Poonawalla Shares & Securities Pvt.Ltd, Pune V. Assistant Commissioner of Wealth-tax, Circle-4, Pune

ITA 380/PUN/2020

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 1656 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 15-03-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Earning of tax free income; Rule 8D; Capital Gains; CHAPTER IV
• Section: 147; 15; 2(14); 14A; 43; 48; 72

Judgement Text

.आयकर अपीलीय अिधकरण “बी” Ɋायपीठ पुणे मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, PUNE BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकर अपीलसं. / ITA No.380/PUN/2020 िनधाᭅरण वषᭅ / Assessment Year : 2016-17 Poonawalla Shares & Securities Pvt. Ltd., 16-B,/1, Sarosh Bhavan, Dr.Ambedkar Road, Pune – 411001 PAN: AAACP 6087 H Vs The Assistant Commissioner of Income Tax, Circle-4, Pune. Appellant/ Assessee Respondent /Revenue Assessee by Shri Percy Pardiwala – AR Revenue by Shri M.G.Jasnani – DR Date of hearing 08/07/2022 Date of pronouncement 29/07/2022 आदेश/ ORDER Per S.S.Godara, JM: This assessee’s appeal for Assessment Year 2016-17 is directed against the Commissioner of Income Tax(Appeals)-3, Pune’s order dated 11.12.2019 passed in case no.PN/CIT(A)-3/Cir 4/193/2018-19/428, in proceedings u/s.143(3) of the Income Tax Act, 1961 [in short “the Act”]. Heard both the parties. Case file perused. 2. The assessee’s first and foremost substantive ground raised in the instant appeal challenges correctness of both the lower authorities ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 2 action invoking section 14A r.w.Rule 8D disallowance of Rs.10,83,615/- in relation to its exempt income. Learned CIT(A) detailed discussion affirming the Assessing Officer’s action to this effect reads as follows: “5. GROUND No.1, 2 & 3 In this ground of appeal, the appellant contended against the disallowance of Rs Rs.10,83,615/- u/s 14A of the Act by applying amended Rule 8D being expenditure incurred for earning exempt income while computing taxable income. 5.1 OBSERVATION OF THE A.O.;- On this issue, the AO has made the following observations in the assessment order: 05. Disallowance under section 14A r, w. Rule 8D : On verification of the Balance Sheet for the year under consideration, it is found that assessee company has made investment in equity shares from which the assessee has earned exempt income. As per provision of section 14A of the Act for the purposes of computing the total income under this Chapter, i.e. “Chapter IV -Computation of total income” no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. 5.1 On examination of facts of the case, investment made and expenditures incurred the undersigned is not satisfied with the correctness of the claim of the assessee. Hence the assessee was requested to justify why the section 14A of the Act should not be applied in its case. Also, We assessee was requested to furnish details of expenditure incurred to earn the exempt income and details of amount of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 3 5.3 The submission of the assessee was considered but found to be not acceptable due to reasons elaborated in the following paras. As requested, the assessee submitted details of amount of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not OF Shall not form pad of total income. The same is placed on record. /\s per assessee's submission this value is Rs. 12,96,56,850/- and 1% of the same is Rs. 12,96,569/-. Further, it is seen that expenditure directly relating to income which does not form part of total income comes to Rs.8,93,921/-.Therefore the total disallowance as per Rule 8D should have been Rs. 21,90,490. Further, the assessee has already made disallowance u/s 14A of Rs. 11,06,875/-. Therefore, in view of these facts, the assessee was requested to show cause vide notice dated 01.12.2018 as to why an amount of Rs. 10,83,615/- should not be added back to the total income of the assessee u/s 14A of the Act. The relevant portion of the show cause is reproduced below for ready reference: "It is seen that you have made disallowance u/s 14A of Rs. 11,06,875/- but as per rule 8D disallowance u/s 14A should have been Rs. 21,90,490/- which is computed as below: 1. The amount of expenditure directly realting to income which does not form part of total income -Rs. 8,93,921/-and 2. An amount equal to one percent of annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income - Rs. 12,96,569/- Therefore, you are requested to show cause as to why difference amount of Rs. 10,83,615/- (Rs. 21,90,490 - 11,06,875) should not be added back to your total income. ” ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 4 5.4 The assessee replied to this show cause notice by stating to consider its earlier submission only. The submission put forth by the assessee company has been duly considered. Section 14A was introduced in the year 2001 to clarify the intention of the legislature with respect to expenses relating to earning of exempt income. This was passed after the Supreme Court decision in the case of Rajasthan Warehousing Corporation [242 ITR 450 (2000)], where it was held that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not eligible to tax, was not allowable as a deduction. Sectionl4A reads as under: “Expenditure incurred in relation to income not includible in total income. 14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 5 (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]” 5.5 If the provisions of law contained under section 14A and diction of section 14A is perused, it is clear that section 14A codifies the well accepted principle of taxation that if an income is not taxable, no expenditure in relation to such income can be claimed against taxable income. The words used in section 14A are ‘in respect of expenditure incurred by the assesse in relation to income which does not form part of total income under this Act'. These words encompass within their ambit direct as well as indirect expenses. In fact, provision of law as contained in section 14A(3), though introduced later, clarifies that indirect expenses clearly come within the purview of section 14A because the situation dealt with by this subsection can arise only in respect of indirect expenses. 5.6 The expression ‘expenditure incurred by the assessee’ in relation to income which does not form part of the total income has a wider meaning. Therefore, such expenditures would not encompass only the direct or proximate expenditures incurred for the purpose of earning exempt income but it would include all other expenses attributable or in relation to exempt income i.e. it implies both direct and indirect relations between expenditure and exempt income. This is especially required in light of the fact that certain ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 6 expenses like cost of borrowing, salary, employees welfare expenses, postage / telegram expenses, travelling and conveyance expenses, rent etc are common expenses which are related to both earning of exempt income and normal / regular business activity of the assessee company. The assessee has incurred various kinds of expenses in its profit and loss account. It is not possible that assessee has not incurred any expenditure in connection with investments and earning of exempt income. 