Short-term capital loss from any asset can be set off against short-term capital gain from any other asset under the same head, regardless of different tax rates or STT payment.
Issue:
Whether, under the provisions of Section 70(2) of the Income-tax Act, 1961, a Short-Term Capital Loss (STCL) arising from any asset can be set off against a Short-Term Capital Gain (STCG) arising from any other asset under the same head of income (Capital Gains), irrespective of different tax rates applicable to such gains or whether Securities Transaction Tax (STT) was paid on them. Specifically, can STCL (on which STT was paid) be set off against STCG (on which STT was not paid)?
Facts:
- The issue concerns Assessment Year 2022-23.
- The question is about the set-off of a Short-Term Capital Loss (STCL) against a Short-Term Capital Gain (STCG).
- The specific scenario considered is where STCL arose from an asset on which STT was paid, and STCG arose from an asset on which STT was not paid.
- The legal basis for set-off is Section 70(2) of the Income-tax Act, 1961.
Decision:
The court held in favor of the assessee. It ruled that under the provisions of Section 70(2), STCL arising from any asset could be set off against STCG arising from any other asset under a similar computation made, irrespective of different rates of tax. The court specifically affirmed that short-term capital loss (on which STT was paid) can be set off against short-term capital gains (on which STT was not paid).
Key Takeaways:
- Section 70 – Inter-source Set-off: Section 70 deals with the set-off of losses from one source against income from another source falling under the same head of income.
- Section 70(2) – Capital Gains Head: Section 70(2) specifically deals with the capital gains head. It allows a capital loss from one capital asset to be set off against capital gain from another capital asset. It distinguishes between long-term capital losses (which can only be set off against long-term capital gains) and short-term capital losses (which can be set off against both short-term and long-term capital gains).
- No Distinction Based on STT or Tax Rate for STCL: The crucial clarification here is that for STCL, there is no restriction on its set-off against STCG based on whether STT was paid on the underlying transaction or whether the gains are taxable at different rates.
- STT Paid STCG (Section 111A) vs. Non-STT STCG:
- Section 111A: Short-term capital gains arising from the transfer of equity shares or units of equity-oriented funds where STT has been paid are taxable at a concessional rate of 15%.
- Other STCG: Other short-term capital gains (e.g., from the sale of unlisted shares, property, or shares where STT is not applicable/paid) are taxable at normal slab rates.
- Principle of Set-off: The fundamental principle of set-off under Section 70 is that losses under a particular head of income can be adjusted against income under the same head, before carrying forward any remaining loss. This principle is not overridden by different tax rates or STT applicability for different types of short-term gains. The computation of capital gains (and losses) happens first, and then the set-off is applied. The differential tax rates apply to the net taxable gain.
- Favorable to Assessee: This ruling is favorable to the assessee as it allows greater flexibility in setting off short-term capital losses, ensuring that income is taxed on a net basis within the same head of income.
IN THE ITAT MUMBAI BENCH ‘I’
Teacher Retirement System of Texas
v.
ACIT (IT) – 4(1)(2)
SANDEEP SINGH KARHAIL, Judicial member
and Girish Agrawal, Accountant member
and Girish Agrawal, Accountant member
IT Appeal NO.1371 (MUM) of 2025
[Assessment Year 2022-23]
[Assessment Year 2022-23]
MAY 23, 2025
Anish Thacker, Pranay Gandhi for the Assessee. Soumendu K. Dash, Sr.DR for the Revenue.
ORDER
Sandeep Singh Karhail, Accountant Member. – The assessee has filed the present appeal against the final assessment order dated 23/12/2024, passed under section 143(3) r.w. section 144C(3) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 29/11/2024 issued by the learned Dispute Resolution Penal-2, Mumbai, (“learned DRP”) under section 144C(5) of the Act, for the assessment year 2022-23.
2. In this appeal, the assessee has raised the following grounds: –
“Based on the facts and circumstances of the case and in law, the Appellant craves leave to prefer an appeal against the order dated 23 December 2024, issued by the Deputy Commissioner of Income-tax (International Tax) -4(1)(2), Mumbai [hereinafter referred to as the Ld. AO’], under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (‘the Act’), in pursuance of the directions under section 144C(5) of the Act issued by the Hon’ble Dispute Resolution Panel – II, Mumbai (‘Ld. DRP*) dated 29 November 2024 on the following grounds, each of which is without prejudice to and independent of the other.
