DCIT CIR 3(3), MUMBAI v. SILVASSA HYDROCARBONS & INVESTMENTS P. LTD, MUMBAI

ITA 2199/MUM/2009 | 2006-2007
Pronouncement Date: 29-03-2010 | Result: Dismissed

Appeal Details

RSA Number 219919914 RSA 2009
Bench Mumbai
Appeal Number ITA 2199/MUM/2009
Duration Of Justice 11 month(s) 21 day(s)
Appellant DCIT CIR 3(3), MUMBAI
Respondent SILVASSA HYDROCARBONS & INVESTMENTS P. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted I
Tribunal Order Date 29-03-2010
Date Of Final Hearing 04-03-2010
Next Hearing Date 04-03-2010
Assessment Year 2006-2007
Appeal Filed On 08-04-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH MUMBAI. BEFORE S/SHRI S.V.MEHROTRA AM & V. DURGA RAO JM I.T.A. NO. 2199/MUM/2009 ASSESSMENT YEAR: 2006-07 THE DCIT CIRCLE 3(3) V. SILVASSA HYDROCARBONS & INVST. AAYAKAR BHAVAN M.K. ROAD P. LTD. 3 RD FLOOR MAKER CHAMBERS- MUMBAI. IV 222 NARIMAN POINT MUMBAI . PA NO.AAACR 2654 J (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NARENDRA SINGH RESPONDENT BY : MS AMISHA GANDHI O R D E R PER S.V.MEHROTRA AM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 9.2.2009 OF LD CIT (A)-III MUMBAI FOR THE ASSESSMENT YEAR 2006-0 7. 2. GROUND OF APPEAL RAISED BY THE REVENUE READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD CIT (A) HAS ERRED IN TREATING THE LONG TERM CAPITAL GAI N AS EXEMPT U/S.10(38) AND DIRECTED THE AO NOT TO SET OFF THE SAME AGAINST LONG TERM CAPITAL LOSS U/S.28. 3. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IN THE RELEVANT ASSESSMENT YEAR WAS ENGAGED IN THE BUSINESS OF INVESTMENT. IT HAD FILE D ITS RETURN OF INCOME DECLARING TOTAL INCOME AT RS.19 04 759/- COMPUTED UNDER NORMAL PROV ISIONS OF INCOME TAX ACT 1961 AND BOOK PROFIT OF RS.76 90 373/- COMPUTED UNDER SECTIO N 115JB OF THE I.T.ACT. DURING THE YEAR THE ASSESSEE COMPANY HAD CLAIMED THE LONG TER M CAPITAL GAINS OF RS.176 81 04 738/- AS EXEMPT INCOME U/S.10(38) OF THE I.T.ACT. FURTHE R THE ASSESSEE HAD CLAIMED LONG TERM CAPITAL LOSS OF RS.3 75 62 243/- WHICH WAS CARRIED FORWARD TO THE NEXT ASSESSMENT YEAR. 2 SINCE THE LONG TERM CAPITAL GAINS WAS NOT SET OFF A GAINST THE LONG TERM CAPITAL LOSS THE AO REQUIRED THE ASSESSEE TO EXPLAIN AS WHY THE LONG TE RM CAPITAL LOSS ARISING OUT OF SALE OF PREFERENCES SHARES SHOULD NOT BE SET OFF AGAINST LO NG TERM CAPITAL GAINS. BEFORE THE AO IT WAS SUBMITTED THAT THE LONG TERM CAPITAL LOSS ARISI NG ON SALE OF UNLISTED PREFERENCE SHARES CANNOT NOT BE ADJUSTED AGAINST LONG TERM CAPITAL GA IN EXEMPT U/S.10(38) ARISING ON SALE OF LISTED SHARES ON WHICH SECURITY TRANSACTION TAX HAD BEEN PAID. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION AND HELD THAT THE LONG TERM C APITAL LOSS WAS REQUIRED TO BE ADJUSTED AGAINST THE EXEMPT LONG TERM CAPITAL GAINS AND THE BALANCE LONG TERM CAPITAL GAINS IF ANY WAS TO BE ALLOWED AS EXEMPT INCOME. 