No Hierarchy in STCL Set-Off u/s 70(2): ITAT Strikes Down AO’s Computation Method
The Tribunal ruled that short-term capital losses can be set off against any short-term capital gains irrespective of tax rates.
The Income Tax Appellate Tribunal, Mumbai Bench (ITAT) held that Section 70(2) of the Income Tax Act, 1961 does not prescribe any hierarchy for setting off short-term capital losses (STCL) against short-term capital gains (STCG) merely because of different tax rates. Thereby, ruled that the computation mechanism adopted by the Assessing Officer (AO) on the basis of tax rates or...
The Income Tax Appellate Tribunal, Mumbai Bench (ITAT) held that Section 70(2) of the Income Tax Act, 1961 does not prescribe any hierarchy for setting off short-term capital losses (STCL) against short-term capital gains (STCG) merely because of different tax rates. Thereby, ruled that the computation mechanism adopted by the Assessing Officer (AO) on the basis of tax rates or Securities Transaction Tax applicability (STT), and any such prioritisation is contrary to law.
The appellant, iShares Core MSCI Emerging Markets ETF, along with its group entities, filed appeals challenging final assessment orders passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 for the Assessment Years 2022-23 and 2023-24.
The case arose when the AO rejected the methodology adopted by the appellant for setting off STCL arising from transactions on which STT was paid against STCG arising from transactions not subjected to STT. The AO held that losses taxable at a lower rate should first be adjusted against gains taxable at the same rate.. The Dispute Resolution Panel upheld this approach, leading to the present appeal before the Tribunal.
The appellant through Pranav Gandhi contended that Section 70(2) of the Income Tax Act, 1961 permits the set-off of STCL against STCG computed in a similar manner under Sections 48 to 55 of the Act, without prescribing any priority based on tax rates or STT applicability. Additionally, Sections 111A and 115AD of the Income Tax Act, 1961 only prescribe the rate of tax and do not alter the computation mechanism of capital gains. Placing reliance on consistent decisions of coordinate benches allowing such set-off, he submitted that the AO had effectively rewritten the statute by importing a hierarchy that does not exist in law.
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The Bench comprising Vikram Singh Yadav, Accountant Member and Sandeep Singh Karhail, Judicial Member ruled that Section 70(2) of the Income Tax Act, 1961 allows set-off of STCL against income from any other short-term capital asset, provided the computation is made under Sections 48 to 55 of the Act. The provision does not differentiate between gains based on tax rates or STT applicability.
The Bench observed that Sections 111A and 115AD merely prescribe tax rates and do not govern computation. The AO’s reliance on tax rates to impose a hierarchy was held as legally unsustainable. Therefore, the Tribunal directed the Assessing Officer to accept the appellant’s method of computation and allow the set-off as claimed.
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