Set-off of Capital Loss Against Capital Gain Permissible Despite Different Tax Rates: ITAT Delhi

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In a significant ruling clarifying the scope of capital loss set-off provisions under the Income-tax Act, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that capital losses can be set off against capital gains irrespective of the difference in tax rates applicable to such gains and losses. The Tribunal observed that the mechanism of set-off under section 70 is governed by the head of income and statutory conditions prescribed therein, and not by the rate at which the resulting income is taxed. Where the Act permits adjustment of short-term and long-term capital losses against eligible capital gains, the same cannot be denied merely because the gains are taxable at a lower rate, especially when such set-off causes no loss to the revenue. This decision provides important clarity and relief to taxpayers facing automated disallowances by CPC on similar grounds.

Case Summary

  • Tribunal: ITAT Delhi Bench
  • Citation: [2025] 180 taxmann.com 881 (Delhi – Trib.)
  • Issue: Whether an assessee can set off brought-forward long-term capital losses (LTCL) and current year short-term capital losses (STCL) against current year long-term capital gains (LTCG), even though the tax rates applicable to the losses and gains differ.

Facts

  1. The assessee (individual taxpayer, Ira Sharma in reported coverage) had brought forward long-term capital losses from prior years and also incurred short-term capital losses in the current year.
  2. The assessee had long-term capital gains in the current year from sources like NCDs and mutual funds.
  3. On filing the return, the assessee set off these brought-forward LTCL and current year STCL against the current year LTCG.
  4. The CPC (Centralised Processing Centre) disallowed this set-off and made additions on the grounds that the tax rates on losses and gains differed.
  5. The CIT(A) upheld the CPC’s view and dismissed the assessee’s appeal.

Tribunal’s Holding

  • Set-off Allowed: The Tribunal held that the set-off of capital losses against capital gains is governed by Section 70 of the Income Tax Act, which looks at the head of income (‘Income from Capital Gains’) and the manner of computation, not the tax rates applicable on such gains/losses.
  • No Restriction on Rates: There is no provision in Section 70 that prohibits set-off on the basis of differing tax rates applicable to various types of capital gains.
  • Loss Set-off Rules Applied: Under Section 70:
    • STCL may be set off against any capital gain (short-term or long-term).
    • LTCL may be set off only against LTCG.
  • Since the losses had a higher effective tax rate than the gains and both fell under the head Income from Capital Gains, allowing the set-off does not cause any loss to the revenue.
  • Accordingly, the Tribunal allowed the assessee’s claim and directed the Assessing Officer to accept the set-off as claimed in the return, quashing the CPC and CIT(A) orders.

Legal Principle

  • The decision underscores that capital loss set-off depends on the income head and the statutory set-off rules (Section 70) and not on the juxtaposition of differential tax rates on the gains or losses.

  • In this context, differing tax rates applicable to short-term vs long-term gains/losses do not restrict set-off under the Act.

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