HC upholds long term capital gain exemption prior to set off of long term capital loss

By TG Team Income Tax Judiciary August 4, 2013

TaxGuru Citation: 2013 taxguru.in 1016
Case Name: Commissioner of Income Tax Vs Vijay M.Mahtaney (Madras High Court)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: All High Courts, Madras High Court

Upgrade to Basic or Premium to download.

Already Upgraded? Log in.

Issue- Whether while computing the capital gain, exemption available under the head Capital Gain should be given effect and then only the provisions for set off and carry forward of losses should be applied under the Act?

Facts :- It is seen from the facts narrated that the assessee herein made a long term capital gain to the tune of Rs.6,42,22,435/‐ on the sale of shares. Admittedly, the assessee had invested the long term capital gains in REC Bonds to the tune of Rs.6,50,00,000/‐. Apart from this, there were long term capital loss on sale of shares and immovable properties which were claimed to be carried forward to the subsequent years. The Assessing Officer apparently agreed with the assessee on this state of affairs. However, in exercise of jurisdiction under Section 263 of the Income Tax Act, 1961, the Commissioner of Income Tax (Appeals) viewed that as per Section 74(1) of the Income Tax Act, the loss relating to the long term capital asset shall be first set off against income, if any, under the head “Capital gains” assessable for that assessment year in respect of any other capital asset not being a short term capital asset and then only the exemption under Section 54 EC would apply. He thus held that the assessment completed under Section 143(3) of the Income Tax Act is thus erroneous and prejudicial to the interest of the Revenue requiring revision of assessment. While summarily rejecting the assessee’s reply based on Section 54 EC, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to redo the assessment.

Aggrieved by the same, the assessee went on appeal before the Income Tax Appellate Tribunal. The Tribunal pointed out that even though Section 45(1) does not specify Section 54EC as had been done by erstwhile Sections 54, 54A, 54B, 54EA, 54EB and 54F, yet, going by the import of Section 54EC(1)(a) and (b), the assessee was entitled to take advantage of the said provisions even before working out Section 70. Pointing out to the scheme of Sections 45 to 55A which provide for the computation of capital gains, the Tribunal held that 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. It viewed that 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. Irrespective of whether Section 54EC(1) is found in Section 45 or not, in terms of Section 54EC, the effect of it cannot be ignored, as the investment in REC bonds takes the capital gains out of the charging provision. Since the amount invested in REC bonds does not enter into the computation at all, the revision done was not sustainable in law. Consequently, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals). Aggrieved by this, present appeal has been filed by the Revenue.

Held – The High Court observed that provision for investment in specified bonds (Section 54EC of the Act) was inserted via CBDT Circular4 as a replacement of earlier provisions (Sections 54EA and 54EB of the Act). Thus, the intention of CBDT Circular was to add sunset clause to earlier Sections and replace with new section. The provisions of calculation of capital gains5 specifically mention the earlier Sections (Section 54EA and 54EB of the Act) and not the new Section (54EC). However, as the intent of the CBDT Circular was to replace the earlier sections, hence the benefit cannot be denied to the taxpayer. The High Court disagreed with the tax department’s argument that for the purpose of working out relief of investment in specified bonds, one has to take recourse first to set off provisions and then to look at Section for claiming exemptions for Capital Gain. Provisions of the Act relating to carry forward and set off losses shows that the loss that has to be looked at first is not with reference to the loss arising in respect of any new capital asset, but in the totality of the loss suffered on the sale of capital asset chargeable to tax as per the Act. Thus the High Court confirmed that the taxpayer was entitled to claim benefit of investment in bonds prior to set off provisions.

In the High Court of Judicature at Madras

Dated: 18.06.2013

Coram

The Honourable Mrs.JUSTICE CHITRA VENKATARAMAN and

The Honourable Ms.JUSTICE K.B.K.VASUKI

Tax Case (Appeal) No.152 of 2010

Commissioner of Income Tax

Vs.

Vijay M.Mahtaney

APPEAL under Section 260 A of the Income Tax Act against the order dated 4.9.2009 made in I.T.A.No.1017/Mds/2008 on the file of the Income Tax Appellate Tribunal ‘C’ Bench for the assessment year 2003‐04.