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TMI Blog1980 (9) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... n relevant facts. The assessment year under reference is 1968-69, the previous year being the year ended 31st March, 1968. The assessee is an individual. He submitted his return of income declaring his total income of Rs. 4,02,790 on 30th September, 1968, within the time allowed to the assessee. The assessee's capital gain for the assessment year under reference was Rs. 5,392 before allowing deductions under s. 80T of the I.T. Act, 1961. The capital loss brought forward from the earlier years was Rs. 34,607. The figure of capital loss brought forward from the earlier years worked out as under : Rs. Balance carried forward from 1960-61 ... 896 Loss carried forward from 1961-62 ... 69,600 ------------- 70,496 Less: Capital gain in 1967-68 allowed in that year ... 35,889 ------------- Balance loss carried forward in A.Y. 68-69 ... 34,607 Capital gain in assessment year 1968-69 ... 5,392 -------------- Balance loss carried forward in A.Y. 1969-70 ... 29,215 The contention of the assessee before the ITO was that the entire amount of Rs. 5,392 which was capital gain for the relevant assessment year ought not to have been set off against the brought forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us years, as the case may be, of every person. Section 5 pertains to the scope of total income and provides: " Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived... " Chapter IV of the Act deals with the computation of total income and lays down various heads of income. It provides : " Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income : A-Salaries. B-Interest on securities. C-Income from house property. D-Profits and gains of business or profession. E-Capital gains. F-Income from other sources. " Section 45 of the Act deals with capital gains being a head of income as mentioned in s. 14. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 53, 54, 54B, 54D and 54E, be chargeable to income-tax under the head " Capital gains " and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for a situation where in respect of any assessment year, the net result of the computation under any head of income other than " Capital gains " is a loss and visualises a situation where the assessee has no income under the head " Capital gains " and it provides that, in these circumstances, the assessee is entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. The aforesaid ss. 70 and 71 provide for the set off of loss from one source against income from another source under the same head of income and set-off of loss from one head against income from another respectively. The question of carry forward and set-off of business loss against different heads of income for subsequent years is dealt with by s. 72 onwards. Section 72(1) caters to the situation where for any assessment year, the net result of the computation under the head " Profits and gains of business or profession ", is a loss to the assessee, not being a loss sustained in a speculation business, and it provides that when such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the chapter, the deductions specified in ss. 80C to 80VV. Section 80B is the definition section. Sub-s. (5) defines de gross total income " to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the chapter or under s. 280-0. The second part of Chap. VI-A is Part B, which pertains to deductions in respect of certain payments which the assessee may have made during the relevant assessment year. Sections 80C to 80GG are comprised in this part. The third Part C relates to deductions in respect of certain incomes. Sections 80HH to 80TT are found in this Part C, and the last part of Chap. VI-A is " D ", which relates to other deductions and s. 80U to s. 80VV are found in this part. As the very title of Chap. VI suggests, the deductions which are contemplated by Chap. VI-A are to be made in computing the total income of the assessee for the purpose of income-tax assessment. A combined reading of ss. 80A(1) and 80B shows that in computing the total income of an assessee, certain deductions provided for in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income of an assessee for that year, which after other deductions as provided by Chap. VI-A would result in the net total income of the assessee exigible to income-tax on account of the combined operation of the charging s. 4 read with ss. 5 and 14, a question can arise whether the income arising under a given head may get completely wiped off on account of the provisions of set-off as contemplated by ss. 72 to 74 to which we have made a reference earlier. Thus, it is trite to say that if the income arising from any head in a given assessment year gets completely set off, such income would naturally get excluded at the stage of computation of the gross total income of the assessee for that year. It is only in a case where the income arising under the concerned head does not get set off either because there is no such occasion for its being set off by any previous year's carry-forward loss or it gets partially set off and some balance is left of income under that head, that such income from that head can have its say in the computation of the gross total income and once it has any say in the computation of gross total income, the further question of effecting special deductions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from earlier years completely, drown and wipe off the capital gains for the given year, as assessable under s. 45 read with s. 48, then, no income from that head would be left for being added as head of income for computing the gross total income out of which special deductions could be effected under Chap. VI-A for arriving at the net total income exigible to tax. It is only in cases where the capital gains of given assessment year are either not fully set off against carried forward capital loss of a previous year as per s. 74 or when such losses are not there at all, that the question of applicability of s. 80T would arise, as in such cases, net income chargeable under the head " Capital gains " would squarely form part of the computation of gross total income of the assessee for that year and it is at this stage that special deductions as provided by s. 80T have to be effected. It is further pertinent to note that s. 80T provides that " where the gross total income of an assessee not being a company includes any income chargeable under the head 'Capital gains' relating to capital assets other than short-term capital assets (such income being hereinafter referred to as