Set off of losses under STCG

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.

 FACTS

 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:

Assessee’s contentions

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.

Revenue’s contentions

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.

Tribunal Ruling

The Tribunal held that   :

• If the intention of the legislature had been not to confer the choice on the assessee for setting- off of the short-term capital loss where transactions have been subject to STT against short-term capital gains where transactions have not been subject to STT, it would have clearly set out such an intention in the language of section 70(2) itself, as has been done in sub-section (3) of section 70 of the Act. In the absence of such stipulation in sub-section (2) of section 70 of the Act, the choice has been left to the assessee in deciding about the setting-off of short-term capital loss from one transaction against any other short-term capital gain.
• The words used in section 70(2) of the Act stating that “the assessee shall be entitled” means that the option is with the assessee and the assessee will decide the manner of setting-off of short-term capital loss from one transaction against short- term capital gains from any other transaction.
• Chapter XII, which includes sections 111A and 115AD, provides for a particular rate of tax to be applied on the income covered under those sections individually and those sections do not deal with computation of income but provide the rate of tax applicable on the income.

Conclusion

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