On the facts and circumstances of the case and in law, the Ld. AO and the Ld. DRP have:
Merits of the case Rejecting the hierarchy of set-off of Short-Term Capital losses adopted by the Appellant.
1. erred in rejecting the hierarchy of set-off of short-term capital losses adopted by the Appellant and thereby, taxing the gross short-term capital gains in respect of transactions on sale of Rights Entitlement / fractional proceeds not chargeable to Security Transaction Tax (‘STT’);
2. failed to appreciate that income under the head ‘Capital gains’ is determined as per sections 45 to 55A of the Act whilst sections 111A and 115AD of the Act only provide for determination of tax in certain cases and therefore, gains arising on transactions subjected to STT and those not subjected to STT are no different and satisfy the ‘similar computation’ condition specified in section 70(2) of the Act.
3. failed to appreciate that section 70 of the Act does not provide any hierarchy for set-off of losses, the short-term capital loss arising from sale transactions subjected to STT can be first set-off against the short-term capital gains arising from sale transactions not subjected to STT, instead of short-term capital gains arising from sale transactions subjected to STT.
4. erred in not following the binding decisions of the jurisdictional Tribunal and rejecting the set-off merely because the Department has preferred an appeal before the jurisdictional High Court against one of the orders of the jurisdictional Tribunal.
Levy of interest under Section 234C Levy of interest under section 234C of the Act – INR 1,425,796
5. erred in levying interest under section 234C of the Act amounting to INR 1,425,796 instead of INR 7,415 computed in the return of income filed by the Appellant;
Initiating penalty proceedings under section 270A of the Act.
6. erred in initiating penalty under section 270A of the Act alleging under reporting of income by the Appellant.”
3. The issue arising in grounds nos.1 to 4, raised in assessee’s appeal, pertains to the manner of set off of short-term capital loss, which was incurred by the assessee from the transaction in shares on which Securities Transaction Tax (“STT”) was paid.
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a resident of the United States of America, and is registered as a Foreign Portfolio Investor with the Securities and Exchange Board of India. For the year under consideration, assessee filed its return of income on 26/07/2022, declaring a total income of INR 1,392,97,42,630. The return filed by the assessee was selected for scrutiny under CASS, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee computed the net short-term capital gains amounting to INR 312,17,86,831, which is chargeable to tax as follows: –
| Particulars | AmiNR)s (in INR) |
| Short-term capital gains on transaction not subject to STT (30%) (A) | 77,840,748 |
| Short-term capital gain on transaction subject to STT (15%) (B) | 4,836,838,283 |
| Less : Short-term capital loss on transaction subject to STT© | 1,002,792,200 |
| Net Short-term capital loss on transaction subject to STT [D=(A+B)-C)] | 3,111,786,831 |
| Total short-term capital gains chargeable to tax | 3,121,786,831 |
5. Thus, it was observed that the assessee set off the short-term capital loss (on which STT was paid), which is taxable at 15% under section 111A of the Act, against the short-term capital gains (on which STT was not paid), which is taxable at 30% under section 115AD of the Act, and thereafter, set off the balance loss against the short-term capital gains earned on the transaction of sale of share subjected to STT. Accordingly, the assessee was asked to show cause as to why such an adjustment of short-term capital loss with short-term capital gains having a differential rate of taxation should not be rejected and an adjustment be made accordingly. In response, the assessee submitted that section 70(2) of the Act provides for set off of shortterm capital loss against the income arising under similar computation from any other capital asset. The assessee further submitted that the reference to “a similar computation” in respect of any other capital asset could only connote a computation of capital gains as per the provisions of sections 45 to 55 of the Act without any reference to the provisions of the Act relating to the rate of tax applicable to the taxation of such gains. In support of its submission, the assessee placed reliance upon the decisions of the Court/Tribunal, wherein a similar issue was decided in favour of the taxpayer. Thus, the assessee submitted that in the absence of a specific stipulation for set off, the assessee has the choice to choose the set off approach which is beneficial to it.
