1. The assessee sold a residential house at M.Q. Road, Ernakulam, for Rs. 2,92,500 and purchased another residential house for Rs. 1,56,666.
The ITO valued the cost of the residential house sold as on 1-1-1964 at Rs. 88,750 which he deducted from Rs. 2,92,500. Then out of that he deducted the value of the residential house purchased amounting to Rs. 1,56,666. Thereafter he allowed deduction under section SOT of the Income-tax Act, 1961 ('the Act') amounting to Rs. 15,521. Thus, he determined the capital gains at Rs. 31,560.
2. Before the AAC it was contended that deduction under Section 80T should be given first from the gross capital gains and out of the balance amount the purchase cost of the new asset should be deducted.
The AAC did not accept the submission. He held that the amount that has to be deducted under Section 54 of the Act is in the nature of exemption. The capital gains chargeable to tax is arrived at after granting the above exemption. The net capital gains after granting the above exemption has to be included in the total income. Then the relief under Section 80T is to be allowed. Thus, he upheld the assessment order. Against the same the assessee has preferred this appeal.
3. The learned counsel for the assessee submitted that deduction under Section 80T has to be allowed first from the gross capital gains and out of the balance, the exemption under Section 54 relating to the purchase cost of the new asset should be deducted. We are unable to accept the submission. Sections 45(1) and 48 of the Act which are relevant for our purpose read 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 and 54F 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.
48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or 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 capital asset and the cost of any improvement thereto.
It is clear from Section 45 that capital gain is chargeable to income-tax after allowing the exemption under Section 54. Under Section 48 the capital gains shall be computed by deducting the cost of acquisition of the asset and the cost of improvement thereto and the expenditure incurred in connection with such transfer from the full value of the consideration received or accruing as a result of the transfer of the capital asset. Thus, under the above provisions, the cost of acquisition of the asset and the cost of improvement thereto and the expenditure incurred will be first deducted from the full value of consideration received. Then the exemption under Section 54 will be allowed. It is only after computing the capital gains the question of allowing deduction under section SOT would arise. Section 80T comes under Chapter VIA of the Act. Section 80B(5) of the Act which is under Chapter VIA defines 'gross total income' which means the total income computed in accordance with the provisions of this Act before making any deduction under this Chapter or under Section 280-O of the Act. It is clear from the above provision that it is only after computing the total income the question of making any deductions under Chapter VIA would arise. Thus, after allowing exemption under Section 54 and computing the capital gains then only the question of allowing deduction under Section 80T would arise.
4. In H.H. Sir Rama Varma v. CIT  129 ITR 156, the Kerala High Court has held that the relief under Section 80T is to be given only for the amount of capital gains after the capital loss is set off. In CIT v. Gautam Sarabhai  129 ITR 133, the Gujarat High Court held that the computation of capital gains is to be made under Section 45 read with Section 48 and after the capital loss carried forward from the previous years had been set off against the capital gains as per the provisions of Section 74(1)(a)(") of tne Act and it is only thereafter that the further deduction contemplated by Section 80T can be effected. In this case, the decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT  118 ITR 243 was considered. It was observed as under: To recapitulate, the Supreme Court in Cloth Traders' case  118 ITR 243 was not concerned with a situation in which income under a given head for the given assessment year may be nil on account of it being adjusted or set off against any other permissible carried forward losses of a previous year as per the relevant provisions of the Act. This is a question which has arisen for our consideration in the present proceedings and the answer to this question can naturally not be found from the decision of the Supreme Court in Cloth Traders' case  118 ITR 243, as the Supreme Court was not concerned with such a situation in that case.... (p. 151) On the other hand, the Gujarat High Court followed the ratio laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v.CIT  113 ITR 84. In our view, the ratio laid down in the above cases squarely apply to the instant case. We may also refer to a decision of the Tribunal in the case of M. Raghavan [IT Appeal No. 319 (Coch.) of 1983, dated 28-1-1985] wherein it was held that after allowing exemption under Section 54 the question of allowing deduction under Section 80T would arise.
5. The learned counsel for the assessee strongly relied on the decision of the Supreme Court in Cloth Traders (P.) Ltd.'s case (supra). That decision has been considered by the Gujarat High Court in the above case referred to. Reliance was also placed on a decision of the Madras High Court in CIT v. V. Venkatachalam  120 ITR 688, wherein it was held that relief under Section 80T will have to be worked out on the gross amount of capital gains before adjusting the loss. Firstly, contrary view has been taken by the Kerala High Court in the case of H.H. Sir Rama Varma (supra) which is binding on us as well as the decision of the Gujarat High Court in Gautam Sarabhai's case (supra).
Further, Section 45 clearly provides that the amount worked out under Section 54 is not to be deemed to be the income of the assessee and after allowing the exemption under Section 54 only the capital gain has to be computed. So, it is only thereafter the question of deduction under Section 80T would arise. This issue did not come up for consideration in the decision of the Madras High Court. Hence, it is distinguishable.
6. Thus, in our view, it is only after computing the capital gains under Section 48 and after allowing the exemption under Section 54 the deduction under Section 80T can be allowed. The computation of capital gains made by the ITO is perfectly in order. The appeal filed by the assessee thus fails and is accordingly dismissed.