Income Tax Appellate Tribunal - Mumbai
Joint Commissioner Of Income-Tax vs Montgomery Emerging Markets Fund on 29 March, 2006
Equivalent citations: [2006]100ITD217(MUM), (2006)102TTJ(MUM)31
ORDER
O.K. Narayanan, Accountant Member
1. These two appeals, filed by the Revenue relate to the assessment years 1995-96 and 1996-97. These appeals are directed against the orders of the CIT(A)-XVII at Mumbai passed on 23-11 -1998 and 12-2-2000, respectively. The appeals do arise out of the assessments completed under Section 143(3) of the Income-tax Act, 1961.
2. These two appeals are placed before this Special Bench to consider and decide the following question referred to it by the Hon'ble President of the Income-tax Appellate Tribunal.
Whether under the facts and circumstances of the case, setting off of short-term capital gains against long term capital losses is permissible to compute the amount for taxation under the head 'capital gains'.
3. This Special Bench has been constituted by the Hon'ble President as the relevant question was referred to by the regular Bench of ITAT, H-Bench, Mumbai, while hearing the appeal in ITA Nos. 829/Mum./1999 and 2400/Mum./2000. When the cases were taken up for hearing by the said Division Bench, it was argued on behalf of the assessee that the order of the CIT(A) relating to set off of losses was in accordance with the law applicable for the relevant assessment years 1995-96 and 1996-97. But the Revenue relied on an order of the Tribunal passed in the case or Ravindra K. Mariwala v. Jt. CIT [2003] 86 ITD 35 (Mum.) where it was held as follows:
The learned Counsel for the assessee has relied upon circular No. 26(LXXVI-3)(F.No. 4(53)-IT/54), dated 7-7-1955 to support his contention that option is with the assessee to set off loss in one head against the income in any other head. However, in our opinion, the above circular is not applicable for setting off the loss within the same head. In the above example, the assessee has loss under the head "business", profit under the head "income from house property" and also has income under the head "interest on securities" which was tax free. The assessee was permitted as per above circular to set off business loss against the income from house property. However, as we have noted for the purposes of income tax, long term capital gain and short term capital gain are to be separately worked out. While determining long term capital gain, naturally, if there is loss from transfer of one asset and profit from transfer of other asset, both have to be set off against each other and then only the net long term capital gain/long term capital loss can be determined. We accordingly uphold the finding of the lower authorities that the long term capital loss is to be adjusted against the long term capital gain. The Assessing Officer will redetermine the exemption under Section 54F accordingly.
4. The counsels for the assessee further invited the attention of the Bench to the latest amendments brought to Sections 70 to 74 of the Income-tax Act, 1961 with effect from assessment year 1992-93 and further clarification issued by the CBDT in its circular No. 495, dated 22-9-1987 which is reported in 168 ITR 87 (St). They also contended that the decision arrived at by the Tribunal in the case of Ravindra K Mariwala (supra) was not correct view and, therefore, sought for upholding the orders of the CIT(A) assailed by the Revenue in the impugned appeals.
5. On hearing both sides, the Division Bench found that it is a fit case to be referred to a Special Bench and accordingly, referred the issue to the Hon'ble President which has finally culminated in the Constitution of this Special Bench.
6. Before going right away to the adjudication of the issue, it is necessary for us to state the essential facts leading to the reference of this question. These two appeals are filed by the Revenue in respect of two different assessees for different assessment years. But the issue raised in both the appeals is the same to which we have already made a mention. The ground raised by the Revenue are similar. The singular ground raised by the Revenue in I.T.A. No. 829/Mum./1999 is as follows:
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not upholding the levy of tax under Section 143(3) arising on set off of long term capital loss against long term capital gain resulting in net long term capital gain and arising on set off of short term capital loss against short term capital gain resulting in net short term capital gain which were taxed at the rate prescribed for long term capital gain and short term capital gain under Clause (iii) of Section 115AD of the Income-tax Act, 1961.
The grounds raised by the Revenue in I.T.A. No. 2400/Mum/2000 are as under:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not upholding the levy of tax and additional tax under Section 143(1)(a) arising on set off of net long term capital loss against net short term capital gain, resulting in capital gain the nature of Short Term Capital Gain, which was taxed at the rate prescribed for Short Term Capital Gain under Clause (iii) of Section 115D.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding computation adopted by Assessing Officer for working out the capital gain cannot be upheld and further erred in directing that computation shown by the assessee in respect of the above in the return of income should be accepted.
7. In the above circumstances and in the facts of the case, which are exactly similar, it is sufficient for this Bench to detail the facts of one of these two cases. If the facts of both the appeals are narrated, it would amount to repetition but for the change in figures. Therefore, to make the matter simple and handy, we proceed to explain the facts leading to the issue raised in the appeal relating to the assessment year 1995-96 in ITA No. 829/ Mum/1999 filed in the case of M/s Montgomery Emerging Markets Fund.
8. The assessee is a non-resident. It is carrying on the business of Foreign Institutional Investor (FII), within the meaning of Section 115AD of the Income-tax Act, 1961. It is established as a Trust in USA. The assessee filed its return of income for the assessment year 1995-96 on 29-12-1995 declaring a taxable income of Rs. 4,25,93,070. The income returned by the assessee consisted of capital gains as well as income from other sources. Income from other sources comprised of dividend income.
