1. This appeal by the assessee relates to the assessment year 1980-81, for which the previous year ended on 31-3-1980.
2. The dispute in the present appeal relates to the relief available to the assessee under Section 80T of the Income-tax Act, 1961 ('the Act') on a capital gain made by the assessee.
3. During the previous year, the assessee sold certain properties situated within the Cochin Corporation area. The tax on capital gains arising out of the transaction was computed by the ITO in the following manner: The sale consideration was Rs. 1,02,140. The cost of acquisition of the properties with improvements came to Rs. 21,000 and the expenses for the sale to Rs. 2,500. Deducting these amounts the balance amount came to Rs. 78,640. The assessee had purchased another property for his residence and because of this he was entitled to exemption to the extent of Rs. 46,000 under Section 54 of the Act.
Deducting this amount the balance came to Rs. 32,640. The deduction under section SOT was worked out by the ITO on this amount.
4. The contention of the assessee is that the deduction under section SOT should be worked out on the gross capital gains and that the exemption under Section 54 should be granted from the balance amount.
This contention was rejected by the ITO and also by the AAC. Aggrieved by the same, the assessee has come up in appeal.
5. In support of the contention that the base amount for the deduction under Section 80T should be the gross capital gains, the assessee relied upon the decisions of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT  118 ITR 243 and that of the Madras High Court in CIT v. V. Venkatachalam  120 ITR 688. It was also contended by the assessee that a decision of the Kerala High Court to the contrary in H.H. Sir Rama Varma v. CIT  129 ITR 156 was based on an earlier decision of the Kerala High Court in Emeete & Sons (Travancore) (P.) Ltd. v. CIT  129 ITR 163 that the latter decision stands impliedly overruled by the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. (supra) and that the two decisions of the Kerala High Court are no more good law.
6. The contention of the learned departmental representative was to the following effect: The deduction under Section 80T is in respect of capital gains. Reference has, therefore, to be made to Section 45 of the Act to find out what the capital gains is. Under Section 45 the amount exempted under Section 54 does not constitute capital gains and is not deemed to be the income of the assessee. The amount does not, therefore, form part of capital gains or gross capital gains. If the position is otherwise and if the assessee's contention is accepted, deduction under Section 80T can be claimed even when the entire sale consideration becomes exempt under Section 54 because of investment in another property. With regard to the decisions relied on by the assessee, it was contended by the department that the matter has been considered in all its aspects by the Gujarat High Court in CIT v.Gautam Sarabhai  129 ITR 133, that the Gujarat High Court had in that case distinguished the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. (supra) and had dissented from the decision of the Madras High Court in the case of V. Venkatachalam (supra). It was also pointed out by the department that under Section 54 only the difference between the sale consideration received and the amount invested is made chargeable.
7. In reply, it was contended by the assessee that the computation provision with regard to capital gains are contained in Section 48 of the Act, that Section 48 provides for deduction of only the cost of acquisition and the cost of improvements and that the rest of the capital gains will, therefore, constitute gross total capital gains and that in the light of the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. (supra), the assessee is entitled to Section 80T deduction on the gross capital gains.
8. We have considered the matter. The decisions under Section 80T relied on by either side were with reference to the question whether the deduction under Section 80T is to be given on the gross amount of long-term capital gains prior to setting off of other losses of the same year and/ or long-term loss under the head 'Capital gains' brought forward from the earlier years or thereafter. There is a conflict of decisions on the question and the position has been clearly set out thus in Chaturvedi and Pithisaria's Income-tax Law, Third edn., Vol. 2: Deduction under Section 80T - Whether to proceed set off of other losses or of unabsorbed carried forward capital loss ?--There is a difference in judicial opinion on the point whether deduction under Section 80T is to be given on the gross amount of long-term capital gains prior to setting off of other losses of the same year and/or long-term loss under the head 'Capital gains' brought forward from earlier year(s) or thereafter.
One view is this that against long-term capital gains of the current year unabsorbed carried forward long-term capital loss is first to be set off as per the provisions of Section 74(1)(a)(ii). Any balance left after such set off will supply the base for deduction under Section 80T [CIT v. Gautam Sarabhai  129 ITR 133 (Guj.), following CIT v. M. Seshasayee  129 ITR 166 (Mad.) and H.H. Sir Rama Varma v. CIT  129 ITR 156 (Ker.) and relying on Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84 (SC) and CIT v. Amul Transmission Line Hardware (P.) Ltd.  104 ITR 771 (Guj.) and distinguishing Cloth Traders (P.) Ltd. v. Addl.
CIT  118 ITR 243 (SC)].
On the other hand, the other view is that the gross amount of long-term gains without setting off of the current year's business loss--[CIT v. V. Venkatachalam  120 ITR 688 (Mad.), relying on Cloth Traders (P.) Ltd. v. Addl. CIT  118 ITR 243 (SC) and distinguishing Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84 (SC)] or short-term capital loss [Addl. CIT v. K. AL. KR. Ramaswami Chettiar  120 ITR 694 (Mad.)] will supply the base for deduction under section SOT.9. In our view, it is not necessary to go into the conflict of decisions pointed out above because the factual position in the present case is different. In the cases mentioned above, the dispute related to a stage after the computation of capital gains under Sections 45 to 55A of the Act. The dispute arose at a stage where the capital loss of the year or of the earlier years was sought to be set off against the capital gains. This set off is under the provisions relating to set off and carry forward of loss contained in Chapter VI of the Act. In the present case, the question is whether the amount exempted under Section 54 constitutes chargeable capital gains at all.
10. Section 45, insofar as it is relevant for the present purpose, says that any profits or gains arising from the transfer of a capital asset, shall, save as otherwise provided in Section 54, be chargeable to Income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year. Therefore, the charging section provides that the amount worked out under Section 54 is not to be deemed to be the income of the assessee and is not to be charged at all. The computation provisions contained in Section 48 relate to the computation of the chargeable income. The amount worked out under Section 54 is similar to income totally exempted under Section 10 of the Act. The deduction under Section 80T relates to an income chargeable under the head 'Capital gains'. It cannot operate with regard to an amount which does not form part of the amount chargeable under the head 'Capital gains'. As already stated, the amount worked out under Section 54 is not chargeable to Income-tax and is not to be deemed to be the income of the previous year by virtue of Section 45.
If the position is otherwise, an assessee can claim relief under Section 80T even when the entire amount of capital gains is exempt under Section 54. The contention of the assessee that the amount worked out under Section 54 should be treated as part of the gross total income for the purpose of working out the deduction under Section 80T cannot, therefore, be accepted. The appeal of the assessee has, therefore, to fail.