VEMF-A.LP, MUMBAI V. DCIT (IT) 4(3)(1), MUMBAI

ITA 6727/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1277 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 17-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B S BIST
• Assessee Lawyers: ARVIND SONDE
• Keywords: Transactions in derivatives
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 6727/MUM/2016 ASSESSMENT YEAR: 2012-13 VEMF A, LP VS. DCIT (IT) 4(3)(1) BMR HOUSE, 36B, 16 TH FLOOR, R. NO. 1611 DR. R.K. SHIRODKAR MARG, AIR INDIA BLDG., NARIM AN POINT PAREL, MUMBAI 400012 MUMBAI - 400021 PAN NO. AAAAV4854G (APPELLANT) (RESPONDENT) ASSESSEE BY : MR. ARVIND SONDE, AR REVENUE BY: MR. B.S. BIST, DR DATE OF HEARING : 05/0 4/2017 DATE OF PRONOUNCEMENT: 10/04/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2012-13. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 58, MUMBAI AND ARISES OUT OF ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: THE LEARNED CIT(A) ERRED IN UPHOLDING THE ORDER OF THE AO AND IN DISPOSING THE APPEAL OF THE APPELLANT ON THE FOL LOWING GROUNDS : I. IN DENYING THE APPELLANT THE ABILITY TO OFFSET SHOR T-TERM CAPITAL LOSSES (STCLS) FIRST TOWARDS SHORT-TERM CAPITAL GAINS ( STCGS) GENERATED FROM TRANSACTIONS IN DERIVATIVES AND THEN SUBSEQUEN TLY TOWARDS STCGS ITA NO. 6727/MUM/2016 2 FROM SALE OF EQUITY SHARES WHICH WERE SUBJECT TO SE CURITIES TRANSACTION TAX (STT). II. IN ADOPTING A MECHANISM TO OFFSET STCLS, WHICH IS N OT IN ACCORDANCE WITH THE RIGHTS OF THE APPELLANT AND CONTRARY TO TH E LEARNED CIT(A)S OWN COMMENTS IN THE ORDER. III. IN HOLDING THAT THE PROVISIONS OF SECTIONS 70 AND 7 1 OF THE ACT HAVE NO ROLE TO PLAY IN DETERMINING COMPUTATION OF TAX DUE ON STCGS UNDER SECTION 115AD OF THE ACT. IV. IN FAILING TO RECOGNISE THAT COMPUTATION OF INCOME AND COMPUTATION OF TAX ARE LINKED AND ONLY ONCE COMPUTATION OF INCOME IS COMPLETED CAN TAX BE COMPUTED AND HENCE IN ORDER TO DETERMINE THE TAX DUE UNDER SECTION 115AD, IT IS IMPERATIVE THAT THE QUANTUM OF INCOME TO WHICH TAX APPLIES HAS TO BE DETERMINED AFTER APPLYING SEC TIONS 70 AND 71 OF THE ACT. V. IN HOLDING THAT WHILE THERE IS NO DISTINCTION BETWE EN STCLS FROM DIFFERENT SOURCES, STILL PROCEEDING TO DIFFERENTIAT E BETWEEN STCLS ON WHICH STT HAS BEEN PAID AND OTHER STCLS. VI. IN NOT ADJUDICATING THE GROUND NO 4 RAISED BY THE A PPELLANT THAT SURCHARGE ON INCOME-TAX WAS INAPPLICABLE IN THE APP ELLANTS CASE FOR A.Y. 2012-13. 3. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE A.Y. 2012-13 REPORTING TOTAL INCOME OF RS. 7,24,36,816/-. DURING THE YEAR, THE ASSESSEE HAD EA RNED SHORT TERM CAPITAL GAINS (STCG) OF RS. 3,45,80,444/- FROM SALE OF SHARES WHICH WERE SUBJECT TO STT TAXABLE AT 15%. THE ASSESSEE HA D SUFFERED LOSSES OF RS. 1,44,23,525/- FROM SIMILAR TRANSACTIONS. THE ASSESSEE HAD ALSO EARNED STCG OF RS. 14,15,08,175/- FROM TRANSACTIONS IN DERIVATIVES WHICH ARE TAXABLE AT 30%. THE ASSESSEE HAD INCURRED LOSSES ON SIMILAR TRANSACTIONS AT RS. 8,92,28,278/-. IT HAS C OMPUTED ITS TOTAL LOSS AT RS. 10,36,51,803/-. WHILE COMPUTING ITS TAXABLE INCOME, THE ASSESSEE HAD FIRST SET OFF ALL ITS LOSSES FROM THE STCG OF RS. 14,15,08,175/- FROM TRANSACTIONS IN DERIVATIVES. IT HAS A TAXABLE ITA NO. 6727/MUM/2016 3 INCOME OF RS. 7,24,36,816/- COMPRISING OF RS. 3,45, 80,444/- FROM SALE OF EQUITY SHARES WHICH ARE SUBJECT TO STT AND RS. 3 ,78,56,372/- FROM TRANSACTIONS IN DERIVATIVES. 