5.7 In the case of Godrej & Boyce Manufacturing Company Ltd, the Hon’ble Bombay High Court has held that section 14A supersedes the principles of law that in the case of a composite business, expenditure incurred towards tax-free income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non taxable income. Once a proximate cause for disallowance is established which in the relation of expenditure with income which does not form part of total income, a disallowance under section 14A has to be effected. Further court held that disallowance u/s 14A read with Rule 8D requires to be made even if investment pertains to earlier years. In the assessee’s case there is proximate cause for disallowance and section 14A r w Rule 8D are clearly applicable. This decision of Bombay High Court has been duly approved by the Hon’ble Supreme Court of India. Further, in the case of ITO vs Daga Capital, IT AT, Mumbai -Special Bench has held that section 14A has an overriding effect and applies to all expenditure in relation to exempt income even though such expenditure would have been allowable under other provisions such as 36(1)(iii). Further, court has held that the words "in relation to" in section 14A encompass not only the direct expenses but also the indirect expense which has any relation to the exempt income. The argument that the words contemplate a “direct and immediate connection” between the expenditure and the exempt income cannot be accepted. The fact that the dividend income is "incidental” to the purchase of shares is also irrelevant. Further, it has been noticed by the Supreme Court in its decision in CIT Vs Walfort Shares and Stock Brokers (P) Ltd ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 7 (2010) 233 CTR (SC) 42. The theory of apportionment of expenditure between taxable and non-taxable income, has in principle been widened under Sec 14A. Reading Section 14A in juxtaposition with section 15 to 59 it has been observed that the word "expenditure incurred” in Sec 14A refers to expenditure on rent, tax, salary, interest etc. in respect of which allowances’ are provided for. Besides, it is reasonable to presume that an investment of this nature would require the deployment of assessee’s intellectual, physical and financial resources. 5.8 The assessee in its reply has relied on the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income-tax, Range 10(2), Mumbai dated 12.08.2010 and held that since the amendment to Rule 8D has been notified on 02.06.2016, it would apply with effect from AY 2017-18. Relying upon the same judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income-tax, Range 10 (2), Mumbai (supra), I am of the opinion that the amended Rule 8D is applicable for the pending assessments for the AY 2016-17. The Hon’ble Bombay High Court has come out with principles that guide in determining as to whether an amendment is prospective or retrospective. These principles are in the favor of the Department and clearly indicate how the amendment to Rule 8D on 02.06.2016 is applicable for cases under scrutiny for the AY 2016-17. For e.g. principle given by the Hon’ble High Court: 1. In determining as to whether an amendment is to take effect prospectively or with a retrospective effect, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether an amendment is clarificatory or substantive; ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 8 In this principle, the Hon'ble Court has held that the date from which the amendment takes place is not a conclusive proof with regard to applicability of amendment a prospective or retrospective. The scheme of the statute prior to and subsequent to the amendment helps in determining whether it is clarificatory or substantive. Since Rule 8D merely states the method of quantifying the disallowance, the amendment to the same is just clarificatory in nature. Further, as on the date of applicability of the amendment i.e. 02.06.2016, the ITR was not filed by the assessee. Therefore, the assessee was aware of the amendments which it chose to ignore making it liable for furnishing of inaccurate particulars of income. Further, the Hon’ble Bombay High Court in the above judgment held that since the Rule 8D was notified on 24.03.2008, the same would apply with effect from the assessment year 2008-09. The reason for applicabiiity of a provision from the subsequent AY is specifically for the fact that the due date for filing of the ITR has elapsed. For example in the given case where Rule 8D was notified on 24.03.2008, the due date for filing of ITR for AY 2007-08 (relevant to 24.03.2008) was 30.09.2007 which had already elapsed. However, the amendment to Rule 8D was notified on 02.06.2016 where assessee had enough time to file the ITR for the AY 2016-17 as the due date for filing of the ITR for AY 2016-17 was 30.09.2016. It is pertinent to note here that the assessee has filed its original return of income on 29.09.2016 and thereafter, revised its ITR on 28.03.2018. Therefore, the assessee was aware of the amendment which it chose to ignore making it liable for furnishing of inaccurate particulars of income. Further, it is also pertinent to note here that the assessee in its submission has made claim that, the assessee company has disallowed Rs. 11,06,8757- which is more than the exempt income amounting to Rs. 10,24,180/-. The contention of the assessee is not acceptable because the assessee has shown total exempt income of Rs. 2,92,68,952/- in its return of income and not Rs. 10,24,180/-. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 9 5.9 Further assessee itself has applied provisions of old Rule 8D while calculating the suo moto disallowance. This indicates that application of Sec 14A r.w Rule 8D is acceptable to the assessee. In view of the above discussion, the expenditure incurred in relation to income not included in total income as per the amended provisions of section 14A r.w. rule 8D needs to be disallowed and added back to the total income of the assessee. The assessee has contended to restrict the disallowance to only those investments from which exempt income is received during the year. This contention is not acceptable because as discussed above assessee must have incurred some expenses for making the investments from which exempt income though not received in the current year but will be earned in future. These expenses need to be disallowed. Rule 8D very clearly states that, an amount equal to one per cent of the annual average of the monthly average of the "ii) opening and closing balances of the value of investment, income from which does not or shall not form part of total income” Thus investments from which exempt income will be earned in future also need to be considered. This position is clarified by the Central Board of Direct Taxes vide Circular No 5/2014/[F. No. 225/18/2013-ITA. II] dated 11/02/2014. The Circular clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where in a particular year the assessee has not earned any exempt income. Thus all the investments from which exempt income is earned or will be earned need to considered for the calculation under Rule 8D. As seen from the show cause given to the assessee which is reproduced above the amount of disallowance under Rule 8D is Rs. 21,90,490/-. The assessee has already added Rs.11,06,875/- to its income u/s 14A, therefore the difference amount of Rs. 10,83,615/- is added to the total income of the assessee u/s 14A of the Act. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 10 5.2 SUBMISSION OF THE A.R.:- During appellate proceedings the Ld AR of the appellant has given following written submission vide letter dated 11.06.2019: “1. Investment held by our Company and Income received: As mentioned earlier in this submission, appellant company suo- moto disallowed direct expenses of Rs. 1,07,971/- and interest Rs. 7,85,950/-. As regards indirect expenses, a sum of Rs. 2,12,954/- was disallowed being 0.5% of average investments wherever exempt dividend income was received. For the sake of simplicity investments made by the appellant company are bifurcated into three categories. Sr No Particulars Average Investment Dividend Received Disallowable U/s 14A read with Rule 80- 0.50% of Avg. Inv. 1 Listed Securities and Income is received 4,25,90.76910,24,180 2,12,954 2 Listed Securities and Income is NOT received 7,30,92,68603,65,463 3 Unlisted Securities and income is NOT received 12,96,56,85006,48,284 4 Securities earning taxable income 1,01,93,5103,0000 Total 25,55,33,814 10,27,180 12,26,7022 ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 11 It was the contention of the appellant before the learned A.O. that for computing average investments only those investments are to be considered on which income is received during the year. The reliance is placed on the decision of Delhi Special Bench in case of ACIT v Vireet Investment (P) Ltd (82 taxmann.com 415) wherein at para no 11.16 it is held that "Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that those investments are to be considered for computing average value of investment which yielded exempt income during the year. " Copy of the decision is enclosed at Paper book page No 46 2. Applicability of rule 8D : Further, during the assessment proceedings, the appellant company was asked as to why Rule 8D should not h e applied. Also, it was asked to produce working of disallowance under Rule 8D considering 1% of average of investments. The appellant filed the reply vide submission dated 20.09.2018 & 24.11.2018 We reiterate our stand taken before the learned A. O. We believe that, Rule 8D may not be applicable in our case as Rule 8D tends to give vague results at many occasions for e.g. disallowance as per rule 8D exceeds expenditure debited to P&L A/c. There is no matching principle between income & expenditure as the disallowance is based mainly on investment theory rather than income theory. The investment theory taken as base by rule 8D for working disallowance U/S.14A is not correct. Investments are mainly held for appreciation & dividend is just incidental benefit earned without incurring any expenses. Hence, rule 8D should not be strictly applied while working disallowance U/S. 14A. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 12 Rule 8D is not automatic in each and every case and the same is applied only if the disallowance made by the assessee is not reasonable based on facts of the case and nature of the business. Further relevant part of the submission is reproduced as below; "As Rule 8D was amended w.e.f. 02.06.2016, we are of the opinion that it will be applicable from Assessment Year 2017-18. We rely on the decision of the Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd. Vs Dy. Commissioner of Income Tax Range 10(2), [2010] 328 ITR 81 (Bombay) pronounced on 12.08.2010. Relevant portion of the para No 67 is reproduced below for your ready reference: .... The Rules were notified to come into force on 24-03-2008. It is a trite principle of that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently, rule 8D[which has been notified on 24.03.2008 would apply with effect from assessment year 2008-09. Relying on above, since amendment to Rule 8D have been notified on 02.06.2016, it would apply with effect from assessment year 2017-18. Also, the above view is confirmed by Hon. Supreme Court in case of CIT y. Essar Teleholdings Ltd [2018] 90 taxmann.com 2(SC). In its judgment, Hon. Court has observed as follows: “—49. It is relevant to note that impugned judgment in this appeal related on earlier judgment of Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) where the Division bench of the Bombay High could after elaborately considering the principles to determining the prospectively or retrospectivity of the amendment has concluded that Rule 8D is prospective in nature. Against the aforesaid judgment of the Bombay High Court dated 12.08.2010 an appeal was filed in this court which has been ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 13 decided by vide its judgment reported in Godrej and Boyce Mfg. Co. Ltd. (supra), this Court, while deciding the above appeal repelled the challenges raised by the assessee regarding vires of Section 14A. In para 36 of the judgment, this Court noticed that with regard to restrospectivity of provisions Revenue had filed appeal, hence the said question was not gone into the aforesaid appeal. In the above case, this Court specifically left the question of restrospectivity to be decided in other appeals filed by the Revenue. We thus have proceeded to decide the question of restrospectivity of Rule 8D in these appeals. 50. In vide of our opinion as expressed above, dismissal of the appeal by the Bombay High Court is fully sustainable. As held above, the Rule 8D is prospective in operation and could not have been applied to any assessment year prior to Assessment Year 2008-09." In view of above, we request that, the disallowance as computed Rs.25,10,743/- should not be considered while passing order U/s 143." 3. In para 5.8, learned A.O. , while referring the judgment of Hon. Bombay High Court that in case of Godrej & Boyce, has observed that Hon. High Court ruled that Rule 8D was applicable from A.Y. 2008-09 as it was notified on 24.03.2008 and due date for filing ITR for A.Y. 2007-08 was elapsed. It is humbly submitted that after referring to para 67 of the said decision (reproduced herein before), it is clear that any rule which is in existence on first day of April is applicable to that Assessment year. Whether period for filing ITR is elapsed or not is immaterial. In the present case, the amended Rule 8D was not in existence on 01 April 2016 and hence, the erstwhile rule was applicable to AY 2016-17. From the above, it is crystal clear that, amended Rule 8D is not at all applicable to Assessment Year 2016-17. Since, amended Rule ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 14 8D is not applicable to Assessment Year 2016-17, any addition made by applying this Rule needs to be deleted." 