Set - off of short-term capital loss which has been subject to STT against short-term capital gains arising on off-market transactions including buy back / open offer, etc., which are not subject to STT
First State Investments (Hongkong) Ltd. A/c First State Asia Innovation and Technology Fund v. ADIT [2009-TIOL-547- ITAT-MUM].
The Income-tax Appellate Tribunal (“the Tribunal”), in the case of First State Investments (Hongkong) Ltd. A/c First State Asia Innovation and Technology Fund1 (“the assessee”), examined the manner of set-off of short- term capital loss suffered from sale transactions subject to Securities Transaction Tax (”STT”) against short- term capital gains arising prior to introduction of STT, during the financial year.
The Finance (No.. 2) Act, 2004 introduced section 111A to the Income-tax Act, 1961 (“the Act”) to provide a concessional tax rate of 10% on short-term capital gains arising on transactions executed on the stock exchange and which were subject to STT. The Finance (No.2) Act, 2004 also introduced a chapter on the levy of STT on select transactions in the Indian capital market. Prior to the introduction of STT, short-term capital gains were subject to tax at 30% as per section 115AD of the Act.
Accordingly, if short-term capital gains arising on transactions are executed on recognised stock exchanges in India and are subject to STT, then such short-term capital gains would be subject to a concessional rate of tax, i.e. at 10%. Short-term capital gains not subject to STT would continue to be charged to tax at 30% as per section 115AD of the Act.
The assessee is registered with the Securities and Exchange Board of India (“SEBI”) as a sub-account and is governed by the provisions of section 115AD of the Act.
During the financial year ended March 2005, the assessee had , as per the provisions of section 70 of the Act , set-off short-term capital loss which was subject to STT first against short-term capital gains not subject to STT , and offered the net short-term capital gains to tax at 10% in its return of income filed with the Indian tax authorities.
However, the Assessing Officer denied the assessee the option to set-off short-term capital loss arising on sale transactions which are subject to STT first against the short-term capital gains not subject to STT. The Assessing Officer contended that the net short-term capital gains should be worked out separately for each category of capital gains.
The following illustration shows the manner of set-off:
|DESCRIPTION||AS PER ASSESSING OFFICER||AS PER ASSESSEE|
|Non-STT trades (at 30%)||100||-50||50||100||-65||35|
|STT Trades (at 10%)||200||-15||185||200||200|
|Total taxable capital
Under the provisions of the Act contained in sub-section 2 of section 70 of the Act, the law does not differentiate between the short-term capital assets which are subject to different tax rates, nor does it prescribe any order in which the losses computed as short-term capital losses need to be set-off against short-term capital gains. If short term capital gains / loss were to be indeed treated distinctly so as to have separate set-off provisions , then the provisions of section 70 would have been amended to accommodate the different types of short-term capital gains / losses.
The Departmental Representative contended that , since there are two different provisions (namely sections 111A and 115AD of the Act) for taxing the short-term capital gains subject to STT at 10% and those not subject to STT at 30%, the assessee could not set- off losses taxable under section 111A of the Act against gains taxable under section 115AD of the Act.
The Tribunal held that :
The decision has clarified that legislature does not differentiate between short-term capital gains which are subject to different tax rates and the choice has been left to the assessee to decide the manner for setting off of short-term capital loss from one transaction against any other short-term capital gain.
This Ruling would also be applicable to the set-off of short-term capital loss which has been subject to STT against short-term capital gains arising on off-market transactions including buy back / open offer, etc., which are not subject to STT