My client sold two lots of long-term shares in the same year — one at a loss on shares whose gain would have been exempt under s.10(38), the other at a taxable gain. Can the loss be set off against the gain?
On this Gujarat High Court decision, no. Because s.10(38) keeps the income arising from such a capital asset out of the computation of total income altogether, the loss arising on the same class of asset is likewise not includable, and is therefore not available for set-off under s.70(3) or for carry forward under s.74. The Court rejected the argument that 'income' in s.10(38) does not include 'loss'.
Decided by the High Court (Akil Kureshi J and Sonia Gokani J) on 2014-01-13, reported as Tax Appeal No. 440 of 2013 (Gujarat High Court); cited in the Bombay High Court as [2014] 367 ITR 261 (Guj.). It bears on section 74, section 70, section 10(38), section 45 of the Income Tax Act 1961, in Capital Gains and Capital Gains Exemptions matters.
This is the harder of the two competing lines and it is the only High Court decision found that decides the point. It matters twice over. For the s.10(38) years — assessment year 2005-06 to assessment year 2018-19 — it is the authority the Revenue will cite against any claim to set off or carry forward a long-term capital loss on securities transaction tax paid shares. And it is the reasoning that the department reaches for whenever an exemption provision is met by a loss, because it rests on the Supreme Court's Harprasad principle that a loss under a head not chargeable to tax cannot be carried forward and absorbed against a taxable source. The competing line is at Tribunal level and is set out in a separate entry: Raptakos Brett and, after it, United Investments hold that the 'income includes loss' concept applies only where the entire source is exempt, and not where one stream within a taxable source is exempted. The Bombay High Court admitted an appeal on the point in PCIT v Vibhadeep Investments and Trading Ltd on 27 January 2020, describing the Gujarat view as diametrically opposite to the Tribunal's — so the conflict had been placed before a second High Court as a substantial question of law and, on the material read here, remained unresolved. For years from assessment year 2019-20 the question changes shape: s.10(38) was withdrawn and s.112A now charges the gain, so the reasoning that the source is exempt no longer applies on its own terms.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2006-07 the assessee filed a return declaring total income of about Rs 8.67 lakh. In scrutiny it emerged that during the year he had sold shares of Suashish Diamond Limited, incurring a long-term capital loss of Rs 1,44,73,463, and had sold shares of Karp Diamond Ltd, earning a long-term capital gain of Rs 1,03,00,809. He claimed set-off of the loss against the gain. That the Suashish Diamond shares were covered by s.10(38) was not in dispute. The Assessing Officer disallowed the set-off and the carry forward on the footing that a loss from a source whose income is exempt cannot be set off against, or carried forward against, taxable income. The Tribunal, by order dated 4 April 2012, upheld the Revenue relying on s.10(38) and on the Supreme Court's decision in CIT v. Harprasad & Co. P. Ltd. The assessee appealed under s.260A, contending among other things that the term 'income' in s.10(38) does not take in a 'loss' and that s.74(1)(b) governed the set-off.
The tax appeal was dismissed; no question of law was found to arise. Where the capital asset is one covered by s.10(38), the income arising from it is excluded from the computation of total income, and the loss arising from the same asset is likewise not includable in that computation, with the consequence that any loss in respect of such a capital asset is not available for set off. The contention that 'income' in s.10(38) does not include 'loss' was rejected (paragraphs 7 and 8).
The Court took as its starting point the undisputed fact that the shares in question were covered by s.10(38), and reasoned that if s.10(38) directs that in computing the total income of the previous year the income covered by that clause shall not be included, then the loss arising out of the same asset and covered by the same clause is equally outside the computation for that year. The assessee's argument that 'income' for the purposes of s.10(38) excludes 'loss' was rejected as having been rightly rejected by the Tribunal. From that conclusion the Court drew the immediate consequence that no loss in respect of such a capital asset is available for set-off. It approved the Tribunal's reliance on CIT v. Harprasad & Co. P. Ltd., where the Supreme Court held that the concept of carry forward of loss does not stand in vacuo but involves the notion of set off, postulating the permissibility and possibility of the carried forward loss being absorbed against the profits and gains of the subsequent year; that set off implies the tax being exigible; that if such set off is not possible because the income of the subsequent year is from a non-taxable source there would be no point in allowing the loss to be carried forward; and, conversely, that a loss arising under a head not chargeable to tax cannot be carried forward and absorbed against income from a taxable source in a subsequent year (paragraph 7).
If that be so, the loss also arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration.