9. The assessee had income by way of short term capital gains to the extent of Rs. 3,28,84,671, for the assessment year under appeal. It had also a short term capital loss of Rs. 78,30,370. On the long term capital gains side, the assessee had a gain of Rs. 2,22,73,890 and loss of Rs. 1,38,79,913.
10. The assessee company, in its computation of income, at first, set off the short term capital loss against the short term capital gains, thus reducing the short term capital gains from Rs. 3,28,84,671 to Rs. 2,50,54,301 [Rs. 3,28,84,671 -- Rs. 78,30,370 = Rs. 2,50,54,301]. The assessee again made a set off of the long term capital loss of Rs. 1,38,79,913 against the short term capital gains. Thus, the short term capital gains ultimately got reduced to Rs. 1, 11,74,388 [Rs. 2,50,54,301-Rs. 1,38,79,913 = Rs. 1,11,74,388].
11. In short, the assessee set off both short term capital loss as well as long term capital loss against the income from short term capital gains. As a result of the above computation, the long term capital gains derived to the assessee at Rs. 2,22,73,890, remained in tact.
12. The assessee by way of the above computation of long term capital gains, sought to derive the benefit of concessional rate of tax on the entire amount of long term capital gains. If the assessee had set off the long-term capital loss against long-term capital gains, the taxable long-term capital gains would be reduced to that extent and taxable short-term capital gains would be correspondingly increased. The result would be that the low rate taxable amount is less and the higher rate taxable amount is more. The assessee wanted to avoid this marginal liability arising out of the differential tax rate. The assessee, therefore, used the option of setting off to its advantage.
13. But the Assessing Officer was not to agree with the option exercised by assessee. According to the assessing authority, long term capital loss should be first set off against the long term capital gains. Short term capital gains could be disturbed by long term capital loss only if the long term capital gains were not sufficient to absorb the long term capital loss. Likewise, the assessing authority also held that the short term capital loss must be first set off against short term capital gains. The Assessing Officer did not accept the freedom/option of the assessee to choose the method of set off which suited to it. According to the Assessing Officer long term capital loss shall first be set off against the long term capital gains and if there is a remainder of long term capital loss, the remainder alone shall be set off against the short term capital gains. When the Assessing Officer worked out the set off of long term and short term capital loss, the long term capital gains of the assessee reduced to Rs. 83,93,977 from the original amount of Rs. 2,22,73,890 [Rs. 2,22,73,890 -Rs. 1,38,79,913 = Rs. 83,93,977]. Likewise, the short term capital gains of Rs. 3,28,84,671 got reduced to Rs. 2,50,54,301 after setting off of the short term loss of Rs. 78,30,370.
14. In both the methods adopted above, one by the assessee and the other by the Assessing Officer, the total income liable to tax remained the same at Rs. 4,25,93,070. What is changed by the adjustment made by the Assessing Officer is only the composition of the taxable income. In the scheme of computation made by the assessing authority, the long term capital gains got reduced to Rs. 83,93,977 as against the long term capital gains of Rs. 2,22,73,890 reflected in the computation of the income of the assessee. On the other hand, the short term capital gains as computed by the Assessing Officer got increased to Rs. 2,50,54,301 as against a short term gains of Rs. 1,11,74,388 reflected in the computation of the assessee. In short, the long term capital gains eligible for concessional rate of tax got reduced in the assessment order whereas the short term capital gains liable for normal rate of tax got increased as against the reversed proposition made out by the assessee company. This is the sum and substance of the facts of the case.
14.1 In the connected first appeals, the CIT(A) observed that Section 70 provides for setting off of loss from one source of income against gain from another source under the same head. He held that the view of the Assessing Officer that short term capital gains is a separate source different from long term capital gains, is erroneous. He observed that the head of income provided under Section 14 of the Income-tax Act is "capital gains". Whether the capital gains would be short term or long term are dependent on the holding period of the asset which was transferred. The source will be the asset itself. The CIT(A) further referred to the amendment brought in by the Finance Act, 1987 (No. 2 of 1987) with effect from 1 -4-1988. According to the CIT(A), as per the said amendment, there is no distinction between short term and long term capital gains in the matter of set off and carry forward of losses. He further referred to the CBDT circular No. 495 dated 22-9-1987 which explained that the purpose of the above amendment was to make the provisions relating to set off and carry forward more simple by doing away with the distinction between short term and long term capital gains. The CIT(A) also recalled that the principle laid down in the Board's circular No. 26 of 7-7-1955 issued in respect of the corresponding provisions of 1922 Act and also in the light of the decisions of the Tribunal in Meghdoot Enterprises (P.) Ltd v. IAC [1992] 40 ITD 471 (Delhi) and ITO v. V.R. Nimbkar [1986] 19 ITD 714 (Bom.) it is not appropriate to hold that under the amended provisions of law contained in Section 70, setting off is restricted to short term capital loss against short term capital gains and long term capital loss against long term capital gains. In the decisions referred to by the CIT(A) while deciding upon the provisions of law contained in the unamended Sections 70 and 71, the Tribunal had held that if an assessee had suffered a loss on short term capital asset and had income from other sources and also from long term capital gains, the assessee would be entitled to set off short term capital loss against income from other sources and it was not necessary that short term capital loss should be set off against long term capital gains. In the light of the above discussions, the CIT(A) held that the computation submitted by the assessee was in accordance with law and the adjustment made by the Assessing Officer, therefore, had to be vacated. The issue was decided in favour of the assessee.
