Ita/216/2013 Of M/S. Appolo Tyres Ltd v. The Deputy Commissioner Of Income-Tax

“C.R.” IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS TUESDAY, THE 3 DAY OF AUGUST 2021 / 12TH SRAVANA, 1943 ITA NO. 216 OF 2013 AGAINST THE ORDER IN ITA 627/2008 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: M/S. APPOLO TYRES LTD.6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD, KOCHI-31 (PAN: AAACA 69900). BY ADVS.SRI.JOSEPH MARKOSE (SR.)SRI.V.ABRAHAM MARKOSSRI.BINU MATHEWSRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/S: THE DEPUTY COMMISSIONER OF INCOME-TAXCIRCLE 1(1) ERNAKULAM, KOCHI-682018. BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES)SRI.P.K.R.MENONSR.COUNSEL GOITAXESJOSE JOSEPH, SC, FOR INCOME TAXCHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT OTHER PRESENT: SRI.CHRISTOPHER ABRAHAM, SC - ITA. THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 03.08.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T S.V.Bhatti, J. Heard learned Senior Counsel Mr Joseph Markos andlearned Standing Counsel Mr Christopher Abraham for parties.2.M/s.Apollo Tyres Ltd., Kochi/Assessee is theappellant. The Deputy Commissioner of Income Tax, Ernakulam/Revenue is the respondent. The assessee challengesthe order of Income Tax Appellate Tribunal (for short ‘theTribunal’), Cochin Bench, Cochin in ITA No.627/Coch/2008dated 08.02.2013. The issues raised in the appeal pertain to theAssessment Year 2005-06. The appeal is admitted on thefollowing substantial questions of law. “1.Whether on the facts and in the circumstances of thecase the Tribunal is justified in law in disallowing the I.T.A. No.216/2013 deduction of Rs.2,76,00,000/- being advances paid toContinental Group of Companies for supply of machineryand written off during the year, holding that the amount isof the nature of capital expenditure? 2.Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing thesetting off of long term capital loss on sale of shares andunits of mutual funds against long term capital gain onsale of land? 3. Substantial question no.1 relates to disallowance of the deduction of Rs.2,76,00,000/- being advances paid to thesupplier of machinery and written off on account of failure onthe performance of obligations by the supplier. The assesseehas filed ITA No.26/2013 for the Assessment Year 2003-04 andquestion no.4 in the said appeal relates to disallowing thededuction of advances written off by the assessee. The Counsel I.T.A. No.216/2013 appearing for the parties state that the same reason could be adopted for answering the instant question as well. For thereasons recorded in ITA No.26/2013 in question no.4 therein,the instant question is answered in favour of the Revenue andagainst the Assessee. 4.Substantial question no.2 deals with the claim of the assessee in setting off long term capital loss on sale of sharesand units of mutual funds against the long term capital gainearned on the sale of land. The question presents theapplication of Section 10(38) of the Income Tax Act, 1961 (forshort ‘the Act’) on one hand and on another the extent to whichset-off under Section 70(3) read with Sections 48 to 55 of the Actcould be claimed by the assessee. The circumstances relevantfor examining the question are very briefly stated thus: 4.1In the previous year, corresponding to AssessmentYear 2005-06, the assessee has sold shares and units of mutual I.T.A. No.216/2013 4.Substantial question no.2 deals with the claim of the assessee in setting off long term capital loss on sale of sharesand units of mutual funds against the long term capital gainearned on the sale of land. The question presents theapplication of Section 10(38) of the Income Tax Act, 1961 (forshort ‘the Act’) on one hand and on another the extent to whichset-off under Section 70(3) read with Sections 48 to 55 of the Actcould be claimed by the assessee. The circumstances relevantfor examining the question are very briefly stated thus: 4.1In the previous year, corresponding to AssessmentYear 2005-06, the assessee has sold shares and units of mutual I.T.A. No.216/2013 funds and paid STT (Securities Transaction Tax). In the sameprevious year, the assessee sold land. In the computation filedby the assessee, the assessee has set off the loss on the sale ofshares and mutual funds against the capital gains made fromthe sale of land and accounted for the net figure for the purposeof capital gain. The case of the assessee is that the assessee isentitled to claim set-off for the loss booked on sale of sharesetc., against the income earned from the sale of a long termasset, under Section 70(3) of the Act. The assessee, it is claimed,is entitled to have any loss arising on account of transfer of anylong term capital asset set-off against income, if any, arising onaccount of transfer of any other long term capital asset in thesame Assessment Year. In other words, the case of the assesseeis that the assessee is entitled to set off the loss booked againstthe income earned on