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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 ..... ther than short-term capital assets assessable for that assessment year under section 74(1)(a)(ii) of the Act ? 2. Whether the Tribunal was right in law in holding that the capital gain for any assessment year could be determined after applying the provisions of section 80T and, therefore, the deduction of Rs. 5,000 under the said section must be allowed first and the provisions of carry forward and set-off must be applied thereafter? " In order to appreciate the nature of the controversy posed far our decision in the present proceedings, it is necessary to have a look at certain 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. Bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which amongst others includes any capital gains chargeable under s. 45. Section 2(45) defines " total income " to mean the total amount of income referred to in s. 5, computed in the manner laid down in the Act. Section 4, which is the charging section, provides that where any Central Act enacts that Income-tax shall be charged for any assessment year at any rate or rates, Income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under a similar computation made for the assessment year in respect of any other capital asset. Section 70(2)(ii) provides that where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any capital asset other than a short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation, made for the assessment year in respect of any other capital asset not being a short-term capital asset. Section 71 provides 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f against the capital gains, if any, relating to capital assets other than short-term capital assets assessable for that assessment year and, if it cannot be so set off, the amount therof not so set off shall be carried forward to the following assessment year, and so on ....... .." Thereafter follows Chap. VI-A which pertains to deductions to be made in computing the total income. This chapter is divided into four broad parts. Part A relates to general provisions and comprise of ss. 80A and 80B. Section 80A(1) provides that in computing the total income 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 Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward for being set off against capital gains of subsequent years, are all found in chapters preceding Chap. VI-A. Thus, in order to determine whether capital gains have accrued to an assessee in a given assessment year, computation of such capital gains will have to be made under the provisions of s. 45 read with s. 48 of the Act. These are the sections under which computation of capital gains arising to an assessee in a given year, has to be made. Before such capital gains which are computed as aforesaid can enter the calculation of the gross total 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 comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross 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, a question arises about effecting special deductions as per that section. Thus, before s. 80T contingency can arise, it must be shown that in a given assessment year, the gross total income of the assessee includes income chargeable under the head " Capital gains ". But if because of supervening event of operation of s. 74 of the Act, the carried forward capital losses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, find that the view taken by the Tribunal and the AAC on this aspect cannot be sustained on the clear language of the relevant statutory provisions of the Act to which we have referred earlier. Now has reached the stage when it becomes necessary to refer to certain decisions to which our attention was drawn by the learned advocates of both the sides. In H. H. Sir Rama Varma v. CIT a similar question had arisen before the Kerala High Court. The question that was posed for consideration before the Kerala High Court was whether s. 80T relief is 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. The question before the Supreme Court was whether in computing the profits of the assessee for the purpose of special deduction provided under s. 80E, items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years have to be deducted before arriving at the figures from which the 8 per cent. contemplated by s. 80E is to be deducted or not. The Supreme Court noted the important words in s. 80E(1) and stated that the words appearing in parenthesis, that is, " as computed in accordance with the other provisions 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of calculating the deduction of 8% the items in respect of the unabsorbed depreciation and development rebate should not have been excluded. He, therefore, set aside the order of the ITO and directed that a fresh assessment be made in accordance with law. The assessee being aggrieved by the decision of the Addl. Commissioner, carried the matter in appeal to the Tribunal which took the view that the unabsorbed depreciation and development rebate could not be deducted in computing the deduction admissible under s. 80E of 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 Indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction of 8% contemplated by s. 80E(1). The Supreme Court, in this connection, negatived the contention of the assessee that the words " total income " as mentioned in s. 80E(1) had been used in the commercial sense and held that in sub-s. (1) of s. 80E, the expression " total income " is followed by the words " as computed in accordance with the other provisions of this Act " in parenthesis and the mandate of these words clearly negatived the argument that the expression " total income " had been used in the sense of 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to be non-deductible before working out the 8% deduction under section 80E(1) cannot be accepted. As observed earlier, on a proper construction of the provision contained in sub-section (1) of section 80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of 8% under section 80E(1)." The aforesaid decision of the Supreme Court, in our view, squarely answers the question which has been posed for our consideration 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 earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served (p. 777) : " Now, if a reference is made to section 72(1), it will be found that it provides that where the net result of computation under the head ' Profits and gains of business or profession' is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome includes this particular category of income, whatever be the quantum of such income included, the condition would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of "such income ", as the case may be. It was further observed (p. 258): "The words 'such income' cannot have reference to the quantum of the income included but refer only to the category of the income included, viz., income by way of dividends from a domestic company." In that connection, it was observed that 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a component part of the gross total income. These words merely prescribe a condition for the applicability of the section, namely, that the gross total income must include the category of income described by the words " income by way of dividends from a domestic company ". If the gross total income includes this particular category of income, whatever be the quantum of such income included, the condition would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of " such income ". 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 quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Patel, for the assessee, also invited our attention to the decision of the Madras High Court in CIT v. V. Venkatachalam [1979] 120 ITR 688. Mr. Patel submits that this is a solitary judgment of the Madras High Court which has taken a view on this very question in favour of the assessee. The question posed for decision of the Madras High Court in the aforesaid case was as to whether the Tribunal was correct in holding that the assessee was entitled for the assessment year 1973-74, to relief under s. 80T of the I.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital gains arising in the relevant assessment year against business loss for the same year. Hence the decision of the Madras High Court cannot be of any assistance to the assessee. Even otherwise, it is not possible to agree with the reasoning of the Madras High Court in the aforesaid decision and to hold that the decision of the Supreme Court in Cloth Traders' case [1979] 118 ITR 243 fully covers the question of interpretation of s. 80T read with s. 80B(5) and s. 74(1)(a)(ii) as contended by the learned advocate 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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court and s. 80T now under consideration, is that in s. 80E itself the definition, which is now provided in s. 80B(5), was incorporated. In other words, the expression 'as computed in accordance with the other provisions of this Act' found in brackets in s. 80E is now to be found in s: 80B(5)." The question was accordingly answered in favour of the revenue. The aforesaid decision of the Madras High Court in M. Seshasayee's case thus takes the same view which we are inclined to take in the present proceedings. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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