1. This appeal by the assessee is directed against the order of CIT, BC-IX, Mumbai, passed under Section 263 of the IT Act.
"1. The learned CIT, Bombay City DC has erred in law and on the facts of the case in calculating deduction under Section 48(2) on the capital gams only after deducting exemption under Section 54E. 2. Your appellant most respectfully submits that on the facts of the case and as per the law deduction under Sections 48(2) and 54E are to be computed independently of each other with reference to the same amount of capital gams and therefore prays that the order under Section 263 of the learned CIT, Bombay City IX be set aside and that the order of the learned Asstt. CIT, Circle 27(2) be restored." 3. The facts of the case are that the assessee sold a plot of land for Rs. 1,80,00,000. After claiming deduction under Sections 54E and 48(2), the assessee computed the net taxable capital gains at "nil". The AO accepted the assessee's worKing and completed the assessment under Section 143(3) on 25th Jan., 1990. The CIT was of opinion that the AO wrongly computed deduction under Section 48(2). He directed the AO to recompute the deduction under Section 48(2) after considering exemption under Section 54E. The assessee, aggrieved by the order of CIT under Section 263, is in appeal before us.
4. At the time of hearing before us, it is submitted by the learned counsel for the assessee that Section 48(1) provides how to compute capital gains. As per the said section, from the full value of consideration received on the transfer of capital asset, the cost of acquisition and the expenditure incurred wholly and exclusively in connection with such transfer is to be reduced. The resultant figure would be capital gain. As per Section 48(2), from the capital gain as computed under Section 48(1), deduction of first Rs. 10,000 and 50 per cent of the balance is to be allowed. The assessee has rightly computed deduction under Section 48(2) as provided in the Act. The CIT has directed the AO that from the capital gain as computed under Section 48(1), deduction under Section 54E is to be reduced arid on the balance capital gain deduction under Section 48(2) is to be allowed. He submitted that the Department cannot interpolate Section 54E in between Sub-sections (1) and (2) of Section 48. He further submitted that as per Explanation after Section 53, deduction under Section 54E is to be worked out on the basis of capital gains as computed under Section 48(1)(a). The assessee has rightly computed deduction under Section 54E considering this Explanation. However, this Explanation could be relevant only for the purpose of computing deduction under Section 54E and it cannot be further extended for reducing deduction under Section 54E from the capital gain for the purpose of computing deduction under Section 48(2). He further submitted that Section 48(2) clearly provides that deduction is to be computed on the capital gain as computed under Section 48(1)(a). Thus, there is no scope for reducing deduction under Section 54E from the capital gain computed under Section 48(1) to work out deduction under Section 48(2). In support of this contention, he relied upon the decision of Tribunal in the case of Hotel Dinesh v.Asstt. CIT (IT Appeal No. 1323 (Bom) of 1991). He fairly pointed out that the decision of Hon'ble Kerala High Court in the case of CIT v.V.V. George (1997) 227 ITR 893 (Ker) is against the assessee. However, he submitted, this decision does not correctly interpret the various provisions of Sections 48(1), 48(2) and 54E, etc. That the Hon'ble High Court mainly relied upon the commentary by Kanga & Palkhivala, while the Tribunal in the case of Hotel Dinesh (supra) has elaborately discussed the various provisions of the Act and upon the correct interpretation of the same has come to the conclusion that deduction under Section 48(2) is to be allowed on the capital gain before applying Section 54E. The decision of the Tribunal is more reasonable and it should be followed. He further submitted that the decision of a High Court other than jurisdictional High Court is not binding upon the Tribunal. In support of this contention, he relied upon the decision of Hon'ble jurisdictional High Court in the case of CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom). He further submitted that when the language of the Act is clear and unambiguous, the literal interpretation should be adopted, and in case of doubt, the construction most beneficial to the subject should be adopted. In support of this contention, he relied upon the decision of Hon'ble apex Court in the case of CIT v. Shahzada Nand & Sons (1966) 60 ITR 392 (SC). He accordingly submitted that the order of the CIT passed under Section 263 should be quashed and that of AO restored.