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Handle my notice → Ask a CA on WhatsAppOn this Gujarat High Court decision, no. Because s.10(38) keeps the income arising from such a capital asset out of the computation of total income altogether, the loss arising on the same class of asset is likewise not includable, and is therefore not available for set-off under s.70(3) or for carry forward under s.74. The Court rejected the argument that 'income' in s.10(38) does not include 'loss'. This was decided by the High Court (Akil Kureshi J and Sonia Gokani J) and bears on section 74, section 70, section 10(38), section 45 of the Income Tax Act 1961. It is reported as Tax Appeal No. 440 of 2013 (Gujarat High Court); cited in the Bombay High Court as [2014] 367 ITR 261 (Guj.). This is the harder of the two competing lines and it is the only High Court decision found that decides the point. It matters twice over. For the s.10(38) years — assessment year 2005-06 to assessment year 2018-19 — it is the authority the Revenue will cite against any claim to set off or carry forward a long-term capital loss on securities transaction tax paid shares. And it is the reasoning that the department reaches for whenever an exemption provision is met by a loss, because it rests on the Supreme Court's Harprasad principle that a loss under a head not chargeable to tax cannot be carried forward and absorbed against a taxable source. The competing line is at Tribunal level and is set out in a separate entry: Raptakos Brett and, after it, United Investments hold that the 'income includes loss' concept applies only where the entire source is exempt, and not where one stream within a taxable source is exempted. The Bombay High Court admitted an appeal on the point in PCIT v Vibhadeep Investments and Trading Ltd on 27 January 2020, describing the Gujarat view as diametrically opposite to the Tribunal's — so the conflict had been placed before a second High Court as a substantial question of law and, on the material read here, remained unresolved. For years from assessment year 2019-20 the question changes shape: s.10(38) was withdrawn and s.112A now charges the gain, so the reasoning that the source is exempt no longer applies on its own terms. If it applies to you, the first step is this: Fix the assessment year first. If the loss arose in a year when s.10(38) applied to the transaction, this decision is against you and must be met head on; if it arose from assessment year 2019-20 onwards, s.10(38) is not in play and the argument is a different one under s.112A.
For assessment year 2006-07 the assessee filed a return declaring total income of about Rs 8.67 lakh. In scrutiny it emerged that during the year he had sold shares of Suashish Diamond Limited, incurring a long-term capital loss of Rs 1,44,73,463, and had sold shares of Karp Diamond Ltd, earning a long-term capital gain of Rs 1,03,00,809. He claimed set-off of the loss against the gain. That the Suashish Diamond shares were covered by s.10(38) was not in dispute. The Assessing Officer disallowed the set-off and the carry forward on the footing that a loss from a source whose income is exempt cannot be set off against, or carried forward against, taxable income. The Tribunal, by order dated 4 April 2012, upheld the Revenue relying on s.10(38) and on the Supreme Court's decision in CIT v. Harprasad & Co. P. Ltd. The assessee appealed under s.260A, contending among other things that the term 'income' in s.10(38) does not take in a 'loss' and that s.74(1)(b) governed the set-off. The matter was decided on 2014-01-13 by the High Court (Akil Kureshi J and Sonia Gokani J). On those facts the High Court held as follows. The tax appeal was dismissed; no question of law was found to arise. Where the capital asset is one covered by s.10(38), the income arising from it is excluded from the computation of total income, and the loss arising from the same asset is likewise not includable in that computation, with the consequence that any loss in respect of such a capital asset is not available for set off. The contention that 'income' in s.10(38) does not include 'loss' was rejected (paragraphs 7 and 8).
The Court took as its starting point the undisputed fact that the shares in question were covered by s.10(38), and reasoned that if s.10(38) directs that in computing the total income of the previous year the income covered by that clause shall not be included, then the loss arising out of the same asset and covered by the same clause is equally outside the computation for that year. The assessee's argument that 'income' for the purposes of s.10(38) excludes 'loss' was rejected as having been rightly rejected by the Tribunal. From that conclusion the Court drew the immediate consequence that no loss in respect of such a capital asset is available for set-off. It approved the Tribunal's reliance on CIT v. Harprasad & Co. P. Ltd., where the Supreme Court held that the concept of carry forward of loss does not stand in vacuo but involves the notion of set off, postulating the permissibility and possibility of the carried forward loss being absorbed against the profits and gains of the subsequent year; that set off implies the tax being exigible; that if such set off is not possible because the income of the subsequent year is from a non-taxable source there would be no point in allowing the loss to be carried forward; and, conversely, that a loss arising under a head not chargeable to tax cannot be carried forward and absorbed against income from a taxable source in a subsequent year (paragraph 7). In the words reproduced by the source cited on this page: "If that be so, the loss also arising out of such an asset and covered by the said clause would likewise be not includable in computation of the income of the assessee for the year under consideration." The decision followed or applied CIT v. Harprasad & Co. P. Ltd. [1975] 99 ITR 118 (SC) — relied on, as applied by the Tribunal.
