1. This is an appeal by the assessee Sri S.M. Sundaram, Mylapore, Madras-4, against the order passed by the CIT(A)-V, Madras, in the income-tax assessment for the asst. yr. 1992-93. The only ground raised by the assessee in this appeal is that the CIT(A) erred in confirming the disallowance of the claim for deduction under Section 48(2) of the IT Act, 1961, from the share of long term capital gains.
2. The assessee is a partner in the firm, The Foundry and Engineering Services (FES). In the return of income for the asst. yr. 1992-93 the assessee admitted share income from the firm FES comprising of loss of Rs. 1,75,537 under the head 'Business' and long term capital gains of Rs. 3,97,680 as also short term capital gains of Rs. 30,179. From the long-term capital gains the assessee claimed deduction under Section 48(2). The AO completed the assessment determining the total income at Rs. 2,79,200 without considering the claim for deduction under Section 48(2) from the long-term capital gains. Though the assessee took up the matter in appeal, the CIT(A) held that the assessee was not entitled to deduction under Section 48(2) in respect of the share of capital gains allocated' from the firm. The CIT(A) noticed that in the hands of the firm deduction had already been allowed under Section 48(2) while assessing the capital gains and so, from the share of capital gains allocated to the partner there was no question of again allowing the deduction. Aggrieved with the finding of the appellate authority, the assessee has filed this appeal before the Tribunal. We have heard at length the assessee's counsel Sri T.N. Seetharaman, advocate, and the Departmental Representative Sri G.S.D. Babu.
3. During the previous year under consideration the assessee was a partner in the firm The Foundry & Engg. Services. The firm derived capital gains on the sale of certain capital asset. It is not disputed that in computing the capital gains assessable in the hands of the firm deduction was allowed under Section 48(2). It was the net amount after the deduction under Section 48(2) that was allocated to the assessee at Rs. 3,97,680 which was included in the taxable income for the asst. yr.
1992-93. The assessee wanted again deduction under s, 48(2) to be given from his share of the capital gains. The assessee's contention is that under Section 67(2) of the Act, for the purpose of assessment in the hands of the partner of a firm income is apportioned under various heads in the same manner as in the hands of the firm and so, the sum of Rs. 3,97,680 retained the character as capital gains and so all the deductions and reliefs available on the capital gains would be allowable from the share of capital gains included in the total income of the partner. Sri Seetharaman, the learned counsel for the assessee, contends before us that there is no bar in the Act in giving the deduction under Section 48(2) from the share income assessable in the hands of the partner after allowing the deduction in the assessment of the firm. It is his contention that such deduction in the hands of the partner does not amount to a double deduction, as the deduction already allowed under Section 48(2) was in the hands of a different assessee namely, the firm and not in the assessment of the individual partner.
Drawing our attention to Section 80T (omitted w.e.f. 1st April, 1988), Sri Seetharaman points out that when deduction was allowable under Section 80T till the asst. yr. 1987-88 there was the provisions of Section 80A(3) acting as a bar against the deduction under Section 80T in the hands of the partner of a firm. According to him, as Section 80A(3) was amended w.e.f. 1st April, 1989, omitting therefrom Section 80T, the bar against the deduction from the capital gains in the assessment of the partner is removed. The learned counsel submits that under the law as applicable for the asst. yr. 1992-93, the assessee cannot be denied the deduction under Section 48(2) in the absence of any bar similar to the bar as previously provided in Section 80A(3).
Arguing on the above lines, the learned counsel urged us to reverse the order of the CIT(A) and to allow the assessee's claim for deduction under Section 48(2) from the share of capital gains allocated to the assessee as a partner.
4. The subject of capital gains is codified as a separate situation in Section 45 of the IT Act onwards. Section 48 gives the mode of computation of the capital gains and the deductions in regard thereto.
Section 48(1) speaks of the mode of computation of the income chargeable under the head 'Capital gains'. The first step involved in the process of computation is the deduction from the full value of consideration received, two items viz. (1) the expenditure incurred wholly and exclusively in connection with the transfer, and (2) the cost of acquisition and the cost of any improvement thereto. Section 48(1) contains the statutory provision relating to the transfer of a long-term capital asset, providing for further deductions specified in Section 48(2). From a close reading of Section 48(1) it can be seen that the income chargeable under the head 'Capital gains' shall be computed (a) by deducting from the full value of the consideration received the amounts mentioned in Clauses (i) and (ii) and where the capital gains is a long-term capital gains, by making the further deduction as specified in Sub-section (2). In other words, the income chargeable under the head 'Capital gains' is computed by deducting from the full value of the consideration-- (1) the expenditure incurred wholly and exclusively in connection with the transfer; (2) the cost of acquisition of the asset and the cost of any improvement thereto; and (3) in respect of long-term capital gains, allowing a further deduction specified in Section 48(2).
It is the net amount after allowing all the three types of deductions as above, that is chargeable to tax as capital gains.
5. In the case of the partnership firm, The Foundry and Engineering Services, there was the transfer of a capital asset giving rise to long term capital gains. The capital gains chargeable to tax in the case of the firm was computed in accordance with the provisions of Section 48, after allowing all the three types of deductions as shown above. The net capital gains was chargeable to tax in the hands of the firm. In the assessment of the firm for the asst. yr. 1992-93 the capital gains allocable to the assessee as a partner was determined at Rs. 3,97,680.
