Case Law Details
JS Capital LLC Vs ACIT (ITAT Mumbai)
STCL Taxable at 15% Can Offset STCG Taxable at 30% under Sections 111A and 115AD
In the case of JS Capital LLC vs. ACIT, Mumbai, the Income Tax Appellate Tribunal (ITAT) addressed an appeal against the order passed by the ACIT for the Assessment Year 2020-21. The appellant, a non-resident entity registered as a Foreign Portfolio Investor (FPI), contested the disallowance of set-off of Short-Term Capital Loss (STCL) against Short-Term Capital Gain (STCG) earned from the sale of derivatives.
The appellant claimed STCG on the sale of derivatives taxable at 30% and also claimed STCL taxable at 15%. The Assessing Officer (AO) disallowed the set-off, stating that STCG on derivatives was in the nature of speculative gain and attracted tax liability at 30%. Therefore, the AO proposed an addition to the total income.
The appellant argued that the mere difference in the rate of taxation should not disallow the set-off, as both STCG and STCL were under similar computation. They referred to various judicial pronouncements supporting their contention.
The ITAT reviewed the case and found that under Section 70(2) of the Income Tax Act, STCL arising from any asset can be set off against STCG arising from any other asset under similar computation, irrespective of the difference in tax rates. The ITAT cited previous decisions of the Tribunal and the High Court to support this interpretation.
Based on the precedent and the provisions of the Income Tax Act, the ITAT allowed the appellant’s appeal, stating that STCL arising from STT paid transactions can be set off against STCG arising from non-STT transactions, regardless of the difference in tax rates.
Consequently, the ITAT ruled in favor of the appellant, allowing the set-off of STCL against STCG and overturning the AO’s disallowance.
The appeal was allowed by the ITAT, providing relief to the appellant.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal filed by the assessee is directed against the order passed by the ACIT, International Tax, Circle-3(1)(1), Mumbai dated 26.07.2023 for A.Y. 2020-21. The assessee has raised the following grounds before us:
“1. On the facts and in the circumstances of the case and in law, the [final assessment] order [dated 26 July 2023] passed by the Assistant Commissioner of Income-tax – International tax Circle 3(1)(1) Mumbai (‘Ld. AO’) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (Act’) is bad in law and void ab initio.
2. On the facts and in the circumstances of the case and in law, the final assessment order dated 26 July 2023 passed by the Ld. AO under section 143(3) read with section 144C(13) of the Act having been passed beyond the limitation provided in terms of section 153 of the Act, is illegal, being barred by limitation, void-ab-initio and is therefore, liable to be quashed.
3. On the facts and in the circumstances of the case and in law, the notice under section 143(2) of the Act issued by the Assistant Commissioner of Income Tax, National Faceless Assessment Centre – 1(1)(2). Delhi [‘NaFAC’] is without jurisdiction and consequently, all proceedings consequent to the aforesaid notice under section 143(2) of the Act are also bad in law, void-ab-initio and liable to be quashed.
4. On the facts and in the circumstances of the case and in law, the Ld. AO erred in not allowing set-off of short-term capital loss (‘STCL’) of AY 2020-21 and brought forward STCL of AY 2019-20 under section 111A read with section 115AD of the Act (taxable at 15%), against short-term capital gains (‘STCG) under section 115AD of the Act (taxable at 30%).
In doing so, the Ld. AO has erred in:
a. holding that STCL of AY 2020-21 and brought forward STCL of AY 2019-20 covered under section 111A read with section 115AD of the Act (subject to tax rate of 15%) cannot be set-off against STCG of AY 2020-21 taxable under section 115AD of the Act (subject to tax rate of 30%).
b. not appreciating the fact that section 70(2) and 74(1)(a) of the Act grants an unconditional right to set-off STCL against STCG regardless of differential tax rate.
5. On the facts and in the circumstances of the case and in law, the Ld. AO failed to state and apply the correct amount of Total Income of the Appellant when making its determinations in the notice of demand and computation sheet in connection with the final assessment order dated 26 July 2023.
6. On the facts and in the circumstances of the case and in law and as a consequence of the misstatement by the Ld. AO in Ground 5 above, the Id. AO erred in determining the Total Income of the Appellant amounting to INR 347, 883 ,770/- and thereby, consequentially determining the demand of INK 137, 496 ,340/-.