15. Revenue is aggrieved by the decisions of the CIT(A) in both these cases and, therefore, these appeals before the Tribunal. It is in this context, the present question, if repeated again, is placed before the Special Bench, as extracted below:
Whether under the facts and circumstances of the case, setting off of short term capital gains against long term capital losses is permissible to compute the amount for taxation under the head 'capital gains'.
16. We heard Shri R.K. Rai, the learned Commissioner of Income-tax appearing for the Revenue. The detailed arguments made by the learned Commissioner are summarized below:
(1) The long term capital loss has to be set off against long term capital gains. Similarly, short term capital loss need to be set off against short term capital gains.
(2) Long term assets from one source of income and short term assets from another source of income, for the purposes of Section 70. Therefore, the natural meaning and permissible interpretation of Section 70 would be that long term capital loss shall be set off against long term capital gains "and short term capital loss shall be set off against short term capital gains.
(3) The reliance placed by the assessee and the CIT(A) on Board's circular No. 26 issued in the light of Section 24(1) of 1922 Act is misplaced. In the said circular the question considered was a case of "inter-head adjustment" which is different from the case under consideration where the case is that of "intra-head adjustment". Section 70 of 1961 Act is a new provision and no such provision existed in 1922 Act and, therefore, there is no much relevance in relying on a circular issued under the provisions of 1922 Act.
(4) The reliance placed by the assessee and the CIT(A) on the decision of Allahabad High Court in the case of Seth Shiv Prasad v. CIT is also not in the right direction. The first and foremost rule of statutory construction is that words and phrases of technical legislation are to be construed in their technical meaning. Where the language in a statute is plain and unambiguous, there is no question of construction of statute for the reason that the statute speaks for itself. In the case under consideration, the question is how set off of loss is made by way of intra head adjustment. If the statute categorises capital gains in two groups, viz. long term and short term, the intra head adjustment has to be made with reference to each such category separately. If there is any ambiguity in a provision of law, the legislative intent has to be gathered. The legislative intent has to be gathered from the statute itself by looking into the context, contents and other provisions of the statute, which may throw some light on the subject. In the present case, the statute itself categorises, the assets into two classes, viz. long term capital assets and short term capital assets and, therefore, "source of income" in the above context means the source of either long term capital asset or short term capital asset.
(5) The reliance placed by the CIT(A) and the assessee on the decision of the Bombay Tribunal in the case of V.R. Nimbkar's (supra) is again on the wrong footing. It was held in that case by the Tribunal that the assessee was free to set off short term capital loss against income from other sources, before setting it off against long term capital gains. The above decision relates to a case pertaining to the assessment year 1980-81. The provisions of law contained in Section 70 which prevailed for that assessment year were substantially different from the law prevailed for the assessment years 1995-96 and 1996-97, pertaining to the cases under consideration. The Finance Act, 1987 has amended the provisions of Section 70 and the amended law should apply to the impugned assessment years 1995-96 and 1996-97 which are different from the law relating to the assessment year 1980-81.
(6) Further, in the above case V.R. Nimbkar's (supra) the Tribunal nowhere has held that an assessee is entitled to treat a particular item within the long term or short term gains or loss, in a manner different from another item falling under the same category. For the very same reasons stated above, the reliance placed on the decision of Delhi ITAT in the case of Meghdoot Enterpirses (P.) Ltd. (supra) also out of context.
(7) The CIT(A) has observed that as a result of the amendment brought in by the Finance Act, 1987 in the provisions of law contained in Section 70, there is no distinction between long term capital gains and short term capital gains in matters relating to carry forward and set off of losses. The above observation of the CIT(A) is not disputed. After the amendment brought in by the Finance Act, 1987, no distinction exists between long term capital gains and short term capital gains; but it is only for the purpose of inter-head adjustment of carry forward and set off. In fact, the distinction between long term capital gains and short term capital gains has been incorporated by the Finance Act, 1987 itself by inserting Section 2(29A) and 2(42B) in the Act. These items, which should constitute giving rise to long term capital gain and short term capital gain has been clearly defined in the Act and the conclusion of the CIT(A) that the distinction between long term capital gains and short term capital gains have been completely done away with by the amendment to Section 70 by the Finance Act, 1987 is not correct.
(8) The CBDT circular No. 495 which explained the objects of the amendment brought in by the Finance Act, 1987 states that the amendment has been brought to do away with any distinction between long term capital gain and short term capital gains. The said circular states that to ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long term capital gain would be treated as any other losses so that they could be set off against income under any other head in the same year and if not fully set off, may be carried forward. The distinction between short term capital losses and long term capital losses has also been removed and all capital losses could be carried forward for eight succeeding years and set off only against capital gains, if any, in those years. It is apparent from the above circular that the distinction between long term and short term capital gains has been obliterated only for the purpose of inter-head adjustments by way of carry forward and set off and not for intra-head adjustments.
