i. Capital Loss from share swapping is allowed.
Facts:
Assessee-company, a Foreign Institutional Investor, was engaged in business of share trading.
The assessee received shares in ratio of 1 : 16 shares held by it in a company. This resulted in long term capital loss. AO disallowed the assessee’s claim of long term capital loss, on swap transaction. When the matter was referred to DRP, it was held that no sound reason was furnished by the assessee to explain as to why it entered in an exchange transaction that resulted in huge loss, that no prudent businessman would enter in to such a transaction, that swap ratio of shares transacted was not done by the competent authority i.e. a merchant banker.
Held:
Swapping of shares was approved by an agency of Govt. of India i.e. FIPB and it had approved the ratio of shares to be swapped. In these circumstances to challenge the prudence of the transaction was not proper. Even if the transaction was not approved by the Sovereign and it was carried out by the assessee in normal course of its business, the Ld AO/DRP could not question the prudence of the transaction. Genuiuness of a transaction can be definitely a subject of scrutiny by revenue authorities, but to decide the prudence of a transaction is prerogative of the assessee. A decision as to whether to do / not to do business or to carry out/not to carry out a certain transaction is to be taken by a businessman. If it is proved that a transaction had taken place, then resultant profit or loss has to be assessed as per the tax statutes. Therefore by casting doubt about the prudence of the transaction, members of the DRP had stepped in to an exclusive discretionary zone of a businessman and it is not permissible.
ii. Set off of short term capital loss subject to STT allowed against short term capital gain not subjected to STT
Facts:
Assessee has claimed set off of short-term capital loss subjected to Securities Transaction Tax(STT) against the short-term capital gains that was not subjected to STT. The AO held that as both the transactions were subject to different rates of tax, the set off of loss is not correct. He held that in order to set off the short term capital loss, there should be short term capital loss and short term capital gain on computation made u/s. 48 to 55. The assessee was entitled to have the amount of such short term capital loss set off against the short term capital gain, if any, as arrived under a similar computation made for the assessment year under consideration.
Held:
The phrase “under similar computation made” refers to computation of income, the provisions for which are contained u/ss. 45 to 55A of the Act. The matter of computation of income was a subject which came anterior to the application of rate of tax which are contained in section 110 to 115BBC. Therefore, merely because the two sets of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. The Tribunal therefore, held that short term capital loss arising from STT paid transactions can be set off against short term capital gain arising from non SIT transactions.
Note: Readers may also read following decisions of Mumbai Tribunal:
• DWS India Equity Fund [IT Appeal No. 5055 (Mum.) of 2010]
• First State Investments (Hong Kong) Ltd. vs. ADIT [2009] 33 SOT 26 (Mum)