It was that share of capital gains that the assessee had declared in the individual return of income filed by him for the asst. yr. 1992-93.
It is .provided in Section 67(2) that the share of a partner in the income or loss of the firm as computed under Sub-section (1) shall be apportioned under the various heads of income in the same manner in which the income or loss of the firm has been determined under each head of income. In accordance with the provisions of Section 67(2), the sum of Rs. 3,97,680 allocated to the assessee as his share retains the same character as capital gains. It is mainly on the strength of the provisions of Section 67(2) that the assessee claims deduction under Section 48(2) on the capital gains allocated as his share from the firm's income.
6. From the statutory provisions relating to the mode of computation of the capital gains as given in Section 48 we have seen that the deductions under Section 48 are given in computing the capital gains.
It is the net capital gains computed in accordance with the provisions of Section 48 that is chargeable to tax in the hands of the firm and in the assessment of the firm the share due to each partner is allocated.
There is no provision in the Act to allow again the deduction under Section 48(2) in the hands of the partner, from the share of capital gains already determined as allocable to him. Section 48(2) is applicable in the process of computation of the capital gains arising from the transfer of a long-term capital asset. It is not a deduction allowable from the capital gains, i.e., after computing the capital gains. It may be made clear that in the hands of the partner we are not computing the capital gains; we are only assessing the share of capital gains as computed in the assessment of the firm. As, in the assessment of the partner there is no computation of the capital gains, there is no question of allowing the deduction under Section 48(2) which is allowable only while computing the capital gains (in the present case, in the hands of the firm).
7. Sri Seetharaman, the learned counsel for the assessee, has referred to Section 80T providing for the deduction from the capital gains included in the gross total income. He also referred to Section 80A(3) specifically providing that no deduction would be available in computing the total income of the partner, after allowing the deduction under Section 80T in computing the total income of a firm, AOP or BOI.It is pointed out that Section 80T was omitted by Finance Act, 1987, and that in the new scheme of computation of capital gains deduction was inserted by Section 48(2). According to learned counsel, the legislature has intentionally removed the bar in Section 80A(3) against the deduction under Section 80T and so in new scheme of assessment of capital gains, there is no bar in allowing the deduction in the assessment of the partner of a firm. It is true that Section 80A(3) has been amended by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, omitting therefrom Section 80T. Before the amendment it was clearly provided in Section 80A(3) that where in 'computing the total income of a firm, AOP or BOI, any deduction is admissible under Section 80G or......Section 80T no deduction under the same section shall be made in computing the total income of a partner of the firm, or as the case may be, of a member of the AOP or BOI in relation to the share of such partner in the income of the firm, etc. The reference to Section 80T has been removed from Section 80A(3) w.e.f. 1st April, 1989. That was because Section 80T itself has been omitted from 1st April, 1988, as its provisions have been incorporated in the new Section 48.
8. True, after incorporation of the new Section 48, providing for the mode of computation of the capital gains and the deductions thereto, there is no provision akin to Section 80A(3) specifically providing that no deduction shall be allowable under Section 48(2) in the hands of the partner of a firm after allowing the deduction in the assessment of the firm. The reason is clear that Section 48(2) allows the deduction while computing the capital gains, and not from the capital gains, included in the gross total income. Section 80T providing for a deduction from the gross total income (before its deletion) reads as under; "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 gains (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...." 9. It may be noted that Section 80T provides for a deduction from the income chargeable as capital gains which was included in the gross total income, whereas Section 48(2) provides for a deduction while computing the capital gains. We do not agree with the learned counsel for the assessee that previously when deduction was allowable under Section 80T, the legislature intentionally provided in Section 80A(3) that once the deduction was. allowable in the case of a firm etc., no such deduction would be allowed in the case of a partner, and that after Section 80T was substituted by Section 48(2), there was no such bar against the deduction allowable in the case of a partner. Section 80T provided for the deduction from the gross total income of the assessee, wnich included capital gains. Under the then existing provision there could be the claim for deduction under Section 80T from the gross total income of an assessee being a partner of a firm, whose income included share income by way of capital gains. "That was why the legislature provided a specific provision in Section 80A(3) against the deduction in the case of a partner, whose total income included the share of capital gains allocated from the assessment of the firm. But after the substitution, Section 48 gives a different mode of computation of the capital gains, and it is in the process of computation of capital gains that the deduction under Section 48(2) is allowed. It is to be borne in mind that Section 48(2) is not allowing a deduction from the gross total income of an assessee, which included the income chargeable as capital gains. Hence under Section 48(2), while allowing the deduction there could arise no confusion as to whether - the deduction is allowable to the partner or to the firm or to both. The deduction under Section 48(2) is allowable only once, i.e., while computing the capital gains arising from the transfer of a long-term capital asset. In the present case the long-term capital gains arose when the firm transferred its assets. The capital gain was computed in the assessment of the firm. In the computation all deductions including the deduction under Section 48(2) were allowed.
Section 48(2) does not provide for a deduction once again, from the share of capital gains allocated to a partner, even though by virtue of Section 67(2), that share income retains the character of capital gains.
10. In the circumstances discussed above, we uphold the finding of the CIT(A) that the assessee being a partner in the firm, is not entitled to the deduction under Section 48(2) of the IT Act on the share of capital gains, allocated to him on the basis of the computation in the assessment of the firm. This appeal by the assessee is, therefore, dismissed.