6. The Assessing Officer (“AO”), vide draft assessment order dated 14/03/2024 passed under section 144C(1) of the Act, disagreed with the submissions of the assessee and held that section 111A and section 115AD of the Act provides different rate of taxes, and therefore, these two sections are distinct and work in different spheres. The AO further held that section 115AD of the Act, being a special provision for Foreign Institutional Investors, overrides the general provision, namely section 111A of the Act. Therefore, the set off of short-term capital loss has to be adjusted according to the differential rates contemplated in the said sections. Thus, the assessee’s manner of setting off its short-term capital loss, taxable at 15%, first against the short-term capital gains, taxable at 30%, and the balance set off against the short-term capital gains taxable at 15% was disallowed. Accordingly, the short-term capital gain was computed by first setting off 15% loss against 15% gains, and thereafter, set off with other gains, as follows: –
| Particulars | Amount (INR) | R)x RR NR) |
| Short term capital gain on transaction not subject to STT (30%) (A) | 77,740,748 (Taxable @ 30%) | 2,33,22,225 |
| Short term capital gain on transaction subject to STT (15%) (B) | 4,406,838,283 | |
| Less : Short term capital loss on transaction subject to STT (15%) (C) | (1,362,792,200) | |
| Net Short-term capital gain (15%) (B-C) | 304,40,46,083 | 45,36,06,913 |
| Short term capital loss carried forward | Nil |
7. Accordingly, the AO computed the net short-term capital gains amounting to INR 47,99,29,138, as compared to the net short-term capital gains amounting to INR 46,82,68,025 offered by the assessee.
8. The assessee filed detailed objections against the addition made by the AO. Vide directions dated 29/11/2024, issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee and upheld the computation of capital gains made by the AO vide draft assessment order. The learned DRP further noted that this issue is pending consideration before the Hon’ble Bombay High Court in the case of DIT v. M/s. DWS India Equity Fund, in ITA No.1414 of 2012, and there is no judicial finality on this issue.
9. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order under section 143(3) r.w. section 144C(13) of the Act computed the net short-term capital gains of INR 47,99,29,138. Being aggrieved, the assessee is in appeal before us.
10. During the hearing, the learned Authorized Representative (“learned AR”) submitted that this issue is covered in favour of the assessee by various decisions of the Co-ordinate Bench of the Tribunal.
11. On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the order passed by the lower authorities and submitted that under section 70(2) of the Act the short-term capital loss can only be set off against the short-term capital gains which is computed in a similar manner as the short-term capital loss. Thus, it was submitted that the short-term capital loss, which is taxable at 15%, can only be set off against the short-term capital gain, which is taxable at 15%.
12. We have considered the submissions of both sides and perused the material available on record. The sole issue which arises for our consideration in the present appeal is whether the short-term capital loss (on which STT was paid) can be set off against short-term capital gains (on which STT was not paid). Before proceeding further, it is relevant to note the provisions of section 70(2) of the Act, which deals with the set off of short-term capital loss, and the same reads as follows: –
“(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be 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.”
13. Thus, as per the provisions of section 70(2) of the Act, the short-term capital loss can be set off against gain from any other capital asset. Section 70(2) of the Act does not make any further classification between the transactions where STT was paid and the transactions where STT was not paid.
14. We find that while deciding a similar issue, the Co-ordinate Bench of the Tribunal in iShares MSCI EM UCITS ETF USD ACC v. DCIT, reported in following the decision of the Hon’ble Calcutta High Court in CIT v. Rungamatee Trexim (P.) Ltd. [IT Appeal number 812 of 2008, dated 19.12.2008], allowed the set off of short-term capital loss (on which STT was paid) against the short-term capital gains (on which STT was not paid). The relevant findings of the Co-ordinate Bench, in the aforesaid decision, are as follows: –
“016. This Leaves us with the only grounds relating to computation of shortterm capital gain and set off of short-term capital loss. The only issue in this appeal is that assessee has earned short-term capital gain of 7 791,221/-which is chargeable to tax at the rate of 30%. Assessee claims that it has short-term capital loss on which securities transaction taxes are paid, and therefore such loss should be set-off against the short-term capital gain irrespective of the tax bracket of such gain and losses.