It was decided by the High Court on 2014-01-13 and is reported as Tax Appeal No. 440 of 2013 (Gujarat High Court); cited in the Bombay High Court as [2014] 367 ITR 261 (Guj.). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 74, section 70, section 10(38), section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The tax appeal was dismissed; no question of law was found to arise. Where the capital asset is one covered by s.10(38), the income arising from it is excluded from the computation of total income, and the loss arising from the same asset is likewise not includable in that computation, with the consequence that any loss in respect of such a capital asset is not available for set off. The contention that 'income' in s.10(38) does not include 'loss' was rejected (paragraphs 7 and 8). It arises in Capital Gains and Capital Gains Exemptions matters, on section 74, section 70, section 10(38), section 45 of the Income Tax Act 1961, and was decided by Akil Kureshi J and Sonia Gokani J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check which High Court has jurisdiction over your assessee. This is a Gujarat High Court decision; in Bombay the point stood admitted as a substantial question of law and the Tribunal line is the other way. If you are running the taxpayer's case, build it on the source versus stream distinction — that s.10(38) exempts one specie of income arising from a source, capital gains, which remains chargeable — and cite Royal Calcutta Turf Club v CIT [1983] 144 ITR 709 (Cal), on which the Tribunal line rests, rather than arguing at large that income does not include loss. That last argument is precisely what this Court rejected. Distinguish on the facts where you can: here the loss and the gain were on shares of different companies, the loss shares being admittedly covered by s.10(38), and the assessee's counsel appears not to have advanced the source versus stream argument at all. Do not let the point be lost procedurally. A long-term capital loss is carried forward only under s.74(1), which s.80 read with s.139(3) makes conditional on the loss being determined in a return filed within the s.139(1) time; a belated return kills the claim before the merits are reached.
Searched for later treatment; none was found. That is not the same as a source affirming it. This is a judgment a practitioner should not cite without knowing what has been said about it. A citedby search returns a single later decision, and it refuses to follow it. In Nikhil Sawhney v ACIT (ITAT Delhi, 17 August 2020) the Bench set out at para 23(a) that in 'Kishorebhai Bhikhabhai Virani Vs Assistant Commissioner of Income, 367 ITR 261' the Gujarat High Court held that the 'loss arising on sale of capital asset covered under section 10(38) would not be includible in computation of assessee's income and therefore would not be available for set off', and then declined to follow it as rendered per incuriam and sub silentio, the Supreme Court decisions in Karamchand Premchand and Harprasad not having been considered, allowing the carry forward of a long term capital loss of Rs 90,80,571. A Tribunal cannot overrule a High Court, and outside Gujarat the judgment is in any event only persuasive, but the argument is live and will be made. A probe for a High Court holding the opposite - that such a loss can be set off or carried forward - returned nothing, so this is not a case of High Courts in conflict; it is a High Court whose reasoning the Tribunal has attacked. No later decision applying or affirming it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Paragraph 7 of the judgment was obtained as a full verbatim transcription through indiankanoon's print view and the phrase 'would likewise be not includable in computation of the income' was confirmed by exact-phrase retrieval, which returned this judgment plus five later decisions reproducing it. Paragraphs 1 to 6 were read only in abridged form, so the questions as proposed by the assessee are described rather than quoted, and the figures — a loss of about Rs 1.44 crore and a gain of about Rs 1.03 crore — come from that abridged reading. The judgment does not state in terms that securities transaction tax was paid on the sale of the Suashish Diamond Ltd shares; what it records is that their coverage by s.10(38) was not in dispute. The reported citation 367 ITR 261 is taken from the Bombay High Court's reference to this decision in PCIT v Vibhadeep Investments and Trading Ltd and was not verified against the report itself. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The tax appeal was dismissed; no question of law was found to arise. Where the capital asset is one covered by s.10(38), the income arising from it is excluded from the computation of total income, and the loss arising from the same asset is likewise not includable in that computation, with the consequence that any loss in respect of such a capital asset is not available for set off. The contention that 'income' in s.10(38) does not include 'loss' was rejected (paragraphs 7 and 8).
TaxSphere, “Kishorebhai Bhikhabhai Virani v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/kishorebhai-virani-long-term-capital-loss-on-10-38-shares-not-available/ (validity last checked 2026-09-07)
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