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Tax Publishers Nikhil Sawhney v. ACIT [ITA No. 1248/Del/2017] : 2020 TaxPub(DT) 3194 (Del.-Trib) Allowability of carry forward of losses arising from long-term capital loss on sale of shares/equity units *Facts:* Assessee returned exempted long-term capital loss on sale of shares and units under section 10(38) by revising the return and claimed carry forward of the said loss before assessing officer at the time of assessment. Assessing officer held that section 10(38) (as it then existed until 1-4-2018) exempts long-term capital gains from Equity shares/Units sold thru a stock exchange and subject to STT (Securities transaction tax) from scope of income. Since income itself is exempt the loss also is also exempt thus not eligible for carry forward of losses which was affirmed by the Commissioner (Appeals). Aggrieved assessee went in higher appeal to ITAT. Held in favour of the department (against the assessee) by the ITAT holding that -- 1. Income as envisaged under section 10(38) would cover losses as well. While positive income is gains negative income is losses. 2. The ITAT refused to accept the plea of the assessee that section 10(38) has carved out only long-term capital gains that too only from sale of STT paid equity shares/units alone from scope of income, thus the intent was only to selectively exempt only one genre of the category of income called capital gains that too long-term capital gains only from equity shares/units. So the said section cannot be read to cover long-term capital losses from equity shares/units as well. 3. The concept of exempted income as per Kanga and Palkhivala is also explained to cover positive and negative incomes both in it and not selectively exclude only losses. 4. There cannot be filters applied in exempt incomes by saying positive income is exempt and negative income is not exempt or not in its scope. 5. The decision of Kishorebhai Bhikabhai Virani infra was rendered per incuriam was incorrect. *Dissented:* Raptakos Brett & Co. Ltd. v. DCIT (2015) 69 SOT 383 (Mum) : 2015 TaxPub(DT) 2490 (Mum-Trib) *Affirmed:* Kishorebhai Bhikhabhai Virani v. The Asst. Commissioner of Income Tax (2015) 55 taxmann.com 91 (Gujarat) : (2014) 367 ITR 261 (Gujarat) : (2015) 275 CTR 572 (Gujarat) : 2014 TaxPub(DT) 3879 (Guj-HC) Shri Somnath Vaijanath Sakre v. ACIT [ITA No. 2605/Pun/2016 (Pune-Trib.)] Applied: Positive income includes negative income as well -- CIT (Central) v. Harprasad and Co. (P.) Ltd. (1975) 99 ITR 118 (SC) : 1975 TaxPub(DT) 0320 (SC) Kanga & Palkhivala's The law and Practice of Income Tax, 11th Edition at page no. 531-532 of Vol-I which deals with the issue of losses of income under section 10 as under :-- "2. Losses from Incomes covered under Section 10.--A thorny issue that arises under section 10 is the question of what happens if the assessee has a loss under a particular clause. For instance, section 10(38) deals with income from sale of certain equity shares and mutual funds on which securities transaction tax is paid. Now, if there is a loss, will the loss also not form part of the total income? Or will the assessee, subject to the other provisions of the Act, be able to set off these losses against capital gains for that year? Section 10 states that 'income' falling within any of its clauses shall not be included in the computation of 'total income' of the assessee. The question is, does income include a loss? In the case of an insurance company making a loss under the scheme covered under section 10(23AAB), the Bombay High Court skirted this question -- it held that since insurance companies' assessments are covered under section 44, the question of disallowing this loss did not arise. This is the correct decision in that context, since insurance companies are treated differently under the Act. In certain judgments under section 271(1)(c) dealing with penalty, the Courts have held that income does not include loss. These judgments were overturned by the introduction of an Explanation in that section. This Explanation was held to be retrospective as it was clarificatory, effectively overruling all the previous judgments holding that income does not include loss. For this, the Supreme Court relied on the judgments in CIT v. Harprasad and Co. (P) Ltd. and CIT v. J.H. Gotla, which were rendered in the context of clubbing of income. Recently, the Supreme Court, while upholding the constitutional validity of the retrospective amendment to section 143(1A), held that it was 'settled law at least since 1975 that the word "income" would include within it both profits as well as losses'. The upshot of this discussion is that the law is now fairly settled that "income" includes "loss". It is submitted, however, that when applying this proposition to section 10, a distinction must be made between business income and incomes that fall under the head of capital gains. In the case of business income, the question of a 'loss' under a clause falling within section 10 will not arise at all because the expenditure towards earning this business income is anyway disallowed under section 14A. But when it comes to incomes covered under 'capital gains', like those covered under section 10(38). Where section 14A does not apply, the judgments discussed above will now imply that any losses will also not be included in the computation of total income."