17. The learned Commissioner, therefore, summarized that capital assets are of two categories, viz. long term assets and short term assets and gains arising therefrom are of two distinct categories of income separately defined in the Act as long term capital gains and short term capital gains. All transfers which give rise to long term capital gains need to be treated in a composite manner as they arise from one source, viz. transfer of long term capital assets. Therefore, both gains as well as loss pertaining to long term assets have to be consolidated and the net result alone can be considered for further adjustment.
18. The learned CIT continued to argue that all items falling under long term capital gains are to be dealt in a composite manner and this is further highlighted by the fact that different rates of taxes have been provided under Sections 112 and 115AD for the taxation of long term capital gains. Sections 112 and 115AD are charging sections. Charging sections of a statute impose charge on income and, therefore, have to be construed strictly. As against this, Sections 70 to 74 of the Act are machinery sections, which provide the mechanism for quantification of tax and levy of collection of tax later on. The charging section of any statute has paramountacy over the machinery provisions. Therefore, provisions of Section 70 have to be interpreted in a manner so that such interpretation does not defeat the legislative intent of the charging Sections 112 and 115AD of the Act. Therefore, items of income which are subject to a different rate of taxation are to be dealt in a composite manner. This treatment is necessary more so, because certain exemptions are also available in respect of long term capital gains.
19. The learned Commissioner concluded that the issue has been considered by ITAT, Mumbai Bench "D" in the case of Ravindra K. Mariwala (supra) wherein the Tribunal has held that the assessee has to first work out the net of long term capital gains by setting off long term capital loss and net of short term capital gains after set off of short term capital loss. Long term capital loss can be set off against short term gains only if long term capital gains are not sufficient to absorb the long term capital loss. He, therefore, submitted that the decision of Tribunal in the above case may be approved by the Special Bench.
20. Shri S.E. Dastur, the learned senior counsel along with Shri P.F. Kaka appeared for the respondent assessees. The learned senior counsel explained at the outset itself that Sections 112 and 115AD provided for special rate of tax in respect of long term capital gains and Foreign Institutional Investors (FII). They are not charging provisions as construed by the learned Commissioner of Income-tax. The learned senior counsel stated that these sections are not relevant in deciding the subject matter of these appeals. On the other hand, the learned senior counsel submitted that the provisions of law contained in Sections 70, 71 and 72 are the relevant provisions of law to be looked into. He explained that Section 45 is the charging section in respect of capital gains and not Sections 112 and 115AD. He explained that each asset has to be considered separately while construing the source of income for the purpose of Section 70. Capital gains are to be computed under the provisions of Section 48 and the computation has to be made with reference to individual asset and not with reference to any class of assets falling under the head 'capital gains'. The gain or loss, as the case may be, arising on transfer of any asset needs to be understood and computed on asset to asset basis. An asset by itself is a source for capital gains or capital loss.
21. The learned senior counsel explained that the law relating to set off and carry forward of capital gains have undergone changes as a result of legislative amendments by which the law upto the assessment year 1987-88 were different from the law relating to the assessment years from 1988-89 to 2002-03 under which period the assessment years 1995-96 and 1996-97 relating to the present cases, fall. Again the law has been amended and it is different from the assessment year 2003-04 onwards.
22. He explained that as per the law stood in Section 70 upto assessment year 1987-88, 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 another source under the same head. Where the result of computation made for any assessment 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 of f against income, if any, as arrived at in a similar computation made for the assessment year in respect of any other capital asset. But where it is a long term capital loss, the assessee shall be entitled to have the amount of such loss set off only against long term capital gains.
23. The learned senior counsel thus explained that upto assessment year 1987-88 capital gains had a different treatment by which short term capital loss could be set off against either short term or long term capital gains whereas long term capital loss could be set off only against long term capital gains.
24. He further explained that the above law was amended by the Finance Act, 1987 with effect from 1 -4-1988, which existed for the period from assessment year 1988-89 to 2002-03. As per the amended provisions of law where the net result for any assessment year in respect of any source falling under any head of income 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. The learned senior counsel explained that the different treatment given to the set off of capital loss has been dispensed with for the period from assessment year 1988-89 to assessment year 2002-03, which was the result of the amendment brought in by the Finance Act, 1987.
25. The learned Counsel further continued to explain that the said amendment was again undone by the Finance Act, 2002 with effect from assessment year 2003-04 onwards whereby the special treatment given to capital loss has been re-instated in the statute.
26. The learned senior counsel submitted that as the law relating to the period for the assessment year 1988-89 to assessment year 2002-03, as reflected by the amendment brought in by the Finance Act, 1987 is the law applicable for the impugned assessment years under consideration, viz. assessment years 1995-96 and 1996-97, the crucial question to be adjudicated is "what is a source of income?" The learned senior counsel explained that this is because the benefit of set off is provided in Section 70 for the relevant period with reference to any source falling under any head of income; the result being that a loss from any source could be set off against income out of any other source. Obviously, source is the most important aspect to be considered herein.
27. Following are the summary of the contentions made by the learned senior counsel in this regard:
(1) The importance of the concept "the source of income" is apparent from the heading itself, given to Section 70 which read "...set off of loss from one source against income from any other source under the same head of income". Upto assessment year 1987-88, as already stated, short term loss could be set off against both short term and long term capital gains; long term capital loss could be set off only against long term capital gains. The position was amended for the period from assessment year 1988-89 to 2002-03 where the assessee had the option to set off the short term capital loss as well as the long term capital loss against the short term capital gains without disturbing, if possible, the long term capital gains.