017. The only dispute between the assessee and revenue is as under:-
| Sr. No. | Assessee’s version | Revenue’s Version |
| 1. | Short-term capital loss was set off against the net shortterm capital gain on which no securities transaction taxes paid | seort-term capital loss should be first set ofagamst short-term capital gaih on which securities transaction tax is paid |
| 2. | Balance short-term capital loss shall be first set of against short-term capital gain on which securities transaction taxes paid | If short-term capital loss still remains it is to be carried forward and not that afagainst shnrt-term capital gain on which no seauritins transaotion tax is peid anq sensequently shortterm capital gain on which no securities transaction tax is paid is to be taxed at the rate of 30% |
| 3. | If short-term capital gain on which securities transaction tax is paid still remains, such gains are set of against available brought forward short-term capital loss | One short-term capital gain on which no securities transaction tax is paid is proposed to be taxed at the rate of 30% the brought forward short-term capital loss allowed to be carried forward without utilizing such brought forward short-term capital loss was set off |
018. Provisions of section 70 of the income tax act provides for the set off of losses from one source against income from another source under the same head of income. According to section 70 (1) where assessee suffers loss in respect of any source under any head of income other than capital gain, assessee is entitled to have the amount of such loss set of against his income from any other source under the same had. Therefore, these provisions speaks about inter head adjustment other than the head of capital gains. For capital gains provisions of section 70 (2) of the act provides that where assessee suffers short-term capital loss, assessee shall be entitled to set off such losses against capital gain computed in a similar manner as under section 48 to 55 of the act. According to section 70 (3) of the act where assessee suffers longterm capital loss, assessee shall be entitled to set of such losses against longterm capital gains computed in similar manner as provided under section 48 to section 55 of the act. It is clear that section 48 to section 55 does not provide for rate of tax on capital gain. It specifically lays down the computation mechanism of capital gain and certainly not tax on such capital gains
019. Thus, it is clear that assessee has incurred short-term capital losses of Rs. 49,454,381/- (which is subject to securities transaction tax) and also earned short-term capital gain of Rs. 791,221/- (which is not subject to securities transaction tax and taxable as per section 115AD at the rate of 30%). Thus, assessee submits that that short-term capital loss on which securities transaction taxes paid, can be set of against the short-term capital gain which is not subject to securities transaction tax. Further such capital gain is also computed as per section 115AD of the act.
020. It is not the case before us that either in the computation of short-term capital gains or short-term capital loss there is any difference in the manner of computation. Therefore, short-term capital gain arising during the year and short-term capital loss arising during the year are computed in a similar manner as provided under section 48 to section 55 of the income tax act. Further as we have already stated that section 48 to section 55 of the income tax act does not lay down any rate of tax payable on short-term capital gain.
021. Therefore, we do not find any reason to deprive the assessee from setoff of short-term capital losses suffered by the assessee for the same year against the short-term capital gains earned by the assessee. Such claim is in accordance with the provisions of section 70 (2) of the act.
022. We find that several judicial precedents relied upon by the assessee also supports the case of the assessee. The honourable Calcutta High Court in Rungamatee Trexim ITA number 812 of 2008 dated 19 December 2008 held that there is no provision nor the act compels the assessee to lst set of shortterm capital gain which STT against short-term capital loss with STT and then allows set of against short-term capital gain without STT. Therefore, without multiplying judicial precedents, following the decision of the honourable Calcutta High Court, and several other judicial precedents of the coordinate benches relied upon before us, we allow ground number 4 – 10 of the appeal of the assessee and direct the assessing officer to allow set-off of short-term capital loss suffered by the assessee against short-term capital gain of Rs. 791,221/-.”
15. Further, in light of the findings of the coordinate bench in the aforesaid decision, we do not find any merit in the submissions of the learned DR. It is also pertinent to note that the emphasis on the term “similar computation” in section 70(2) of the Act only refers to the computation as provided under sections 48 to 55 of the Act.
16. We find that similar findings have been rendered by the Co-ordinate Benches of the Tribunal in favour of the taxpayer in the following decisions: –
1. Emerging Markets Index Non-Lendable Fund v. DCIT, Mumbai, in ITA No. 4589/Mum/2023, order dated 05.08.2024.
2. Vanguard Total International Stock Index Fund v. ACIT (IT) – 4(3)(1), in ITA No.4656/Mum/2023, order dated 13.12.2024.
3. JS Capital LLC v. ACIT (International Taxation), reported in /206 ITD 142 (Mumbai – Trib.)
4. Dy. DIT v. M/s. DWS India Equity Fund, in ITA No.5055/Mum/2010, order dated 11.04.2012.
17. The learned DR could not show us any cogent reason to deviate from the aforesaid judicial precedents. Therefore, respectfully following the aforesaid decisions, we direct the AO to accept the methodology adopted by the assessee for the computation of the capital gains. As a result, grounds no.1 to 4 raised in assessee’s appeal are allowed.
18. The issue arising in ground no.5, raised in assessee’s appeal, pertains to the levy of interest under section 234C of the Act, which is consequential in nature. Therefore, the same needs no separate adjudication.
19. Ground no.6, raised in assessee’s appeal, pertains to the initiation of penalty proceedings under section 270A of the Act, which is premature in nature. Therefore, the said ground is dismissed.
20. In the result, the appeal by the assessee is partly allowed.