STT must for tax breaks on losses, says tribunal

First appellate authority had ruled otherwise

The Mumbai Income-Tax Appellate Tribunal (ITAT) has upheld a penalty on a foreign investing entity that had attempted to pay lower taxes by setting off long-term capital losses based on transactions on which it paid securities transaction tax (STT) against long-term capital gains based on non-STT transactions.

The ITAT said the tax authority’s penalty imposed for concealment of income and providing incorrect information was valid, adding that tax on non-STT-based transactions cannot be reduced on account of losses on STT-based transactions.

“…the moment there is a transfer… any income or loss arising there-from is irrelevant for the purpose of computation of total income, where the transaction attracts STT, being a precondition for the application of the said provision. The assessee’s case, therefore, only needs to be stated to be rejected,” said the order by the tribunal.

NO TAX BREAK, RULES ITAT

• Luxembourg-based Asia Pacific Performance Fund claims tax break
• It set off losses on STT-based transactions against gains through non-STT transactions
• Tax authorities denied the tax break and imposed a penalty on the fund
• It appealed against the same and won
• Tax department appealed at a higher forum
• Judgment went in tax department’s favour
• Ruling in line with previous SC judgment, say experts

The ruling was issued in the case of Asia Pacific Performance SICAV (‘APP’) on December 27. The fund is a Luxembourg-based entity registered with the Securities and Exchange Board of India (Sebi).  

A note from BMR Advisors said that the ruling was a significant one from the point of view of emphasising the need for sufficient technical backing to the positions that a taxpayer chooses to adopt as well as the action that can be taken by the revenue authorities.

“The ruling is an important one as it brings out the finer nuances as regards the levy of penalty by revenue authorities as well as on some of the procedural aspects that must be followed by taxpayers when their case has been selected for scrutiny audit proceedings,” it said.

Suresh V Swamy, executive director, tax & regulatory services, at PricewaterhouseCoopers, said it reiterates an established position. "The Supreme Court of India has clarified this position on a number of occasions. Therefore, an exempt negative income (that is, exempt loss) cannot be carried forward and set off against a taxable gain in a non-STT-paid transaction,” he said.

APP had appealed against the penalty with the first appellate authority, which had ruled in its favour.