Income Tax Appellate Tribunal - Mumbai
Vipul A Shah, Mumbai vs Assessee on 28 January, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "F", MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI PRAMOD KUMAR (A.M)
ITA NO.3190/MUM/2010(A.Y. 2004-05)
Mr. Vipul A. Shah, The ACIT 25(3),
301, Padma Priya Apt., Above PNB Bank, Bandra Kurla comples,
42-A, Presidency Society, Vs. Bandra (E), Mumbai.
N.S.Road, JVPD Scheme,
Vile Parle (W), Mumbai - 49.
PAN:ABAPS 8115K
(Appellant) (Respondent)
Appellant by : Shri. Paresh Saparia
Revenue by : Smt. Ashima Gupta
ORDER
PER N.V.VASUDEVAN, J.M,
This is an appeal by the Assessee against the order dated 28/01/2010 of CIT(A)-XXXV, Mumbai, relating to AY 04-05.
2. The grounds of appeal of the Assessee read as follows:
"1. The Learned CIT(A) erred in non granting set off of indexed long term capital loss against non indexed long term capital gains.
2. The set off of indexed long term capital loss against non indexed long term capital gains requires to be allowed."
3. The Assessee is an individual. He carries on the business of share trading. For AY 04-05, he filed a return of income offering income under the head "Capital Gains" as follows:
INCOME FROM CAPITAL GAINS:
Long Term Capital Gain/Loss As per Statement No.1 attached (6,47,991) As per Statement No.2 attached 2,65,054 As per Statement No.3 attached 69,86,923___ 63,11,933 Add: Short term Capital Gain (As per statement attached) 59,35,818 1,22,47,751 2 ITA NO.3190/MUM/2010(A.Y. 2004-05) Sec.48 of the Income Tax Act, 1961 (the Act) provides for the mode of computing Capital gains.
Mode of computation.
48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :
Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non- resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted:
Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government :] Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section :
Provided also that no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No.
2) Act, 2004.] 3 ITA NO.3190/MUM/2010(A.Y. 2004-05) Explanation.--For the purposes of this section,--
(i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973);
(ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf;
(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;
(iv) "indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;
(v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification21 in the Official Gazette, specify, in this behalf.
4. The mode of computation of capital gain is to reduce from the full value of consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the capital asset and its improvement and expenses connected with transfer of the capital asset. While reducing the cost of acquisition of capital asset, under the second proviso the Assessee has the option to increase the cost of acquisition by applying the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee. Thus the capital gain chargeable to tax will be less. In that sense the benefit of cost indexation allowed to an Assessee is a benefit to the Assessee. It is to be noted that the benefit of indexed cost is available only when the capital gain arises out of transfer of a long term capital asset. Section 112 of the Act provides as follows:
4 ITA NO.3190/MUM/2010(A.Y. 2004-05)Tax on long-term capital gains.
112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of,--
(a) in the case of an individual or a Hindu undivided family, being a resident,--
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :
Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent ;
(b) in the case of a domestic company,--
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :
(c) in the case of a non-resident (not being a company) or a foreign company,--
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;
(d)] in any other case of a resident,--
(i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent.
Explanation.--
5 ITA NO.3190/MUM/2010(A.Y. 2004-05)Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities or unit or zero coupon bond, exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.
Explanation.--For the purposes of this sub-section,--
(a) "listed securities" means the securities--
(i) as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956); and
(ii) listed in any recognised stock exchange in India;
(b) "unit" shall have the meaning assigned to it in clause (b) of Explanation to section 115AB.]] (2) Where the gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
(3) Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, the total income shall be reduced by the amount of such income and the rebate under section 88 shall be allowed from the income-tax on the total income as so reduced.
5. As per the provisions of Sec.112(1) (d) the rate of tax on long term capital gain is 20%. However proviso to Sec.112(1) provides that if the Assessee gives up the right to claim indexation benefit under the Second proviso to Sec.48, then the rate of tax on long term capital gain is only 10%.
6. In the case of the Assessee we have already seen that the long term capital gain that accrued to the Assessee during the previous year was a sum of Rs.63,11,933. We have also seen that in arriving at this figure the Assessee had set off the long term capital loss of Rs.6,74,991 against the long term capital gain of Rs. 69,86,923 + 2,65,054. While computing the long term capital loss the Assessee availed of the benefit of indexation as per the second proviso to Sec.48 of the Act. However, while computing the long term capital gain the Assessee did not avail the benefit of indexation and rather took the benefit of proviso to Sec.112(1) of the Act by 6 ITA NO.3190/MUM/2010(A.Y. 2004-05) which long term capital gain was taxable only at 10% as against the normal rate of 20% had the benefit of indexation been claimed.