the sale of a long term capital asset. TheAssessing Officer disallowed the set-off claimed by the assessee I.T.A. No.216/2013 under Sec 70 (3) of the Act. 4.2The reasoning of the Assessing Officer is thatwhatever income is exempt under different clauses of Section10, such income shall be removed from the purview of incomebefore computation of the total income of an assessee. Hence,an income that includes loss as well is exempt and computationis not done in respect of such excluded item i.e., loss. Further,the applicability of Section 70(3) arises only upon computationof income as per the provisions of Sections 48 to 55 has beenmade by the assessee. Comparing the details of the case onhand, the receipt in the form of sale proceeds on the sale of longterm capital assets is suffering a loss at the hands of theassessee. In the view of the Assessing Officer, the loss is notcomputed under Sections 48 to 55 of the Act and, for allpurposes, the entry is ignored both by the assessee and theDepartment. Therefore, the loss suffered by the assessee on the I.T.A. No.216/2013 sale of a long term capital asset covered by Section 10(38)cannot be set off under Section 70(3) of the Act, unless thecomputation of such income or loss is made under Sections 48to 55 of the Act. The Assessing Officer thus rejected the claim ofset-off made by the assessee. The CIT (Appeals) examined therival assertions, and, on being satisfied with the view taken bythe Assessing Officer, confirmed the view taken by theAssessing Officer. The assessee carried the matter in appealbefore the Tribunal. The Tribunal confirmed the view taken bythe Assessing Officer and the CIT (Appeals). Hence the Appeal.5.Senior Advocate Mr Joseph Markos, while reiteratingthe arguments put forward by the assessee before the statutoryauthorities and the Tribunal, expanded the contention byarguing that the view taken by the Tribunal and the authoritiescould negate the statutory deduction allowed to the assessee.According to him, the criteria for attracting Section 10(38) is I.T.A. No.216/2013 I.T.A. No.216/2013 that income arising from the transfer of a long term capitalasset, being an equity share in a company or a unit of an equity-oriented fund, the transaction is chargeable to STT. In the caseon hand, the twin requirements are attracted, however, insteadof earning income, the transaction resulted in a loss to theassessee. The loss is from a long term asset, and, hence, couldbe set off in terms of Section 70(3) of the Act. Therefore, theincome derived from the sale of shares even is exempt from thecomputation of the total income of the assessee, the loss fromthe sale of a long term share is set off against income from thesale of a long term asset. According to him, Section 70(3), ifplainly read, does not prohibit the assessee from availing theloss otherwise incurred by the assessee in respect of the sale ofa long term capital asset that has been subjected to STT.Therefore, he argues that the Tribunal and the authoritiesought to have allowed the claim of set-off made by the assessee under Sec 70 (3) of the Act. In support of his argument, herelied on the judgments reported in Royal Calcutta Truf Club v.CIT[1]; CIT v. Karamchand Premchand Ltd[2]; CIT v. Harprasad & Co.[3] andKishorebhai Virani v. ACIT[4]. 6.Mr Christopher Abraham, learned Standing Counselfor the Department, contends that computation of the totalincome is dealt with by Section 14 of the Act and Section 14classifies income under five heads, namely (i) salaries, (ii)income from house property, (iii) income from businessprofession (iv) income from capital gains, and (v) income fromother sources. Each one of these heads of income is capable ofhaving more than one source of income. The case on hand dealswith income under the head ‘capital gains’. The assessee underthis head has two sources of income; firstly, from the sale ofequity shares and units in mutual funds which are long term 1(1982) 144 ITR 100 (Ker.)2(1960) 40 ITR 106 (SC)2(1960) 40 ITR 106 (SC) 3(1975) 99 ITR 118 (SC) 4(2014) 367 ITR 261 (Guj.) capital assets and the sale was subjected to STT; secondly, saleof land held for more than three years and is in the nature oflong term capital gain. The sources now clubbed together aredistinct and separate. The first source, namely income from thesale of shares/units in mutual funds is a non-taxable source inview of Section 10(38) of the Act and excluded fromcomputation for arriving at income. Therefore, the loss fromthese non-taxable sources is not available for set-off against anyof the incomes from the second source i.e., a source computedunder Sections 48 to 55 of the Act. 6.1Therefore, the first contention is that the assessee ismixing up heterogeneous heads as homogeneous heads andclaiming the set-off. He further contends that the decisions incase and areRoyal Calcutta Truf ClubNetesoft India v. DCIT[5]distinguishable both in law and in fact. The ratio of theSupreme Court in Harprasad & Co.case that the words ‘income’5ITA No.5359/Mum/2017 (Mumbai Tribunal) I.T.A. No.216/2013 or ‘profits and gains’ should be understood as including losses also. So that, in one sense, ‘profits and gains’ represent plusincome, whereas losses represent minus income. In otherwords, the loss is negative profit. Both positive and negativeprofits are of a revenue character. Both must enter intocomputation wherever it becomes material in the same mode ofthe taxable income of the assessee. Therefore, the effect fromthe perspective of the Act is that both the income and the lossare excluded from computation under Sections 48 to 55 of theAct. 