Set off of long term capital loss with indexation against long term capital gains without indexation is allowable
ITAT, MUMBAI BENCH ‘B’, MUMBAI
Keshav S. Phansalkar
v.
ITO
ITA NO. 3261/MUM/2007
JUNE 3, 2009
RELEVANT EXTRACTS :
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8. Section 70(3) of the Act postulates that for any assessment year where there is a loss in respect of long term capital asset, the asscssee shall be entitled to have the amount of such loss set off against the income, if any fas arrived at under a similar computation) made for the assessment year in respect of any other long term capital asset. Section 112 of the Act provides for tax on long term capital gains. Section 112 of the Act provides that where the total income of the assessee includes any income arising from the transfer of a long term capital asset, assessable under the head 'income from capital gains', the tax payable by the assessee on the total income shall be aggregate of the amount of income tax payable on the total income as reduced by the amount of such long term capital gains and the amount of income tax calculated on such long term capital gains @ 20% in the case of an individual / Hindu undivided family, being resident and domestic company and also in the case of nonresident, not being a company or foreign company and in any other cases. The proviso under section 112 of the Act reads as under:-
"Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent;
(b) in the case of a fdomestic] company,—'
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income: and
(ii) the amount of income-tax'calculated on such long-term capital gains at the rate of [twenty] per cent:
[(c) in the case of a non-resident (not being a company) or a foreign company,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long- . term capital gains at the rate of twenty per cent;]
[(d)]in any other case [of a resident],—
(i) the amount of income-tax pay able on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income ; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of [twenty] per cent."
9. While computing the tax on long term capital gains, the provisions of the Act by way of section 112 recognizes two methods of computing gain arising on the transfer of long term capital asset. The provision for computation of tax on sale of assets being listed securities/units or zero coupon bond is provided in the proviso under section 112(1) of the Act. In respect of listed securities/units or zero coupon bonds, the option is available to the assessee, to compute the tax payable on the income arising on the transfer of such assets either by indexation of cost of acquisition or without indexation. The proviso to section 112(1) of the Act provides that where the assessee exercises the option of indexation of cost of acquisition and working out the tax on income from long term capital gains with indexation, rate of tax applicable is 20% as provided under the Act. How ever, in case the assessee opts not to resort to provisions of second proviso to section 48 i.e. opts long term capital gain without indexation, then the tax is to be worked out @ 10% of such amount of capital gain. In case, where the assessee computes the income from long term capital gains with indexation on which tax payable @ 20% of such gains and such tax exceeds 10% of the amount of capital gains worked out by the assessee without indexation, then the proviso to section 112 of the Act provides that the excess shall be ignored for computing the tax payable by the assessee. In other words, the assessee has to work out the long term capital gains with indexation and without indexation and in case, the working with indexation is exercised, which in turn is assessable @ 20% gains and such amount exceeds 10% of the amount of capital gains worked out without indexation, then such excess is to be ignored. The word . used in the proviso to section 112 of the Act is "shall" implying thereby that the computation of long term capital gain with indexation and LTCG without indexation has to be carried out by the assessee before exercising the option of paying tax either on gain arising after indexation or without indexation. Once the computation of long term capital gain with or without indexation has been worked put by the assessee,. men the quantum of tax payable on long term capital assets with indexation @ 20% and the 10% lax payable on gains arising without indexation is the indicator for adopting one of the methods of computation of income from capital gains. In all such cases, where the lax on I/I'CG without indexation being 10% of the gains is less than 20% of tax payable in respect of the income arising from long term capital asset with indexation, then the assessee has an option of paying lower of the tax.
10. Section 14 of the Act classifies the heads of income for the purpose of charge of income tax and computation of total income and the following heads of income are provided :
"A.—Salaries
B - Omitted
C—Income from house property.
D—Profits and gains of business or profession.
E—Capital gains.