5. The learned Departmental Representative, on the other hand, heavily relied upon the decision of Hon'ble Kerala High Court in the case of V.V. George (supra). He submitted that this is the solitary decision of a High Court on the issue under consideration. There is no contrary decision of any other High Court. Therefore, the above decision of the Hon'ble Kerala High Court should be followed. He further submitted that as per the Explanation after Section 53, for the purpose of computing deduction under s, 54E, the amount of capital gain as worked out under Section 48(1) is to be considered. Therefore, naturally, Section 54E is interpolated between Sections 48(1) and 48(2). Once deduction under Section 54E is allowed on the capital gain as computed under Section 48(1), on the balance of capital gain only deduction under Section 48(2) can be allowed. If the interpretation made by the learned counsel for the assessee is accepted, the assessee will get double deduction on the same amount of capital gain, one under Section 54E and another under Section 48(2). He, therefore, submitted that the order of the CIT passed under Section 263 is quite fair and reasonable. The same should be sustained.
6. We have carefully considered the arguments of both sides and perused the material placed before us. Chapter IV-E of the IT Act deals with capital gains. It begins with Section 45 and ends with Section 55 A. We shall discuss herein in brief the relevant provisions of Chapter IV-E as, they stood at the relevant time. Section 45 is a charging section which reads as under : "45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54D, 54E, 54F and 54G, be chargeable to income-tax under the head "capital gains", and shall be deemed to be the income of the previous year in which the transfer took place." Section 48 provides the mode of computation and deduction which reads as under: "48(1) The income chargeable under the head "Capital gains" shall be computed,-- (a) by deducting from the full value of the consideration received on 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; (b) where the capital gain arises from the transfer of a long-term capital asset (hereinafter in this section referred to, respectively, as long-term capital gain and long-term capital asset) by making the further deductions specified in Sub-section (2).
(2) The deductions referred to in Clause (b) of Sub-section (1) are the following namely : (a) where the amount of long-term capital gain arrived at after making the deductions under Clause (a) of Sub-section (1) does not exceed ten thousand rupees, the whole of such amount; (b) in any other case, ten thousand rupees as increased by a sum equal to,-- (i) in respect of long-term capital gain so arrived at relating to capital assets, being buildings or lands or any rights in buildings or lands or gold, bullion or jewellery,-- (A) in the case of a company, ten per cent of the amount of such gain in excess of ten thousand rupees; (B) in the case of any other assessee, fifty per cent of the amount of such gain in excess of ten thousand rupees;".
Section 54E, which provides that capital gain arising on transfer of capital asset not to be charged when the assessee made investment in specified assets, reads as under: "54E. (1) Where the capital gain arises from the transfer of a long-term capital asset, (the capital asset so transferred being hereinafter in this section referred to as the original asset) and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any specified asset (such specified asset being hereinafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-- (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under Section 45; (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under Section 45:" Explanation provided after section 53 is relevant for section 54E also, which reads as under: "Explanation : In this section and in Sections 54, 54B, 54D, 54E, 54F and 54G, references to capital gain shall be construed as references to the amount of capital gain as computed under Clause (a) of Sub-section (1) of Section 48." In the light of the above provisions, we will consider the rival contentions. Section 45 is a charging section for capital gains which provides that profits or gains arising from transfer of a capital asset are chargeable to IT under the head "capital gains". However, this provision is subject to exceptions provided in Sections 53, 54, 54B, 54D, 54E, 54F and 54G. Thus, to the extent exemption worked out under Section 54E, the capital gain is not chargeable to tax at all under Section 45. This is also evident from the language of Section 54E which provides that if the cost of a specified asset is not less than net consideration, the whole of such capital gain shall not be charged under Section 45. Similarly, when the investment in the specified asset is less than net consideration, then the proportionate amount is not chargeable to capital gains tax under Section 45. Section 48(1) provides the mode for computation of income chargeable under the head "capital gains". Therefore, once, because of investment under Section 54E, the whole of the capital gain or part thereof is not chargeable to capital gains tax under Section 45, in our opinion, the same cannot be considered as capital gains for working out deduction under Section 48(1)(b) r/w Section 48(2). Moreover, Section 54E provides that if the investment in the specified asset is not less than net consideration received on transfer of capital asset, the whole of such capital gain shall not be chargeable under Section 45, meaning thereby that for getting full exemption from capital gains, the assessee should invest the entire sale consideration in specified assets. If the interpretation put forward by the learned counsel for the assessee is accepted, then the assessee will get full exemption from capital gains without making investment equivalent to the amount of net consideration received on the transfer of capital asset. This would be evident from the working of the capital gain which was made by the assessee and was accepted by the AO in the order passed under Section 143(3).' The comparative position of working made by the assessee/AO and CIT is as under: Less : Deduction under s. 54E on investment made in IDBI Bonds Rs. 1,00,01,500 From the above chart, it is seen that the sale price of the land was Rs. 1.80 crores. The assessee made investment in specified assets which qualifies for exemption under Section 54E for Rs. 1,00,01,500 which was less than the net consideration. However, as per the working by the assessee, which is accepted by the AO, the taxable capital gain-worked out to 'nil' which clearly appears to be against the intention of legislature as expressed in Section 54E(1)(a).