4. ON APPEAL LD CIT (A) FOLLOWING HIS DECISION IN THE CASE OF RELIANCE POLYOLEFINS P.LTD FOR A.Y. 2006-07 IN APPEAL NO.CIT(A)-III/3(3) /IT-37/08-09 ORDER DATED 19.11.2008 DIRECTED THE AO NOT TO SET OFF LONG TERM CAPITAL LOSS U/S.48 AGAINST LONG TERM CAPITAL GAIN EXEMPT U/S.10(38) OF THE ACT. LONG TER M CAPITAL LOSS WAS DIRECTED TO BE ALLOWED TO BE CARRIED FORWARD. AGGRIEVED THE REVE NUE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING LD COUNSEL FOR THE ASSES SEE FILED BEFORE US A COPY OF DECISION OF THE ITAT IN THE CASE OF G.K.RAMAMURTHY V. JCIT (ITA NO.1367/M/2009) FOR A.Y. 2005-06 AND CONTENDED THAT THIS ISSUE IS COVER ED IN FAVOUR OF THE ASSESSEE BY THE SAID DECISION. 6. LD D.R. SUBMITTED THAT FOR ALLOWING THE APPEAL O F THE ASSESSEE LD CIT (A) HAS FOLLOWED HIS DECISION IN THE CASE OF RELIANCE POLYO LEFINS P. LTD. (SUPRA). THE APPEAL AGAINST THE DECISION OF LD CIT (A) IN THE SAID CASE IS PENDING BEFORE THE TRIBUNAL. THEREFORE THE MATTER MAY BE KEPT IN ABEYANCE TILL THE DISPOSAL OF THE APPEAL IN THE CASE OF RELIANCE POLYOLEFINS (P)LTD (SUPRA). 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REC ORD OF THE CASE. ALTHOUGH THE APPEAL IN THE CASE OF RELIANCE POLYOLEFINS P.LTD (S UPRA) IS PENDING FOR DISPOSAL WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF G.K.RAMAMURTHY (SUPRA) WHEREIN ON IDENTICAL FACTS THE TRIBUNAL OBSERVED AS UNDER: 3 5. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE DECISIONS CI TED. SOME ADMITTED FACTS OF THE CASE ARE THAT THERE WAS LONG TERM CAPITAL GA IN OF RS. 33 01 57 200/- ON SALE OF CERTAIN SHARES BETWEEN THE PERIOD 01.10.200 4 TO 31.03.2005 IN RESPECT OF WHICH SECURITY TRANSACTION TAX (STT) WA S PAID AND THE SAME WAS EXEMPTED U/S 10 (38) OF THE ACT. THE ASSESSEE WAS A LSO HAVING LONG TERM CAPITAL LOSS IN RESPECT OF REDEMPTION OF UNITS AND OTHER LOSS PERTAINING TO THE PERIOD PRIOR TO 01.10.2004 AMOUNTING TO RS. 9 23 55 945/-. THE ASSESSEE CLAIMED CARRY FORWARD OF LONG TERM CAPITAL LOSSES O F RS. 9 23 55 945/- TO THE SUBSEQUENT YEARS. THERE IS NO DISPUTE THAT THE CAP ITAL GAIN IN QUESTION WAS EXEMPT U/S 10(38) OF THE ACT. THERE IS ALSO NO DISP UTE THAT THE CAPITAL LOSS ON SALE OF SHARES WHICH WAS CLAIMED BY THE ASSESSEE TO BE CARRIED FORWARD FOR SET OFF IN SUBSEQUENT ASSESSMENT YEAR WERE INCU RRED PRIOR TO 01.10.2004 WHEN SECTION 10(38) WAS NOT IN EXISTENCE. THE CASE OF THE REVENUE IS THAT SUCH LOSS IS ADJUSTABLE AGAINST THE LONG TERM CAPIT AL GAINS WHICH WERE UNDER THE SAME HEAD THOUGH THE SAME WAS EXEMPT U/S 10(38) OF THE ACT. 5.1 WE SHALL NOW EXAMINE THE SCHEME OF THE ACT TO FIND OUT IF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER CHAPTER-III OF THE ACT ENTERS THE COMPUTATION OF TOTAL INCOME. SEC. 4 OF T HE ACT CREATES CHARGE OF INCOME-TAX AND IT PROVIDES THAT WHERE ANY CENTRAL A CT ENACTS THAT INCOME TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES INCOME-TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR TH AT YEAR IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS (INCLUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF THIS ACT IN RESPECT OF THE TOTAL INC OME OF THE PREVIOUS YEAR OF EVERY PERSON. THE CHARGE OF TAX IS THUS ON TOTAL IN COME. SEC. 2 (45) DEFINES TOTAL INCOME TO MEAN TOTAL AMOUNT OF INCOME REFERRE D TO IN SEC.5 COMPUTED IN THE MANNER LAID DOWN IN THIS ACT. CHAPTER-II OF THE ACT FROM SECTION 4 TO 9 DEAL WITH BASIS OF CHARGE. CHAPTER-III OF THE ACT DEALS WITH INCOME WHICH DO NOT FORM PART OF TOTAL INCOME AND ARE CONTAINED IN SECT. 10 TO 13-B OF THE ACT. CHAPTER IV DEALS WITH THE COMPUTATION OF TOTAL INCOME. FIRSTLY INCOME IS CATEGORIZED UNDER VARIOUS HEADS OF INCOME. THIS IS LAID DOWN IN SECTION 14 OF THE ACT WHICH LAYS DOWN THAT SAVE AS OTHERWI SE PROVIDED BY THIS ACT ALL INCOME SHALL FOR THE PURPOSES OF CHARGE OF INC OME-TAX AND COMPUTATION OF TOTAL INCOME BE CLASSIFIED UNDER THE FOLLOWING HEADS OF INCOME SALARIES INCOME FROM HOUSE PROPERTY PROFITS AND G AINS OF BUSINESS OR PROFESSION CAPITAL GAINS INCOME FROM OTHER SOURCE S. CHAPTER V THEN BRINGS INCOME OF OTHER PERSONS WHICH ARE TO BE INCLUDED I N THE TOTAL INCOME OF AN ASSESSEE AND THIS IS CONTAINED IN SECTION 60 TO 65 OF THE ACT. CHAPTER-VI (CONTAINING SEC. 66 TO 80) THEN LAYS DOWN PROVISION S REGARDING AGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSS. SEC TION 60 READS AS UNDER:- TOTAL INCOME IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE THERE SHALL BE INCLUDED ALL INCOME ON WHICH NO INCOME-TAX IS PAYAB LE UNDER CHAPTER VII. 5.2 THE PROVISIONS OF SECTION 66 ARE NOT APPLICABLE TO INCOMES WHICH ARE ABSOLUTELY EXEMPT FROM TAX AS PER SECTION 10 SECTI ON 11 ETC. FALLING UNDER CHAPTER III. THIS POSITION IS MADE CLEAR BY S. 66 I TSELF AS IT SPEAKS ONLY OF INCOMES ON WHICH TAX IS NOT PAYABLE AND SIMILAR WOR DS ARE USED IN CHAPTER VII ONLY THUS LEAVING OUT BY IMPLICATION INCOMES WH ICH DO NOT FORM PART OF TOTAL INCOME AT ALL AS PER CHAPTER III FROM THE SCO PE OF S. 66 IN CIT VS. 4 N.M. RAIJI [1949] 17 ITR 180 (BOM) THE QUESTION FO R CONSIDERATION BEFORE THE HONBLE BOMBAY HIGH COURT WAS AS TO WHETHER SHA RE INCOME OF A PARTNER WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAS TO BE ADDED TO THE TOTAL INCOME IN ORDER TO DETERMINE THE RATE AT WHICH INCO ME TAX WAS PAYABLE BY THE PARTNER. SEC. 16 OF THE INCOME TAX ACT 1922 CO RRESPONDING TO SEC. 66 OF THE INCOME TAX ACT 1961 WAS SUBJECT MATTER UNDER C ONSIDERATION IN THE AFORESAID DECISION. THE HONBLE BOMBAY HIGH COURT H ELD AS FOLLOWS:- 2. NOW THE SCHEME OF THE INDIAN IT ACT IS THAT INCO ME PROFITS AND GAINS OF AN ASSESSEE ARE LIABLE TO TAX SUBJECT TO CERTAIN EX EMPTIONS AND EXCEPTIONS. ALTHOUGH CERTAIN SUMS MAY BE EXEMPTED FROM TAXATION STILL THEY MAY FORM PART OF THE TOTAL INCOME OF AN ASSESSEE IN