Tax Publishers

Nikhil Sawhney v. ACIT [ITA No. 1248/Del/2017] : 2020 TaxPub(DT) 3194 (Del.-Trib)

Allowability of carry forward of losses arising from long-term capital loss on sale of shares/equity units

Facts:

Assessee returned exempted long-term capital loss on sale of shares and units under section 10(38) by revising the return and claimed carry forward of the said loss before assessing officer at the time of assessment. Assessing officer held that section 10(38) (as it then existed until 1-4-2018) exempts long-term capital gains from Equity shares/Units sold thru a stock exchange and subject to STT (Securities transaction tax) from scope of income. Since income itself is exempt the loss also is also exempt thus not eligible for carry forward of losses which was affirmed by the Commissioner (Appeals). Aggrieved assessee went in higher appeal to ITAT.

Held in favour of the department (against the assessee) by the ITAT holding that --

1. Income as envisaged under section 10(38) would cover losses as well. While positive income is gains negative income is losses.

2. The ITAT refused to accept the plea of the assessee that section 10(38) has carved out only long-term capital gains that too only from sale of STT paid equity shares/units alone from scope of income, thus the intent was only to selectively exempt only one genre of the category of income called capital gains that too long-term capital gains only from equity shares/units. So the said section cannot be read to cover long-term capital losses from equity shares/units as well.

3. The concept of exempted income as per Kanga and Palkhivala is also explained to cover positive and negative incomes both in it and not selectively exclude only losses.

4. There cannot be filters applied in exempt incomes by saying positive income is exempt and negative income is not exempt or not in its scope.

5. The decision of Kishorebhai Bhikabhai Virani infra was rendered per incuriam was incorrect.

Dissented: Raptakos Brett & Co. Ltd. v. DCIT (2015) 69 SOT 383 (Mum) : 2015 TaxPub(DT) 2490 (Mum-Trib)

Affirmed: Kishorebhai Bhikhabhai Virani v. The Asst. Commissioner of Income Tax (2015) 55 taxmann.com 91 (Gujarat) : (2014) 367 ITR 261 (Gujarat) : (2015) 275 CTR 572 (Gujarat) : 2014 TaxPub(DT) 3879 (Guj-HC)

Shri Somnath Vaijanath Sakre v. ACIT [ITA No. 2605/Pun/2016 (Pune-Trib.)]

Applied: Positive income includes negative income as well -- CIT (Central) v. Harprasad and Co. (P.) Ltd. (1975) 99 ITR 118 (SC) : 1975 TaxPub(DT) 0320 (SC)

Kanga & Palkhivala's The law and Practice of Income Tax, 11th Edition at page no. 531-532 of Vol-I which deals with the issue of losses of income under section 10 as under :--

"2. Losses from Incomes covered under Section 10.--A thorny issue that arises under section 10 is the question of what happens if the assessee has a loss under a particular clause. For instance, section 10(38) deals with income from sale of certain equity shares and mutual funds on which securities transaction tax is paid. Now, if there is a loss, will the loss also not form part of the total income? Or will the assessee, subject to the other provisions of the Act, be able to set off these losses against capital gains for that year? Section 10 states that 'income' falling within any of its clauses shall not be included in the computation of 'total income' of the assessee. The question is, does income include a loss? In the case of an insurance company making a loss under the scheme covered under section 10(23AAB), the Bombay High Court skirted this question -- it held that since insurance companies' assessments are covered under section 44, the question of disallowing this loss did not arise. This is the correct decision in that context, since insurance companies are treated differently under the Act. In certain judgments under section 271(1)(c) dealing with penalty, the Courts have held that income does not include loss. These judgments were overturned by the introduction of an Explanation in that section. This Explanation was held to be retrospective as it was clarificatory, effectively overruling all the previous judgments holding that income does not include loss. For this, the Supreme Court relied on the judgments in CIT v. Harprasad and Co. (P) Ltd. and CIT v. J.H. Gotla, which were rendered in the context of clubbing of income. Recently, the Supreme Court, while upholding the constitutional validity of the retrospective amendment to section 143(1A), held that it was 'settled law at least since 1975 that the word "income" would include within it both profits as well as losses'. The upshot of this discussion is that the law is now fairly settled that "income" includes "loss". It is submitted, however, that when applying this proposition to section 10, a distinction must be made between business income and incomes that fall under the head of capital gains. In the case of business income, the question of a 'loss' under a clause falling within section 10 will not arise at all because the expenditure towards earning this business income is anyway disallowed under section 14A. But when it comes to incomes covered under 'capital gains', like those covered under section 10(38). Where section 14A does not apply, the judgments discussed above will now imply that any losses will also not be included in the computation of total income."