The assessee had long term capital gain of Rs 519,21,44,332 on which it has paid Securities Transaction Tax (STT) hence, claimed as exempt u/s. 10(38) of the Act. In the course of assessment proceedings, the AO noticed that the assessee had claimed carry forward of long term capital loss from sale of shares, though STT paid, at Rs 31,00,52,918. However, the assessee has not set off long term capital loss against long term capital gain. Therefore, he called upon the assessee to explain why such long term capital loss should not be set off against long term capital gain and carry forward of loss to such extent should not be disallowed. In response, it was submitted by the assessee that as per S.  10(38) of the Act, only income arising from long term capital gain on sale of shares subjected to STT is exempt u/s. 10(38) of the Act. Thus, it does not include loss arising out of sale of shares. The AO however, did not find merit in the submissions of the assessee. He observed, the term income as used in S.  10(38) refers to the entire receipts arising from transfer of long term capital asset and also includes loss. Accordingly, he set off the long term capital loss against the exempt long term capital gain, which resulted in part disallowance of carry forward of long term capital loss. The aforesaid decision of the AO was  also upheld by  the CIT (A). The Tribunal held that the  long term capital loss arising out of sale of shares cannot be set off against long term capital gain from shares subjected to STT and claimed exempt u/s. 10(38) of the Act. Accordingly directed the AO to allow carry forward of long term capital loss as claimed by the assessee.(AY. 2007-08)