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.