(2) There is no order of set off of loss as construed by the assessing authority that short term loss should be set off against short term gains and long term loss should be set off against long term gains. The law is that loss arising out of any source could be set off against income from any other source.
(3) In the light of the amended law which prevailed for the period under consideration, every transaction of an assessee under the head capital gains need to be considered as an independent source.
(4) This independent character of "source" is apparent in the words used in Sections 45 and 70 of the Act. In Section 45, the profits or gains is to be computed from the transfer of a capital asset. Whereas the law relating to set off of loss provides that net result for any assessment year in respect of any source falling under any head of income is a loss.... In the charging Section 45, the definite article "a" emphasizes the nature of the qualified asset as capital asset whereas there is no such emphasis with reference to the source of income provided in Section 70 as seen from the usage of the prefix "any". The law has not used the expression "any asset". The law has used the expression "any source". Therefore, there is no question of grouping assets as a source of income which is not contemplated in law. A single transfer can be a source of income/loss.
28. While elaborating on the concept (source), the learned senior counsel relied on a number of judicial pronouncements as below:
(1) The decision of Madhya Pradesh High Court in CIT v. Lady Kanchanbai [1962] 44 ITR 242 (where the court has held that each branch of a business was a separate source for the purposes of Section 2(11) of the Income-tax Act, 1922 and it was permissible for the assessee to have separate previous years for its different offices.
(2) The decision of the Supreme Court in the case of CIT v. Lady Kanchanbai wherein the above decision has been upheld.
(3) The decision of Bombay High Court in the case of Fort Properties (P.) Ltd. v. CIT where the court has held that a transfer of a property by itself is a source.
29. The learned senior counsel further invited our attention to circular No. 495 dated 22-9-1987 (168 ITR (St.) 87) issued by the CBDT by way of explanatory notes to the amendments brought in by the Finance Act, 1987. In Section 70 of the Act, the circular has stated that the distinction between short term and long term capital assets, though conforming to the principle of equity of taxation, has led to complications. To make the provisions simpler, this distinction has been done away with by insertion of sub-Clauses (29A), (29B) and (42B) in Section 2 of the Income-tax Act, 1961, substitution of Sections 71 and 74 and amendments of Sections 70 and 72. To ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long term capital assets would be treated as any other loss so that they can be set off against income under any other head in the same year and if not fully set off, may be carried forward. The distinction between the carry forward of short term capital loss and long term capital loss has also been removed and all capital losses would be carried forward for eight succeeding years and set off only against capital gains, if any, in those years.
30. Reference has also been made to circular No. 8 of 2002 dated 27-8-2002 issued by the CBDT containing the explanatory notes on Finance Act, 2002 relating to direct taxes. The Finance Act, 2002 has amended the law relating to set off and carry forward of losses as they stood for the period from assessment years 1988-89 to 2002-03. The circular has explained that the existing provision contained in Section 70 of the Income-tax Act provides that where the net result for any assessment year in respect of any source falling under any head of income 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. Further, Section 74 of the Income-tax Act provides that a loss under the head 'capital gains' can be carried forward and set off against capital gains in the following eight assessment years. Since long term capital gains are subject to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the said section to provide that while losses from transfer of short term capital assets can be set off against any capital gains, whether short term or long term, losses arising from transfer of long term capital assets, will be allowed to be set off only against long term capital gains.
31. The learned senior counsel contended that the text of the circulars referred to in above paragraphs clearly showed the intention of law wherein the amendment brought in by the Finance Act, 1987 dispensed with any sort of distinction between long term loss and short term loss in matters of set off and carry forward and allowed the set off of loss of any source against the income of any other source. The Legislature itself thought that this is an "anomaly" whereby the assessees were getting benefits unintended for. That is why again amendments were brought in by Finance Act, 2002 to bring back the old position of law where set off and carry forward of long term capital loss was treated differently. From the assessment year 2003-04 onwards, again the long term capital loss could be set off only against long-term capital gains and not against any other source of income. Therefore, it is very much clear from the statute itself that during the interregnum period of assessment years 1988-89 to 2002-03, an assessee had the option to set off a loss incurred in a source of income against the income arising out of any other source.
32. The learned senior counsel explained that the amendments brought in by the Finance Act, 1987 which continued upto assessment year 2002-03 until reversed by the Finance Act, 2002 with effect from 1 -4-2003 have granted the assessee an option to choose the method of computation with least tax burden, as far as the question of set off of loss arising under the head "capital gains" is concerned. The learned Counsel further explained that such option given to an assessee is beneficial in character and in such circumstances, the benefit should go to the assessee even if two views are possible on the issue. On this legal proposition, the learned senior counsel relied on the following decisions:
(1) CIT v. Bosotto Bros. Ltd. [1940] 8 ITR 41 where the Madras High Court has held that the Income-tax Act, being a taxing statute, should receive a strict construction, that is, construction in favour of the subject and not in favour of the crown.
(2) J.C. Thakkar v. CIT where the Bombay High Court has held that the court will insist upon the department to follow the procedure if that procedure leads to a beneficial result as far as the assessee is concerned, unless there is a prohibition or an obligation or a precedent otherwise.