3.1 THE ASSESSING OFFICER (AO) ACCEPTED THE TOTAL I NCOME OF THE ASSESSEE OF RS. 7,24,36,816/- AS DISCLOSED IN ITS R ETURN OF INCOME. THE AO HAS SET OFF SHORT TERM CAPITAL LOSS (STCL) OF RS . 14,423,525/- ARISING ON SALE OF SHARES ON WHICH STT HAS BEEN PAI D (WHICH ARE TAXABLE @ 15%) AGAINST THE STCG OF RS. 34,580,444/- ARISING ON SALE OF SHARES ON WHICH STT HAS BEEN PAID, RESULTING IN NET STCG OF RS. 20,156,919/-. FURTHER THE AO HAS SET OFF STCL OF RS . 89,228,278/- ARISING FROM TRANSACTIONS IN DERIVATIVES (WHICH ARE TAXABLE @ 30%) AGAINST THE STCG OF RS. 141,508,175/- ARISING ON TR ANSACTIONS IN DERIVATIVES RESULTING IN NET STCG OF RS. 52,279,897 /-. 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE LEARNED CIT(A). WE FIND THAT THE LEARNED CIT(A) HAS HELD THAT THE COMPUTATION OF TAX HAS TO BE DONE IN ACCOR DANCE WITH SECTION 115AD, WHILE THE GROSS TOTAL INCOME IS TO BE DECIDE D IN ACCORDANCE WITH OTHER PROVISIONS OF THE ACT. THIS SECTION CLEA RLY DIVIDES THE TOTAL STCG RECEIVED BY THE ASSESSEE INTO TWO PORTIONS I.E . ONE WHEREIN SECTION 111A IS APPLICABLE AND ANOTHER WHERE SECTIO N 111A IS NOT APPLICABLE. THE TAX IN RESPECT OF THE AMOUNTS COVER ED BY SECTION 115AD R.W.S. 111A WILL HAVE TO BE COMPUTED SEPARATE LY WHILE TAX IN RESPECT OF THE REMAINING AMOUNTS HAS TO BE COMPUTED SEPARATELY. THIS COMPUTATION HAS NOTHING TO DO WITH SECTION 70 / 71 AS RELIED ON BY THE ASSESSEE. THE LEARNED CIT(A) HELD THAT IT IS INCORRECT TO INTRODUCE THE RATIO OF SETTING OFF AS CONTEMPLATED U/S 70 / 71 WHILE COMPUTING TAX U/S 115AD WHEREIN NO SUCH MANDATE HAS BEEN GIVEN. ITA NO. 6727/MUM/2016 4 THEREFORE, THE LEARNED CIT(A) UPHELD THE ACTION OF THE AO AND DISMISSED THE APPEAL FILED BY THE ASSESSEE. 5. BEFORE US, LEARNED COUNSEL OF THE ASSESSEE RELIE S ON THE DECISION IN THE CASE OF FIRST STATE INVESTMENTS (HONKONG) LTD. VS. ADIT (2009) (132 TTJ 218); FIDELITY INVESTMENT TRUST FIDELITY OVERSEAS FUND VS . ADIT (2010) (36 SOT 22) (ITAT MUM); DDIT VS. DWS INDIA EQUITY LTD. (2010) (ITA NO 5055/MUM/2010) (AT MUM) (UNREPORT ED); CAPITAL INTERNATIONAL EMERGING MARKETS FUND VS. DDI T (2013) (145 ITD 491) AND CIT VS. RUNGAMATEE TREXIM (P) LTD . (2008) (ITA NO 812 OF 208) (CALCUTTA HIGH COURT) (UNREPORTED). 6. ON THE OTHER HAND, THE LEARNED DR RELIES ON THE ORDER OF THE LEARNED CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE BEGIN WITH THE DECISIONS CIT ED BEFORE US. IN FIRST STATE INVESTMENTS (HONKONG) LTD. (SUPRA) , THE ASSESSEE EARNED STCG ON SALE OF SHARES IN THE A.Y. 2005-06. IT BIFU RCATED SUCH STCG INTO TWO PERIODS I.E. UPTO 30.09.2004 (IN WHICH TAX WAS CHARGEABLE @ 30% AND TRANSACTIONS WERE NOT CHARGEABLE TO STT) AN D PERIOD POST 30.09.2004 (IN WHICH CASE THE REDUCED RATE OF 10% W AS APPLICABLE ON STCG