7. On the facts and in the circumstances of the case and in law and as a consequence of the misstatement by the Ld. AO in Ground 5 above, the Ld. AO erred in consequential levying interest under section 234A & 234B of the Act amounting to INR 393,334,944/–
8. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act in consequence of under reporting of income.
The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary at either at or before the appeal hearing so as to enable the Hon’ble Tribunal members to decide these according to the law.”
2. Fact in brief is that return of income declaring total income of Rs.4,99,98,090/- was filed on 13.02.2021. The case was subjected to scrutiny assessment and notice under section 143(2) of the Act was issued on 29.06.2021. The assessee is a non resident entity registered with the Security Exchange Board of India (SEBI) as a Foreign Portfolio Investors (FPI) for carrying out investment activity in Indian capital markets. The assessee company was a tax resident in USA. During the course of assessment the Assessing Officer (AO) noticed that the assessee has disclosed its income as Long Term Capital Loss (LTCL) on which STT was paid of Rs.1,30,58,60,860/- and also claimed Short Term Capital Loss (STT paid) of Rs.25,49,24,728/-, Short Term Capital Gain (STCG) of Rs.27,64,65,202/- on sale of derivatives and physical settlement of derivatives, dividend income of Rs.2,28,73,297/- claimed as exempt under section 10(34) of the Act and interest on debt securities amounting to Rs.4,99,98,090/-.
3. After perusing the detail filed by the assessee the AO noticed from the computation of income filed by the assessee in the return of income that it has set off STCG on sale of derivatives amounting to Rs.23,07,57,354/- and STCG on physical settlement of derivatives amounting to Rs.4,56,47,848/- which was taxable at the rate of 30% with current year, STCL on sale of equity on which STT was paid taxable at the rate of 15% amounting to Rs.25,49,24,728/-and has set off the above balance STCG with STCL brought forward from the A.Y. 2019-20 amounting to Rs.2,14,80,473/-. After perusal of the aforesaid information the AO was of the view that STCG on sale of derivatives was in the nature of speculative gain and attracts tax liability at the rate of 30% + cess and surcharge and the STCL on sale of equity shares (STT paid) cannot be set off against the said gain. Therefore the AO has passed the draft assessment order on 17.09.2022 under section 143(3) read with section 144C of the Act and proposed an addition of Rs.27,64,05,202/- to the total income by disallowing the set off of STCL of A.Y. 2020-21 and brought forward STCL of A.Y. 2019-20 incurred on sale of equity transactions (STT paid and chargeable to tax at the rate of 15%) against STCG earned from sale of derivatives transactions of A.Y. 2020-21 (non STT paid and chargeable to tax at the rate of 30%).
4. The assessee filed objections before the Dispute Resolution Panel (DRP) and the DRP vide order under section 144C(5) of the Act dated 28.06.2023 dismissed the objections filed by the assessee holding that STCG/STCL on derivative transactions were on a different footing than STCG/STCL on equity shares. Thereafter the AO passed the final assessment order under section 143(3) read with section 144C(13) on 26.07.2023 on the direction of the DRP after determining the tax liability without setting off of STCG loss taxable at the rate of 15% against the STCG on sale of derivatives taxable at the rate of 30% under section 70(2) of the Act.
5. During the course of appellate proceedings before us the Ld. Counsel submitted that the setting off of STCL taxable at the rate of 15% under section 115AD of the Act against STCG taxable at the rate of 30% under section 111A read with section 115AD of the Act cannot be disallowed and the Act does not provide for bifurcation of STCL in different categories on the basis of tax rates. In support of his contention the Ld. Counsel has referred the various judicial pronouncements as under:
