Section 74 – Long-term capital loss on sale of listed equity shares is allowed to be carried forward

5.  United Investments vs. ACIT (Kol.) Members: A.T. Varkey (J.M.) and M. Balaganesh (A.M.) ITA No.: 511/Kol/2017 A.Y.: 2013-14 Date of order: 1^st July, 2019

Counsel for Assessee / Revenue: S. Jhajharia / Sankar Halder

Section 74 – Long-term capital loss on sale of listed equity shares is allowed to be carried forward

FACTS

The assessee was engaged in the business of horse-racing and also as a commission agent. It had deployed its surplus funds by way of investments in listed shares and securities. During the year it had derived long-term capital gain of Rs. 0.77 lakh and suffered long-term capital loss of Rs. 6.05 lakhs on the sales of listed shares. In the return of income, the assessee carried forward the long-term capital loss. However, the CIT(A) rejected the same since, according to him, the gain derived from the sales of listed shares was exempt.

Being aggrieved, the assessee appealed before the Tribunal where the Revenue supported the orders of the lower authorities and submitted that the term ‘income’ included negative income, i.e., loss as well. Thus, when the profit from transfer of shares of listed companies was exempt u/s 10(38), then as a corollary the loss arising from such source also cannot be set off against any other income which is chargeable to tax.

HELD

The Tribunal noted that the judicial authorities, including the Apex Court in the case of CIT vs. J.H. Gotla (156 ITR 323), have held that the expression ‘income’ includes loss. The Tribunal further noted that the decision of the Apex Court was in the context of clubbing of a minor’s income with that of the parents u/s 64, when the Court held that the loss legally assessable in the hands of the minor was also required to be clubbed in the hands of the parent. In the said case, according to the Tribunal, the Revenue had not proved that the source from which the minor earned income or incurred loss was outside the purview of the tax provisions. Although, admittedly, the source of income in the hands of the minor was such that it was liable to tax and if there had been any income, then the same would have been included in the hands of the parent. In the light of this factual and legal position, the Tribunal noted that the Supreme Court held that if the income was liable for clubbing in the hands of the parent, then equally the same principle will apply with respect to loss which was negative income.

According to the Tribunal, the judicial concept that the term ‘income’ includes loss can be applied only when the entire source of such income falls within the charging provisions of the Act. Accordingly, in a case where the source of income is otherwise chargeable to tax, but only a specific specie of income derived from such source is granted exemption, then in such a case the proposition that the term ‘income’ includes loss will not be applicable. It is only when the source which produces ‘income’ is outside the ambit of the taxing provisions of the Act, in such a case alone the ‘income’ including negative income can be said to be outside the ambit of taxing provisions, and therefore the negative income is also required to be ignored for taxation purposes. Therefore, where only one of the streams of income from the ‘source’ is granted exemption by the Legislature upon fulfilment of specified conditions, then the concept of ‘income’ includes ‘loss’ will not apply.

According to the Tribunal, on conjoint reading of the provisions of section 2(14) which defines the term capital assets; section 45 which lays down the charge of tax on gain arising on transfer of ‘capital asset’; section 48 which provides for the manner and mode of computation of long-term capital gain; and section 74 providing for manner for claiming set-off of long-term capital loss / its carry forward, nowhere had any exception been made with regard to long-term capital gain / loss arising on sale of equity shares. The Tribunal further noted that the same is liable to income tax like any other item of capital asset. Therefore, it cannot be said that the source, viz., transfer of long-term capital asset being equity shares, by itself is exempt from tax so as to say that any ‘income’ from such source shall include ‘loss’ as well.

Therefore, relying on the decisions of the Calcutta High Court in the case of Royal Calcutta Turf Club vs. CIT [1983] 144 ITR 709/12 Taxman 133 and the Mumbai Tribunal in the case of Raptakos Brett & Co. Ltd. vs. DCIT (69 SOT 383), the Tribunal held that the claim of the assessee for carry forward of long-term capital loss be allowed.