The same kind of question can be put as “ Can short term capital gains on shares be adjusted with short term capital loss on sale of immovable property? “ . In both the aforesaid situation, there is chance of a tussle between A.O and the taxpayer .The reason is that in section 70 of the I.T. Act , which prescribes set off of loss from one source against income from another source under the same head of income has a phrase “under similar computation” which creates confusion.
Let us see first what section 70 states :70. (1) Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.
Language is very clear. Short term loss arising on any kind of capital asset can be set off with capital gains of any other capital asset. It means that there is no distinction between types of capital asset. So short term capital loss on share can be adjusted with short term or long term gains on any other income.
However, the controversy between Revenue Department and the tax payers has started due to presence of a phrase “under similar computation” in both the subsection 2 & 3 of section 70 of the I T Act .
The higher appellate authorities have however clarified that the meaning of “under similar computation is not what Revenue is implying . In other words , the meaning of the phrase is restricted to what is said by section 48(1) and not to any of the proviso to section 48 of the I T Act.
ITAT , Mumbai in Vipul A Shah vs ACIT [2011] 13 taxmann.com 40 (Mum.)[2011 47 SOT 189] was seized with the similar issue .In this case ,the assessee claimed set-off long term capital loss against long term capital gain. While computing the long term capital loss the assessee availed benefit of indexation. However, while computing the long term capital gain assessee did not avail benefit of indexation and rather took benefit of proviso to section 112(1). The Assessing Officer disallowed the set-off on ground that set-off could be allowed only when mode of computation of long term capital loss and long term capital gain were similar, and claim of said set-off could not be allowed in terms of section 70(3). On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
The Tribunal held as under :A plain reading of the provisions of section 70(3) of the Act shows that the first part of the provisions refers to a loss as computed under sections 48 to 55 of the Act in respect of any capital asset. The second part of the provisions refers to income if any as arrived at under similar computation. Thus the second part refers only to the mode of computation under sections 48 to 55 and that would be the correct interpretation. It cannot be said that the second part of the provisions by using the expression “similar computation”, refers to a similar computation under either the second proviso to section 48 or proviso to section 112(1) of the Act. As rightly contended on behalf of the assessee, the provisions of section 70(3) of the Act existed much prior to the mode of computation of capital gain without applying the benefit of indexation which were introduced later by an Amendment in the year 2000. It cannot be therefore that the Legislature would have contemplated while enacting the provisions of section 70(3) of the Act a situation as contemplated by proviso to section 112(1) of the Act, when it used the expression “similar computation” in section 70(3) of the Act.We also find force in the submission of the learned counsel for the assessee that similar restrictions could not be imposed when long term capital loss is sought to be carried forward and set off against long term capital gain in the later assessment year in terms of the provisions of section 74(1)(b) of the Act. The learned counsel for the assessee had relied on several judicial pronouncements before us but those decisions did not deal with the issue in the light of the stand taken by the Assessing Officer and therefore those decisions are not being referred to in this order. For the reasons stated above, we hold that that the expression “similar computation” used in section 70(3) of the Act does not refer to the computation under sections 48 to 55 of the Act (sic) and not the computation second proviso to section 48 of the Act vis-à-vis proviso to section 112(1) of the Act but the computation under sections 48 to 55 of the Act. The Assessing Officer is therefore directed to accept the claim of the assessee in this regard. The appeal of the assessee is accordingly allowed.17. In the result, the appeal by the assessee is allowed.
In other words, the Tribunal accepted the plea that under similar computation mean the computation u/s 48 to section 55 of the I T Act not the proviso to section 48 .
In another judgment ,ITAT Mumbai Mohanlal N. Shah (HUF ) v. Asstt. CIT [2008] 26 SOT 380 , the facts involved was that from the perusal of the computation of income, the Assessing Officer noticed that the assessee has calculated long-term capital gain from sale of shares without indexation which has been offered for taxation at the flat rate of 10 per cent as per proviso to section 112(1) of the Act against which the long-term capital loss on sale of units after indexation has been set off. He did not allow the said adjustment.
The issue before Tribunal was , in its words
, we find that the only dispute in this case is as to whether while computing the income under the head ‘capital gains’, income from certain sources can be computed taking the benefit of indexation and the income from certain other sources can be computed without indexation and can there be a set off of loss computed from a source with indexation from the gain from computed without indexation another source.
The Tribunal relying on Delhi Bench of the Tribunal in the case of Devinder Prakash Kalra v. Asstt. CIT [2006] 151 Taxman 17 in held as under
it is clear that the word ‘a’ used in the provisions of the Act have to be understood in the context of the provision and not the plain dictionary meaning of the word. Therefore, as observed above, the Legislature intended that the assessee may avail the benefit of indexation on each of the specified long-term capital asset and pay 20 per cent tax thereon or pay 10 per cent tax without indexation. The decisions relied on by the revenue are not applicable to the facts of the case before us as they are all cases of non-residents and the A AR was deciding whether there was discrimination against the non-residents. Therefore, respectfully following the decision of the co-ordinate Bench in the case of Devinder Prakash Kalra (supra) this appeal of the assessee is allowed
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