5.3. DECISION The observations of the AO, submissions of the appellant and the material on record have been considered.The AO disallowed the following amounts u/s 14A of the Act:\ 5.4 The AO disallowed the following amount u/s 14A of the Act: i) Expenses directly related to exempt income Rs.1,0,7971/- ii) Out of interest paid based upon average invest- ment and total investment Rs.7,85,950/- iii) 1% of average investment Rs.12,96,569/- Total Rs.21,90,490/- The AO also observed that the appellant has itself disallowed an amount of Rs.11,06,875/- therefore, the AO made further disallowance of Rs 10,83,615/-. 5.5 The submission of the appellant is that an appropriate amount has already been disallowed by the appellant itself so further disallowance should not be made. In this regard, it is relevant to refer to the decision of the Godrej Boyce Manufacturing Company Ltd 328 ITR 81, Hon'ble Bombay High Court held in para 43 as given below: "Prior to the enactment of section 14A, where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and non-taxable income, the expenditure incurred on earning non-taxable income could not be allowed as a deduction as against the taxable income. As a result of the enactment of section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Hence, even in the case of a composite and indivisible business, which results in the earning of taxable and non-taxable ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 15 income, it would be necessary to apportion the expenditure incurred by the assessee. Only that part of the expenditure, which is incurred in relation to income which forms part of the total income, can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed. From this, it would follow that section 14A has within it implicit notion of apportionment. The principle of apportionment which prior to the amendment of section 14A would not have applied to expenditure incurred in a composite and indivisible business which results in taxable and non-taxable income, must, after the enactment of the provisions, apply even to such a situation. The expression 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for." This observation clarifies that in case of composite and indivisible business having taxable and non-taxable income, expenditure like rent, taxes, salaries, interest etc are to be apportioned. Rule 8D(2)(iii) stipulates that 0.5% of average investment will be disallowed., The appellant has made investments in Mutual Funds & Bonds. The appellant has to do all sorts of activities, use employees to help him monitor various activities in such concerns, make phone calls, use computers for emails and has to do many more activities to keep his investment in Mutual Funds & Bonds safe and to got maximum return as per his ability. The appellant has not show that no resources were used for such activities. Further, such use cannot be ruled out as no one works in such water tight compartments. Under such circumstances, disallowance has to be made as per Rule 8D(2)(iii). 5.6 The appellant has also argued that the AO has disallowed 1% of average investment in place of 0.5% whereas the same would applicable from Assessment Year 2017-18 as the Rule 8D was amended w.e.f. 02.06.2016. However, as the Rule was amended w.e.f 02.06.2016, it would be applicable for the AY 2016-17 relevant for ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 16 the AY 2016-17. Therefore, the submission of the appellant is rejected. Accordingly, Grounds No 1, 2 & 3 of the appellant are DISMISSED.” 3. Suffice to say, learned counsel is fair enough in not challenging correctness of direct expenditure of Rs.1,07,971/-. The same stands upheld therefore. 4. Next comes proportionate interest expenditure disallowance component amount of Rs.7,85,950/- wherein the assessee appears to have been having non-interest bearing funds of Rs.39,35,44,380/- (page 9 in paper book) as against investments of Rs.23,12,74,991/-. We thus invoke the necessary presumption of the assessee having invested its interest free funds only in light of hon’ble apex court recent decision in South Indian Bank Ltd. Vs. CIT(2021) 130 taxmann.com 178 (SC). This second disallowance component of Rs.7,85,950/- stands deleted therefore. 5. We now advert to the administrative expenditure disallowance component of Rs.12,96,569/- taken by the lower authorities @1% of the average investments in the light of statutory amendment in rule 8D w.e.f 02.06.2017. Learned DR could hardly refer to any material that the foregoing computation formulae of 1% carries retrospective effect. The fact also remains that both the lower authorities have proceeded to include the assessee’s entire investments than only ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 17 those yielding exempt income in the relevant previous year. Faced with the situation, we quote ACIT vs. Vineet Investment Private Ltd., (2017) 165 ITD 27 (Del ) (SB) and ACB India Ltd. Vs. CIT [2014] 374 ITR 108 (Del) to direct the Assessing Officer to re- compute this last component of administrative expenses afresh as per law in very terms. Ordered accordingly. This former substantive grounds is partly accepted. 6. Next comes the latter issue of correctness of disallowance of Long Term Capital Loss amount of Rs.3,20,25,607/- on sale of listed shares. The senior counsel vehemently argued that both the lower authorities have erred in law and in facts in disallowing the assessee’s claim to this effect seeking to carry forward the same to subsequent assessment year(s). He has also taken pains to file a detailed written note summarizing all of the assessee’s arguments regarding the instant issue as follows: “5. Grounds 3 and 4 deal with the AO’s denial of carry forward of loss of Rs.3,20,75,607, winch has arisen on sale of shares of Orchid Chemicals & Pharmaceuticals Ltd., a transaction on winch securities transaction tax (‘STT’) was paid. In doing so, the AO has relied on the judgement of the Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. ACIT (2014) (367 ITR 261), and has disregarded an earlier judgement of the Calcutta High Court in the case of Royal Calcutta Turf Club vs. CIT (1983) (144 ITR 709), which was also not considered by the Gujarat High Court. The AO has also chosen to disregard series of decisions of the Tribunal ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 18 winch have considered the ratio of both the judgements of the High Courts and have come to the conclusion that an assessee is entitled to carry forward/set off loss arising out of a transaction on winch STT has been paid. 6. At the outset, it is submitted that carry forward of losses arising under the head Capital gains is dealt with by section 74 of the Act, which states that where the net result of the computation under the head ‘Capital gains’ is a loss to the assessee, the whole loss shall, subject to the other provisions of the section, be carried forward to the following assessment year and set off in