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10(38) exemption is optional?

SamTK (Chartered Accountant) (194 Points)

06 February 2014

So I was wondering if the exemption under section 10(38) is optional?

Say for instance, I've incurred a loss on the transfer of an equity share which meets the requirements of section 10(38), can I do away with section 10(38), and carry forward the long-term capital loss?

I was filing an Income Tax Return of a client using SmartTax(from SmartBiz Technologies), and when I claimed a Long-Term Capital Loss by way of an entry in the software, the software automatically carried forward the loss by not claiming the loss under section 10(38). Is that possible under the Act?

Thank you in advance.

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11 Replies

CA Raj Doshi (Practising CA) (8813 Points)
Replied 07 February 2014

Only if there is profit arising under 10(38) then it is exempt. In case of loss , one should not even think of exemption as it is only for reducing theParticular income in particular and the Gross total income at large. Thus , in your case , there is one condition not fulfilled and that is there should be a long term capital gain. Regards , Raj C. Doshi

Max Payne (employed) (2569 Points)
Replied 07 February 2014

I Disagree Raj Sir, the exemption u/s 10(38) is mandatory. If the assessee has incurred loss, such loss cannot be set off or carried forward.

SamTK (Chartered Accountant) (194 Points)
Replied 07 February 2014

RajCDoshi As far as I know, gains includes both profit and loss.

So your contention of "gains vs loss" is not tenable, I think.

But well, lets see what the others have to say.

TARUN (na) (50 Points)
Replied 07 February 2014

Capital gain section 10(38) gives exemption on sale long term cap gains on cap asset being an equity share in a company or unit of an equity oriented fund. Since the section exempts any income arising from the transfer of specified security. And if income from a particular source is altogether exempt from tax, then loss from dat source cannot be set off against income from a different source or income under a different head. Hence , a loss arising on sale of specified securities satisfying the conditions of section 10(38) is not eligible for setoff against taxable gains under section 70 or c/f and setoff under section 74. Such loss shall have no tax treatment.

mukesh (charter accountant) (21 Points)
Replied 07 February 2014

The exemption under sec10 (38) is mandatory. .If there is loss than that become the dead loss ..The only way is to sell the share offline..

CA Raj Doshi (Practising CA) (8813 Points)
Replied 08 February 2014

Interesting reply Tarun . I shall look in to the matter more thoroughly and come back with my points if any. Really eye opening.

umesh kumar soni (Student CA Final ) (22 Points)
Replied 08 February 2014

As income is exempted then loss will become worthless, cnt set off

Sreenivas (Student CA IPC / IPCC) (49 Points)
Replied 08 February 2014

Exemption under section 10(38) is available for long term capital gain arising from equity shares or equity oriented mutual funds.No exemption is availed for loss.

imkdm (Student) (107 Points)
Replied 08 February 2014

Respected,

As explained by Mr. Tarun, Sec. 10(38) is applicable only if the transferred asset is "a long term CAPITAL Asset".

"Exemption under Section 10(38) is available only if shares are held as capital assets. If shares are held as stock - in - trade, exemption under section 10(38) is not applicable."

- Alka Agarwal v. DIT (2011) 48 SOT 493 (Delhi).

Taking into account above view and logical reasoning, if you "trade in shares" (rather than being an investor), gains or losses arising on account of share trading would be outside of purview of Section 10(38). To summarize, the section 10(38) would not apply in case of "trading assets / inventories".

However, you would have to justify reasonably to the revenue that you are a share trader and not mere an investor. I hope this much would suffice.

Thanking you.

SamTK (Chartered Accountant) (194 Points)
Replied 09 February 2014

Also, assuming that such a loss cannot be carried forward, can an assessee choose to not pay STT for a certain transaction conducted on a Recognized Stock Exchange, or is it mandatorily charged for any equity transaction on the stock exchange?

And, since 10(38) does not apply on the purchasing-end, the buyer of the shares would have no problem conducting an off-market transaction. How are these transactions conducted? And are there any other sections of the Act applying to such transactions?

imkdm (Student) (107 Points)
Replied 09 February 2014

As I have explained, section 10(38) would not apply in case of shares which are regarded as inventories rather than as investments. Therefore, I see no harm in carrying forward losses from trading in shares which would of course be c/f under the head ''Profits and Gains from Business/Profession'' as trading would be regarded as business activity. Now shares on which STT would not be payable: Yes. You may conduct such transactions off-market using TIFD notes (Transfer Instructions for delivery) (notes requesting transfer of shares from one demat account to another). However an investor would have to - 1. Arrange a buyer for shares himself. 2. Bear risk of realizing the payment. 3. Bear other operational risk. Investor may get payment in cash / bank / other mode, rather than in a demat account. Being an off-market transaction, I think, STT would not be payable. (I am not sure). However the best way, in such case, would be that investor should convert potential long term loss into short term loss. Eg. I have 100 shares of X Ltd., bought @ Rs. 100, eleven months ago. Current market price is Rs. 75. If I am certain, share prices would not go up in near future, I shall sell shares within 1 month (so that holding period is less than 12 months). I can use this short term loss against any future long/short term gains. If I still want to hold same shares, I should sell them today, book short term loss and pick up the same shares in same quantity tomorrow, so that I still own shares for potential benefits. ( I used the word tomorrow because if you sell and purchase same shares in same day, it would be intra day transaction. Profit / Loss from the same would be subject to tax as income from speculative business. You may voice different opinion). Off-market transaction is a hectic matter. Later option will require timely analysis of portfolio. Thanks.

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