ORDER TO DETERMINE THE RATE AT WHICH INCOME-TAX IS PAYABLE. THEREFORE IT FOLLOWS T HAT THE TOTAL INCOME OF AN ASSESSEE IS NOT NECESSARILY WHOLLY SUBJECT TO TAX. PORTIONS OF IT MAY BE EXEMPT FROM TAXATION AND YET MAY BE COMPUTED FOR TH E PURPOSE OF DETERMINING THE RATE AT WHICH TAX IS PAYABLE .TOTAL INCOME IS DEFINED IN S. 2(15) OF THE ACT AND IT MEANS TOTAL AMOUNT OF INCOME PROFITS AND GAINS COMPUTED IN THE MANNER LAID DOWN IN THIS ACT. THEREFORE IT WOULD BE ERRON EOUS TO SUGGEST THAT TOTAL INCOME IS TO BE DETERMINED ONLY IN THE L IGHT OF S. 4 SUB- SECTION (3) OF THE ACT. HOW TOTAL INCOME IS TO BE COMPUTED AND DETERMINED DEPENDS UPON THE VARIOUS PROVISIONS CONT AINED IN THE ACT AS A WHOLE. THEN WE MIGHT LOOK AT VARIOUS SECTIONS WHICH PROVIDE FOR EXEMPTIONS FROM THE PAYMENT OF TAX. THERE IS S. 7 W HICH CONTAINS VARIOUS PROVISOS WHICH COVER SUMS NOT LIABLE TO TAX . SIMILARLY S. 8. SECTION 14 ALSO CONTAINS EXEMPTIONS WITH REGARD TO CERTAIN SUMS ON WHICH NO TAX IS PAYABLE AND S. 15 CONTAINS EXEMPTI ONS IN CASES OF LIFE INSURANCE. IT WILL BE NOTICED THAT THE LANGUAG E USED IN ALL THESE SECTIONS TO WHICH I HAVE REFERRED IS SIMILAR IF N OT IDENTICAL WITH THE LANGUAGE USED IN S. 25(4) VIZ. THAT THE TAX IS NO T PAYABLE ON THESE DIFFERENT SUMS. NOW IF MR. JOSHIS CONTENTION WAS SOUND THEN WITH REGARD TO THESE VARIOUS EXEMPTIONS WHICH I HAVE ENU MERATED ALTHOUGH TAX IS NOT PAYABLE THEY SHOULD ALL BE INC LUDED IN THE TOTAL INCOME FOR THE PURPOSE OF DETERMINING THE RATE PAYA BLE IN RESPECT OF INCOME-TAX. NOW THE SHORT AND CONCLUSIVE ANSWER TO THAT CONTENTION IS S. 16 OF THE INDIAN IT ACT. IT IS THAT SECTION W HICH IN TERMS INCLUDES IN THE TOTAL INCOME OF AN ASSESSEE ONLY CERTAIN SUM S WHICH ARE EXEMPTED FROM THE PAYMENT OF TAX. THEREFORE BY IMP LICATION WHERE THE SUMS ARE NOT INCLUDED IN THE TOTAL INCOME BY S. 16 THOSE SUMS ARE NOT ONLY EXEMPTED FROM THE PAYMENT OF TAX BUT THEY ARE ALSO EXCLUDED FROM THE TOTAL INCOME. NOW WHEN WE LOOK AT S. 16 IT DOES NOT INCLUDE THE SUM COVERED BY S. 25(4) AS A SUM WHICH IS TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. THE SCHEME THEREFORE OF THE IT ACT IS CLEAR AND IS VERY DIFFERENT FROM WHAT MR. JOSHI SUG GESTS IT IS. THE SCHEME IS THAT WHEREVER ONE FINDS AN EXEMPTION OR EXCLUSION FROM PAYMENT OF TAX THE EXEMPTION OR EXCLUSION ALSO OP ERATES FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME. NOT ONLY IS THE SUM NOT LIABLE TO TAX BUT IT IS ALSO NOT TO FORM PART OF THE TOTA L INCOME FOR THE PURPOSE OF DETERMINING THE RATE. WHEN THE LEGISLATU RE INTENDS THAT CERTAIN SUMS ALTHOUGH NOT LIABLE TO TAX SHOULD BE INCLUDED IN THE TOTAL INCOME IT EXPRESSLY SO PROVIDES AS IT IS DO NE IN S. 16 AND 5 THEREFORE PRIMA FACIE WHEN WE COME TO S. 25(4) AND WHEN WE FIND THAT THE ASSESSEE IS NOT LIABLE TO PAY TAX ON THE SUM RE CEIVED BY HIM AS HIS SHARE IF THE PARTNERSHIP THAT