In an interesting ruling, the Mumbai Tax Tribunal has held in the case of Raptakos Brett & Co. Ltd Vs. DCIT that Long-term capital loss on sale of shares CAN be set-off against long-term gains on land sale arising to the Taxpayer.
Ruling in Brief
Income from sale of shares which are held for a longer-term (i.e. held for a period of 12 months or more, called ‘Long-term capital assets’) are exempted from tax under the Indian Tax law, when such shares are sold in a stock exchange and a Transaction tax (called Securities Transaction Tax) is paid. The general view was that since the ‘income’ is exempt, the loss, if any, from such transactions cannot be claimed as ‘set-off’ against taxable gains from other Long-term capital assets. In the aforesaid ruling, the Tax Tribunal has held that the loss arising from sale of long-term equity shares in stock exchange CAN be claimed as set-off against other, taxable gains from sale of long-term assets (sale of land in the given case).
Ruling Debriefed
The Controversy
In India, gains from sale of shares which are of a “Long-term” nature (i.e. shares held for more than 12 months) and sold in a stock exchange are exempt from Tax. The relevant section in the Tax code [Section 10(38)] refers to exemption for “income arising from the transfer of long-term capital asset, being an equity share” which is sold in a recognized stock exchange.
An “exemption” provision under section 10 under the Indian Tax law operates very differently from a “deduction” provision, inasmuch as the income which is governed by an exemption provision is kept completely outside the purview of income-computation process.
Further, the the term “income” is interpreted as including both the positive (i.e. gain) and negative (i.e. loss) aspects of income, based on a ruling on a ruling of the Supreme Court which clarified that income also includes a loss.
The widely prevalent view therefore was that when there is a loss on sale of “long-term” equity shares in a stock exchange, the said loss does not enter the income-computational process and therefore not admissible for set-off against a Long-term gain that a Taxpayer may have from a taxable, long-term capital asset. The Honorable Gujarat High Court in its decision in the case of Kishorebhai Bhikabhai Virani Vs. ACIT had also taken the above view (i.e. that loss from sale of equity shares cannot be claimed for set-off)
Case made out for a differential treatment of loss from sale of shares
The counsel appearing for the Taxpayer, Mr. Soli Dastur, argued that the normal computation provisions under the Income-tax Act would apply when the exemption is granted to only a ‘part’ of the source of income. It was argued that exemption provided under section 10(38) was applicable only to listed equity shares and units of equity oriented funds, and was also conditional. It was argued that in such a situation, the exemption applied only in case there was a gain from the transaction. It was therefore argued that in a scenario where the transactions resulted in a loss to the Taxpayer, then the normal computation provisions would apply.
Reliance was placed on an ruling of the Calcutta High Court in the case of Royal Calcutta Turf Club Vs CIT, which was on the issue of exemption given to breeding horses and pigs under section 10(27).
Ruling of the Mumbai Tribunal
The Mumbai Tax Tribunal accepted the arguments advanced on behalf of the Taxpayer and ruled that losses from sale of long-term capital asses, being equity shares, can be claimed as set-off. The Tribunal took note the ruling by the Gujarat High Court, the facts of which case were more appropriately applicable, but preferred to adopt the view of the Calcutta High Court as it found the latter’s view to be based on precedents laid down by the Apex Court.
Our view
The aforesaid ruling being a decision at the Tribunal level, the same is unlikely to result in any re-thinking of the stand adopted by Revenue authorities. However, Taxpayers may consider lodging a claim of set-off of any such losses suffered by them, to keep the option of availing set-off of such losses open.
Action Steps by Taxpayers
Review the positions taken in relation to losses on sale of equity shares and lodge claim for set-offs. The option of filing a revised return can also be explored, if the amounts involved are material and time-line window for revised return is still available. Such claims can also be made at the audit stage, if the audits are open. We would also recommend to assess the mitigating option of paying tax even while making a claim for set-off of long-term capital loss.
Even where there is no immediate need for set-off, claims for losses suffered may be made to secure such a right to set-off against a future foreseeable gain.