 20^th December, 2019.