(3) CIT v. Naga Hills Tea Co. Ltd. wherein the Supreme Court has held that where two reasonable constructions are possible while interpreting the provisions of taxing statute, the construction which is in favour of the assessee has to be accepted.
33. The learned senior counsel also referred to the decision of ITAT, Mumbai Bench "D" in the case of Ravindra K. Mariwala (supra) which has been relied on by the Revenue to support the computation arrived at by the assessing authority. The learned senior counsel submitted that the said decision is not applicable to the computation of set off as reflected in the present case and this position is apparent from the relevant statutory provisions and the connected circulars issued by the OBDT. He submitted that the Special Bench may decide the matter in the light of the provisions of law contained in Section 70 during the relevant period wherein the identity of loss or income is made with the source and not with the head and, therefore, the computation of the assessee be upheld.
34. Shri Rai, the learned Commissioner, in reply, submitted that while interpreting the provisions of law contained in Section 70 which prevailed for the period from assessment year 1988-89 to assessment year 2002-03, one should not loose sight of the definitions brought in Sub-sections (29A) and (42B) of Section 2 in respect of long term capital gains and short term capital gains, respectively which clearly indicated that these two are to be treated separately till the final figure of loss or income is determined and for that matter, long term capital gains and short term capital gains are different sources of income. The learned Commissioner further explained that the provisions of law contained in Sections 2(29A), 2(42B), 70, 112 and 115AD have to be read together resulting in a harmonious construction giving due wattage to the special provisions of law relating to the assessment and levy of tax on long term capital gains, which are substantially different from the assessment and levy of tax on short term capital gains. The learned Commissioner submitted that the facts of the case, considered by the Bombay High Court in the case of Fort Properties (P.) Ltd. (supra) are distinguishable on the face of the statutory amendments brought in the Act relating to the carry forward and set off of long term and short term capital gains. He, therefore, submitted that the Tribunal may hold the decision of the Bombay Bench in Ravindra K. Mariwala's case (supra) as the correct decision and allow the appeals filed by the Revenue.
35. We heard both sides in detail. Section 70 of the Income-tax Act, 1961 deals with the law relating to set off of loss from one source of income against another source of income under the same head of income. As pointed out by the learned senior counsel, the heading given to the section is self-explanatory and provides for specific law relating to intra-head adjustment of income and loss. This is for the purpose of arriving at the net outcome of income or loss under a particular head of income. The law relating to inter-head set off is provided in Section 71 of the Income-tax Act. The heading given to Section 71 is again a clear statement for set off of loss under one head against income from another head.
36. The relevant Section 70 upto the assessment year 1987-88 placed restrictions on long term capital gains in setting off against other sources of income falling under the head "capital gains". The law provided that save as otherwise provided in the 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. Where the result of the computation made for any assessment year in Sections 48 to 55 in respect of short term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. 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 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. It is clear, therefore, if repeated, that the law relating to set off under a particular head of income provided in Section 70 of the Income-tax Act, 1961 isolated the long term capital loss from the benefit of setting off against other sources except against long term capital gains. This position existed upto the assessment year 1987-88.
37. Thereafter, the Finance Act, 1987 brought an amendment in Section 70 with effect from 1-4-1988. The amendment removed the isolation in respect of the set off of long term capital loss and made the law simple. It provided that 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 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. The fetter against long term capital loss was thus dispensed with.
38. In the circular No. 495 dated 22-9-1993 [168ITR (St.) 87, p. 93], at paragraphs 13.1 to 13.5, the CBDT explained the amendments brought in the provisions of law contained in Sections 70, 71, 72 and 74. Paragraph 13.2 of the circular reads as under:
13.2 The distinction between short-term and long-term capital assets though conforming to the principle of equity of taxation has led to complications. To make the provisions simpler, this distinction has been done away with by insertion of Sub-clauses (29A), (29B) and (42D) in Section 2 of the Income-tax Act, 1961, substitution of Sections 71 and 74 and amendment of Sections 70 and 72. To ensure uniform treatment of capital losses and capital gains, losses arising on transfer of long-term capital assets (after they are scaled down by the same percentage of deduction as long-term capital gains) would be treated as any other losses so that they can be set off against income under any other head in the same year and if not fully set-off may be carried forward. The distinction between the carry forward of short-term capital losses and long-term capital losses has also been removed and all capital losses would be carried forward for 8 succeeding years and set off only against capital gains, if any, in those years.
39. It is very clear from the above explanatory note that by the amendment brought in by the Finance Act, 1987 the law provided in Section 70 for set off of loss from one source against income from any other source under the same head of income was made simpler resulting in a uniform treatment of capital loss whether short term or long term. This position prevailed for the period from assessment years 1988-89 to 2002-03.
40. The position was again amended by the Finance Act, 2002 with effect from 1 -4-2003.where the earlier restriction against the set off of long term capital loss has been again reinstated. The law for the assessment year 2003-04 onwards, in fact assumed the same colour which it had in the past, upto the assessment year 1987-88.
41. As far as these appeals are concerned, the relevant assessment years are 1995-96 and 1996-97. Therefore, the law applicable to the present cases is the law which was modified by the amendment brought in by the Finance Act, 1987 and existed for the interregnum period from assessment years 1988-89 to 2002-03. The text of law contained in Section 70 for the relevant period is extracted below:
Save as other provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income 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.
42. The law is very simple and straight in its declaration. Section 70 deals with set off of loss under the same head of income. In other words, it deals with intra-head set off of loss. The question of intra-head set off pointed out by the Assessing Officer is dealt in by the provisions of law contained in Section 71. Therefore, the distinction drawn by the assessing authority between inter-head and intra-head set off in the context of Section 70 does not arise at all. In the amended provisions of law contained in Section 70, the option is given to an assessee to set off any loss arising from any source falling under any head of income against his income from any other source under the same head. As argued by the learned senior counsel, the most important issue to be considered is 'what is source of income? Long term capital gains as well as short term capital gains and the losses also are considered for taxation under a common head "capital gains". The law states that under a particular head, there could be a number of sources of income out of which assessee may incur loss in respect of some source and assessee may earn income from other source. There can be a bundle of sources under a particular head of income. Out of that particular head of income, the assessee is free to set off loss against income from another source. There is no distinction between short term capital asset or long term capital asset as far as the head of income "capital gains" is concerned. The Allahabad High Court in the case of Seth Shivprasad (supra) has held that a source of income may be described as the spring or fount from which a clearly definite channel of income flows. It is that which by nature and incidents constitute a distinct and separate origin of income capable of consideration as such in isolation from other source of income and which by the manner of dealing adopted by the assessee can be treated so. As per the above judgment, any definite channel through which income flows is to be treated as a source of income. That is why in fact Section 70 recognises that there can be a number of sources of income under a particular head of income. The Madhya Pradesh High Court in the case of Lady Kanchanbai's (supra) had an occasion to consider source of income for the purpose of Section 2(11) of the Income-tax Act, 1922. The court held therein that each branch of a business could be a separate source and, therefore, assessee could have separate previous years for its different offices. Even in a single business, the court has visualized the scope of different sources of income, and obviously all such business income fall under the same head of income. The above decision has been later confirmed by the Supreme Court in Lady Kanchanbai's case (supra) where the Supreme Court has held that a particular source of income, profits and gains means the income from a particular source which has been brought to tax under the Act and not which has been taken into consideration for computing the total world income of the assessee. The Supreme Court held that it is possible for an assessee to have a different previous year for each separate source of income, profits and gains. The Bombay High Court in the case of Fort Properties (P.) Ltd. (supra) considered the same issue. The court on pages 253 and 254 has held as under:
...In our opinion, no such controversy can arise as previous year is related to source of income and not head of income. These are two independent expressions which have been used in the Income-tax Act in different sections for different purposes. They convey two different ideas. In Section 3, dealing with the previous year, the expression used is source of income - not head of income.... Once the assessee opts for a previous year different from the financial year for a particular source of income, it will not change with the change of head under which income from the said source is assessed. Section 14 of the Act classifies the income of the assessee under different heads only for the purpose of charge of income-tax and computation of total income. Income falling under the same head may be derived from various sources and even in respect of income from different source falling under the same head, subject to provisions of Section 3, an assessee may have different previous years. It is thus clear that the source of income is different from head of income. Source means the real source of income. Every income must have a source which cannot change. In a given case, there may be a controversy about the head under which income from a particular source would be assessable. Determination of that controversy will affect the charge of tax and the computation of income. It will in no way affect the previous year in which income from such source is assessable.... In the instant case, the source of income is the transfer of the property....
43. When we consider the relevant decisions of the courts of law rendered in Seth Shivprasad's case (supra), Lady Kanchanbai's case (supra) and Fort Properties (P.) Ltd. 's case (supra), we find that every spring of income is a different source of income for an assessee and for that matter, the transfer of one property may be one source of income different from the transfer of another property which would be again another source of income.
44. Therefore, it is very apparent that source of income does not mean head of income. The Assessing Officer has proceeded on a hypothesis as if the source of income is the head of income itself. This is not a proper construction of law provided in Section 70. Short term capital gains/loss as well as long term capital gains/ loss both are computed under the head "capital gains" for the aggregation of income culminating into total income which is taxable under the Income-lax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources clubbed under respective heads and finally aggregated into the total income. The classification of income under different heads for computing the total income does not interfere with the independent character of different sources of income available to an assessee. Both, short term capital gains/loss and long term capital gains/loss are different sources of income, falling under the same head "capital gains". Even under short term capital gains, different transactions will be different sources of income resulting in short term capital gains/loss. Likewise, different transactions of long term capital assets will be different sources of income for an assessee to arrive at long term capital gains/loss. This is reflected in the scheme of computation of capital gains provided in Section 48 where gains or loss is computed on the basis of individual asset and transaction and not on the basis of class of assets. Therefore, we have to agree with the argument of the learned senior counsel that every transaction of a property is a different source of income for the assessee. Head of income is not the source of income. Source of income is having the direct nexus with the stream or fountain out of which the income springs to the assessee. Head of income is provided for clubbing purpose of those like minded incomes derived from different sources for the purpose of aggregation and allowable deductions.
