ITAT gives directions to AO for allowing setting off Capital Loss carried forward against Capital Gains earned

ITAT gives directions to AO for allowing setting off Capital Loss carried forward against Capital Gains earned

Mumbai Bench of the Income Tax Appellate Tribunal (ITAT), gave directions to the Assessing Officer (AO) to allow set-off of capital loss carried forward against capital gains earned

The ITAT stated, "A right for more liberal treatment is already earned cannot be lost because of subsequent restriction, since vested right cannot be divested, unless specifically withdrawn either explicitly or by implication. In other words, existing rights of set-off cannot be treated as withdrawn."

It referred to the judgment of the Special Bench of Tribunal in the case of Kotak Mahindra Capital Co. Ltd., wherein it was held that the provisions of Section 74(1) as amended with the effect of 1 April 2003 would apply only to long-term capital loss relating to assessment year (AY) 2003-04 and onwards.

The Special Bench further held that the restriction imposed therein in terms of setting off long-term capital loss only against long-term capital gains and not against short-term capital gain is applicable only in relation to the long-term capital loss incurred by the assessee in AY 2003-04 and subsequent years and same is not applicable to long-term capital loss relating to and brought forward from a period prior to AY 2003-04 which shall be governed by provisions of Section 74(1) prior to the amendment made with the effect of 1 April 2003.

In the instant case, M/s Apollo Finvest (India) Ltd (appellant) filed the return on income for the AY 2005-06 declaring Nil income under the normal provisions and Rs.12,49,990 as book profit under Section 115JB of the Act.

The appellant is a non-banking public financial company that is engaged in investment in shares, mutual funds, securities, debentures, etc. The main grievance of the appellant is that the AO erred in not setting off the short-term capital gain of Rs.54,38,407 earned by it against long-term capital loss brought forward from AY 2001-02, which later on is affirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

The appellant further contended that carry forward provisions are contained in Section 74 of the Act before the amendment by the Finance Act, 2002. It was further mentioned that there was no distinction between long-term capital loss and short-term capital loss. Hence, the AO erred in applying the provisions of Section 74 as amended by the Act. It was further submitted that the AO should have applied the provisions before the amendment as the losses brought forward related to the AY 2001-02.

The Finance Act, 2002 has restored the distinction between short-term capital loss and long-term capital loss with the effect of 1 April 2003, by providing for one-way compulsory set off of short term capital loss against long-term capital gains, while denying set-off of a long-term capital loss against short-term capital gains.

The Coram comprising of Vikas Awasthy and N.K. Pradhan allowed the appeal and directed the AO to allow set-off of capital loss carried forward from AY 2001-02 against capital gains earned by the appellant during the year under consideration.