6.2By inviting our attention to the view taken by theSupreme Court in Harprasad & Co.case it is argued that incomeincludes profit as well as loss. In one sense, ‘profits and gains’represent plus income whereas ‘losses’ represent minus income.According to him, what is important in all these cases is loss isnegative profit. Both positive and negative profits are of a 6.2By inviting our attention to the view taken by theSupreme Court in Harprasad & Co.case it is argued that incomeincludes profit as well as loss. In one sense, ‘profits and gains’represent plus income whereas ‘losses’ represent minus income.According to him, what is important in all these cases is loss isnegative profit. Both positive and negative profits are of a revenue character and enter into computation wherever itbecomes material in the same mode of the taxable income ofthe assessee. By laying emphasis on the above view of the apexCourt, he argues that what is excluded by Section 10(38) of theAct, does not come within the mode of computation underSections 48 to 55 of the Act. The inclusion of an excludedincome, as well as loss for set-off under Section 10(38), wouldcompletely change the meaning of Section 70(3) of the Act. Heargues that the substantial question of law framed has to beanswered in the negative, in favour of the Revenue and againstthe Assessee. He relies on the judgment of Gujarat High Courtin Kishorebhai Virani case with considerable force and submitsthat the facts in Kishorebhai Viranicase, the application of thedecision in Harprasad & Co.case of the Supreme Court and theconclusions recorded by the Gujarat High Court would apply tothe case on hand in entirety and by following the said judgment I.T.A. No.216/2013 the appeal has to be dismissed. 7.We have taken note of the rival contentions andperused the record. 7.1The question of law framed deals with the claim of the assessee to set off the loss suffered by the assessee from the sale of long term capital assets i.e., shares against the incomeearned from the sale of a long term capital asset. Section 10(38)reads as follows: “10(38) any income arising from the transfer of a long-termcapital asset, being an equity share in a company or a unit of anequity oriented fund or a unit of a business trust where- (a) the transaction of sale of such equity share or unit isentered into on or after the date on which Chapter VII ofthe Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transactiontax under that Chapter:” Chapter III of the Act deals with incomes that do not form part of total income. Sections 10 to 13 are various incomes that are I.T.A. No.216/2013 treated as not forming part of the income of the assessee. Chapter IV deals with the computation of total income. Section 14 deals with heads of income. Sections 45 to 55 deal with computation of capital gains. Chapter VI deals with aggregationof income and set-off or carry forward of loss. Set-off of loss from one source against income from another source under the same head of income. Section 70 reads thus: “(1) xxxxx (2) xxxxx (3) Where the result of the computation made for any assessmentyear under sections 48 to 55 in respect of any capital asset (otherthan a short-term capital asset) is a loss, the assessee shall beentitled to have the amount of such loss set-off against the income,if any, as arrived at under a similar computation made for theassessment year in respect of any other capital asset not being ashort- term capital asset.” 7.2There is no quarrel between the assessee and the Revenue that the shares and units of mutual funds sold by the I.T.A. No.216/2013 assessee would come under Section 10(38) of the Act. Thus hadthere been income such income is excluded from thecomputation of income of the assessee. Sections 48 to 55 dealwith the computation of long term capital gains by the assessee.The principle laid down by the Supreme Court in Harprasad &Co.case is to the effect that income is inclusive of profit and lossi.e., both positive and negative effects of the transaction. Hence,it is legal and correct not to introduce the entry of sale of sharesin the computation of income under Sections 48 to 55. The set-off of loss etc is dealt with by Section 70(3) of the Act. 7.3Let us understand Sec 70 (3) as follows: 7.2There is no quarrel between the assessee and the Revenue that the shares and units of mutual funds