V.V. Kamat, J.
1. At the instance of the Revenue, the following two questions expect our answer :
' 1. Whether, on the facts and in the circumstances of the case, the computation of capital gain by the Tribunal at Rs. 5,03,688 is in accordance with law ?
2. Whether, on the facts and in the circumstances of the case, should not the provisions of Section 48(2) of the Income-tax Act be given effect to before giving effect to the provisions of Section 54E of the Income-tax Act ?'
2. Reading the two questions, it would be at once clear that our answer to question No. 2 will determine the answer to question No. 1 because ultimately the process of computation of capital gains would follow the line of order as a result of our answer to question No. 2. After hearing counsel for both sides, in other words, if we answer question No. 2 in the affirmative, the consequence would be of justification of the order of the first appellate authority. If we answer otherwise, it would be of the order of the Tribunal with regard to the determination of the amount of capital gains as a result thereof.
3. The assessee is a partner of V.V. George and Associates. The question is of determination of the amount of capital gains with regard to the assessment year 1988-89. The Income-tax Officer determined the long-term capital gains at Rs. 7,35,617 after allowing deductions under Section 48(2) and then exemptions with regard to Section 54E of the Income-tax Act, 1961. This was as against an amount of Rs. 2,79,950 as returned by the assessee.
4. With regard to the question under consideration, the first appellate authority has referred to the contention sought to be urged on behalf of the assessee. The contention was that the Income-tax Officer committed an error in considering the question of exemption under Section 54E of the Act after allowing deductions under Section 48(2) of the Act. The submission was that resort to consideration of exemption under section 54E of the Act should be taken first in point of time before consideration of the allowable deduction under Section 48(2) of the Act. This contention is considered by the first appellate authority in the light of the Explanation to Section 53 introduced with effect from April 1, 1988. The authority observed that the language of the Explanation clearly states that the reference to 'capital gains' in all the sections including Section 54E should be considered as reference to the amount of capital gains as computed under Section 48(1)(a) of the Act. Relying on the Explanation and its plain language, the first appellate authority has determined taxable capital gains at Rs. 7,07,250. It is in the following manner :
(Rs.)
(Rs.)
'Sale consideration
20,25,000
Less : Brokerage
10,000
Otherexpenses in connection with the sale including the cost of demolition of theresidential building
15,000
25,000
Net consideration
20,00,000
Less : Costof land as on April 1, 1974
1,69,375
Cost ofother structures on the land including the office building
50,000
2,19,375
Capital gains
17,80,625
Less :Exemption under section 54E
17,80,625 X 4,00,000
20,00,000
3,56,125
14,24,500
Less : Deduction under section 48(2)
Rs. 10,000+ 50 per cent. of 14,24,500
7,17,250
Taxable capital gains
7,07,250. '
5. In this way the first appellate authority modified the order of the Income-tax Officer stating that the taxable capital gain will be Rs. 7,07,250 as against Rs. 7,35,617 as determined by the Income-tax Officer.
6. The assessee took up the matter before the Income-tax Appellate Tribunal. The Tribunal has taken up the aspect for consideration in paragraph 8 of its order. The Tribunal has also quoted the text of the Explanation to Section 53 of the Income-tax Act. However, it appears that on reading the language of the Explanation, the Tribunal has concluded that the assessee is eligible for exemption in respect of the deposits with the Industrial Development Bank computed with reference to the gross capital gains, i.e., before giving effect to the provisions of Section 48(1)(b) of the Act. In other words, the Tribunal has not agreed with the understanding of the language of the Explanation to Section 53 of the Act and has observed in the context that there is nothing either in Section 54E or Section 48 which goes to diminish the amount of deductions by the amount of exemption granted under Section 54E. Characteristically the Tribunal observes that the two provisions of sections 48 and 54E could be telescoped into one another in any manner. The Tribunal has observed that both the sections operate simultaneously at the stage of computation, immediately after the provisions of Section 48(1)(a) were given effect to.
7. In this situation, the Tribunal has determined the taxable capital gains at Rs. 5,03,688. The process of calculation is as follows :
(Rs.)
(Rs.)
'Saleconsideration
20,25,000
Less: Deduction under section 48(1)(a) :
Brokerage
10,000
Travelling,advertisement and
demolitioncharges
15,000
25,000
Netconsideration in terms of Explanation 5 to section 54E
20,20,000
Less: Deduction under section 48(1)(a)(iii):
Cost of acquisitionbeing market value as on April 1, 1974
2,29,375
Add: Cost of improvement
75,000
3,04,375
Capitalgains
16,95,625
Less: Exemption under section 54E read with Explanation to section 53
3,39,125
Add: Deduction under section 48(2)(b)
16,95,625X 4,00,000
20,00,000
Rs.10,000 plus 50 per cent. of 16,85,625
8,52,812
11,91,937
Taxablecapital gain
5,03,688.'
8. After hearing counsel for both sides, in our judgment, it is the language of the Explanation to Section 53 of the Act that would determine the situation. This Explanation is added in pursuance of the Finance Act, 1987, and is in force with effect from April 1, 1988, and, therefore, governs the situation in the process of computation and determination of taxable capital gains in the proceedings relating to the assessment year 1988-89. There is no dispute in regard thereto.
9. The subject of capital gains gets codified as a separate situation--E. Capital gains--from Section 45 of the Act onwards. A perusal of the initial sections of this Chapter would serve as a guide to know the scheme of the subject statutorily dealt with. 'Capital gains' basically relate to a situation of transfer of a capital asset, resulting into either profits or gains as a result thereof. Section 45 of the Act itself makes it clear that even though this is the ordinary position, the statutory provisions of Sections 53, 54, 54B, 54D, 54E, 54F and 54G are in the nature of exceptions thereto. We are concerned with Section 54E which is in the nature of an exception from the plain language of the statute. Thus, profits or gains arising from a situation of transfer is understood as capital gains chargeable to income-tax under the head 'Capital gains' and gets a deeming situation to be the income of the previous year in which the transfer took place.
10. Without entering into unnecessary details it would be worthwhile to mention that subsequent sections clarify the situation relating to the transfer of a capital asset in the context referred to therein.
11. Section 46 of the Act (succeeding section) deals with the situation relating to distribution of assets by companies in liquidation. This situation need not detain us in any way. Section 47 thereafter specifies transactions not amounting to transfer and they are specified therein. This also need not detain us. Section 47A speaks of situations under which exemption gets withdrawn.
12. It is thereafter in the context of relevance Section 48 of the Act requires consideration. The statutory provisions of this section deal with the mode of computation and deduction and it is in regard thereto Section 48(1)(a) speaks of the ways of computation and the first aspect is in the process of computation by deduction from the full value of the consideration received, two items, viz., expenditure incurred wholly and exclusively and the cost of acquisition in regard thereto. Incidentally Section 48(1)(b) speaks of the statutory provision relating to the transfer of a long-term capital asset providing for further deductions specified in Section 48(2). Thus it would be found that after knowing about the concept of capital gains, the statutory provision speaks of consequential mode of computation and deductions in regard thereto.
13. The next statutory provision in the context is Section 49 conveying the required particulars relating to the cost of acquisition with stated specific particulars in regard thereto. Lastly, in this travel Section 50 speaks of special provision in relation to depreciable assets.
14. It would thus be found that the above statutory provisions go to speak about the process of determination of capital gains referring to the deductions, the cost of acquisition and other ancillary situations as codifed taking the situation to the determination of capital gains after application of the above statutory provisions.
15. We have already emphasised and noted that in the very basis statutory provision of Section 45, the provisions of sections 53 onwards (to be precise Sections 53, 54, 54B, 54D, 54E, 54F and 54G) have been separated. They deal with the situations of exemptions with reference to the determination of capital gains. It is in the statutory provision of Section 53 of the Act, the Explanation under consideration comes on the statute as a result of the Finance Act, 1987, with effect from April 1, 1987. The said Explanation is reproduced hereinbelow :
'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,'
16. In support of understanding the language of the above Explanation learned senior tax counsel sought to adopt by way of his submissions submitting that the Explanation is merely of a clarificatory nature and has not really changed the law. 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. In fact learned senior tax counsel in adopting the above submissions has taken justified resort to the observations in the commentary to the said Explanation as available in the Law and Practice of Income-tax, by Kanga and Palkhivala, 8th edition, Vol. I, at page 790. The submissions are with the required force, appreciating the pattern of the statutory provisions discussed by us hereinbefore. Considering the effect of the above process of reasoning, it would be difficult for us to sustain the approach of the Income-tax Appellate Tribunal, when the Tribunal has observed that both the facets operate simultaneously at the stage of the computation immediately after the provisions of Section 48(1)(a) were given effect to. It would be also equally difficult for us to agree with the description of the situation when the Tribunal chooses to observe that neither of them is telescoped into the other. In our judgment, all the statutory provisions, as we have discussed above, appear in the logical sequence one after the other, finally dealing with the aspect of exemption ultimately in the process of determination of what would be the taxable capital gain. It is the first appellate authority that has correctly approached the situation. If this is the position, the computation given by the first appellate authority and not the one given by the Tribunal would hold water in the process of analysis to its point of termination. The process of calculation is arithmetic as a result of application of the statutory provisions in the context of their inter-connection reaching the desired consequence of determination of taxable capital gain. The result of the above discussion would be that the determination of the taxable capital gains arrived at by the first appellate authority would replace the one of the Tribunal which is the result, inevitably in the process of the above reasoning.
17. For the above reasons, we answer question No. 1 in the negative, to mean that the computation of the taxable capital gains should be Rs. 7,07,250, as determined by the first appellate authority, which would be in accordance with law except that instead of the amount of Rs. 50,000 as cost of the structure, the figure arrived at by the Tribunal at Rs. 75,000 should be substituted. Thus, it would be that the taxable capital gainswould be Rs. 6,82,250 (Rs. 7,07,250-Rs. 25,000), to be precise. Question No. 2 is answered in favour of the Revenue and against the assessee.
18. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.