SUM CANNOT AND DOES NOT FORM PART OF HIS TOTAL INCOME. MR. JOSHI HAS NOT SUCCEEDED IN PO INTING OUT TO US ANY PROVISIONS IN THE ACT WHEREBY THIS PARTICULAR S UM COVERED BY S. 25(4) HAS BEEN MADE A PART OF THE TOTAL INCOME OF T HE ASSESSEE. THEREFORE IN MY OPINION THE SHARE OF THE PROFIT O F THE ASSESSEE IN THE FIRM S.B. BILLIMORIA & CO. IN THE ACCOUNTING YEAR 1943 CANNOT BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE FOR AS CERTAINING THE RATE OF INCOME-TAX. 5.3 IT IS THUS CLEAR FROM THE SCHEME OF THE ACT TH AT INCOMES WHICH DO NOT FORM PART OF THE TOTAL INCOME AS LAID DOWN IN CHAPT ER-III OF THE ACT DO NOT ENTER THE COMPUTATION OF TOTAL INCOME AT ALL. 5.4 NOW WE SHALL EXAMINE THE PROVISIONS WITH REGARD TO CLAIM OF CARRY FORWARD AND SET OFF. THE ASSESSEE IN THE PRESENT CA SE HAS CLAIMED CARRY FORWARD OF LONG TERM CAPITAL LOSS. SUCH CLAIM HAS T O BE TESTED IN TERMS OF SEC. 74 OF THE ACT WHICH CONFERS SUCH RIGHT ON THE ASSESSEE. THE RELEVANT PORTION OF SEC. 74 OF THE ACT READS AS FOLLOWS: LOSSES UNDER THE HEAD CAPITAL GAINS-(1) WHERE IN RESPECT OF ANY ASSESSMENT YEAR THE NET RESULT OF THE COMPUTATION UNDER THE HEAD CAPITAL GAINS IS A LOSS TO THE ASSESSEE THE WHOLE LOSS SH ALL SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER BE CARRIED FORWARD TO T HE FOLLOWING ASSESSMENT YEAR THE SECTION SAYS SUBJECT TO OTHER PROVISIONS OF TH IS CHAPTER I.E. CHAPTER VI CONTAINING SEC.66 TO 80. THE OTHER PROVISIONS WHICH WILL BE RELEVANT IN THIS REGARD ARE SEC.70(3) SECTION 70: SET OFF OF LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THE SAME HEAD OF INCOME. ..(3) WHERE THE RESULT OF THE COMPUTATION MADE FOR ANY ASSESSMENT YEAR UNDER SECTIONS 48 TO 55 IN RESPECT OF ANY CAPITAL A SSET {OTHER THAN A SHORT- TERM CAPITAL ASSET) IS A LOSS THE ASSESSEE SHALL B E ENTITLED TO HAVE THE AMOUNT OF SUCH LOSS SET OFF AGAINST THE INCOME IF ANY AS ARRIVED AT UNDER A SIMILAR COMPUTATION MADE FOR THE ASSESSMENT YEAR IN RESPECT OF ANY OTHER CAPITAL ASSET NOT BEING A SHORT-TERM CAPITAL ASSET 5.5 THE CASE OF THE REVENUE IS THAT THE LONG TERM C APITAL GAIN WHICH WAS EXEMPT U/S 10(38) OF THE ACT IS INCOME ARRIVED AT UNDER SIMILAR COMPUTATION MADE AS THE LONG TERM CAPITAL LOSS WAS ARRIVED AT A ND THEREFORE THE LONG TERM CAPITAL LOSS HAS TO BE SET OFF AGAINST LONG TERM CA PITAL GAIN. IN OTHER WORDS THE CASE OF THE REVENUE IS THAT THE LONG TERM CAPIT AL GAIN IS INCOME NOTWITHSTANDING THE FACT THAT IT IS EXEMPT U/S (38) OF THE ACT. THIS REASONING IN OUR VIEW IS FALLACIOUS. WE HAVE ALREADY POINTED OUT THAT INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME DO NOT ENTER THE COMPUTATION OF TOTAL INCOME AT ALL I.E. UNDER ANY OF THE HEADS OF INCOM E MENTIONED IN SEC. 14 OF THE ACT. THEREFORE THE QUESTION OF AGGREGATING THEM UNDER CHAPTER VI AT ALL DOES NOT ARISE. THEREFORE THE QUESTION OF SET OFF O F THE SAME UNDER SEC. 70(3) OF THE ACT ALSO DOES NOT ARISE FOR CONSIDERATION. T HEREFORE THE RIGHT OF CARRY 6 FORWARD U/S 74(1) OF THE ACT IN RESPECT OF THE LONG TERM CAPITAL LOSS SUFFERED BY THE ASSESSEE IS NOT HIT BY THE PROVISIONS OF SEC . 