|DATE:||(Date of pronouncement)|
|DATE:||February 22, 2010 (Date of publication)|
|Click here to download the judgement (ramamurthy_exempt_capital_gains_loss.pdf)|
Non-exempt capital loss cannot be set off against exempt capital gains
S. 10 (38) inserted w.e.f. 1.10.2004 provides that long-term capital gains (LTCG) on which security transaction tax (STT) is paid shall not be included in total income. The assessee earned long term capital gain (LTCG) of Rs. 33,01,57,200 on sale of shares after 1.10.2004 in respect of which STT was paid. The LTCG was exempt u/s 10 (38). In the period prior to 1.10.2004, the assessee suffered a long term capital loss of Rs. 9,23,55,945 on redemption of units. The assessee claimed that the said long term capital losses were not liable to be set off against the exempt capital gains. The AO & CIT (A) took the view that in computing income under the head “capital gains”, the said loss had to be set off against the capital gains. On appeal by the assessee, HELD deciding in favour of the assessee:
(i) Under the scheme of the Act, income which does not form part of the total income as per Chapter-III does not enter the computation of total income at all. (N.M. Raiji 17 ITR 180 (Bom) followed where it was held that exempt share income of a partner could not be taken into account even for rate purposes);
(ii) S. 70 (3) which provides that long-term capital gains shall be set off against long-term capital loss does not apply because the exempt capital gains do not enter the computation of total income at all and the question of aggregating them under Chapter VI and setting them off u/s 70 (3) does not arise. Consequently, the right of carry forward the loss u/s 74(1) is unaffected;
(iii) S. 10(38) was inserted with the object to grant exemption to LTCG as tax has already been levied on a different footing (STT). The revenue’s contention that long term capital loss should be adjusted against exempt LTCG will be contrary to the intention, object and purpose of enacting s. 10 (38). Further, the revenue’s view will result in absurdity if the facts are reversed because then LTCG earned before 1.10.2004 (which is taxable) will be eligible for set off against (exempt) long term capital loss suffered after 1.10.2004. This will result in a loss from an exempt source being set off against taxable gain which is contrary to law.
(iv) Consequently the long term capital loss is not liable to be set off against exempt income long term capital gains.
Note: In CIT vs. Harprasad 99 ITR 118 (SC) it was held that capital loss incurred in a year when capital gains were not exigible to tax cannot be set against capital gains in subsequent years. In Ramjilal Rais 58 ITR 181 (All) & Thiagarajan 129 ITR 115 (Mad) it was held that loss from sources that were exempt from tax cannot be set off. A contrary view has been taken in Royal Calcutta Turf Club 144 ITR 709 (Cal).