accordance with the provisions of the section. It is submitted that there is nothing in section 74, which disentitles an assessee from carrying forward losses arising on the sale of shares on which STT has been paid. Had the intention of the Legislature been to not permit carry forward/ set off of such losses, the same could have been provided for in this section. Similarly, it was open to the Legislature to carve out an exception in the definition of the term ‘capital asset’ in section 2(14) to provide that those equity shares, the sale of which invites payment of STT, will not be considered capital assets. Likewise, the Legislature could have provided in section 47, that the transfer of equity shares on w 7 hich STT has been paid will not be considered as a ‘transfer’ for the purposes of section 45 of the Act. Had the Legislature adopted any of the above three scenarios, the same would have resulted in both, exemption of income and denial of set off/carry forward of losses. However that has not been done. The Legislature has, consciously, only exempted the gains arising on the transfer of shares under section 10(38), as it then stood. 7. It is worth appreciating that this conclusion is not only manifest from the clear language of the above provisions, but is also in line with the scheme of the Finance Act, 2004 and section 10(38) of the Act. The Finance Act, 2004 introduced both, the levy of STT and exemption of income on sale of shares on which STT was paid under section 10(38) of the Act. The memorandum ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 19 explaining the provisions of the Finance Bill, by which the aforesaid amendments were made reads as under- “Levy of Transaction tax and exemption/concession on capital gain arising from securities entered in a recognized stock exchange Under the existing provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities are charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities. Short-term capital gains arising from transfer of securities are taxed at the applicable rates. Long-term capital gains are taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer has an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the longterm capital gains and short-term capital gains are taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains are taxed as any other normal business income. With a view to simplify the tax regime on securities transactions, it is proposed to levy a tax at the rate of 0.13 per cent, on the value of all the transactions of purchase of securities that take place in a recognised stock exchange in India. This tax shall be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The provisions relating to the proposed tax are contained in Chapter VII of the Finance (No.2) Bill, 2004, and shall take effect from the date this Chapter comes into force. Further, it is proposed to insert clause (28) in section 10 of the Income-tax Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. It is also proposed to insert a new section 111A and amend section 115AD of the Income-tax Act, so as to provide that short-term capital gains arising from sale of such securities to an investor including FIIs shall be charged at the rate often per cent.” ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 20 8. It is apparent from the above that the simultaneous levy of STT and exemption of gains under section 10(38) was to simplify the collection of tax by the stock exchange instead of each seller having to pay capital gains tax at the time of sale. The Legislature in its wisdom provided that once STT was paid, an assessee should not be burdened with tax on capital gains once again. If the AO’s argument is accepted and carry forward of losses is denied, it would not only be in violation of the clear language of the Act but would also be in clear conflict with the above scheme. Such an interpretation would result in a double jeopardy in the hands of the seller, as it would have to first pay STT at 0.15 percent of the value of the transaction, and at the same time, not get the benefit of the loss suffered by it. Therefore, the AO’s interpretation of the provisions fails both, the test of literal interpretation as well as purposive interpretation. 9. It is submitted that there is a marked difference between keeping a source of income/loss outside the purview of the Act and exempting an income. Section 10(38) does not deal with the source of income at all, it only deals with income arising on the sale of shares. The only exclusion under this provision is that of income, as is borne out from the Memorandum. Since section 10(38) does not deal with the source of the transaction or with cases where the sale of shares results in a loss, the question of invoking this provision to deny carry forward of losses does not arise. This distinction between excluding an income and a source of income was first considered by the Calcutta High Court in the case of Royal Calcutta Turf Club vs. CIT (1983) (144 ITR 709), wherein the Court w 7 as seized of the question whether loss arising from the business of breeding of horses [the income of which would have been exempt u/s. 10(27)] of the Act w 7 as eligible for setting off against other business income of the assessee. Clause (27) of section 10, as it then stood, is reproduced hereinbelow. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 21 “(27) any income derived from a business of livestock breeding, or poultry or dairy farming;” 10. Having regard to the language of clause (27), the Court concluded that what is excluded is only the income and not the source of income itself. Therefore, the assessee w 7 as entitled to set off the losses arising from the business of livestock breeding against income from other sources. 11. In holding so, the Court relied on the judgement of the Supreme Court in the case of CIT vs. Karamchand Premchand Ltd. (i960) (40 ITR 106). In that case, the assessee, which held the managing agency of a company in British India also carried on a pharmaceutical business outside British India. During the relevant year, it earned profit in the managing agency business but incurred losses in the pharmaceutical business. The question w 7 as whether in ascertaining the business profits of the assessee for the purpose of the Business Profits Tax Act, 1947, the losses incurred outside British India w 7 ere to be reduced. The Supreme Court held that the third proviso to section 5 of the Business Profits Tax Act took out of the ambit of the Act merely 'income, profits or gains' of a business in an Indian State and did not exclude the business itself. Accordingly, the Supreme Court held that the loss suffered by the assessee in the pharmaceutical business carried on outside British India had to be deducted in computing the business income of the assessee for the purpose of the business profits tax. 12. The High Court also considered the department’s reliance on the judgement of the Supreme Court in the case of CIT vs. Harprasad & Co. (1975) (99 ITR118) and held that the Supreme Court had in fact held that “if the loss was from a source or head of income not liable to tax or congenitally exempt from income-tax, neither the assessee was required to show the same in the return, nor was the ITO under any obligation to compute or assess it much less for the purpose of 'carry forward'.” Accordingly, it was held that the judgement of the Supreme Court was given in view of the ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 22 facts that 'capital gains' were neither intrinsically nor congenitally of income character. 