70(3) OF THE ACT. 5.6 IN RAMJILAL RAIS VS. CIT 58 ITR 181 (ALL.) AND IDENTICAL STAND WAS TAKEN BY THE ASSESSEE. THE FACTS IN THE AFORESAID C ASE WERE THE ASSESSEE HUF SUFFERED LOSS IN BUSINESS DURING THE BROKEN PER IOD WHEN THE HUF BUSINESS ON PARTITION PASSED HANDS TO A PARTNERSHIP BUSINESS. THE INCOME FOR THE BROKEN PERIOD WAS INCOME WHICH DID NOT FROM PAR T OF THE TOTAL INCOME. THE ASSESSEE CLAIMED THAT IT WAS ENTITLED TO SET OF F THE LOSS FROM THE BUSINESS AGAINST THE INCOME UNDER OTHER HEADS. THIS CLAIM WA S REJECTED BY THE ITO AND HE DID NOT SET OFF THE LOSS AGAINST THE INCOME UNDER OTHER HEADS. THE AAC HOWEVER ON APPEAL HELD IN FAVOUR OF THE ASSE SSE BUT THE TRIBUNAL REVERSED THE FINDING OF THE AAC AND RESTORED THAT O F THE ITO. THE QUESTION BEFORE THE COURT WAS AS TO WHETHER THE LOSS SUFFERE D IN THE BUSINESS DURING THE BROKEN PERIOD CAN BE SET OFF AGAINST INCOME UN DER OTHER HEADS. THE HONBLE ALLAHABAD HIGH COURT HELD AS FOLLOWS: .WE ARE OF OPINION THAT THE SET OFF CANNOT BE AL LOWED. 3. THE INDIAN IT ACT 1922 EXPRESSLY EXEMPTS CERTA IN ITEMS OF CLASSES OF INCOME FROM ITS OPERATION. SUCH INCOME IS NOT LIABL E TO BE CONSIDERED FOR THE PURPOSES OF THE ACT AT ALL UNLESS SOME OTHER PROVI SION OF THE ACT BRINGS IT WITHIN ITS SCOPE FOR SOME SPECIFIC PURPOSE. THE ACT CONTAINED FROM TIME TO TIME VARIOUS PROVISIONS WHICH PROVIDED FOR EXEMPTIO N. THERE WERE THE PROVISOS TO S. 7 BEFORE IT WAS AMENDED IN 1955. THE RE ARE THE PROVISOS TO S. 8. SEC. 14 SETS OUT A NUMBER OF EXEMPTIONS OF GENER AL NATURE. SEC.15 15A 15B AND 15C SIMILARLY PROVIDE FOR EXEMPTION. ALTHOU GH THE LANGUAGE GENERALLY EMPLOYED IS THAT THE THE TAX SHALL NOT B E PAYABLE IN RESPECT OF SUCH SUMS THE ACTUAL LANGUAGE EMPLOYED IS IMMATERI AL. WHAT IS TO BE ASCERTAINED IS WHETHER THE LANGUAGE CLEARLY INTENDS AN EXEMPTION FROM THE OPERATION OF THE ACT. NOW THE SEVERAL SUMS COVERED BY THESE PROVISIONS WOULD LIE OUTSIDE THE SCOPE OF THE ACT ALTOGETHER WERE IT NOT THAT CERTAIN PROVISIONS OF THE ACT EXPRESSLY INCLUDE THEM WITHIN ITS SCOPE FOR A CERTAIN PURPOSE. ONE SUCH PROVISION IS S. 16(1)(A) WHICH DE CLARES THAT IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE ANY SUMS EXEMPTED U NDER SOME OF THE PROVISIONS MENTIONED ABOVE SHALL BE INCLUDED. THESE SUMS ARE INCLUDED IN THE TOTAL INCOME FOR THE PURPOSE OF DETERMINING THE TRUE RATE APPLICABLE TO THE RATE APPLICABLE TO THE TAXABLE INCOME OF THE AS SESSEE. THE SUM EXEMPTED UNDER S. 25(4) IS NOT REFERRED TO IN S. 16(1) AND I S NOT LIABLE TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. IT IS EXEMPT A LTOGETHER FROM THE OPERATION OF THE ACT. THE BOMBAY HIGH COURT TOOK TH IS VIEW IN CIT VS. N.M. RAIJI (1949) 17 ITR 180 (BOM) AND WE ARE IN RESPEC TFUL AGREEMENT WITH THAT DECISION. 