F—Income from other sources"
Thereafter provision of computing the income under the respective heads of income is provided under various sections and Chapter E relating to capital gains is enshrined in sections 48 to 55 of the Act. The Act recognizes two types of capital gains arising in the hands of the assessee i.e. income from sale of long term capital asset and income from sale of short term capital asset. The difference between the two arising on-sate of long term capital asset and short term capital asset is the period of holding of the respective asset as provided under the respective sections. Once the income from capital gains is determined under section 45 to SS of the Act and in case there is a loss from one source as against the gain from another source under the same head of income, then the provisions of section 70 come into play. Section 70(1) clearly provides that where the net result for any assessment year in respect of any sources falling under any head of income other than capital gains is loss, then the assessee shall be entitled to set off of such loss against income from any other source under same head. Section 70(2) provides that where as a result of computation of income under section 48 to 55 in respect of airy short term capital asset, if there is a loss then the assessee shall be entitled to set off of the said loss against the income, if any, arrived at under a similar computation made for the assessment year in respect of any other short Term capital asset. Section 70(3) of the Act provides for similar computation in respect of capital asset other than the short term capita) asset. Section 71 of the Act provides for set off of loss from one head against income from another head and section 72 provides for carry forward and set off of business losses.
11. Reading the provisions of set off of carry forward losses against the income arising to the assessee, it transpires that the Act recognizes two instances for set off. The first instance of set off of losses from one source of income is against the income arising from another source under the same head of income and the second set off provided under section 71 of the Act talks of the set off of loss from one head against the income from another head. In case, the assessee has different sources of income under one head of income, then section 70(1) provides for set off of losses arising from one source against the another source under the same head of income except in case of capital gains. In respect of capital gains, the Act recognizes two types of capital gains in respect of transfer of short term capital asset and in respect of any capital gain arising on transfer of asset other than the short term capital asset The head of income in both the cases is 'capital gains' i.e. Chapter E dealing with capita] gain, but the Act recognizes two kinds of capital gains i.e. one arising in respect of short term capital asset and the second arising in respect of long term capital asset. Section 70(3) of the Act dealing with set off losses arising on transfer of long term capital asset against the gain arising on account of sale of long term capital asset talks of two sources of income under the same head 'income from capital gains'. Similarly, under section 70(2) of the Act similar provisions are provided in respect of short term capital asset. The first step to be determined is whether the assessee has transferred short term capital asset or long term capital asset. Any losses arising on the transfer of a capital asset is necessarily to be adjusted against the capital gain arising thereunder, whether short term or long term Any losses arising from transfer of long term capital assets is to be adjusted against the gain arising from transfer of long term capital gains. The aforesaid provisions of section 70 were substituted by Finance Act, 2002 with effect from 1.4.2003 and prior to its substitution, the section provided that where, die net result for any assessment year, in respect of any source falling under any head of income was loss, the assessee was entitled to have such amount of loss set off against the income from other sources falling under the same head of income. Prior to the amendment of Finance Act, 2002 losses arising on the transfer of short term capital asset could be set off against the gain arising from the transfer of long term capital asset. But after the amendment with effect from 1.4.2003, the amended provisions of section 70 do not allow such set off between the gain/loss arising on transfer of short term capital asset/long term capital asset.
12. The provisions of Section 112 of the Act are only to be applied for working out the tax on long term capital gain as clarified by us in paras hereinabove. There are two methods of computing the tax on income arising from transfer of long term capital asset i.e. with indexation or without indexation and in case where the tax payable being 10% of the amount of capital gains without indexation is less than the tax worked out on transfer of long term capital asset after indexation, then the assessee has an option of paying the lower amount of tax. The two methods of computing the gain/loss on transfer of long term capital asset fall under the same head of income i.e. capital gain on transfer of long term capital asset The spirit of section 70(3) covers all such transactions where the gains are arising on the transfer of long term capital asset and in case of any set off of loss arising from one source i.e. transfer of long term capital asset against gain arising on the transfer of another sources of transfer of long term capital asset is to be allowed under the provisions of section 70(3) of the Act. Accordingly, we are of the view that the option of the assessee to work out the gain arising on transfer of long term capital asset with or without indexation is distinct from allowing the set off of loss arising under one particular method of computation against gain arising on account of following another method of computation of gains on transfer of long term capital asset Both workings are for the purpose of determining the income from transfer of long term capital assets and the same falls under the same-head of income and such set off of loss arising from one source against the gain arising from another source under same head is allowable to the assessee in accordance with the provisions of section 70(3) of the Act. Accordingly, we direct the Assessing Officer to set off the capital loss -worked out by the assessee with indexation against the long term capital gains 'without indexation worked by the assessee in the original computation of income, '. but after detennimng the tax on gains on the transfer of long term capital asset is worked out after following the formula provided in the proviso to section 112 of the Act. The grounds of appeal are thus allowed.
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