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Good News For Taxpayers: Share Loss = Gain!

Published on Wed, Jun 24,2015 | 22:40, Updated at Thu, Jun 25 at 18:10Source : CNBC-TV18 

On this audiocast, The Firm highlights a very interesting tax case. In a recent decision, the Mumbai Income Tax Appellate Tribunal allowed for long-term capital loss on the sale of shares to be offset against long-term capital gains on the sale of land. That's great news for taxpayers! But does this decision turn Supreme Court jurisprudence on its head? Will it sustain? Rajan Vora, Partner, EY is here to answer that question.



Raptakos Brett & Co Ltd (‘RBCL’ or ‘Taxpayer’), an Indian pharmaceutical company had incurred loss on sale of equity shares, which has been subject to securities transaction tax (STT) and also made some gain on sale of land.  The Taxpayer had set-off long term losses (‘LTCL’) on account of sale of STT paid share against the long-term capital gain (‘LTCG’) on sale of land by claiming that exemption under section 10(38) of the Indian Tax law ('ITL') provided specifically in respect of LTCG on sale of STT paid equity shares while LTCL does not come within purview of the said exemption.  In this regard, Reliance was placed on Calcutta High Court decision in the case of Royal Calcutta Turf Club (144 ITR 709).  The Tax Authority placing reliance on decision of Apex Court in case of Harisprasad & Company Pvt Limited (99 ITR 118) and decision of Gujarat High Court in case of Kishorebhai Bhikhabhai Virani applied the concept of income includes losses and contended that if the income from sale of STT paid shares doesn't form part of total income, the losses also should also not form part of the total income. Accordingly, LTCL on the sale of STT paid equity shares cannot be set-off against LTCG on the sale of land.  The First Appellate Authority (‘FAA’) confirmed the order of the Tax Authority.

On appeal by the Taxpayer, the Tribunal relying on decision of Calcutta High Court in case of Royal Calcutta Turf Club (supra) held that LTCL arising on STT paid equity shares, can be set off against LTCG arising on sale of land, in spite of the fact that the LTCG on sale of such shares is exempt under the provisions of Section 10(38) of the ITL. Further, the Tribunal ruled that the exemption is provided in respect of qualified shares, which are only a part of the entire source of capital gains, and not for the entire source. Furthermore, the concept of income including loss will apply only when the entire source of income is exempt under the ITL and not in the cases where only one particular stream of income falling within a source is exempt

Conclusion: This decision of the Tribunal is beneficial for taxpayers as it concludes that, where only a part/stream of source is exempt under the ITL, the loss in respect of such source may still be tax admissible. Taxpayers may wish to evaluate if this ruling could assist them to support claims for set off in respect of LTCL pertaining to transactions in listed securities, while gain is exempt by virtue of the tax provisions.


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