ITAT Clarifies: Capital Loss Can Be Set Off Against Capital Gain Despite Different Tax Rates
Tribunal says Section 70 allows set-off of losses across assets, tax rate differences don’t matter
Ruling offers relief to investors and strengthens clarity in capital gains taxation
By Our Legal Reporter
New Delhi: December 13, 2025:
In a landmark ruling, the Income Tax Appellate Tribunal (ITAT) has clarified that capital losses can be set off against capital gains even if the applicable tax rates on those gains differ. This decision provides significant relief to investors and taxpayers who often face disputes with the tax department over the treatment of capital losses.
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The case involved a foreign portfolio investor who had short-term capital losses from equity shares (taxable at 15%) and short-term capital gains from derivatives (taxable at 30%). The tax department denied the set-off, arguing that differing tax rates prevented such adjustment. The ITAT rejected this view, ruling in favour of the taxpayer.
Background of the Case
- The assessee, a foreign investor, reported short-term capital loss (STCL) from equity shares where Securities Transaction Tax (STT) was paid.
- The assessee also reported short-term capital gain (STCG) from derivatives, which are taxed at a higher rate.
- The assessee set off the losses against the gains under Section 70(2) of the Income Tax Act.
- The tax department objected, claiming that different tax rates meant the set-off was not permissible.
- The ITAT bench disagreed, ruling that Section 70(2) allows set-off of STCL against STCG irrespective of tax rates.
Tribunal’s Observations
The ITAT noted:
- Section 70(2) clearly permits set-off of short-term capital loss from one asset against short-term capital gain from another asset.
- The law does not restrict set-off based on differing tax rates.
- The department’s interpretation would unfairly penalise taxpayers and contradict the intent of the legislation.
- The ruling aligns with earlier decisions, including the case of VEMF-A, LP, where similar facts were considered.
Legal Principles
- Section 70 of the Income Tax Act governs intra-headset-off of losses.
- Section 70(2) specifically allows short-term capital loss from one source to be set off against short-term capital gain from another source.
- The law does not distinguish between assets taxed at different rates.
- Therefore, taxpayers can freely adjust losses and gains within the same category.
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Impact on Taxpayers
This ruling has major implications:
- Relief for investors: Taxpayers can now confidently set off losses against gains without worrying about differing tax rates.
- Clarity in law: The decision removes ambiguity and prevents arbitrary denial of setoffs by tax authorities.
- Encouragement for compliance: Investors will be more willing to declare losses and gains accurately, knowing they can adjust them.
For foreign portfolio investors and domestic taxpayers alike, the ruling strengthens fairness in capital gains taxation.
Expert Opinions
Tax experts have welcomed the ruling, noting that:
- It upholds the principle of equity in taxation.
- It prevents double taxation and ensures taxpayers are not penalised for investing in different asset classes.
- It sets a precedent for future cases, reducing litigation.
According to professionals, the ITAT’s interpretation is consistent with the legislative intent of Section 70 and will help streamline tax compliance.
Similar Cases
- In JS Capital LLC (ITAT Mumbai, 2024), the Tribunal allowed set-off of STCL from equity shares against STCG from derivatives despite differing tax rates.
- In Prudential Sugar Corporation Ltd (ITAT Chennai, 2025), the Tribunal permitted set-off of capital loss against slump sale gains.
- These cases collectively reinforce the principle that set off is allowed irrespective of tax rate differences.
Broader Implications
The ITAT ruling has wider significance for India’s tax system:
- For taxpayers: Assurance that genuine losses can be adjusted against gains.
- For authorities: A reminder to interpret laws fairly and consistently.
- For policymakers: The need to maintain clarity in tax provisions to reduce disputes.
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This case also highlights the importance of judicial oversight in ensuring fairness in tax administration.
Conclusion
The ITAT’s ruling on capital loss set off is a landmark in protecting taxpayer rights. By clarifying that losses can be set off against gains irrespective of differing tax rates, the Tribunal has reinforced fairness and consistency in India’s tax system.
For investors, the message is clear: declare your capital losses and gains accurately and use Section 70 to adjust them. The law supports you, and differing tax rates do not prevent set-off.
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