4. THE ASSESSEE POINTS OUT THAT BEFORE ITS AMENDMEN T BY THE IT(AMENDMENT) ACT 1939 THE DEFINITION OF TOTAL I NCOME WAS: TOTAL INCOME MEANS TOTAL AMOUNT OF INCOME PROFITS AND GAINS FROM ALL SOURCES TO WHICH THIS ACT APPLIES COMPUTED IN T HE MANNER LAID DOWN IN S. 16. AS A RESULT OF THE AMENDMENT ACT OF 1939 THE PRESE NT DEFINITION OF TOTAL INCOME IS: 7 TOTAL AMOUNT OF INCOME PROFITS AND GAINS REFERRED TO IN SUB-S. (1) OF S. 4 COMPUTED IN THE MANNER LAID DOWN IN THIS AC T. 5. IT IS CONTENDED THAT THE AMENDMENT EXTENDED THE SCOPE OF THE DEFINITION OF TOTAL INCOME SO THAT IT COVERED NOT ONLY THE SUMS SPECIFICALLY REFERRED TO IN S. 16 BUT ALSO THOSE S UMS MENTIONED OTHER PROVISIONS OF THE ACT IN RESPECT OF WHICH IT WAS DE CLARED THAT NO TAX WAS PAYABLE. IT APPEARS TO US THAT THE CONTENTION I S STATED RATHER WIDELY. IT IS NOT EVERY SUM DECLARED BY THE ACT TO BE EXEMPT WHICH IS LIABLE TO E INCLUDED IN THE TOTAL INCOME. IT IS ONL Y THOSE SUMS WHICH THE ACT SPECIFICALLY REQUIRES TO BE SO INCLUDED. TO OUR MIND THE AMENDMENT OF THE DEFINITION OF TOTAL INCOME DOES NOT ELIMINATE THE DISTINCTION BETWEEN THE TWO CATEGORIES OF EXEMPTED SUMS THOSE WHICH ARE EXEMPT FROM CHARGE AS WELL AS FROM INCLUSION IN THE TOTAL INCOME AND THOSE WHICH ARE EXEMPT FROM CHARGE BUT ARE LIA BLE LE TO BE INCLUDED IN THE TOTAL INCOME. NOTHING HAS BEEN SHOW N TO US TO TAKE US TO THE CONCLUSION CONTENDED FOR BY THE ASSESSEE. 6. IF AS IT SEEMS TO US THE INCOME OF THE BROKEN PERIOD IS EXEMPT ALTOGETHER FROM THE OPERATION OF THE IT ACT THEN T HERE IS NO BASIS FOR APPLYING THE PROVISIONS OF S. 24(1) TO THAT SUM. IF THE ASSESSEE HAS EARNED A PROFIT DURING THE BROKEN PERIOD IT IS NOT LIABLE TO BE CONSIDERED FOR ANY PURPOSE IN RESPECT OF THE ASSESS MENT YEAR TO WHICH THE BROKEN PERIOD RELATES. 5.7. ONE MORE ANGLE OF EXAMINATION OF MAT TER IS TO SEE THE PURPOSE AND INTENTION OF INSERTION OF CLAUSE (38) OF THE SE CTION 10 OF THE ACT OF THE LEGISLATURE. BEFORE INSERTION OF CLAUSE (38) OF THE SECTION 10 OF THE ACT THE EXISTING PROVISIONS OF THE INCOME-TAX ACT PROFITS AND GAINS ARISING TO AN INVESTOR FROM THE TRANSFER OF SECURITIES WERE CHARG ED TO TAX EITHER AS LONG TERM CAPITAL GAINS OR SHORT TERM CAPITAL GAINS DEPE NDING ON THE PERIOD OF HOLDING OF THE SAID SECURITIES. SHORT-TERM CAPITAL GAINS ARISING FROM TRANSFER OF SECURITIES ARE TAXED AT THE APPLICABLE RATES. LO NG TERM CAPITAL GAINS ARE TAXED AT 20% AFTER ADJUSTING FOR INFLATION BY INDE XING THE COST OF ACQUISITION. FOR LISTED SECURITIES THE TAXPAYER HA S AN OPTION TO PAY TAX ON LONG-TERM CAPITAL GAINS AT 10% BUT WITHOUT INDEXATI ON. FOR FOREIGN INSTITUTIONAL INVESTORS (FIIS) THE LONG TERM CAPIT AL GAINS AND SHORT TERM CAPITAL GAINS ARE TAXED AT THE RATE OF 10% (WITHOUT