Question And Answer
Subject: Can I claim set-off of long term capital loss incurred on sale of listed securities against taxable income?
Category:  Income Tax
Asked by: Ravindra Khurana
Answered by:
Tags: ,
Date: September 1, 2019
Query asked by Ravindra Khurana

I have deployed surplus funds by way of investments in listed shares & securities. During the relevant year I sold holdings in different listed companies and derived long term capital gain of Rs.77,330/- and incurred long term capital loss of Rs.6,05,425/-. The AO noted that the aggregate long term capital gain of Rs.77,330/- derived on sale of listed shares fulfilled the conditions prescribed in Section 10(38) and therefore held it to be exempt from income-tax. With regard to claim of long term capital loss of Rs.6,04,425/-; he held that since the gain derived from sale of long term listed shares is exempt then any loss incurred there from was to be ignored. He accordingly denied the claim for carry forward of long term capital loss of Rs.6,04,425/-u/s 74 of the Act. Is the AO right in his decision?

Answer given by

The AO is not right in his decision in treating the long term capital loss incurred on sale of listed shares on the same footing as that of long term capital gain and thereby denying the carry forward of long term capital loss since long term capital gain was exempt u/s 10(38) of the Act.

What is contemplated in section 10(38) is exemption of positive income and losses will not come within the purview of the said section.

The Legislature has not put any embargo to exclude Long term capital loss from sale of shares to be set off against Long term capital gain arising on account of sale of other capital asset.

In CIT Vs J.H. Gotla (156 ITR 323) the Supreme Court held that the expression ‘income’ shall include loss because the loss is nothing but negative income.

However, this judgement does not apply to capital gains.

The judicial concept that the term ‘income’ includes loss can be applied only when the entire source of such income falls within the charging provisions of the Act.

Accordingly in a case where the source of income is otherwise chargeable to tax but only a specific specie of income derived from such source is granted exemption, then in such case the proposition that the term ‘income’ includes loss will not be applicable.

It is only when the source which produces ‘income’ is outside the ambit of taxing provisions of the Act, in such case alone the ‘income’ including negative income can be said to be outside the ambit of taxing provisions and therefore the negative income is also required to be ignored for taxation purposes.

As a corollary therefore where only one of the streams of income from the ‘source’ is granted exemption by the Legislature upon fulfillment of specified conditions, then the concept of ‘income’ includes ‘loss’ will not apply.

The ‘source’ of long term capital gain i.e. long term capital asset being equity shares is not completely outside the charging provisions.

No exception has been made with regard to long-term capital gain/loss arising on sale of equity shares and it is liable to income-tax like any other item of capital asset. Therefore it cannot be said that the source viz., transfer of long term capital asset being equity shares by itself is exempt from tax so as to say that any ‘income’ from such source shall include ‘loss’ as well.



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