By TIOL News Service

MUMBAI, JULY 01, 2015: THE issue before the Bench is - Whether Long term capital loss on sale of equity shares can be set off against Long term capital gain arising on sale of land. Yes is the answer.

Facts of the case

The assessee is a pharmaceutical company, engaged in manufacturing and sale of pharmaceuticals, formulations, dietetic specialities and animal husbandry. The assessee in the computation of income had shown Long term capital loss on sale of shares amounting to Rs.57,32,835/- and loss on sale of mutual funds units amounting to Rs.2,61,655/-. The said Long term capital loss has been set off against the Long term capital gains of Rs.94,12,00,000/- arising from sale of land. The AO held that the losses claimed cannot be allowed since the income from LTCG on sale of shares and mutual funds are exempt u/s. 10(38). That apart, of the LTCL in respect of shares where securities transaction tax has been deducted, would have been exempt from LTCG had there been profits, therefore, LTCL from sale of shares cannot be set off against the LTCG arising out of the sale of land. The CIT(A) confirmed the action of the AO on the ground that exempt profit or loss construes separate species of income or loss and such exempt species of income or loss cannot be set off against the taxable species of income or loss.

On Appeal before the Tribunal the AR submitted that what is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section. The set off of LTCL has been clearly provided in sections 70 and 71. The Legislation has not put any embargo to exclude LTCL from sale of shares to be set off against Long term capital gain arising on account of sale of other capital asset. Even in the definition of capital asset u/s. 2(14), no exception or exclusion has been provided to equity shares the profit/gain of which are treated as exempt u/s. 10(38). The DR submitted that, firstly, if the income from the LTCG on sale of shares is exempt, then the loss from such sale of shares will also not form part of the total income and therefore, there is no question of set off against other income or LTCG on different capital asset.

The assessee had shown dividend income of Rs.5,15,28,242/- which was claimed as exempt u/s. 10(34). The assessee claimed that investments have been made out of its own capital and internal accruals and, therefore, no disallowance u/s. 14A is called for. The AO proceeded to apply Rule 8D thereby making the disallowance of Rs.39,80,215/- even though such Rule has been made applicable w.e.f. 01.04.2008. The CIT(A) confirmed the said addition.

The AR submitted that the disallowance have been made after applying Rule 8D, which admittedly is not applicable in the impugned assessment year i.e. A.Y. 2007-08.It was further submitted that in the A.Y 2007-08 the statute provided for quantification/determination of the disallowance as per the method prescribed but the said method was not there in the statute or rules. Therefore, no disallowance can be made because there can be no determination of expenditure. The DR submitted that there is no allocation of expenditure by the assessee and, therefore, some disallowance is called for even though Rule 8D is not applicable in this year.

Having heard the parties, the Tribunal held that,

++ the whole genre of income under the head capital gain on transfer of shares is a source, which is taxable under the Act. If the entire source is exempt or is considered as not to be included while computing the total income then in such a case, the profit or loss resulting from such a source do not enter into the computation at all. However, if a part of the source is exempt by virtue of particular "provision" of the Act for providing benefit to the assessee, then in our considered view it cannot be held that the entire source will not enter into computation of total income;

++ section 10(38) excludes in expressed terms only the income arising from transfer of Long term capital asset being equity share or equity fund which is chargeable to STT and not entire source of income from capital gains arising from transfer of shares. It does not lead to exclusion of computation of capital gain of Long term capital asset or Short term capital asset being shares. Accordingly, Long term capital loss on sale of shares would be allowed to be set off against Long term capital gain on sale of land in accordance with section 70(3). The AO to allow the claim of set off of Long term capital loss on sale of shares against the Long term capital gain arising on sale of land;

++ the assessee has pointed out that entire investments have been made out of its own capital and internal accruals, therefore, no expenses can be said to be attributable. This claim of the assessee required examination by the AO having regard to the accounts of the assessee and the nature of expenditure which can be said to be attributable for earning of the exempt income. If such an examination has not been done and no satisfaction has been arrived, then the AO cannot reject the assessee's claim and proceed to disallow u/s. 14A(2). In the instant case, admittedly, the AO has not conducted such an examination and the assessment order is also silent about his satisfaction on the claim of the assessee. The matter should be restored back to the file of the AO to examine the conditions as laid down in section 14A(2) and, thereafter, decide the issue in accordance with the provisions of law without resorting to Rule 8D.

(See 2015-TIOL-1013-ITAT-MUM)