7. The question before the AO was whether the set off of long term capital loss against the long term capital gain as claimed by the Assessee could be allowed. The claim for such set off is to be decided in accordance with the provisions of Sec.70(3) of the Act. We shall extract the entire provisions of sec.70 of the Act as the same would be relevant while dealing with the arguments advanced before us by the parties. The provisions of Sec.70 of the Act, read as follows:
Set off of loss from one source against income from another source under the same head of income.
70. (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than "Capital gains", 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.
(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.
(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.]
8. A bare perusal of the provisions of Sec.70(3) of the Act would show that long term capital loss can be set off against income in the form of long term capital gain. The AO however was of the view that the set off can be permitted only when the mode of computation of long term capital loss and long term capital gain are similar. In this case we have already seen that when arriving at the long term capital loss the Assessee opted for the benefit of indexation as per the second proviso to Sec.48 of the Act, but when arriving at the long term capital gain the Assessee did not opt for benefit of the second proviso to Sec.48 of the Act, rather he opted for the benefit of 7 ITA NO.3190/MUM/2010(A.Y. 2004-05) lesser rate of tax as provided under the proviso to Sec.118(1) of the Act. Thus according to the AO the computation of capital loss and capital gain being not similar the set off could not be allowed in terms of Sec.70(3) of the Act.
9. We may clarify that while determining the long term capital loss after opting for the benefit of indexation, the Assessee had also calculated the results had the benefit of indexation not been claimed. According to such calculation the Assessee would have derived a capital gain of Rs.3,46,571 without the benefit of indexation instead of loss of Rs.6,6,74,991. Thus as per books of accounts without benefit of indexation the Assessee has earned long term capital gain of Rs.3,46,571. The long term capital gain of Rs.2, 65,054 being item no.2 of the computation of long term capital gain, is the net result of long term capital gain computation as follows:
Actual long term capital gain on sale of shares was Rs.38,51,126. The Assessee claimed exemption u/s.54F to the extent of Rs. 35,86,072 which was allowed only to the extent of Rs.17,86,476. Thus long term capital gain was determined at Rs.20,64,650.
10. . The AO accordingly determined the long term capital gain of the Assessee as follows:
As per statement No.1 (as discussed actual loss) Rs. 3,46,571 As per statement No.2(recomputed above) Rs.20,64,650 As per statement No.3 Rs.69,86,923
-------------------
87,05,002
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11. On appeal by the Assessee the CIT(A) by order dated 26.11.2007 allowed the Assessee's appeal and directed the AO to accept the computation of capital gain as claimed by the Assessee. On further appeal by the Revenue, the ITAT in ITA No. 962/Mum/2008 by order dated 8/9/2009 directed the CIT(A) to consider the issue afresh in the light of the provisions of Sec.70(3) of the Act and the decision of the Mumbai ITAT in the case of Mohanlal N.Shah (HUF) 26 SOT 380 (mum). The CIT(A) by the impugned order upheld the order the AO for the following reasons:
8 ITA NO.3190/MUM/2010(A.Y. 2004-05)" 3. I have considered the submission of the representative and the stand taken by the A.O. Admittedly, the appellant worked out the long term capital gains without indexation but worked out the long term capital loss with indexation and set off the same against the long term capital gains. It is true that the appellant is having the option to compute long term capital gains with or without indexation and the tax rate would accordingly vary. However, while setting off long term capital loss against capital gains, the provisions of section 70(3) are applicable. As per section 70(3), the assessee is entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the A.Y in respect of any other capital asset not being a short term capital asset. As rightly held by the AO the important words in section 70(3) are "under similar computation" and the Hon'ble Tribunal has also highlighted these words in its order dated 8/9/2009. It is true that the Hon'ble Tribunal dealt with a similar issue in the case of Mohanlal N. Shah (HUF) (26 SOT 380) in which the assessee had calculated Long Term Capital Gains from sale of shares without indexation which was offered for taxation at the flat rate of 10% as per proviso to section 112(1) of the Act against which Long Term Capital Loss on sale of units after indexation was set off. Even though the facts before the Mumbai Tribunal were similar to the case of the appellant., the Hon'ble Tribunal interpreted the work "a" used before the capital asset in sections 48 and 112 and decided the issue in favour of the appellant. Even though section 70(3) was reproduced in the above decision, the real significance and importance of the words "similar computation" were not brought to the notice of the Hon'ble Tribunal. If the issue involved in the case of the appellant is covered by the decision of Hon'ble Mumbai Tribunal in the case of Mohanlal M. Shah, as argued by the representative, there was no necessity for the Hon'ble Tribunal to set aside this issue to the file of CIT(A). Thus the Hon'ble Tribunal was aware of the fact that the words "similar computation" in section 70(3) were not examined in depth while dealing with the case of Mohanlal N. Shah. I find that the crux of the issue involved in this appeal revolves around the interpretation of words "under similar computation" in section 70(3). This means that only if the capital gains and capital losses are made under similar computation, the set off could be allowed and not otherwise. In this circumstances, I find that the AO has correctly restricted the set off of capital loss by reworking the same without indexation and set off the same against non-indexed Long Term Capital Gains. The order of the AO is perfectly in order as per the language of section 70(3) and I do not find any reason to interfere with the assessment order and the same is confirmed."
12. Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal.
9 ITA NO.3190/MUM/2010(A.Y. 2004-05)13. We have heard the rival submissions. The learned counsel for the Assessee submitted that the expression "similar computation" as used in Sec.70(3) of the Act refers to the computation of long term capital gain referred to in Sec.48 to 55 of the Act. According to him in the earlier part of Sec.70(3) the expression used is "Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss" and it is this expression that is referred to in the later part of Sec.70(3) as similar computation. In this regard he pointed out that proviso to Sec.112(1) of the Act came into the statute books much later in point of time to the provisions of Sec.70(3) of the Act and therefore the legislature would not have intended that the expression "similar computation" used in Sec.70(3) of the Act would mean a computation by applying either the provisions of Second Proviso to Sec.48 of the Act or a computation by applying the provisions of Proviso to Sec.112(1) of the Act and in case the two modes of computation are employed than that would not be "similar computation"
envisaged by Sec.70(3) of the Act. In this regard, the learned counsel for the Assessee also submitted that when long term capital loss is carried forward, the same is allowed to be set off without any restriction with regard to the mode of computation of such loss. He also submitted that Sec.70(2) of the Act in the context of set off short term capital loss has used the similar expression. In this regard he submitted that while computing short term capital loss the mode of computation cannot be different as in the case of computation of long term capital loss/gain. According to him this also suggests that the expression "similar computation" refers to the computation u/s.48 to 55 of the Act and not the computation second proviso to Sec.48 of the Act vis-à-vis proviso to Sec.112(1) of the Act He therefore submitted that the interpretation as adopted by the CIT(A) was not in accordance with law and therefore the claim of the Assessee should be accepted.
14. The learned D.R. relied on the order of the impugned order of the CIT(A).10 ITA NO.3190/MUM/2010(A.Y. 2004-05)
15. We have considered the rival submissions. The provisions of Sec.70(3) of the Act read as follows:
"(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset."
16. A plain reading of the provisions of Sec.70(3) of the Act shows that the first part of the provisions refers to a loss as computed u/s.48 to 55 of the Act in respect of any capital asset. The second part of the provisions refers to income if any as arrived at under similar computation. Thus the second part refers only to the mode of computation u/s.48 to 55 and that would be the correct interpretation. It cannot be said that the second part of the provisions by using the expression "similar computation", refers to a similar computation under either the second proviso to Sec.48 or proviso to Sec.112(1) of the Act. As rightly contended on behalf of the Assessee, the provisions of Sec.70(3) of the Act existed much prior to the mode of computation of capital gain without applying the benefit of indexation which were introduced later by an Amendment in the year 2000. It cannot be therefore that the legislature would have contemplated while enacting the provisions of Sec.70(3) of the Act a situation as contemplated by proviso to Sec.112(1) of the Act, when it used the expression "similar computation" in Sec.70(3) of the Act. We also find force in the submission of the learned counsel for the Assessee that similar restrictions could not be imposed when long term capital loss is sought to be carried forward and set off against long term capital gain in the later Assessment year in terms of the provisions of Sec.74(1)(b) of the Act. The learned counsel for the Assessee had relied on several judicial pronouncements before us but those decisions did not deal with the issue in the light of the stand taken by the AO and therefore those decisions are not being referred to in this order. For the reasons stated above, we hold that that the expression "similar computation" used in Sec.70(3) of the Act does not refer to the computation u/s.48 to 55 of the Act and not the computation second proviso to 11 ITA NO.3190/MUM/2010(A.Y. 2004-05) Sec.48 of the Act vis-à-vis proviso to Sec.112(1) of the Act but the computation u/s.48 to 55 of the Act. The AO is therefore directed to accept the claim of the Assessee in this regard. The appeal of the Assessee is accordingly allowed.
17. In the result, the appeal by the Assessee is allowed.
Order pronounced in the open court on the 8th day of April, 2011.
Sd/- Sd/- (PRAMOD KUMAR) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 8th April, 2011
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"F" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
12 ITA NO.3190/MUM/2010(A.Y. 2004-05)
Details Date Initials Designation
1 Draft dictated on 29/3/2011 Sr.PS/PS
2 Draft Placed before author 30/3/2011 Sr.PS/PS
3 Draft proposed & placed before JM/AM
the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order