The option to or not to avail the benefit of indexation for the computation of capital gains on the transfer of each of the long term capital asset is with the assessee

Mohanlal N. Shah HUF v ACIT
ITA No. 789/Mum/2004
September 24,2008

6. Having heard both the parties and having considered their rival submissions, we find that the only dispute in this case is as 10 whether while computing the income under the head ‘capital gains’, income from certain sources can be computed taking the benefit of indexation and the income from certain other sources can be computed without indexation and can there be a set off of loss computed from a source with indexation from the gain from computed without indexation another source. Let us first examine the relevant legal provisions. The computation of income from capital gains is governed by sec.48 of the Income Tax Act, which reads as follows-

” Sec.48 – The income chargeable under the head “Capital gains” shall be computed, by deduction from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:-

[i] expenditure incurred wholly and exclusively in connection with such transfer*

[ii] the cost of acquisition of the asset and the cost of any improvement thereto;Provided that.. .. .. .. .. ..Provided further that where long-term capital gain arises from the transfer of a long term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause [ii] shall have effect as if for the words “cost of acquisition’ ‘ and “cost of any improvement” , the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:

A plain reading of the above provision reveals that capital gains from each asset which is transferred has to be computed. This is clear from the definite article The’ used before the words ‘capital asset’ The second proviso to sec.48 also provides that where there is a long term , capital gain on transfer of a long term capital asset, [other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian Company referred to in first proviso], words ‘cost of acquisition’ and ‘cost of improvement’ used in clause [ii] shall mean Indirect cost of acquisition’ and Indirect cost of improvement’ respectively. Thus, it can be seen that indexation is allowable while computing the ‘capital gain’ from the transfer of each long term capital asset.

7. Then comes sec.70 of I.T.Act which provides for set otl of loss from one source against income from another source under the same head of income. Sub-sec.[3] of sec.70 which is relevant for the present case is as under-

“Sec.70-[l] .. .. .. .. .. .. ..70(2) .. .. .. .. .. ..

70/3/ – Where the result of the computation made for any assessment year under sections 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 toss 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.”

8. The next relevant section is sec 12 which deals with the tax on long term capital gain. For proper appreciation of the case, therelevant portion of sec. 112 is reproduced hereunder-

” Sec. 112 [1] – Where the total income of an assessee includes any income, arising from the transfer of a long term capital asset, which is chargeable under the head “Capital gains*, the tax payable by the assessee on the total income shall be the aggregate of,-

[a] in the case of an individual or a Hindu undivided family, [being a resident]

[i] the amount of income tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income’ and

[ii] the amount of income-tax calculated on such long term capital gains at the rate of twenty percent:

Provided that .. .. .. .. ..[b] .. .. .. .. .. .[c] .. .. .. .. .. ..[d] .. .. .. .. .. Provided that where the tax payable in respect of any income arising from the transfer of a long term capital asset, being fisted securities [or unit] or zero coupon bond] exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 148, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.”

9. From the above provision of law, it can be seen that the capital gains on each of the capital asset transferred has to be computed and then aggregated by setting off the loss, if any, from the transfer of long term capital assets from the gain, if any, of the other long term capital assets. As provided in sec.48, the option is with the assessee to or not to avail the benefit of indexation for the computation of capital gains on the transfer of each of the long term capital asset. It is only after computing the capital gains as per sec.48, can it be aggregated by setting off the loss u/s.70 of the I. T.Act and it is then that the rate of tax as provided u/s.112 is applied. The second provision to sec. 12 provides that if the capital asset which is transferred is a listed security or units or a zero coupon bond, and if the tax payable thereon exceeds ten percent of the capital gains computed without indexation, then such excess shall be ignored for the purpose of computing the tax payable by the assessee. Thus, it is seen that the legislature intended to tax the capital gains with indexation at 20% and to limit the tax on the capital gains on transfer of listed securities or units or zero coupon bonds computed without indexation to 10% thereof.