13. It is submitted that the judgement of the Gujarat High Court in the case of Kishorebhai (supra), on which the AO places reliance simply relied on Harprasad (supra) and decided the issue in the department’s favour. It neither considered the judgement of the Calcutta High Court in the case of Royal Calcutta Turf (supra), nor did it consider the judgement of the Supreme Court in the case of Karamchand (supra), which formed the basis of the Calcutta High Court’s judgement. 14. It is submitted that the two conflicting views between Calcutta High Court and Gujarat High Court have since been considered by the Tribunal in a series of decisions. The Mumbai Tribunal in the case of Raptakos Brett & Co. Ltd. vs. DCIT (2015) (69 SOT 383) considered both the decisions and followed Royal Calcutta Turf (supra) in view of the fact that the judgement in the case of Kishorebhai (supra) was based solely on the judgement of the Supreme Court in the case of Harprasad (supra), which was in a different context and such judgement in fact supported the assessee’s argument that only when the source of income is excluded, is a set off of loss to be denied. 15. The decision of the Mumbai Tribunal in the case of Raptakos (supra) has since been followed by the division benches of the Tribunal across the country, including by the Pune Bench in two decisions. Reference may be made to the following decisions which have followed the interpretation of Raptakos in considering the conflicting views taken in Royal Calcutta Turf (supra) and Kishorebhai (supra)-  ACIT vs. Shri Somnath Vaijanath Sakre (2019) (ITA 2986/Pun/16) (Pune)  ACIT vs. Gauri Avinash Bhosale (2019) (ITA 1303/Pun/17) (Pune) ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 23  Netesoft India Ltd. vs. DCIT (2019) (ITA 535/Mum/i7) (Mum)  Nomura India Investment Fund Mother Fund vs. ADIT (2019) (ITA 8140/M/10) (Mum)  United Investments vs. ACIT (2019) (ITA 511/K0I/2017) (Kol) 16. It is pertinent to note that the Kolkata Tribunal in the case of United Investments (supra) has additionally also taken note of the Circular issued by CBDT, being Circular no. 7/2013, in the context of section 10A, which also forms part of Chapter III, wherein the Board had held as under- If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set o ff in accordance with the provisions o f section 72 of the Act...” 17. The Tribunal, therefore, held that the Board has itself accepted the position that where an eligible business, the profits wherefrom would have been exempted under section 10A, incurs a loss, such a loss is eligible to be carried forward and set off. It is submitted that it is a settled position in law that the Circulars issued by the Board are binding on all its officers and such officers do not have the authority to argue contrary to the same. [KP Varghese vs. ITO (1981) (131 ITR 597 ) (SC), Ellerman Lines Ltd. vs. CIT (197D (82 ITR 913) (SC)]. 18. Furthermore, in the case of Nomura (supra), the Tribunal has also noted the fact that the Department’s appeal before the Bombay High Court in the case of Raptakos (supra) was dismissed on account of non-prosecution by the Department (ITA 357/2016) (Bom). In this regard, it is submitted that it is trite that where the department accepts a decision in one case and does not pursue it any further, then it cannot agitate the same issue in the case of a ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 24 different assessee without just cause. [Berger Paints India Ltd. vs. CIT (2004) (266 ITR 99) (SC)]. Not only did the department not pursue its appeal before the High Court in the case of Raptakos (supra), it has not challenged the decisions of the Tribunal in the cases of Somnath (supra), United Investments (supra) and Netesoft (supra). Therefore, having accepted the ratio of the Tribunal’s decisions in these three matters, the department cannot challenge the said ratio in the case of the assessee. 19. It is reiterated that the later judgement of the Gujarat High Court in the case of Kishorebhai (2014) (supra) has not considered the earlier judgement of the Calcutta High Court in the case of Royal Calcutta Turf (i9#3)(supra). In such circumstances, the courts have taken a view that the earlier judgement is to be followed since the later judgement is per incuriam having not considered the judgement of an earlier court of equal strength. Reliance in this regard is placed on the judgement of the Supreme Court in the case of Sundeep Kumar Bafna vs. State of Maharashtra (AIR 2014 SC 1745), wherein it was held as under- “If the third sentence of para 48 is discordant to Niranjan Singh, the view of the coordinate Bench of earlier vintage must prevail, and this discipline demands and constrains us also to adhere to Niranjan Singh...It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law, consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam any provision in a statute, rule or Regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Coequal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court... It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 25 We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam.” 20. In any event, the jurisdictional High Court in the case of ITO vs. Siemens Ltd. (1985) (156 ITR 11) (Bom) has held that where there are conflicting views by two non-jurisdictional High Courts, then the lower courts must adopt that view which is favourable to the assessee. The relevant portion of the judgement is extracted below- “Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is, but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him.” 21. In view of the aforesaid legal position, it is submitted that the assessee ought to be held to be eligible to carry forward losses of Rs. 3,20,75,607. Having submitted so, it may be pointed out that the Delhi Tribunal in the case of Nikhil Sawhney vs. CIT (119 taxmann.com 372) has, contrary to the aforesaid five decisions of the Tribunal followed the judgement of the Gujarat High Court in the case of Kishorebhai (supra) and decided the issue in the department’s favour. It is submitted that the Tribunal in Nikhil Sawhney (supra) has not considered the aforesaid principles that where a later judgement of a High Court does not consider the earlier judgement, then the earlier judgement is to be followed; and that where there are conflicting judgements of two non- jurisdictional High Courts, the judgement which decides the issue in the assessee’s favour is to be followed. 