long-ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be given only for the amount of capital gains after the capital loss is set off. The facts of the case were that in the assessment year in question, the assessee had long-term capital loss brought forward from earlier assessment years to be set off against the capital gains of the assessment year in question. The assessee was entitled to relief under s. 80T of the Act. The question was how the amount of capital gains had to be quantified, on which the relief under s. 80T had to be worked out. The ITO reckoned the capital gains at the net figure after setting off the capital loss for the previous years against the capital gains of the assessment year. It was the assessee's contention that for the purpose of working out the relief under s. 80T, the amount of capital gains should be taken at the very same figure before setting off the loss of the previous assessment years. On appeal by the assessee, the AAC agreed with the assessee's contention and allowed the appeal. On appeal by the revenue, the Tribunal found against the assessee and allowed the department's appeal. It was thereafter that the aforesaid question was referred for the opinion of the High Court. A Division Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Act " have to be given effect and since it is the income from business that has to be computed, the same, in view of s. 29, has to be computed in accordance with ss. 30 to 43A, which would include s. 41(2). The Supreme Court also considered the question of applicability of s. 72(1) to such computation and held that s. 72(1) has a direct impact upon the computation under the head " Profits and gains of business or profession ". In order to fully appreciate the ratio of the decision of the Supreme Court in the aforesaid case, it is necessary to have a look at the relevant facts of that case. The assessee, Cambay Electric Supply and Industrial Co. Ltd., carried on the business of generation and distribution of electricity at Cambay and, as such, was covered by the provisions of s. 80E(1) and was entitled to claim the deduction contemplated by the said section. The assessment in question related to the assessment year 1967-68, the accounting year for which was the financial year ending March 31, 1967. During the accounting period which ended on March 31, 1967, the assessee-company earned an income of Rs. 46,319 from its said business. It appeared that during this period it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, relying on the decision of the Mysore High Court in CIT v. Balanoor Tea and Rubber Co. Ltd. [1974] 93 ITR 115, and thus held against the revenue on this question. That brought the revenue to this High Court by way of a reference under s. 256(1) of the Act. We are directly concerned with the second question which was referred to this court in that case and that was: " Whether unabsorbed depreciation and development rebate amounting to Rs. 2,54,613 is not deductible in computing profits under section 80E(1) of the Act ? " This court by its judgment dated 11 the 24th December, 1975, reported in [1976] 104 ITR 744 (CIT v. Cambay Electric Supply Industrial Co. Ltd.), answered the aforesaid question in favour of the revenue by taking the view that the unabsorbed depreciation and development rebate had to be deducted before arriving at the figure that would be exigible to the deduction of 8% under s. 80E and, therefore, after deducting the aggregate amount of Rs. 2,54,613 from Rs. 8,02,126, the balance of Rs. 5,47,5l3 was held exigible to the deduction of 8% under the said provision. Being dissatisfied, the assessee carried the matter to the Supreme Court. The Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial profits. The Supreme Court further noted that the expression " total income " has been defined in s. 2(45) of the Act as meaning " the total amount of income referred to in section 5, computed in the manner laid down in this Act ", and observed that when this definition has been furnished by the Act itself, that expression appearing in s. 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with such definition. The Supreme Court disapproved the view of the Kerala High Court in Indian Transformers Ltd. v. CIT [1972] 86 ITR 192 and held that the Kerala High Court had regarded s. 72, appearing in Chap. VI, as a provision unconnected with the computation of the total income of an assessee and a provision which comes into operation at a stage subsequent to, the computation of the total income arising from business done in accordance with ss. 30 to 43A occurring in Chap. IV of the Act and, therefore, had held that the unabsorbed losses cannot be set off before calculating the deduction under s. 80E. The Supreme Court ruled that it is not possible to accept the view that s. 72 has no bearing on, or is unconnected with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case. It may be noted that s. 80E(1) which the Supreme Court construed, included in parenthesis the mandatory words, viz , " total income as computed in accordance with the other provisions of the Act ". So far as the facts of the present case are concerned, s. 80T even though not containing these words is controlled by these very words as found in the definition provision of s. 80B(5) which are general provisions which apply to the interpretation of " gross total income ". It is further pertinent to note that the Supreme Court was concerned with the interpretation of s. 72(1) read with s. 80E(1). Section 72(1) to which we have referred in the earlier part of this judgment represents a scheme which is analogous to the scheme represented by s. 74. Section 72(1) provides that where for any assessment year, the net result of the computation under the head " Profits and gains of business or profession " is a loss to the assessee, then under the circumstances contemplated by the said section, it can be carried forward to the following assessment year and can be set off against the profits and gains, if any, of any business or profession carried on by him and assessable fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off against the profits and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year. Thus, section 72(1) has a direct impact upon the computation under the head of 'profits and gains of business or profession'. It is thus obvious that the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be obtained without working out the net result of computation under the head 'Profits and gains of business' ....... In principle, therefore, it is not possible to make any distinction as between carried forward loss and carried forward development