1. This is a revenue's appeal directed against the order of the learned Commissioner (Appeals), Mumbai, dated 23-10-1998 for assessment year 1995-96.
2. Ground Nos. 1 and 2 of the appeal are regarding a single issue, i.e., regarding indexed cost of acquisition which was determined by theassessing officer at Rs. 37,26,013 instead of the claim of the assessee at Rs. 47,82,765 and thereby making an addition of Rs. 10,56,752 but the same has been deleted by the Commissioner (Appeals).
3. The learned DR of the revenue supported the assessment order and reliance was placed by him on the judgment of Hon'ble Apex court rendered in the case of Escorts Farms (Ramgarh) Ltd. v. OT ' and on the judgment of Hon'ble Bom bay High Court rendered in the case of Seth Rasesh Family Trust No. 1 v. OT (1995) 215 ITR 5302.
4. As against this, it is submitted by the learned AR of the assessee that the principle of averaging applicable for ascertaining the cost of bonus shares is relevant only when shares are sold in lots at different point of time but when the entire holding is sold through one transaction, the question of averaging the cost does not arise as the original cost of acquisition is known. Reliance was placed on the judgment of Hon'ble Madras High E court rendered in the case of CIT v.TVS & Sons Ltd. .
It was also submitted that Hon'ble Madras High Court has considered the judgment of Hon'ble Apex court rendered in the case of CIT v. Dalmia Investment Co. Ltd. . Reliance was also placed specifically on two judgments (1) Mala Ramesh v. CIT and (2) T.S. Srinivasan v. OT (2000) 244 ITR 4434 (Mad.). The assessing officer has considered the cost of bonus shares on the basis of averaging and that cost of bonus shares is indexed from the year of allotment of bonus shares whereas entire cost was incurred by the assessee at the time of acquisition itself and, hence, assessee has rightly claimed indexing of whole amount from the year during which, cost of acquisition was incurred. It was also submitted that since in the present case, bonus shares have been issued on 3 dates, namely, 31 -3-1990, 31 -3-1991 and 31-3-1992, the average indexing of cost of bonus shares may be on the basis as suggested by learned Commissioner (Appeals) on page 6 of his order, which says that in the opinion of learned Commissioner (Appeals), the cost of acquisition will have to be indexed till the first issue of bonus shares and then averaged. Again such cost will have to be indexed again till the second issue of bonus shares and then again averaged and again have to be indexed till the third issue of bonus shares and again averaged. It was submitted that if this process is followed, the total indexed cost at the time of sale will be same as worked out by theassessee. It is also submitted that by insertion of Clause 3(a) in Section 55(2) with effect from 1-4-1996, the cost of bonus shares from 1-4-1996 has to be taken at nil and this amendment also supports the working of the assessee.
5. We have considered the rival submissions, perused the material on record and have gone through the judgments cited by both the sides. The judgment of Hon'ble Bombay High Court rendered in the case of Seth Rasesh Family Trust No. 1 {supra), is regarding spreading of cost of original as well as bonus shares but the provisions of Section 48 have been amended by Finance Act, 1992 with effect from 1-4-1993 and as per this amended provision of Section 48, indexed cost of acquisition has to be " allowed instead of cost of acquisition and, hence, we find that this issue was not before Hon'ble Bombay High Court as to whether to arrive at correct indexed cost of acquisition, the averaging should be done on the basis of original cost or on the basis of indexed cost till the date of allotment of bonus shares.
6. In view of this amendment of provision of Section 48, this judgmentcannot be directly made applicable in the present case.