22. It is relevant to note that although Kishorebhai was dealing with a case of section 10(38), and Royal Calcutta Turf was dealing with a case of 10(27), it does not mean that Royal Calcutta is not a binding precedent for cases where question of losses arising on sale of transactions where STT has been paid comes up for consideration. This for the reason that the language of both the ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 26 provisions, for the purpose of the present analysis, is the same, i.e., both the clauses of section 10, exclude from the charge ‘any income’. At this juncture, it is apposite to bear in mind the well settled principle in law that what constitutes a binding precedent is the ‘ratio decidendi’ of a judgement. The words ‘ratio decidendi’ literally translate to ‘reasons for deciding’. Therefore, what is to be considered is the underlying principle which leads the court to decide the matter one way or another. To say that for a decision to constitute a binding precedent, it must have dealt with the very same clause of the very same section is against all canons of law and is too pedantic an approach. In this regard, reliance is placed on the following judgements, which elucidate the above principle-  B Shama Rao vs. Union Territory of Pondicherry (1967 AIR SC 1480) (SC) (Constitution Bench) “It is trite to say that a decision is binding not because o f its conclusion but in regard to its ratio and the principle laid down therein.”  Regional Manager & Anr. Vs. Pawan Kumar Dubey (1976 AIR 1766) (SC) “It is the rule deducible from the application of law to the facts and circumstances of a case which constitutes its ratio decidendi and not some conclusion based upon facts which mau appear to be similar.”  Municipal Corporation of Delhi vs. Gurnam Kaur (1989 AIR 38) (SC) “Quotability as 'law' applies to the principle of a case, its ratio decidendi. The only thing in a Judge's decision binding as an authority upon a subsequent Judge is the principle upon which the case was decided.” ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 27  Krishena Kumar and others vs. UOI (1990) (AIR SC 1782) 26. In other words, the enunciation o f the reason or principle upon which a question before a court has been decided is alone binding as a precedent. The ratio decidendi is the underlying principle, namely, the general reasons or the general grounds upon which the decision is based on the test or abstract from the specific peculiarities of the particular case which gives rise to the decision.  Mohd. Farhan A Shaikh vs. DCIT (2021) (434ITR1) (Bom) (Full Bench) “What is the Precedent? 124. Salmond defines a precedent as a judicial decision, "which contains in itself a principle. The underlying principle, which thus forms its authoritative element, is often termed the ratio decidendi." 23. Without prejudice to any of the above, it is submitted that the conflict between the ratio of the judgement in the case of Royal Calcutta (supra) and in the case of Kishorebhai (supra) has been considered in five decisions of the Tribunal mentioned hereinabove wherein it has been held that the assessee would be entitled to carry forward and set off the loss. Indisputably, the Delhi bench of the Tribunal in the case of Nikhil Sawhney (supra) has taken a contrary view. In view of the apparent conflict in interpreting the two High Court judgements by different benches of the Tribunal, the Bench may consider referring the matter to a Special Bench to resolve such conflict in a way which can henceforth be followed by the Tribunal in other cases. Reliance in this regard is placed on the following-  Engineers India (397 ITR 16) (2017) (SC) ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 28 “4. It is clear from the above that in the impugned jugment, the Bench has differed with the earlier view expressed by the Coordinate Bench. In the circumstances, the appropriate course of action was to refer the matter to the larger Bench and we fail to understand why it was not done.”  CIT vs. Goodlas Nerolac Paints Ltd. (1991) (188 ITR1) (Bom) “It is, therefore, desirable that in case a subsequent Bench of the Tribunal is of the view that the finding given by the Tribunal in an earlier year requires reappraisal either because the appreciation in its view was not quite correct or inequitable or some new facts have come to light justifying reappraisal or reappreciation of the evidence on record, it should have the matter placed before the President of the Tribunal so that the case can be referred to a larger Bench of the Tribunal for adjudication and for which there is a provision in the Act.”  Paras Laminates (1991 AIR 696)(l86 ITR 722) (1990) (SC) “It is true that a Bench of two members must not lightly disregard the decision of another Bench of the same Tribunal on an identical question. This is particularly true when the earlier decision is rendered by a larger Bench. The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. It is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to larger Bench. This is what was done by the Bench of two members who, in their ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 29 reasoned order, pointed out what they perceived to be an error of law in the earlier decision and stated the points for the President to make reference to a larger Bench.”  Sundarjas Kanyalal Bhatija v. Collector, Thane [1990] 183 ITR 130 (SC) “In a multi-Judge court, the Judges are bound by precedents procedure. They could use their discretion only when there is no declared principle to be found, no rule and no authority. Judicial decorum and legal propriety demand that where a Single Judge or a Division Bench does not agree with the decision of a Bench of co- ordinate jurisdiction, the matter may be referred to a larger Bench. It would be subversion of judicial process not to follow this procedure.” 7. The Revenue has placed strong reliance on the CIT(A)’s detailed discussion affirming the impugned disallowance as follows: “6.3 DECISION The observations of the AO, submissions of the appellant and the material on record have been considered 6.4 On this issue, it is seen that the appellant had declared a Long Term Capital Loss of Rs 3,20,75,607/- on sale of listed shares of Orchid Chemicals & Pharmaceuticals Ltd. The AO did not allow to carry forward such loss 6.5 To counter the action of the AO, the appellant has relied on the Hon. ITAT, Mumbai decision in case of Raptakos Brett & Co Ltd u. DCIT, Mumbai [2015] taxmann.com 115. Whereas the AO has relied upon the decision of Hon'ble Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani vs. Asst. CIT (2014) 367 ITR 261 (Guj). In this case, the facts were that for the assessment year 2006-07 the assessee had filed ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 30 the return of income declaring a total income of Rs. 8.67 lakhs (rounded off). The return of the assessee was taken under scrutiny. During the assessment, it was noticed that the assessee had sold the shares of one Suashish Diamond Ltd. and incurred capital loss of Rs. 1.44 crores (rounded off) during the year under