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Business News/ Opinion / Still need clarity on treatment of capital loss from share sale
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Still need clarity on treatment of capital loss from share sale

Till recently, the general view was that such a loss, being from an exempt category of income, was not to be considered for set off against taxable capital gains

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

If equity shares are sold on a stock exchange, the income by way of long-term capital gains arising on such sale are exempt from income tax, since securities transaction tax (STT) is paid on the sale. What if there is a long-term capital loss on such a sale? Does the term “income" include a loss? Can a loss, therefore, be treated as a negative income? Is such a loss also exempt and, therefore, to be ignored in the computation of taxable income, or can such loss be set off against taxable capital gains?

Till recently, the general view was that such a loss, being from an exempt category of income, was not to be considered for set off against taxable capital gains. However, in an interesting recent decision, the Mumbai bench of the Income Tax Appellate Tribunal has taken a view that such long-term capital loss on sale of equity shares on the stock market is not an exempt income and can be set off against taxable capital gains on sale of other assets.

In the case before the tribunal, a company had sold immovable property and earned long-term capital gains from the sale. It also had long-term capital losses on sale of equity shares and on sale of mutual fund units. It claimed a set-off of such losses against the gains from sale of property. However, the tax authorities took the view that such a set-off was not permissible, since the loss on sale of equity shares and mutual fund units was exempt.

The tribunal noted that shares and units were capital assets, and that gains arising from their sale were normally chargeable to tax. It also noted that transfer of long-term shares and units was not an exempt transfer, and that capital gains on transfer of these was to be computed in the same manner as for other capital assets. Further, it said that there was no exemption for long-term capital gains on sale of shares and units under the provisions for set off of losses from one source of income against another source of income.

The tribunal drew a distinction between a source of income, which was itself exempt, and a type of income under a particular source, which was exempt. If the entire source was exempt, then the profit or loss resulting from such source did not enter into the computation of taxable income at all. But if a part of the source was exempt on account of a particular provision of the law providing a benefit to a taxpayer, then the source did enter the computation of taxable income.

Therefore, according to the tribunal, capital gain on transfer of shares was a source that was primarily taxable under the law.

The tribunal was of the view that the exemption for income of long-term capital gains on transfer of shares and units was a conditional one, since the two requirements of the sale being subject to STT and of the sale being transacted after 1 October 2004, had to be complied with. Thus, the exemption was only partially applicable to the source of capital gains on sale of shares and units. The entire source of income of capital gains on their sale was, therefore, not an exempt source.

The tribunal held that the term “income" would include a loss only in a situation where the entire source of income was exempt. Since such source of capital gains on sale of shares and units was not an exempt source, the term “income" would not include a loss under this source, and hence only capital gains (and not capital losses) would be exempt.

Since the computation of income on sale of shares and units was a capital loss, which was not exempt, the tribunal permitted set-off of such capital loss against the capital gains on sale of immovable property.

This decision considered a situation where the net computation of long-term capital gains on sale of shares or units, subject to STT, was a loss. Can one also apply the logic of this decision to a situation where a taxpayer has long-term capital gains on sale of shares or mutual fund units and also has long-term capital losses on sale of other shares or units, all of which have been transacted on the stock exchange, and subjected to STT? Can the taxpayer claim that the long-term capital gains is exempt from tax, while the long-term capital loss can be set off against other taxable capital gains? Or, can she claim exemption for the gains, and carry forward the capital loss if she has no other taxable capital gains? This does seem a little more difficult, given the fact that both the gains and the losses fall under the same source of income, and therefore normally have to be set off against each other.

Before choosing to follow the rationale of this decision, one must keep in mind that this is a decision of the tribunal. Given the stakes involved, it is highly likely that this decision will be challenged by the tax authorities in further appeals to the High Court and/or Supreme Court. Therefore, one can rely on this decision to claim the benefit of set off of such long-term capital losses only if one is willing to face the potential litigation and its associated costs and uncertainties. But most of us will have to await the decisions of the higher courts to get final clarity on the issue.

Gautam Nayak is a chartered accountant.

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Published: 24 Jun 2015, 04:49 PM IST
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