6.1 The learned counsel for the assessee has contended that while working out deduction under Section 48(2), we should simply look into the plain language used in Section 48. As per Section 48(1), first the capital gain is to be computed by reducing the cost of acquisition of the asset and the expenditure in connection with the transfer of asset from the full value of consideration received by the assessee. The resultant figure would be the capital gain for working out deduction under Section 48(2). From a plain reading of Section 48, the contention of the learned counsel for the assessee is correct. However, in our opinion, Section 48 cannot be read in isolation. Capital gain has to be worked out by giving effect to the various provisions provided in Chapter IV-E. Therefore, while interpreting Section 48, Sections 45 and 54E cannot be ignored. If an amount of capital gain is not chargeable to tax by virtue of Section 54E r/w Section 45, it cannot be considered as capital gain on which deduction under Section 48(2) can be calculated. If we accept the contention of the learned counsel, it will give incongruous result, The following example would illustrate it.
Suppose, an assessee transfers a capital asset on which long-term capital gain is chargeable for a sum of Rs. 1 crore. Its cost of acquisition was Rs. 10 lakhs. The assessee invested Rs. 1 crore in assets specified under Section 54E. Now, when the investment in the specified assets is equivalent to net consideration, the entire capital gain, i.e., Rs. 90 lakhs (Rs. 1 crore minus Rs. 10 lakhs) would not be chargeable to capital gains tax under Section 54E(1)(a) r/w Section 45, However, as per the interpretation of the learned counsel, the assessee should be allowed further deduction under Section 48(2) on the capital gains, i.e., Rs. 90 lakhs. When the entire capital gain is exempt under Section 54E, it cannot be conceived that the assessee should be further allowed exemption under Section 48(2). It would look absurd. Therefore, we are of opinion that the various provisions of Chapter IV-E should be interpreted harmoniously so as to give a coherent result. We are, therefore, unable to accept the interpretation put forward by the assessee's counsel.
6.2 We find that the identical issue arose before the Hon'ble Kerala High Court in the case of V.V. George (supra). In that case, the assessee had claimed deduction under Section 48(2) before giving effect to provisions of Section 54E. The AO did not accept the assessee's claim. The first appellate authority also did not accept this contention of the assessee. The assessee took up the matter before the Tribunal. The Tribunal accepted the assessee's contention and recalculated capital gains wherein deduction under Section 48(2) was allowed before deduction under Section 54E. The Revenue, aggrieved by the order of Tribunal, came in reference before the Hon'ble Kerala High Court. The Hon'ble' Kerala High Court answered the question against the assessee and held at p. 898 as under: "We have analysed the scheme of this group of sections dealing with, the subject of capital gains. We have already emphasised that Section 45 of the Act tells. us what could be understood, as the actual capital gain which is arrived at by deducting from the full value of the consideration and dealing with the difference. We have also referred to the contents, as are necessary, dealing with the cost of acquisition and improvements and the expenditure, on the transfer as is available in the statutory provisions of Section 48.
of the Act. It is thereafter a second stage in the process is available meaningfully to determine the quantum of capital gains which could be considered as the statutory capital gain. These provisions denote that the statutory capital gains emerge as a result of deduction what could be understood as situations of exemptions contemplated in Sections 53, 54, 54B, 54D, 54E, 54F or 54G. It would be seen that application of the statutory provisions of the above second lap of the scheme would enable anyone to know what could be understood as capital gains in accordance with the application of the above statutory provisions. In fact, it would be thereafter that one would get what could be understood as taxable capital gain." The ratio of the above decision would be squarely applicable to the case under appeal before us. The learned counsel has heavily relied upon the decision of Tribunal in the case of Hotel Dinesh (supra).
However, we find that at the time when the above matter was decided by the Tribunal, the decision of Hon'ble Kerala High Court was not cited before it and, therefore, the learned Members of Tribunal did not have the benefit of the above decision. After considering the various provisions of Chapter IV-E as discussed by us in detail in earlier paragraphs, we prefer to follow the decision of Hon'ble Kerala High Court in the case of V.V. George (supra). Therefore, respectfully following the same, we hold that the order passed by the AO under Section 143(3) was erroneous and prejudicial to the interests of Revenue and the CIT rightly revised the same under Section 263, We accordingly dismiss the assessee's appeal. 7. In the result, the assessee's appeal is dismissed.