consideration. During the same period, the assessee also earned long-term capital gain of Rs. 1.03 crores (rounded off) on sale of shares of one Karp Diamond Ltd. Such long-term capital gain was charged under section 45 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). In the return that the assessee fifed, it had claimed set off of the capital loss of Rs.1.44 crores against the capital gain of Rs. 1.03 crores. The Assessing Officer disputed such claim and after hearing the assessee disallowed the same holding that the loss from exempt source can neither be allowed as set off nor can be allowed to be carried fowvard and absorbed against income in subsequent years from the taxable source. On these facts the Hon'ble Gujrat High Court held as under: "7. The fact that the capital asset in question, namely, the shares of Suashish Diamond Ltd. was covered under section 10(38) of the Act was not. in dispute. That being the position, by virtue of section 10(38) of the Act, in computing the total income of the previous year, any income covered under such clause shall not be included. If that be so, the loss also arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration The contention of the learned counsel for the assessee that for the purpose of section 10(38) of the Act the term "income" would not include "loss", cannot be accepted and rightly rejected by the Tribunal. If this is the conclusion, it can immediately be seen that any loss in respect of any such capital asset would not be available for set off The Tribunal rightly ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 31 relied on the decision in the case of Harprasad & Co. (P.) Ltd. (supra) to come to a conclusion that the term "income" under section 10(38) of the Act would also include the loss. In the said decision, the apex court observed that the concept of carry forward of loss does not stand in vacuo. It involves the notion of set off It postulates permissibility and possibility of the carried forward loss being absorbed or set off against the profits and gains of the subsequent year. Set off implies that the tax is exigible and the assessee wants to adjust the loss against profit to reduce the tax demand. It was held that if such set off is not permissible or possible owing to the income or profits of the subsequent year being from a mm- taxuble source, there would be no point in allowing loss to be "carried forward". Conversely, if the loss arising in the previous year was under a head not chargeable to tux, it could not be allowed m be carried forward and absorbed against income in a subsequent year, from a taxable source." Thus, the Hon'ble High Court held that the loss under the head "Long Term Capital Gains" cannot be allowed to be carried forward. 6.6 It was brought to the notice of the appellant that High Court is a senior Authority than ITAT so decision of a High Court will prevail. The appellant was specifically asked to distinguish between Kishorebhai Bhikhabhai Virani and it's own case. However, the appellant could not distinguish Therefore, following the decision of the Hon'ble Gujrat High Court in the case of Kishorebhai Bhikhabhai Virani (Supra), the action of the Ao is confirmed. Ground No 4 of the appellant is DISMISSED.” 8. We have given our thoughtful consideration to the foregoing vehement rival submissions and find no merit in assessee’s stand. It ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 32 has come on record that honourable Gujarat high court’s decision(supra) case has already decided the very issue of section 10(38) income/loss against the assessee and in departments’s favour. It is further an admitted fact that their lordships have dealt with this specific issue of set of and carry forward of losses under section 10(38) whereas honourable Kolkata high court had examined losses which were sought to be covered under section 10(27) of the Act. We had rejected learned senior counsel’s arguments during the course of hearing itself in light of the foregoing legal position. 9. Mr.Pardiwala vehemently argued in tune with the assessee’s written submissions that for application of section 10(38) in facts and circumstances of this case, the assessee’s entire income ought to be exempt from Chapter-IV Part-E under the head “Capital Gains” u/s.45 of the Act. He also quoted Raptakos Brett Co. Ltd.(supra) drawing distinction to this effect in light of honourable Kolkata high court’s foregoing decision. Learned counsel further sought to raise the assessee’s prayer for constitution of a Special Bench u/s.255(3) of the Act as various co-ordinate benches have already distinguished Virani case (supra). 10. As these assessee’s arguments fail to evoke our concurrence. We observe at the cost of repetition that honourable Gujarat high ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 33 court has dealt with the specific issue of the concerned assessee having claimed set-of and carry forward of losses covered under section 10(38) of the Act. It goes without saying that the assessee’s case herein is also covered under sec 10(38) only. 11. There is yet another equally important aspect of the matter. Learned counsel is fair enough in rising to his seniority at the Bar whilst assisting us that it is section 74 of the Act which is applicable in such a case of carry forward of losses. A perusal thereof makes it clear that this provision starts with “the net result of the computation under the head ‘Capital Gain’ is a loss to the assessee”. When we come to section 45(1) of the Act dealing with capital gains, it reads “Any profits or gains arising from the transfer of capital asset”. There is no indication or supportive material which could indicate that the assessee’s corresponding capital asset(s) i.e. its shares held would be chargeable to capital gains u/s.45(1) since coming under the exemption provision i.e. section 10(38) of the Act. We thus quote stricter construction in light of CCE Vs. Dilip Kumar 1 LO (298) 9SCC 1 (SC) (FB) to conclude that once sec 45(1) is not applicable, sec 74 dealing with losses liable to be carried forward would not be attracted in isolation. So far as the assessee’s argument that we ought to constitute a Special Bench, the same would hardly serve any purpose once honourable Gujarat high court hereinabove has ITA No.380/PUN/2020 for A.Y. 2016-17 Poonawalla Shares & Securities Pvt. Ltd., Vs. ACIT, Circle-4, Pune (A) 34 settled the issue. The assessee’s instant latter substantive grounds stands rejected therefore. 12. No other ground or argument has been raised before us. 13. This assessee’s appeal is partly allowed in above terms. Necessary computation shall follow as per law. Order pronounced in the open Court on 29 th July, 2022. Sd/- Sd/- (DR. DIPAK P. RIPOTE (S.S.GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; ᳰदनांक / Dated : 29 th July, 2022/ SGR* आदेशकᳱᮧितिलिपअᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीयᮧितिनिध, आयकर अपीलीय अिधकरण, “बी” बᱶच, पुणे / DR, ITAT, “B” Bench, Pune. 6. गाडᭅफ़ाइल / Guard File. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.