sold by the I.T.A. No.216/2013 assessee would come under Section 10(38) of the Act. Thus hadthere been income such income is excluded from thecomputation of income of the assessee. Sections 48 to 55 dealwith the computation of long term capital gains by the assessee.The principle laid down by the Supreme Court in Harprasad &Co.case is to the effect that income is inclusive of profit and lossi.e., both positive and negative effects of the transaction. Hence,it is legal and correct not to introduce the entry of sale of sharesin the computation of income under Sections 48 to 55. The set-off of loss etc is dealt with by Section 70(3) of the Act. 7.3Let us understand Sec 70 (3) as follows: Set-off of loss from one source against income from anothersource, important words are under the same head of income.Next, Section 70(3) is applicable or attracted, viz:- (a) the result of the computation made for theassessment year, important words are viz. underSections 48 to 55 in respect of any capital asset, being a I.T.A. No.216/2013 short term capital asset, in a loss; (b) enables the assessee to have the amount of such lossset off against the income if any; (c) as arrived at under similar computations i.e.,Sections 48 to 55 made for the assessment year forsame assessment year in respect of the same capitalasset not being a short term capital asset. Under Section 70(3) of the Act, the first requirement is that theresult of the computation made for any assessment year underSections 48 to 55 in respect of any capital asset excluding ashort term capital asset results in a loss. Then, the assesseeshall be entitled to have such loss set-off against the income, ifany as arrived at under a similar computation made for theassessment year in respect of any other capital asset not being ashort term capital asset. Therefore, to merit an adjustmentunder Section 70(3), the assessee is required to first establishthat the loss arrived at by the assessee is on the computation under Sections 48 to 55, in respect of a long term capital asset.And the loss can be set off only against the income arrived atunder a similar computation i.e., Sections 48 to 55 made for thevery assessment year. The literal meaning of Section 70(3)clearly shows that both for including the loss against set-off andsetting of loss against income the computation must have beenmade under Sections 48 to 55 of the Act. The language ofSection 70(3) is clear and unambiguous. In the understanding ofthis Court, the Parliament intended homogeneous entries toadjust the loss or profit against one another and not introduceheterogeneous elements or entries. Hence, the interpretationadopted by the assessee would give benefits not otherwiseintended by the Section. 7.4The effort of the assessee, in our view, includes anexcluded claim, i.e., a heterogeneous claim under Section 70(3)of the Act, by claiming that the homogeneity of long term I.T.A. No.216/2013 capital gain is satisfied by the assessee. We are of the view that the application of Section 70(3) by the assessee is incorrect andillegal. The Assessing Officer has very clearly appreciated theobjection, applied the law to the circumstances of the case, andrecorded the findings. As we have noted supra the CIT(Appeals) and the Tribunal have merely adopted theconclusions recorded by the Assessing Officer. Afterindependently examining the implication of each one of theSections and the principle laid down by the Supreme Court inHarprasad & Co.case, we are of the view that no exception to theview taken by the Assessing Officer, as confirmed by the CIT(Appeals) and Tribunal could be taken by us as well. 8.The decisions relied on by the assessee aredistinguishable on facts. Therefore, we won’t burden thejudgment by stating how these decisions are distinguishableboth in fact and law. We have perused the judgment of the I.T.A. No.216/2013 8.The decisions relied on by the assessee aredistinguishable on facts. Therefore, we won’t burden thejudgment by stating how these decisions are distinguishableboth in fact and law. We have perused the judgment of the I.T.A. No.216/2013 Gujarat High Court in Kishorebhai Virani case and are inagreement with the view taken by the Gujarat High Court. Thequestion of law in the appeal, upon our independentconsideration and also by following the principle laid down inHarprasad & Co.case as applied in Kishorebhai Virani case, will beanswered in favour of the Revenue, and against the assessee.For the above discussion and reasons the appeal fails,accordingly dismissed. No order as to costs. Sd/- S.V.BHATTIJUDGESd/- BECHU KURIAN THOMASJUDGE jjj I.T.A. No.216/2013 PETITIONER ANNEXURE ANNEXURE A1 ANNEXURE A2 ANNEXURE A3 APPENDIX OF ITA 216/2013 TRUE COPY OF ASSESSMENT ORDER DATED 31/12/2007 OF THE RESPONDENT. TRUE COPY OF APPELLATE ORDER DATED 26/03/2008 OF THE COMMISSIONER OF INCOME TAX (APPEALS)II, KOCHI. TRUE COPY OF ORDER DATED 08/02/2013 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN ITA NO.627/COCH/2008.