WHERE TRANSACTIONS WERE CHARGEABLE TO STT IN V IEW OF SECTION 115A). AS AGAINST THIS, THE ASSESSEE HAD ALSO SUFFE RED STCL OF RS. 8.14 LACS UPTO 30.09.2004 AND RS. 169.23 LACS IN POST 30 .09.2004 PERIOD. THE ASSESSEE CLAIMED THAT STCL IN LATER PERIOD BE A LLOWED TO BE SET OFF AGAINST STCG OF FORMER PERIOD TO THE EXTENT OF EXCESS OF STCG OVER STCL UPTO CUT OFF DATE I.E. 30.09.2004. HOWEVER, RE VENUE AUTHORITIES HELD THAT STCL SUFFERED BY THE ASSESSEE IN THE PERI OD BEFORE CUT OFF DATE SHOULD BE SET OFF AGAINST STCG OF THAT PERIOD AND REMAINING AMOUNT BE TAXED @ 30%. THE TRIBUNAL HELD THAT (I) I N VIEW OF ITA NO. 6727/MUM/2016 5 PROVISION OF SECTION 70(2), THE ASSESSEE HAD A CHOI CE IN TAKING DECISION ABOUT SETTING OFF OF STCL FROM ONE TRANSAC TION AGAINST ANY OTHER STCG, WHETHER WITHIN OR OUTSIDE THE CUT OFF D ATE I.E. 30.09.2004 AND (II) THE ASSESSEE WAS JUSTIFIED IN SETTING OFF STCL OF LATER PERIOD AGAINST STCG OF FORMER PERIOD TO THE EXTENT OF EXCE SS STCG OVER STCL UPTO CUT OFF DATE I.E. 30.09.2004. THE ABOVE ORDER HAS BEEN FOLLOWED BY THE CO-ORDINA TE BENCH IN FIDELITY INVESTMENT TRUST FIDELITY OVERSEAS FUND (S UPRA) AND DWS INDIA EQUITY LTD. (SUPRA) . THE DECISION IN DWS INDIA EQUITY LTD. HAS BEEN FOLLOWED IN CAPITAL INTERNATIONAL EMERGING MARKETS FUND (SUPRA) . IN RUNGAMATEE TREXIM (P) LTD. (SUPRA) , HON'BLE CALCUTTA HIGH COURT HELD AS UNDER: ON PERUSAL OF THE PROVISION OF SECTION 70, I FIND THAT THERE IS NO PROHIBITION NOR THE ACT COMPELS THE ASSESSEE TO FIR ST SET OFF SHORT TERM CAPITAL GAIN WITH STT AGAINST SHORT TERM CAPITAL LO SS WITH STT AND THEN ALLOWS SET OFF AGAINST SHORT TERM CAPITAL GAIN WITH OUT STT. IN ABSENCE OF ANY SPECIFIC MODE OF SET OFF PROVIDED IN THE ACT AN D IN ABSENCE OF ANY PROHIBITION AND IN ABSENCE OF ANY SPECIFIC CHRONOLO GY FOR SET OFF PRESCRIBED IN THE ACT, THE ASSESSEE WAS ENTITLED TO EXERCISE HIS OPTION WITH REGARD TO THE CHRONOLOGY OF SET OFF WHICH WAS MOST BENEFICIAL TO THE ASSESSEE. IT IS SETTLED PROPOSITION OF LAW THAT WHEN A PROVISION OF THE ACT GIVES OPTION TO THE ASSESSEE, SUCH OPTION SHOUL D BE EXERCISED WHICH WILL FAVOUR THE ASSESSEE AND NOT THE REVENUE. 8. TO SUM UP, UNDER THE PROVISIONS OF SECTION 70(2) , STCL ARISING FROM ANY ASSET CAN BE SET OFF AGAINST STCG ARISING FROM ANY OTHER ASSET UNDER A SIMILAR COMPUTATION MADE. MERELY BECA USE THE TWO SET OF TRANSACTIONS ARE LIABLE FOR DIFFERENT RATE OF TA X, IT CANNOT BE SAID THAT INCOME FROM THESE TRANSACTIONS DOES NOT ARISE FROM SIMILAR COMPUTATION MADE AS COMPUTATION IN BOTH THE CASES H AS TO BE MADE IN SIMILAR MANNER UNDER THE SAME PROVISIONS. THEREF ORE, STCL ARISING ITA NO. 6727/MUM/2016 6 FROM STT PAID TRANSACTIONS CAN BE SET OFF AGAINST S TCG ARISING FROM NON-STT TRANSACTIONS. 9. AS THE FACTS ARE SIMILAR, WE FOLLOW THE DECISION S ENUMERATED AT PARA 7 HERE-IN-ABOVE AND ALLOW THE APPEAL FILED BY THE ASSESSEE. ORDER PRONOUNCED IN THE OPEN COURT ON 10/04/2017 SD/- SD/- (MAHAVIR SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI: DATED: 10/04/2017 BISWAJIT, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI