EMERGING MARKETS GROWTHN FUND, INC., MUMBAI V. ADIT (IT)-1, MUMBAI

ITA 6857/MUM/2008

• Counselvise Citation: 685719914 RSA 2008
• Duration Of Justice: 2 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 25-04-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 01-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Assessee Lawyers: SANJIV M SHAH
• Keywords: Capital asset; Tax effect

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI, J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO.6857/MUM./2008 (ASSESSMENT YEAR : 2005-06 ) EMERGING MARKETS GROWTH FUND INC. C/O HSBC, 2 ND FLOOR, SHIV PLOT NO.139-140B, WESTERN EXPRESS HIGHWAY, SAHAR ROAD JUNCTION VILE PARLE-E, MUMBAI 400 057 PAN AAACE1943K .. APPELLANT V/S ASSTT. DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION-I SCINDIA HOUSE, N.M. ROAD MUMBAI 400 038 .... RESPONDENT ASSESSEE BY : MR. SANJIV M. SHAH REVENUE BY : MR. JITENDRA YADAV DATE OF HEARING 28.7.2011 DATE OF ORDER 12.8.2011 O R D E R PER J. SUDHAKAR REDDY, A.M. THIS APPEAL PREFERRED BY THE ASSESSEE, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 25 TH AUGUST 2008, PASSED BY THE COMMISSIONER (APPEALS)-XXXIII, MUMBAI, FOR ASSESSMENT YEAR 2005- 06. THE SOLE DISPUTE IN THIS APPEAL IS, WHETHER OR NOT THE LEARNED CIT(A) W AS JUSTIFIED IN HOLDING THAT THE SHORT TERM CAPITAL LOSS ARISING FROM SALE TRANS ACTIONS SUBJECT TO SECURITIES TRANSACTION TAX CANNOT BE SET-OFF AGAINST THE SHORT TERM CAPITAL GAINS ARISING FROM SALE TRANSACTION NOT SUBJECT TO SECURITIES TRA NSACTION TAX. EMERGING MARKETS GROWTH FUND INC. ITA NO.6857/M./2008 2 2. FACTS OF THIS CASE, AS BROUGHT OUT BY THE COMMISSIO NER (APPEALS) IN HIS APPELLATE ORDER, VIDE PARAS-2 AND 3, READ AS FOLLOW S:- 2. THE APPELLANT COMPANY IS A FOREIGN INSTITUTIONAL INVESTOR (FII) REGISTERED WITH THE SECURITIES AND EXCHANGE BOARD O F INDIA (SEBI). THE APPELLANT IS A TAX RESIDENT OF USA. THE APPELLA NT FILED ITS RETURN OF INCOME FOR A.Y. 2005-06 ON 25.10.2005, DECLARING TO TAL INCOME OF ` 879,31,91,020. DURING THE ACCOUNTING PERIOD, THE AP PELLANT HAS EARNED SHORT TERM CAPITAL GAINS AS WELL AS SHORT TE RM CAPITAL LOSSES AS MENTIONED BELOW:- PERIOD SHORT TERM CAPITAL GAINS SHORT TERM CAPITAL LOSS 01.04.2004 TO 30.09.2004 ` 74,61,24,533 ` 8,63,87,141 01.10.2004 TO 31.03.2005 ` 829,64,34,839 ` 18,92,09,865 TOTAL ` 904,25,59,372 ` 27,55,97,006 IN THE RETURN OF INCOME THE APPELLANT HAS WORKED OU T THE SHORT TERM CAPITAL GAINS AS FOLLOWS:- PERIOD 1.4.2004 30.9.204 TAX PAYABLE @ 30% 1.10.2004 TO 31.3.2005 TAX PAYABLE @ 10% SHORT TERM CAPITAL GAINS ` 74,61,24,533 ` 829,64,34,839 ` 8,63,87,141 LESS: SHORT TERM CAPITAL LOSS ` 18,92,09,865 0 TOTAL ` 47,05,27,527 ` 829,64,34,839 3. IN THE RETURN OF INCOME THE APPELLANT INSTEAD OF SETTING OFF THE SHORT TERM CAPITAL LOSS OF ` 18,92,09,865, WHICH AROSE AFTER 1.10.2004, WITH SHORT TERM CAPITAL GAINS OF ` 829,64,34,839 WHICH AROSE AFTER 1.10.2004, SET OFF THE ABOVE LOSS WITH THE SHORT TE RM CAPITAL GAINS OF ` 74,61,24,533 WHICH AROSE PRIOR TO 1.10.2004. THE AP PELLANT IS OF THE VIEW THAT THERE IS NO PROHIBITION FOR SET OFF OF LO SS OF SECOND PERIOD WITH THE GAINS OF THE 1 ST PERIOD (EVEN THOUGH THE TAXATION RATES ARE DIFFERENT) IN SEC. 70 OF THE ACT AND HENCE IT IS EN TITLED TO HAVE SUCH SET OFF. DURING THE SCRUTINY ASSESSMENT UNDER SECTION 1 43(3) THE A.O. HAS NOT ACCEPTED THE APPELLANTS CONTENTIONS FOR THE FO LLOWING REASONS:- (I) AS PROVIDED FOR UNDER CHAPTER-IV OF THE ACT, GR OSS TOTAL INCOME OF THE ASSESSEE HAS TO BE COMPUTED UNDER DIFFERENT HEADS OF INCOME, ONE OF WHICH IS INCOME FROM CAPITAL GAINS. SEC. 48 OF THE SAME CHAPTER PROVIDES FOR THE METHOD OF COMPUTATION OF CAPITAL G AIN INCOME. EMERGING MARKETS GROWTH FUND INC. ITA NO.6857/M./2008 3 COMPUTATION OF INCOME IS COMPUTING THE NET INCOME O F THE PARTICULAR TYPE FOR A PARTICULAR TIME PERIOD. (II) THE INCOME SO CALCULATED IS A NET COMPUTATION, COMPRISING IN IT THE GAINS AS WELL AS LOSSES DERIVED DURING THAT PER IOD. WHILE INCOME AND PROFITS AND GAINS REPRESENT PLUS INCOME LOSSE S REPRESENT MINUS INCOME CIT V/S KARAMCHAND PREMCHAND LTD. (1960) 40 ITR 106 (SC). IN CIT V/S HARPRASAD & CO. (P) LTD. (1975) 99 ITR 1 18, THE SUPREME COURT HELD THAT LOSS IS A NEGATIVE INCOME AND IN CA LCULATION OF TOTAL INCOME OF AN ASSESSEE BOTH NEGATIVE AND POSITIVE IN COMES SHOULD BE TAKEN INTO ACCOUNT. (III) BY VIRTUE OF THE PROVISIONS OF SECTION 111A A ND SEC. 115AD OF THE ACT, TWO DISTINCT TIME PERIODS OF (A) 01.04.2004 TO 30.09.2004; (B) 01.10.2004 TO 31. 03.2005 HAVE BEEN CREATED WITHIN THE P.Y. 2004-05 FOR THE C OMPUTATION OF NET INCOME FROM SHORT TERM CAPITAL GAINS, FOLLOWING THE INTRODUCTION OF SECURITIES TRANSACTION TAX EFFECTIVE FROM 01.10. 2004. HENCE, THE SHORT TERM CAPITAL GAIN INCOME HAS BEEN CATEGORIZED INTO TWO DISTINCT CLASSES DURING THE PREVIOUS YEAR 2004-05. THE SALE TRANSACTIONS IN SECURITIES MADE IN THE FIRST PERIOD IS VERY DIFFERE NT FROM THE SALE TRANSACTIONS IN SECURITIES MADE IN THE SECOND PERIO D BECAUSE THE LATTER HAS SUFFERED SECURITIES TRANSACTION TAX. HENCE, IN NATURE AND CHARACTER, THEY ARE ALTOGETHER IN DIFFERENT CATEGORIES. TWO DI FFERENT TAX RATES APPLY FOR THE STCG INCOME COMPUTED FOR THESE TWO TI ME PERIODS VIZ. 30% AND 10% RESPECTIVELY. SO, IF THE COMPUTATION OF NET INCOME FROM STCG FOR A TIME PERIOD IS POSITIVE INCOME, THEN IT WOULD BE TAXED AT THE PRESCRIBED TAX RATE. IF THE COMPUTATION RESULTS IN A NEGATIVE INCOME I.E., LOSS, THEN IT WOULD BE ELIGIBLE FOR SE T OFF AGAINST OTHER INCOME FOR THE P.Y. 2004-05, AS PER THE PROVISIONS OF LAW. (IV) DETERMINATION OF CAPITAL GAIN INCOME IS WITH R ESPECT TO EACH TRANSACTION OF A TRANSFER OF A CAPITAL ASSET. BUT C OMPUTATION OF CAPITAL GAIN INCOME IS WITH RESPECT TO ALL SUCH CAPITAL GAI N INCOME INCLUDING LOSSES ARISING DURING A PARTICULAR TIME PERIOD. HEN CE, IN A COMPUTATION OF CAPITAL GAIN INCOME FOR A GIVEN PERIOD, STRIPPIN G CAPITAL GAIN LOSS FROM CAPITAL GAIN INCOME IN NEITHER PROVIDED FOR IN LAW NOR IT IS IN CONFORMITY WITH THE GENERAL PRINCIPLES FOR COMPUTAT ION OF INCOME. COMPUTATION OF INCOME IS ALWAYS AN EXERCISE IN ARRI VING AT THE NET INCOME. THE POSITIVE INCOME REPRESENTED BY PROFITS AND THE NEGATIVE INCOME REPRESENTED BY LOSSES CANNOT BE TAKEN SEPARA TELY FOR DIFFERENTIAL TAX TREATMENT. PARTICULARS 1.4.2004 30.9.204 TAX PAYABLE @ 30% U/S 115AD 1.10.2004 TO 31.3.2005 TAX PAYABLE @ 10% U/S 111A SHORT TERM CAPITAL GAINS ` 74,61,24,533 ` 829,64,34,839 LESS: SHORT TERM CAPITAL LOSS ` 8,63,87,141 ` 18,92,09,865 SHORT TERM CAPITAL GAIN (NET) ` 65,97,37,392 ` 810,72,24,974 EMERGING MARKETS GROWTH FUND INC. ITA NO.6857/M./2008 4 3. ON APPEAL, THE COMMISSIONER (APPEALS) UPHELD THE OR DER OF THE ASSESSING OFFICER BY EMPHASIZING ON THE WORDS SIMILAR COMPUTATION MADE APPEARING IN SECTION 70(2) OF THE ACT. THE COMMISSI ONER (APPEALS) NOTICED THE CHANGE IN LAW BY WAY OF AMENDMENT TO SECTION 70 OF THE ACT AFTER 1 ST APRIL 2003, BY FINANCE ACT, 2002, AND ALSO THE CIRC ULAR EXPLAINING THE CHANGES AND CAME TO A CONCLUSION THAT THE REASONS G IVEN BY THE ASSESSING OFFICER SHOULD BE UPHELD. AGGRIEVED, THE ASSESSEE I S IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US, BOTH THE PARTIES MADE ELABORATE SUBMISSI ONS AND, FOR THE SAKE OF BREVITY, WE DO NOT WISH TO EXTRACT THESE SU BMISSIONS AS WE FIND THAT ON SIMILAR FACTS AND ON IDENTICAL FINDINGS OF THE F IRST APPELLATE AUTHORITY IN THE CASE OF FIRST TRADING INVESTMENT (HONG KONG) LTD. T HE F BENCH OF THE TRIBUNAL IN ITA NO.2985/MUM./2008, FOR ASSESSMENT Y EAR 2005-06, VIDE ORDER DATED 23 RD JULY 2009, REPORTED AS (2009) 33 SOT 26 (MUM.), HE LD AS FOLLOWS:- SEC. 70 OF THE ACT LOSSES SET-OFF OF FROM ONE S OURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER SAME HEAD OF INCOM E ASSESSMENT YEAR 2005-06 ASSESSEE ON SALE OF SHARES EARNED SH ORT TERM CAPITAL GAIN IT BIFURCATED SUCH SHORT TERM CAPITAL GAIN I NTO TWO PERIODS, I.E., UPTO 30.9.2004 IN WHICH TAX WAS CHARGEABLE AT RATE OF 30 PER CENT AND TRANSACTIONS WERE NOT CHARGEABLE TO SECURITIES TRAN SACTION TAX AND PERIOD POST 30.9.2004 IN WHICH CASE REDUCED RATE OF 10 PER CENT WAS APPLICABLE ON SHORT TERM CAPITAL GAIN WHERE TRANSAC TION WERE CHARGEABLE TO SECURITIES TRANSACTION TAX IN VIEW OF SEC. 115A AS AGAINST THIS, ASSESSEE HAD ALSO SUFFERED SHORT TERM CAPITAL LOSS OF ` 8.14 LAKHS UP TO 30.9.2004 AND ` 169.23 LAKHS IN POST 30.9.2004 PERIOD ASSESSEE CLAIMED THAT SHORT TERM CAPITAL G AIN IN LATER PERIOD BE ALLOWED TO BE SET-OFF AGAINST SHORT TERM CAPITAL GAIN OF FORMER PERIOD TO EXTENT OF EXCESS OF SHORT TERM CAPITAL GA IN OVER SHORT TERM CAPITAL LOSS UP TO CUT OFF DATED I.E, 30.9.2004 H OWEVER, REVENUE AUTHORITIES HELD THAT SHORT TERM CAPITAL LOSS SUFFE RED BY ASSESSEE IN PERIOD BEFORE CUT OFF DATE SHOULD BE SET-OFF AGAINS T SHORT TERM CAPITAL GAIN OF THAT PERIOD AND REMAINING AMOUNT BE TAXED A T RATE OF 30 PER CENT WHETHER IN VIEW OF PROVISION OF SECTION 70(2 ) ASSESSEE HAD A CHOICE IN TAKING DECISION ABOUT SETTING OFF OF SHOR T TERM CAPITAL LOSS FROM ONE TRANSACTION AGAINST ANY OTHER SHORT TERM C APITAL GAIN, WHETHER WITHIN OR OUTSIDE CUT-OFF DATE, I.E., 30.9. 2004 HELD, YES WHETHER, THEREFORE, ASSESSEE WAS JUSTIFIED IN SETTI NG OFF SHORT TERM CAPITAL LOSS OF LATER PERIOD AGAINST SHORT TERM CAP ITAL GAIN OF FORMER PERIOD TO EXTENT OF EXCESS OF SHORT TERM CAPITAL GA IN OVER SHORT TERM CAPITAL LOSS UPTO CUT-OFF DATE I.E., 30.9.2004 HE LD YES. EMERGING MARKETS GROWTH FUND INC. ITA NO.6857/M./2008 5 5. THIS DECISION WAS FOLLOWED BY A NUMBER OF OTHER BEN CHES OF THE TRIBUNAL, A LIST OF WHICH IS GIVEN BELOW:- FIDELITY INVESTMENT TRUST : FIDELITY OVERSEAS FUND V/S ADDL. DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, ITA NO.6055/ MUM./2008, VIDE ORDER DATED 18 TH AUGUST 2009; ADDL. DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATIO N V/S AMERICAN CENTURY TWENTIETH CENTURY INTERNATIONAL DI SCOVERY FUND, 2010-TII-142-ITAT-MUM-INTL, ORDER DATED 20 TH AUGUST 2010. ADDL. DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATIO N V/S M/S. RUSSELL INVESTMENT PLC EMERGING MARKETS EQUITY FUND , ITA NO.5052/MUM./2009, ORDER DATED 27 TH APRIL 2011. 6. FACTS OF THE PRESENT CASE BEING IDENTICAL, WE RESPE CTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH OF THE TRIBUNAL CITED SUPRA, WE UPHOLD THE ORDER OF THE COMMISSIONER (APPEALS) AND ALLOW THE G ROUND RAISED BY THE ASSESSEE. 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12.8.2011 SD/- V. DURGA RAO JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 12.8.2011 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), MUMBAI, CONCERNED; (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, L BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI