Kishorebhai Bhikhabhai Virani vs Assistant Commissioner of Income Tax

@

Akil Abdul Hamid Kureshi, J.—The appellant-assessee has preferred this appeal against the judgment of the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") dated April 4, 2012, raising the following questions for our consideration:

"A. Whether, in the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the disallowance of the appellant''s claim regarding set off and carried forward of long-term capital loss of Rs. 1,44,73,463 against the long-term capital gain of Rs. 1,03,00,809 for the same assessment year?

B. Whether, on the facts and in the circumstances of the case, the appellant''s claim with regard to set off and carried forward of long-term capital loss of Rs. 1,44,73,463 can be disallowed on the basis of the decisions of the hon''ble apex court in the case of Commissioner of Income Tax (Central), Delhi Vs. Harprasad and Co. P. Ltd., and the Madras High Court in the case of Commissioner of Income Tax Vs. S.S. Thiagarajan (decd.), by Lrs., , especially when neither the facts nor the provisions of law discussed in the said decisions are comparable to the facts of the appellant''s case and the provisions of law applicable to the appellant''s case?

C. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in invoking the provisions of section 10(38) of the Act, especially when the appellant''s case is governed by the provisions contained in section 74(1)(b) of the Act?

D. Whether, on the facts and in the circumstances of the case, can it be said that the impugned order passed by the Tribunal suffers from the vices of non-application of mind and it is based on irrelevant consideration of facts and law in disregard of the relevant provisions of the Act and the law?"

Briefly stated the facts are that for the assessment year 2006-07 the assessee had filed the return of income declaring a total income of Rs. 8.67 lakhs (rounded off). The return of the assessee was taken under scrutiny. During the assessment, it was noticed that the assessee had sold the shares of one Suashish Diamond Ltd. and incurred capital loss of Rs. 1.44 crores (rounded off) during the year under consideration. During the same period, the assessee also earned long-term capital gain of Rs. 1.03 crores (rounded off) on sale of shares of one Karp Diamond Ltd. Such long-term capital gain was charged under section 45 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). In the return that the assessee filed, it had claimed set off of the capital loss of Rs. 1.44 crores against the capital gain of Rs. 1.03 crores. The Assessing Officer disputed such claim and after hearing the assessee disallowed the same holding that the loss from exempt source can neither be allowed as set off nor can be allowed to be carried forward and absorbed against income in subsequent years from the taxable source.

The issue ultimately reached the Tribunal. The Tribunal by the impugned judgment ruled in favour of the Revenue and against the assessee, basing reliance on the provisions contained in section 10(38) of the Act and also referring to various other provisions including section 70(3) of the Act. The Tribunal relied on the decision of the apex court in the case of Commissioner of Income Tax (Central), Delhi Vs. Harprasad and Co. P. Ltd., .

The assessee is now in appeal before us. Having heard the learned counsel for the assessee, we see no error in the decision of the Tribunal. Section 74 of the Act pertains to losses under the head "Capital gains" and clause (b) of sub-section (1) of section 74 of the Act provides, inter alia, that where in respect of any assessment year, the net result of the computation under the head "Capital gains" is a loss, the whole loss shall, subject to the other provisions of Chapter VI, be carried forward to the following assessment year and in so far as it relates to a long-term capital asset, it shall be set off against income, if any, under the head of "Capital gains" assessable for that assessment year in respect of any other capital asset not being a short-term capital asset. It is this provision that the learned counsel for the assessee has placed heavy reliance on. For the application of the said provision, what is necessary is that there should be a loss suffered by the assessee under the head of "Capital gains". In such a situation, if such loss relates to long-term capital asset, it is permitted to be carried forward for the following assessment year and be set off against income, if any, under the head of "Capital gains" assessable for that assessment year in respect of any other capital asset other than a short-term capital asset. For the reasons mentioned hereinafter, in view of the facts of this case, it was not open for the assessee to claim set off of the loss in sale of shares of Suashish Diamond Ltd. Perhaps section 74 of the Act may have otherwise also no applicability because it refers to carry forward of the capital loss set off against capital gain of the subsequent year, which is not the case in the present case. Section 70 of the Act refers to income from any other source under the said head of "Income". Sub-section (3) thereof which is relevant for our perspective reads as under:

"70. (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."

Under section 70(3) of the Act, therefore, where in respect of any capital asset other than short-term capital asset there is a loss, the assessee is entitled to have the amount of such loss set off against the income in respect of any another capital asset not being a short-term capital asset. What is, therefore, significant is that the assessee should have suffered a loss in respect of any capital asset, which is not a short-term capital asset.

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

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

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

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

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

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

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