There is a big news related to income tax for those investing in stock market and mutual funds. Delhi Income Tax Appellate Tribunal (ITAT) has made it clear that if a person has suffered loss from shares or mutual funds, he can set-off this loss from Long Term Capital Gain (LTCG), even if the tax rates applicable on both are different. This decision was taken when a case related to a person from Delhi came to light.
What was the whole matter?
In this case, a person had shown the loss from shares and mutual funds in his income tax return. This included long term capital loss from last year and short term capital loss from the current year. The person had claimed to adjust both these losses from long term capital gains from the sale of shares and mutual funds.
Why did the Income Tax Department stop
When the returns were processed, the Income Tax Department stopped the set-off saying short-term and long-term capital loss cannot be adjusted against gains that have different tax rates. For this reason, the income of the person was increased and additional taxable income of about Rs 25 lakh was added.
After appeal the matter reached ITAT
First this matter went to the appeal level, but even there the decision of the tax department was accepted as correct. After this the person knocked on the door of ITAT Delhi. The Tribunal investigated the entire matter in depth and understood Section 70 of the Income Tax Act. ITAT Delhi said that uniform calculation in the Income Tax Act does not mean the tax rate but the head of income. That is, if both income and loss come under the capital gains head, then they can be set-off against each other.
The tribunal clearly said that it is not written anywhere in the law that the tax rate on loss and gain must be the same. Therefore, set-off cannot be stopped merely on the basis of difference in tax rates.
Why is there no loss to the government?
ITAT also held that such set-off does not cause any loss to the government. On the contrary, here the loss at higher tax rate was being adjusted against the gain at lower tax rate. That means there was no question of tax evasion or taking unfair advantage.
The tribunal also said that in the past also tribunals in different cities have given such decisions, where capital loss was allowed to be set-off from capital gains having different tax rates. This makes it clear that the intention of the law is not to harass investors unnecessarily.
what was the final decision
ITAT Delhi set aside the tax department’s order and said that the individual’s long-term and short-term capital loss set-off against LTCG was fully justified, adding that around Rs 25 lakh that had been added to taxable income was removed.
What does it mean for common investors?
With this decision, the situation has become quite clear for people investing in shares and mutual funds. If you suffer a loss in investment, you can legally reduce your tax burden by using it properly. This decision is being considered a big relief regarding tax planning.
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