Judgment:
ORDER
Per Shri M. A. Ajinkya, Accountant Member - This is an appeal by the department against the order of the CIT (Appeals) IX, Bombay, in which the following two grounds are raised :-
'1. On the facts and in view of the circumstances of the case, the learned CIT (A) erred in allowing dedn. u/s. 80T with reference to the gross amount of Long Term Capitals Gains, without allowing set off of the Short term capital loss against the L. T. C. gains.
2. On the facts and in view of the circumstances of the case, the learned CIT (A) erred in losing sight of the provision contained in Section 40AB introduced w.e.f. 1-4-81, that the deduction u/s. 80HH to 80TT (except section 80M) are to be computed with the reference to the net income under the respective section (As computed in accordance with the provisions of IT Act), which had formed the part of the gross total income.'
2. The assessee is an individual. We are concerned with the assessment year 1982-83, for which its accounting year ended on 31-3-82. At the relevant time, the assessee was a minor and had income from business carried through his guardian. He was also a beneficiary in the income of two trusts. During the year, the assessee sold certain shares of Garware Polyester & Plastics Ltd., and Garware Nylons Ltd. from the sale of these shares, he earned certain long term capital gains. The assessee also sold the shares of RSDV Investments P. Ltd., in which he incurred short-term capital loss of Rs. 1,95,900. The assessee claimed deduction u/s 80T against the gross amount of long-term capital gains, whereas the ITO took the stand that the short term capital loss had first to be adjusted against the long-term capital gain and that the deduction u/s. 80T was available only against the net long-term capital gains after adjustment of such short-term capital loss u/s. 70(2) (i). Against this stand of the ITO, the assessee went in appeal.
3. The CIT (Appeals), relying on the decision of the Madras High Court on Addl. CIT v. K. AL. KR. Ramaswamy Chettiar : [1979]120ITR694(Mad) , allowed the appeal of the assessee and directed the ITO to recompute the deduction u/s. 80T as claimed by the assessee. Against the finding of the CIT (A), the department has come in appeal before us.
4. The learned Departmental Representative relied on the decision of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India : [1985]155ITR120(SC) and argued that the Supreme Court had laid down the principal that deduction under Chapter VIA were available only to that portion of the income which was part of the total income. He drew our attention to the observations of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) which were quoted with approval by the Supreme Court in Distributors (Baroda) (P.) Ltd.s case (supra) at page 139 of the report and which were as under :-
'Tulzapurkar J., speaking on behalf of the court analysed the provisions of sub-sec. (1) of S. 80E in the following words (p. 91) :
On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provision except section 80T; secondly, ascertain what part of the total income so compute represents the profit and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if the be profit and gains so attributable, deduct 80% thereof from such profits and gains and then arrive at the net total income exigible to tax.'
He, therefore, argued that the order of the CIT (A) was incorrect and should be re-considered.
5. The learned counsel for the assessee, on the other hand, argued firstly that section 80T had to be interpreted independently because the deduction under that section was available in respect of long-term capital gains only and short-term capital gains were specifically excluded from the operation of this section. He then referred to the provisions of sec. 70(2) (i), in terms of which the assessee had a choice of setting off the loses suffered by him on sale of short-term capital asset against profit earned on sale of any other capital asset. Thus, according to the counsel for the assessee, intra-head adjustment between the short-term capital loss or capital gain either in respect of long-term capital asset or short-term capital asset could be effected only at the instance of the assessee and such adjustment could not be unilaterally done by the ITO. In the present case, the assessee had offered to be assessed on long-term capital gains earned by it without claiming the benefit of adjustment under sec. 70(2) (i). In this view of the matter, argued the counsel for the assessee, the order of the CIT (A) was correct and did not call for any interference.
6. We have considered the submission made. We have also gone through the order of the CIT (A), the relevant judgment cited and the provision of section 80T and section 70. In our opinion, the decision of the CIT (A) is correct and does not call for any interference. The revlevant portion of section 80T reads under :-
'80T. Where the grows total income of an assessee not being a company includes any income chargeable under the heads Capital gains relating to capital asset other that short-term capital assets (such income being, hereinafter, referred to as long-term capital gains), there shall be allowed; in computing the total income of the assessee, a deduction from such income of an amount equal to, -'
The important point to be noted is that this section referred to any income chargeable under the head 'Capital gains' relating to capital assets other than short-term capital assets which may be a part of the gross total income. Now, income chargeable under the head 'long-term capital gains' will be income on sale of long-term capital assets computed under section 48 to 55. Such income, in the present case, is the income on sale of shares of Garware Plastics & Polyester and Garware Nylons Ltd. No doubt, the assessee also sold some other shares in which it incurred short-term capital loss but it did not choose to ask adjustment of such loss against long-term capital gains in terms of section 70(2) which as it stood at the relevant time, read as under :
'(2) (i) Where the result of the computation made for any assessment year under section 48 to 55 in respect of any short-term capital assets 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.
(ii) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital assets 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 under the similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.'
The expression 'the assessee shall be entitled to have the amount of such loss set off against the income, if any' should be interpreted to mean that the choice in respect of such set off was available to the assessee and in the present case he has chosen not to exercise such choice but has chosen to claim deduction u/s 80T against the gross figure of long-term capital gains. This interpretation finds support from what is provided in sub-clause (ii) of sec. 70(2). This sub-clause provides that where as a result of computation made under section 48 to 55 in respect of any capital asset other than short-term capital asset is a loss. The assessee shall be entitled to have the amount of such loss set off against income, if any, arrived at under similar computation in respect of any other capital asset not being a short term capital asset. In short, this sub-clause provides that long-term capital loss can only be set off against long-term capital gains, whereas the assessee may, if he so chooses, set of short-term capital loss against long-term capital gains. This issue came from consideration before the Madras High Court in CIT v. V. Venkatachalam : [1979]120ITR688(Mad) . At page 694 of the report, another decision of the Madras High Court has been appended as an appendix where similar issue came of consideration. The question referred to the Madras High Court in that case read as under :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to relief under section 80T on the gross amount of the capital gains on assets other than short-term capital assets but not on the net amount after set off of short-term capital assets but not on the net amount after set off of short-term capital loss under section 70(2) of the Income-tax Act ?'
At page 695, the Madras High Court observed as under :
'The opening words here the gross total income of an asset not being a company includes any income chargeable under the head Capital gains relating of capital assets other than short term capital asset would clearly mean that in applying S. 80T, one has to take the income chargeable under the head Capital gains relating to capital assets.'
The cumulative reading of sec. 80T and sec. 70(2) together would support our interpretation that deduction under section 80T is available against income chargeable under the head 'Long-term capital gains' before making any adjustment (for losses etc.) and that the adjustment if short-term capital loss against long-term capital gains is not mandatory but may be allowed if the assessee so wishes. The scope and purpose of section 80T are, in our opinion, sightly different from the scope and purpose of the section 80T as was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.s case (supra). Further, the decision of the Supreme Court in distributors (Baroda) (P.) Ltd. (supra) was given with reference to sec. 80M where again the deduction contemplated is of a different type.
7. The CIT (Appeals) has also referred to two other decisions in CIT v. Gautam Sarabhai : [1981]129ITR133(Guj) and CIT v. M. Seshasayee : [1981]129ITR166(Mad) . In the case of Gautam Sarabhai (supra), the Gujarat High Court was considering the manner of computing capital gains under section 45 read with section 48 of Income-tax Act, 1961, and it held that after capital losses carried forward from the previous years have been set off against the capital gains as per the provision of section 74(1) (a) (ii), if any balance of capital gains remain during the revelant accounting year which is to be added to the gross total income for that year as contemplated by section 80A (1) read with section 80B (5), it is only in that eventuality that the further deduction contemplated by section 80T can be effected. The Gujarat High Court held that if there is no balance of capital gains left for being included in the gross total income for the relevant assessment year because the entire capital gains arising during that year have been wiped off by the capital losses of previous years, there will be no capital gains making up the gross total income and, consequently, section 80T deductions would not arise for consideration in such a case. Now, the adjustment contemplated under section 74(1) (a) (ii) was a mandatory adjustment. The operative portion of section 74(1) (a) provided that where in respect of any assessment year, the net result of the computation under the head 'Capital gains' is a loss, such loss shall, subject to the other provisions of this Chapter, was to be dealt with as provided in clauses (i) and (ii) of that sub-section. The language of this section (section 74) uses the expression 'shall' and leaves no one in doubt that the provisions of the section are mandatory, whereas the language of section 70, which uses the expression 'shall be entitled to', supports the interpretation that the adjustment contemplated in that section is optional and not mandatory. The adjustment of short-term capital loss against long-term capital gains cannot be forced on the assessee who does not ask for such adjustment. The Gujarat High Court in Gautam Sarabhais case (supra) was not required to considered section 70(2) which is of relevance in the present case and, therefore, that decision is distinguishable and cannot be applied to the facts of the present case.
7.1 In M. Seshasayees case (supra) also, the Madras High Court was required to consider a similar issue. The Madras High Court accepted the contention of the department that the gross total income has to be computed in accordance with the provision of the Act and that if we do so than the capital loss would get adjusted as against capital loss under section 74 and that the balance would alone represent capital gains which would be included in the total income. However, the Madras High Court was required to considered the provision of section 74 and not section 70(2), whereas the same High Court in the case of K. AL. KR. Ramaswami Chettiar (supra) gave a decision in favour of the assessee while constructing section 80T along with section 70(2). After an over all consideration of the provision of the relevant section and the relevant case law, we are inclined to the finding of the CIT (A) that on the facts of the present case deduction u/s 80T is available to the assessee against long-term capital gains without the adjustment of short-term capital loss incurred by it. We hold accordingly.
8. In our opinion, the second ground by the department is not relevant and does not advance the case of the department. In the second ground, the department has referred to section 40AB. Probably, the department had in mind the effect of the operation of section 80AB which was inserted by the Finance (No. 2) Act of 1980 with effect from 1-4-1981. This section provides that where any deduction is required to be made under Chapter VIA in respect of any income of the nature specified in that section, which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the amount of income of that nature as computed in accordance with the provision of the Act before making any deduction under Chapter VI shall alone be deemed to be the amount of income which is derived or received by the assessee. When we interpret the expression 'amount of income computed in accordance with the provisions of this Act' in the present context, we find that the assessee, who has exercised the option available under section 70(2) (i) would be justified in claiming that long-term capital gains earned by him without adjustment of short-term capital loss should be treated as income of the nature of capital gains computed under the provision of this Act. Considerable reliance was placed by the learned Departmental Representative on the decision of the Supreme Court in Distributors (Baroda) (P.) Ltd.s case (supra) and on the observation of the Supreme court in Cambay Electric Supply Industrial Co. Ltds case (supra) reproduced in Distributors (Baroda) (P.) Ltd.s case (supra) at page 139. The main principal laid down by the Supreme Court in both these decisions is that one should compute the total income of the assessee in accordance with the provision of this Act before allowing deduction under Chapter VIA. In the present case, if we take the figure of long-term capital gains without adjustment of short-term capital loss as per option exercised by the assessee under the section 70(2) (i), it will still be income computed in accordance with the provision of the Act, and even within the ratio of these two Supreme Court decisions, in our opinion, the assessee would be justified in claiming deduction u/s. 80T against the figure of long-term capital loss.
9. In the result, the departmental appeal is dismissed.