45. We, therefore, find that there is no basis in grouping short term capital assets as a separate source of income and long term capital assets as a separate source of income. Not only short term and long term assets are different sources of income, but even the different short term assets and different long term assets involved in the respective transactions are again different sources of income. When Section 70 provides that a loss falling under a source of income can be set off against income from any other source under the same head, it means that the long term capital loss being a separate source can be set off against short term capital gains, which is another separate source of income. Within the provisions of law contained in Section 70, there is no further identification of sources of income against which alone loss of a particular source can be set off. What is mentioned in the law is only source of income. As far as the head of income "capital gains" is concerned, the sources could be transfer of short-term capital asset as well as transfer of long term capital assets and transfer of different assets will be different sources of income. There is no further identification or qualification with respect to any source so that the law would presume any sort of restriction on set off of loss arising from one source against income arising from any other source. Therefore, the contention of the assessee that irrespective of the identity of the source of income, it is possible for the assessee to set off the loss of a particular source against income from another source, both falling under the same head of income is tenable in law. Accordingly, the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law.
46. This position is highlighted by the CBDT Circular No. 8 of 2002 dated 28-7-2002 issued as explanatory notes on provisions relating to direct taxes brought in by the Finance Act, 2002. At paragraph 40.1 of the circular, modifications relating to set off of long term capital loss brought in by the Finance Act, 2002 with effect from assessment year 2003-04 has been discussed. The circular has stated that the existing provision contained in Section 70 of the Income-tax Act provides that where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from another source under the same head. Further, Section 74 of the Income-tax Act provides that loss under the head "Capital gains" can be carried forward and set off against capital gains in the following eight assessment years. The Legislature found that this position has created an anomaly inasmuch as assessee can get the benefit of concessional rate of tax in respect of long term capital gains coupled with the freedom to choose the mode of set off of capital loss. Therefore, the amendment has been brought in and the circular continued to state that since long term capital gains are subjected to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the said sections to provide that while losses from transfer of short term capital assets can be set off against any capital gains, whether short term or long term, losses arising from transfer of long term capital assets will be allowed to be set off only against long term capital gains.
47. The above explanation provided in the CBDT circular is a speaking testimony to the arguments advanced by the learned senior counsel that there is no hitch in the law existed for the assessment years 1988-89 to 2002-03 in setting off long term capital loss against short term capital gain. When the statute provide such a freedom to the assessee, the Assessing Officer is not justified in making a further grouping of sources and to hold that long term capital loss must be set off first against long term capital gains. The Assessing Officer is in fact bringing out an order of priority of his own relating to the manner in which a loss has to be set off when the statute has not provided any such order of priority. The statute has not prescribed any order of precedence according to which the loss out of one source has to be set off against income from any other source. There is no provocation to visualize that the long term capital loss must first be set off against long term capital gains. That could only be an extreme case of logical argument. Such an argument cannot find support from the provisions of law contained in Section 70 as it stood for the relevant time.
48. The ITAT, Bombay Bench "E" in the case of V.R. Nimbkar (supra) had considered the priority of set off of losses. The Tribunal, after examining the provisions of law held that when the assessee has been given two options without any restrictions, it is open to the assessee to exercise the option of his choice. The Tribunal held that if the assessee claimed that he should be allowed to set off the short term capital loss against a head of income other than capital gains, instead of against the long term capital gains, the claim was rightfully made and was according to law. We think the present case under consideration is abundantly supported by this decision of the Tribunal.
49. A similar view was taken by ITAT, A-Bench, Delhi in Meghdoot Enterprises (P.) Ltd. 's case (supra).
50. Above all, if two reasonable interpretations are possible, that interpretation, which is more beneficial to the assessee has to be adopted as argued by the learned senior counsel in the light of the decisions reported in CIT v. Bosotto Bros. Ltd.'s case (supra), J.C. Thakkar's case (supra) and Naga Hills Tea Co. Ltd.'s case (supra). The rule of statutory construction supports the argument of the assessee that assessee was right in choosing the sources of income inter se for the purpose of setting off under the head capital gains. The Revenue has placed heavy reliance on the decision of ITAT, Mumbai Bench "D" in the case of Ravindra K. Mariwala (supra). We find that the overwhelming stress of argument placed before the Bench in that case was on the concept of "head of income" rather than on different sources of income comprised in a particular head of income. The fundamental distinction between different sources of income which may fall under the same head of income and head of income per se, perhaps, was not highlighted before the Tribunal.
51. Therefore, in the facts and circumstances of the case, we find that the assessee had its right to set off the long term capital loss against short term capital gains for the reason that every transaction relating to the assets brought under the common head of income "capital gains" is to be treated as separate source of income. Every transaction is, for that matter, a source of income with reference to transfer of that asset. Further, during the relevant period, statute has not placed any distinction between long term asset and short term asset or for that matter long-term capital gains and short term capital gains. It was within the legitimate right of the assessee to choose the option which is more favourable to it so that it could avail the benefit of concessional rate of tax on the long term capital gains.
52. Therefore, the question is answered in favour of the assessee and against the Revenue.
53. The only issue raised in both these appeals is the one which we have now considered in the above question. We have held that the issue should be decided in favour of the assessee. Therefore, we find that the orders of the CIT(A) are just and in accordance with law and the ground raised by the Revenue in both the appeals are liable to be dismissed.
54. As no other issues are involved, it is not necessary for us to send back these cases to the Division Bench. We dispose of the appeals, as such.
55. In result, both the appeals filed by the Revenue are dismissed.