1. CIT v. Rungamatee Trexim (Pvt) Ltd. – ITA No. 812 of 2008 (Kol. HC) (2008)
2. First State Investments (Hongkong) Ltd. v. ADIT (International Taxation) – ITA No. 2895/Mum/2008
3. GSB Capital Markets Ltd. v. DCIT – ITA No.307/Mum/2014
4. ADIT (International Taxation) v. Legg Mason Asia (Ex Japan) Analyst Fund – ITA No. 7625/Mum/2011
5. VEMF -A, LP v. DCIT – ITA No. 6727/Mum/2016
6. On the other hand, the Ld. D.R. supported the order of lower authorities.
7. Heard both the sides and perused the material on record. During the year under consideration the assessee has claimed STCG on sale of derivatives taxable @ 30% and during the year under consideration the assessee has also claimed STCL taxable @15% and the same was set off against the STCG which was taxable @ 30% as referred above. In addition to the above the assessee has also claimed brought forward STCL taxable @ 15% to set off against the balance STCG earned on sale of derivatives. The AO after referring provisions of section 70(2) arrived at the conclusion that STCG on derivatives taxable at the rate of 30% and STCL taxable at the rate of 15% were not falling under the similar computation. Therefore the claim of set off was disallowed. The assessee claimed that mere difference in rate of taxation cannot be taken as the reason for disallowance of set off as both the STCG under the category of similar computation. In this regard, we have perused the various judicial pronouncements referred by the Ld. Counsel as mentioned above. We find that in the decision of GSB Capital Markets Ltd. (supra) the coordinate Bench of the Tribunal, Mumbai held that loss arisen from transfer of short term capital assets which are brought forward from earlier years can be set off against the capital gain assessable for subsequent assessment year in respect of any other capital asset which could be either LTCG or STCG. Further, we have perused the decision of ITAT, Mumbai in the case of Legg Mason Asia (Ex Japan) Analyst Fund (supra) wherein it is held that loss arisen on short term capital asset is to be set off against income arising from such assets for same year, irrespective of whether transactions are categorized as off market transactions or on market transactions.
8. We have also gone through the decision of ITAT, Mumbai in the case of VEMF-A, LP (supra) wherein on identical issue and similar fact the ITAT has decided the issue in favour of the assessee. The relevant extract of the decision is reproduced as under:
“7. We have heard the rival submissions and perused the relevant material on record. We begin with the decisions cited before us. In First State Investments (Honkong) Ltd. (supra), the assessee earned STCG on sale of shares in the A.Y. 2005-06. It bifurcated such STCG into two periods i.e. upto 30.09.2004 (in which tax was chargeable @ 30% and transactions were not chargeable to STT) and period post 30.09.2004 (in which case the reduced rate of 10% was applicable on STCG where transactions were chargeable to STT in view of section 115A). As against this, the assessee had also suffered STCL of Rs. 8.14 lacs upto 30.09.2004 and Rs. 169.23 lacs in post 30.09.2004 period. The assessee claimed that STCL in later period be allowed to be set off against STCG of former period to the extent of excess of STCG over STCL upto cut off date i.e. 30.09.2004. However, revenue authorities held that STCL suffered by the assessee in the period before cut off date should be set off against STCG of that period and remaining amount be taxed @ 30%. The Tribunal held that (i) in view of provision of section 70(2), the assessee had a choice in taking decision about setting off of STCL from one transaction against any other STCG, whether within or outside the cut off date i.e. 30.09.2004 and (ii) the assessee was justified in setting off STCL of later period against STCG of former period to the extent of excess STCG over STCL upto cut off date i.e. 30.09.2004.
The above order has been followed by the Co-ordinate Bench in Fidelity Investment Trust Fidelity Overseas Fund (supra) and DWS India Equity Ltd. (supra). The decision in DWS India Equity Ltd. has been followed in Capital International Emerging Markets Fund (supra).
In Rungamatee Trexim (P) Ltd. (supra), Hon’ble Calcutta High Court held as under:
“On perusal of the provision of section 70, I find that there is no prohibition nor the Act compels the assessee to first set off short term capital gain with STT against short term capital loss with STT and then allows set off against short term capital gain without STT. In absence of any specific mode of set off provided in the Act and in absence of any prohibition and in absence of any specific chronology for set off prescribed in the Act, the assessee was entitled to exercise his option with regard to the chronology of set off which was most beneficial to the assessee. It is settled proposition of law that when a provision of the Act gives option to the assessee, such option should be exercised which will favour the assessee and not the revenue.
8. To sum up, under the provisions of section 70(2), STCL arising from any asset can be set off against STCG arising from any other asset under a similar computation made. Merely because the two set of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. Therefore, STCL arising from STT paid transactions can be set off against STCG arising from non-STT transactions.”
9. It is clearly held in the finding of the co-ordinate Bench of the Tribunal as referred above that under the provisions of section 70(2), STCL arising from any asset can be set off against STCG arising from any other asset under a similar computation made irrespective of different rate of tax. Therefore, the issue in appeal in the case of the assessee is squarely covered by the decision of the ITAT as referred above. Therefore following the decision of ITAT (supra), we allow the appeal of the assessee.
10. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 26.02.2024.
Author Bio