INDEXATION) AND 30% RESPECTIVELY. IN CASE OF A TRADER IN SECURITIES HO WEVER THE GAINS ARE TAXED AS ANY OTHER NORMAL BUSINESS INCOME. WITH A VIEW TO SI MPLIFY THE TAX REGIME ON SECURITIES TRANSACTIONS; IT WAS PROPOSED TO LEVY A TAX AT THE RATE OF 0.15 PER CENT ON THE VALUE OF ALL THE TRANSACTIONS OF PURCHA SE OF SECURITIES THAT TAKE PLACE IN A RECOGNIZED STOCK EXCHANGE IN INDIA. THIS TAX WAS TO BE COLLECTED BY THE STOCK EXCHANGE FROM THE PURCHASER OF SUCH SE CURITIES AND PAID TO THE EXCHEQUER. THE ABOVE PROVISIONS RELATING TO THE PRO POSED TAX WERE CONTAINED IN CHAPTER VII OF THE FINANCE (NO.2) BILL 2004 AN D TOOK EFFECT FROM 01.10.04 FURTHER IT WAS PROPOSED TO INSERT CLAUSE (38) IN SECTION 10 OF THE INCOME TAX ACT SO AS TO PROVIDE EXEMPTION FROM LON G TERM CAPITAL GAINS ARISING OUT OF SECURITIES SOLD ON THE STOCK EXCHANG E. THUS SECTION 10(38) HAS 8 BEEN INSERTED WITH A PARTICULAR OBJECT TO GRANT EXE MPTION TO SUCH INCOME AS TAX HAS ALREADY BEEN LEVIED ON SOME DIFFERENT FOOTI NGS. IF WE ACCEPT THE CONTENTION OF THE REVENUE TO ADJUST LONG TERM CAPIT AL LOSS AGAINST EXEMPT INCOME (LONG TERM CAPITAL GAIN) THAT WILL BE CONTRA RY TO LAW AND CONTRARY TO THE INTENTION OBJECT AND PURPOSE OF THE LEGISLATUR E IN INTRODUCING CLAUSE (38) TO SECTION 10 OF THE ACT. FURTHER ON ACCEPTANCE OF REVENUES VIEW ON THE ISSUE THERE IS ABSURD OUTCOME OF INTERPRETATION IF THE FACTS ARE REVERSED THEN LONG TERM CAPITAL LOSS FROM TAXABLE ASSETS WI LL HAVE TO BE ADJUSTED AGAINST THE LONG TERM CAPITAL GAINS EXEMPT U/S 10(3 8) OF THE ACT. SUPPOSE IN THE CASE ON HAND IF THERE IS TAXABLE LONG TERM CAPI TAL GAIN BEFORE 01.10.2004 OF RS. 33 01 57 200/- AND LONG TERM CAPITAL LOSS OF RS. 9 23 55 945/- WHICH MAY BE EXEMPT U/S 10(38) AFTER 01.010.2004 THEN THE LOSS FROM EXEMPT SOURCE WOULD BE SET OFF AGAINST TAXABLE GAIN SUCH SET OFF IS CONTRARY TO LAW. 5.8. IN THE LIGHT OF THE ABOVE DISCUSSION WE ARE NOT IN AGREEMENT WITH THE VIEW OF THE REVENUE THAT LONG TERM CAPITAL LOSS IS TO SET OFF AGAINST EXEMPT INCOME (LONG TERM CAPITAL GAINS) AFTER 1.10. 2004. WE THEREFORE SET ASIDE THE ORDERS OF THE REVENUE AUTHORITIES AND ALL OW THE CLAIM OF THE ASSESSEE. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL WE UP HOLD THE ORDER OF LD CIT (A). 8. IN THE RESULT APPEAL FILED BY THE REVENUE STAND S DISMISSED. PRONOUNCED ON 29 TH MARCH 2010 SD/- (V. DURGA RAO) (JUDICIAL MEMBER) SD/- (S.V. MEHROTRA) (ACCOUNTANTMEMBER) MUMBAI DATED 29 TH MARCH 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- MUMBAI 4. COMMISSIONER OF INCOME TAX CITY- MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH I MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI 9 DATE INITIALS 1. DRAFT DICTATED ON 2.3.2010 PS 2. DRAFT PLACED BEFORE AUTHOR 12.3.2010 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/J M 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER 10