Similarly, in the judgment of Hon'ble Apex court rendered in the case of Escorts Farms (Ramgarh) Ltd. (supra) also, the facts are that the assessing officer worked out the cost of original shares and bonus shares by spreading the cost of original shares over original shares and bonus shares and the assessment order involved in this case also is 68-69, ie., prior to amendment in Section 48 regarding substitution of indexed cost of acquisition instead of cost of acquisition and, hence, this judgment also cannot be made directly applicable in the present case. We find that the judgment of Hon'ble Madras High Court rendered in the case of TVS & Sons Ltd. (supra) supports the case of the assessee. In this case, it was held by the Hon'ble Madras High Court that no separate value should be allotted to bonus shares as entire block of shares has been sold and whole cost of original shares including bonus shares being a known figure. It was also held that it would be unnecessary to ascertain the original cost of each share. The Hon'ble Madras High Court has followed its own earlier judgment in the case of Mala Ramesh (supra), but both these decisions are Aalso related to assessment years prior to amendment in Section 48 regarding replacing of cost of acquisition by indexed cost of acquisition and these this judgments of Hon'ble Madras High Court also cannot be made applicable in the present case directly. The issue in the present case is regarding arriving at the cost of bonus shares by averaging and spreading of total cost of shares over total number of bonus shares and original shares. The second issue involved is regarding indexation. The g contention of the assessee is that either the total cost of original shares should be indexed from the year in which the shares were acquired and the deduction should be allowed to that extent without separately working out the cost of bonus share and then indexing the same. In the alternate, it is submitted by the assessee that if the indexed cost of bonus shares is to be worked out separately, the same should be done by arriving at cost of bonus shares in the year of allotment of bonus shares by first indexing the original cost up to that year. It is the submission of the assessee that if this method is adopted for arriving at cost of bonus shares on the basis of indexed cost of acquisition of shares till the year of allotment of bonus shares, the total indexed cost of original shares and bonus shares will be same as worked out by the assessee on the basis of indexing of total original cost from the year of acquisition of shares without working out separate indexed cost for bonus shares. The learned Commissioner (Appeals) has also agreed to this proposition of the assessee and we are also D in agreement with this contention of the assessee. As per the judgment of Hon'ble Apex court rendered in the case of Dalmia Investment Co. Ltd. (supra), the assessing officer has worked out the cost of bonus shares by dividing the total cost of shares, Le., Rs. 26,14,110 by total number of shares purchased and bonus shares allotted totalling to 2,79,784 and he arrived at average cost of ELs. 9.34 per share. The bonus shares were allotted first time on 31-3-1990, then on 31-3-1991 and lastly on 31-3-1992. E By working out cost of bonus shares the rate of Rs. 9.34 per share, the assessing officer has worked out the indexed cost of bonus share. What happens in the result, is that the assessee is not getting indexation benefit for the period from the date of purchase of shares till the date of allotment of bonus shares on the amount which has been worked out as cost of bonus shares.
We are of the considered opinion that this is not justified and the same is not supported by the judgment of Hon'ble Apex court rendered in the case of Dalmia Investment Co. Ltd. (supra). When this judgment was delivered in the case of Dalmia Investment Co. Ltd. (supra), only the cost of acquisition was eligible for deduction from sale proceeds for working out capital gain and no indexation benefit was allowed. As per the amendment by Finance Act, 1992, the assessee is entitled to benefit of indexation from 1-4-1993. If the method adopted by assessing officer is approved, the assessee is not getting benefit of indexation from the date of acquisition of shares till allotment of bonus shares on that portion of total cost, which has been worked out as cost of bonus shares. Hence, we are of the considered opinion that assessment order on this issue cannot be sustained. Since, total shares including original shares and bonus shares have been sold out in this year and indexation cost of acquisition has been worked out by the assessee on the basis of original cost and date of purchase, we are of the considered opinion that there is no reason to interfere in the order of the learned Commissioner (Appeals) on this issue as it has been noted by the learned Commissioner (Appeals) that the total indexed cost of acquisition worked out on the basis of indexation of original cost till the year of allotment of bonus shares before working out the cost of bonus shares is same at Rs. 47,82,765 as claimed by the assessee without working out cost of bonus shares separately. We, therefore, uphold the order of the Commissioner (Appeals) on this issue. Both these grounds of the revenue are rejected.
3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in directing the assessing officer to allow deduction under Section 80G amounting to Rs. 46,82,209 out of capital gain income.
4. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) failed to appreciate that the provisions of Section 112(2) for capital gains (introduced with effect from 1-4-1993) clearly states that: Where the gross total income of any assessee includes any income arisingfrom the transfer of a long-term capital asset the gross total income shall be reduced by the amount of such income and education under Chapter VI-A shall be allowed as so reduced were gross total income of the assessee' Section 112(2).
8. Briefly stated, facts are that the assessee donated Rs. 6,01,06,000 duringthis year and claimed deduction of Rs. 47,35,650 under Section 80G. Inworking out the quantum of deduction allowable under Section 80G, theassessee has restricted the qualifying amount eligible for deduction under Section 80G to the extent of 10 per cent of Rs. 9,47,14,618, i.e., gross total income minus deduction under Section 80L Rs. 1,625 and claimed full deduction @50 per cent thereof which has been worked as Rs. 47,35,650. The assessing officer did not accept this claim of assessee for the reasons that as per assessing officer, in view of provisions of Section 112(2), long-term capital gain has to be excluded from gross total income and accordingly he worked out revised gross total income at Rs. 10,68,822 by excluding long-term capital gain or Rs. 9,36,44,171. The deduction allowable under Section 80G worked out by him was at Rs. 53,441 being 50 per cent of Rs. 1,06,882, i.e., 1096 of Rs. 10,68,822, le., revised gross total income. On appeal, learned Commissioner (Appeals) has decided the issue in favour of the assessee and it was held by him that in calculating deduction allowable under Section 80G, the assessee will get the deduction of higher amount as worked out by him because two possible interpretations can be given to the principles of calculation of deduction under Section 80G in this case.
It is noted by the learned Commissioner (Appeals) in para No. 5.1 of his order that: the entire LTCG Ahas to bear the tax at the rate of 20 per cent but still he has held that the assessee is entitled to deduction under Section 80G to the extent of Rs. 47,35,653 as claimed by the assessee although it will go to reduce total taxable income to an amount below the amount of total long-term capital gain. Now the revenue is in appeal before us.
9. It is submitted by the learned DR of the revenue that the action of theassessing officer is correct in view of the provision of Section 112(2) and, hence, the order of the learned Commissioner (Appeals) should be reversed and that of theassessing officer should be restored.
As against this, it is submitted by the learned Counsel for the assessee that the definition of GTI (gross total income) for the purpose of Chapter VI-A does not require reduction of LTCG (long-term capital gain) as interpreted by Income Tax Officer. It is submitted that deduction under Section 80G must be allowed from the GTI including LTCG because neither the definition in Section 80B(5) nor Section 80G provide for p excluding LTCG from the GTI for working out the deduction nor is there any reference to Section 112. It is also submitted that as per Section 80G(4), there is a ceiling for the deduc tion under Section 80G i e., 10 per cent of GTI as defined in Section 80B(5) and reduced by any portion on which income-tax is not payable under the Act and any amount in respect of which, the assessee is entitled to a deduction under any other provision of the Chapter VI-A. It is also submitted that since LTCG is a taxable income, the same cannot be excluded for working out the deduction allowable under D Section 80G and it is also submitted that Section 112 is meant to tax the long-term capital gains separately.
10. We have considered the rival submissions, perused the material onrecord and have gone through the orders of the authorities below. We findthat provision of Section 112 is relevant in the present case and, hence, wereproduce the provision of Section 112(2) which reads as under: (2) Where the gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
The definition of Gross Total Income as per Section 80B(5) is also relevant and hence the same is also reproduced below : Gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.
11. From the above definition of word GTI as per Section 80B(5), we find that it refers to total income computed in accordance with the provisions of this Act before making deduction under this Chapter, ie., Chapter VI-A. Section 112(2) has an overriding effect because as per this, for the purpose of deduction under Chapter VI-A, gross total income shall be reduced by the amount of LTCG included in Gross Total Income. This can be interpreted in two ways : one interpretation is what has been done by the assessing officer i.e. work out GTI by reducing LTCG and then calculating the deduction allowable under Section 80G. We are not in agreement with this interpretation made by the assessing officer because the provisions of Section 112(2) has to be considered not only for working out deduction allowable under Section 80G but for allowing any deduction under Chapter VI-A. For working out various other deductions under Chapter VI-A, gross total income is not required to be considered at the time of calculating the amount of deduction allowable. The second interpretation is as noted by the learned Commissioner (Appeals) in para 5.1 of his order that the intention of Section 112(2) is that LTCG should be taxed fully at 20 per cent. This interpretation means that there should be a cap on amount allowable under Chapter VI-A and for that, GTI should be reduced by LTCG. In the present case, the gross total income after reducing LTCG works out to Rs. 10,68,822, le., Rs. 9,47,14,618 less capital gain Rs. 9,36,44,171 less deduction under Section 80L Rs. 1,625. As per this interpretation, deduction allowable under Section 80G although worked out by the assessee at Rs. 47,37,275 should be restricted to this amount at Rs. 10,08,882 and as a result, whole of capital gain of Rs. 9,36,44,171 will be liable to tax as provided under Section 112(2). We are of the considered opinion that Section 112 cannot be ignored since it fixed a cap on deduction allowable under Chapter VI-A to ensure that whole of the long-term capital gain is subjected to tax and, accordingly, we hold that deduction should be allowed to the assessee under Section 80G to the extent of Rs. 10,08,822 only.