rebate or carried forward depreciation allowance so far as section 80-I is concerned." The aforesaid decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. [1978] 113 ITR 84 and the decision of this court in the case of Amul Transmission [1976] 104 ITR 771 clearly lay down the proposition that before computing total income as per the provisions of Chap. VI-A, the overriding effect of sections like s. 72(1) have got to be given due weight and full play. It is only after that type of computation that it can be said that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the deduction permissible under s. 80M is to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, i.e., after making the deductions provided under the Act. The aforesaid decision of the Supreme Court proceeded to consider a question which was quite different from the one which is posed for our consideration in the present proceedings and which squarely arose for consideration of the Supreme Court in Cambay Electricity Co.'s case [1978] 113 ITR 84. It is pertinent to note that the Supreme Court in Cloth Traders' case [1979] 118 ITR 243 was not at all concerned with the question of computation of gross total income after setting off of income under any head during any assessment year against the balance of carried forward losses as per the provisions of s. 72 or s. 74. In Cloth Traders' case [1979] 118 ITR 243, the Supreme Court was only concerned with the interpretation of the provisions of s. 80M and its forerunner, s. 85A or s. 99(1)(iv) of the Act, and the Supreme Court while interpreting these provisions laid down the criterion for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Supreme Court observed that the words employed by the Legislatare in s. 80M clearly prescribed a criterion of eligibility for the benefit of the said section and one of the conditions of such eligibility was that the gross total income must include that particular category of income which was contemplated by s. 80M. In the present case also, it is clear that if the gross total income of the assessee included for any assessment year any capital gains chargeable in that year, then certainly s. 80T benefits would be attracted and the deductions contemplated by that section would have to be effected, though while deciding the applicability of the provision, the quantum of income under a given head is not very relevant as decided by the Supreme Court while interpreting s. 80M, and what is relevant is only the existence of a given category of income as a part and parcel of the gross total income and it is this existence without reference to the quantum of the concerned head of income that would invoke applicability of the concerned deduction provision. Bat the question which has been posed for our consideration did not arise before the Supreme Court in Cloth Traders' case [1979] 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. Act, 1961, on an amount calculated in terms of the aforesaid provisions with reference to the gross capital gains of Rs. 1,02,740. The departmental authorities as well as the Tribunal in that case took the view that the business loss of the assessee for the previous year which amounted to Rs. 41,892 was required to be deducted from set-off against capital gains of the relevant year and, thereafter, relief under s. 80T should be granted. This view of the departmental authorities and the Tribunal was not approved by the Madras High Court in the aforesaid decision in the light of the decision of the Supreme Court in Cloth Traders' case [1979] 118 ITR 243. In the view of the Madras High Court, there was close similarity in the language of s. 80M and that of s. 80T and hence the decision of the Supreme Court in Cloth Traders'case [1979] 118 ITR 243 would apply to a claim under s. 80T as well, as, except for the difference in the category of income, there is no other distinction between these two provisions and the scheme of allowance is also identical according to the Madras High Court, relief under s. 80T will have to be worked out on the gross amount of capital gains, that is, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate for the assessee. It is further pertinent to note that in the aforesaid decision of the Madras High Court an earlier judgment of the Madras High Court in T.C. No. 408 of 1975 [CIT v. M. Seshasayee- has been referred to and it is observed that the said decision is impliedly overruled by the decision of the Supreme Court in Cloth Traders' case [1979] 118 ITR 243. We have already shown earlier that the Cloth Traders'case does not cover the question which was posed for the decision of the Madras High Court in V. Venkatachalam's case [1979] 120 ITR 688. Hence, it is not possible to agree with the view of the Madras High Court in V. Venkatachalam's case that the earlier judgment of the same High Court in T.C. No. 408 of 1975 [CIT v. M. Seshasayee was not correctly decided. At this stage, it is necessary to turn to the aforesaid decision of the Madras High Court in T.C. No. 408 of 1975 (CIT v. M. Seshasayee). The said judgment has been reported in Current Tax Reporter, 1979, Vol. 12, at page 360 . It is delivered in the case of CIT v. M. Seshasayee. The facts of that case were that in computing the relief due to the assessee under the provisions of s. 80T, the assessee took her gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. We fully concur with the view of the Madras High Court in the aforesaid decision and hold that the ratio laid down in Cambay Electricity Co. [1978] 113 ITR 84 by the Supreme Court applies with all force to the situation which has been posed for our consideration in the present proceedings. As a result of the aforesaid discussion, it must be held that while arriving at the figure of capital, gains assessable under s. 45 of the Act, the computation is to be made under s. 45 read with s. 48 and after the said capital gains have been set off against carried forward balance of capital losses, from previous year as per the provisions of s. 74(1)(a)(ii), a further question would arise as to whether any balance, of capital gains arising during the accounting year is left, which can be brought within the fold of gross total income for that year as contemplated by s. 80A(1) read with s. 80B(5) and it is only in that eventuality that the question of effecting further deductions as contemplated by s. 80T can arise for consideration. It goes without saying that if there is no such balance of capital gains left for being included in the gross total income for the relevant assessment year as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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