2020 (8) TMI 320 - AT - Income Tax

Capital gain from sale of commercial property - intra-head adjustment of loss - Benefit of carry forward of long term capital loss on the sale of shares for the current year - whether it is lawful to first compute capital gain after doing intra head adjustments and whether the deductions u/s 54F should be allowed from the net income computed after intra head adjustments? - HELD THAT - As per provisions of section 54F (1) on fulfilment of certain conditions the capital gain arose on sales of such assets will not be chargeable to capital gain under the section 45 of the Act. The scheme of Sections 45 to 55A provide for the computation of capital gains, and the effect has to be given first to the provision of capital gains as given under the above scheme and then apply the provisions of Section 70. Section 70 would come into play only when the capital gains have been computed in accordance with the provisions contained in Sections 45 to 55A. Thus, if, after work out of deduction u/s 54F if the capital gain arose on sale of certain assets is not chargeable to capital gain than the loss arose to assessee on sales of another assets cannot set off from gain of such assets. It is not necessary that one should first apply Section 70(3) and thereafter only, the assessee could invest the capital gain arising from the long term capital asset. We set aside the orders of lower authorities and direct the AO to compute the capital gain from sale of commercial property by not doing intra-head adjustment for the loss suffered from sale of shares and allow to carry forward the long term capital loss for the current year on sale of shares. Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of benefit of carry forward of long term capital loss on sale of shares for the current year.
2. Computation of capital gain after intra-head adjustments and allowance of deductions under section 54F.

Analysis:
1. The appeal was filed against the order of the ld. CIT(A) regarding the disallowance of the benefit of carry forward of long term capital loss on the sale of shares for the current year. The AO had set off the long term capital loss suffered from shares against the long term capital gain from the sale of a commercial property, resulting in a net long term capital gain. The AO disallowed the carry forward of the long term capital loss on the sale of shares. The ld. CIT(A) confirmed this action. The main issue was whether it is lawful to compute capital gain after intra-head adjustments and whether deductions under section 54F should be allowed from the net income computed after intra-head adjustments.

2. The relevant provisions of Sections 45(1), 54F, and 70 of the Income-tax Act were considered. Section 45(1) deals with capital gains, while Section 54F provides for exemptions on the transfer of long-term capital assets. Section 70 pertains to the set off of losses from one source against income from another source under the same head of income. The Tribunal noted that capital gains should be computed first according to the provisions from Sections 45 to 55A before applying Section 70. The Tribunal cited a decision of the Hon’ble High Court of Madras, emphasizing that capital gains should be computed before applying provisions for the set off of capital loss.

3. Considering the above discussions and legal principles, the Tribunal set aside the orders of the lower authorities. The AO was directed to compute the capital gain from the sale of the commercial property without doing intra-head adjustment for the loss suffered from the sale of shares. The Tribunal allowed the carry forward of the long term capital loss on the sale of shares for the current year. Consequently, the appeal of the assessee was allowed, and the order was pronounced in the open court on 11/08/2020.