2011 (5) TMI 236 - AT - Income Tax

Revision - Exemption u/s 54EC - Long term capital gain - Set off and carry forward long term capital loss - . A plain reading of these provisions would show that while section 54EC comes into play in the process of computing capital gains which are assessable under the head capital gains section 74(1) (b) comes into play only when the income assessable to tax under the head capital gains is computed - The stage at which set off of carried forward long term capital loss is to be given is subsequent to the stage at which income under the head capital gains is computed and deduction under section 54EC is to be given in the course of the latter - Therefore Commissioner erred in assuming the order under section 263 because these errors can only be assumed when the order of the AO is erroneous and prejudicial to the interest of the revenue whereas in the present case, the order was not erroneous at all - Decided in the favour of the assessee

Summary

Issues:
Interpretation of the provisions of section 54EC and section 74(1) of the Income Tax Act, 1961 regarding the set off of brought forward long term capital losses before or after granting deduction under section 54EC.

Analysis:
The case involved a challenge to the correctness of the Commissioner's order under section 263 of the Income Tax Act, 1961, for the assessment year 2005-06. The primary issue was the timing of setting off brought forward long term capital losses concerning the deduction under section 54EC. The appellant contended that deduction under section 54EC should be granted before setting off the brought forward losses. The Commissioner, on the other hand, argued that the deduction under section 54EC cannot be allowed before adjusting the brought forward losses. The Tribunal analyzed the provisions of section 54EC and section 74(1) to determine the correct sequence of events in granting deductions and setting off losses.

The Tribunal noted that section 54EC provides for an exemption from taxation of capital gains under certain conditions, specifying that capital gains invested in specified bonds will not be taxed. On the other hand, section 74(1) deals with the carry forward and set off of capital losses, stating that such losses can only be set off against income assessable under the head "capital gains." The Tribunal concluded that the deduction under section 54EC should be granted before setting off brought forward losses, as the exempted income under section 54EC cannot be part of the chargeable income under "income from capital gains." Therefore, the stage for setting off brought forward losses arises only after computing income under the head "capital gains" and granting deductions under section 54EC.

The Tribunal rejected the Commissioner's argument that the deduction under section 54EC cannot be more than the income included in the gross total income, as section 80AB, dealing with deductions under Chapter VIA, does not apply to section 54EC falling under Chapter IV. The Tribunal emphasized that the order of the Assessing Officer was not erroneous in granting the deduction under section 54EC before setting off brought forward losses. Consequently, the Tribunal held that the Commissioner erred in assuming jurisdiction under section 263, as the assessment order was not erroneous. The Tribunal allowed the appeal of the assessee and quashed the revision order.

In conclusion, the Tribunal clarified the correct interpretation of the provisions of section 54EC and section 74(1) regarding the timing of setting off brought forward long term capital losses in relation to the deduction under section 54EC. The Tribunal upheld the appellant's contention that the deduction under section 54EC should be granted before setting off brought forward losses, as the exempted income under section 54EC cannot be considered for setting off losses.