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Commissioner of Income-tax, Gujarat Vs. Gautam Sarabhai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 272 of 1975
Judge
Reported in[1981]129ITR133(Guj)
ActsIncome Tax Act, 1961 - Sections 45, 48, 74(1), 80A(1), 80B(5) and 80T
AppellantCommissioner of Income-tax, Gujarat
RespondentGautam Sarabhai
Appellant Advocate N.U. Raval, Adv.
Respondent Advocate K.C. Patel, Adv.
Cases ReferredCloth Traders P. Ltd. v. Addl.
Excerpt:
direct taxation - set-off - sections 74, 80t and 80b (5) of income tax act, 1961 - assessee's capital gains for assessment year was rs. 5392 before allowing deductions under section 80t - capital loss brought forward from earlier years was rs. 34607 - assessee claimed capital gain not to be set-off against brought forward capital loss - claimed amount of capital gain after deducting rs. 5000 under section 80t should be set-off - income-tax officer computed capital gain chargeable to tax and set-off entire capital gains against the balance of capital loss carried forward from previous year - appeal - whether capital loss brought forward to be set -off against capital gains other than short term capital assets under section 74 (1) (a) (ii) - held, capital gains to be set-off against carried.....majmudar, j. 1. the income-tax appellate tribunal, ahmedabad bench 'b', has referred, at the instance of the revenue, the following two questions of law for our opinion under s. 256(1) of the i. t. act, 1961 : '1. whether the capital loss brought forward has to be set off against the capital gains if related to capital assets other than short-term capital assets assessable for that assessment year under section 74(1)(a)(ii) of the act 2. whether the tribunal was right in law in holding that the capital gain for any assessment year could be determined after applying the provisions of section 80t and, therefore, the deduction of rs. 5,000 under the said section must be allowed first and the provisions of carry forward and set-off must be applied thereafter ?' 2. in order to appreciate the.....
Judgment:

Majmudar, J.

1. The Income-tax Appellate Tribunal, Ahmedabad Bench 'B', has referred, at the instance of the revenue, the following two questions of law for our opinion under s. 256(1) of the I. T. Act, 1961 :

'1. Whether the capital loss brought forward has to be set off against the capital gains if related to capital assets other than short-term capital assets assessable for that assessment year under section 74(1)(a)(ii) of the Act

2. Whether the Tribunal was right in law in holding that the capital gain for any assessment year could be determined after applying the provisions of section 80T and, therefore, the deduction of Rs. 5,000 under the said section must be allowed first and the provisions of carry forward and set-off must be applied thereafter ?'

2. In order to appreciate the nature of the controversy posed for our decision in the present proceedings, it is necessary to have a look at certain relevant facts. The assessment year under reference is 1968-69, the previous year being the year ended 31st March, 1968. The assessee is an individual. He submitted his return of income declaring his total income of Rs. 4,02,790 on 30th September, 1968, within the time allowed to the assessee. The assessee's capital gain for the assessment year under reference was Rs. 5, 392 before allowing deductions under s. 80T of the I. T. Act, 1961. The capital loss brought forward from the earlier years was Rs. 34,607. The figure of capital loss brought forward from the earlier years worked out as under :

Balance carried forward from 1960-61 ... 896Loss carried forward from 1961-62 ... 69,600--------70,496Less : Capital gain in 1967-68 allowed ... 35,889in that year--------Balance loss carried forward in A.Y. 68-69 ... 34,607Capital gain in assessment year 1968-69 ... 5,392--------Balance loss carried forward in ... 29,215A.Y. 1969-70

3. The contention of the assessee before the ITO was that the entire amount of Rs. 5,392 which was capital gain for the relevant assessment year ought not to have been set off against the brought forward capital loss, but the net amount of capital gain after deducting Rs. 5,000 under s. 80T of the Act should have been so set off. The ITO rejected that contention and computed capital gain chargeable to tax for the relevant assessment year and set off the entire amount of Rs. 5,392 against the balance of capital loss which was carried forward from the previous year as detailed above.

4. Being aggrieved by the order of the ITO, the assessee carried the matter in appeal before the AAC, Special Range, Ahmedabad. The AAC by his order dated 13th September, 1972, held that under s. 74(1)(a)(ii) of the Act, capital loss had to be set off against the capital gain which related to the capital assets other than short-term capital assets assessable for that assessment year. He held that the said loss brought forward had to be set off against the capital gain assessable. He further held that the capital gain in the previous year can only be determined after applying the provisions of s. 80T and, therefore, the deduction of Rs. 5,000 under s. 80T must be allowed first and the provisions of carry forward and set-off must be applied thereafter.

5. The revenue, being aggrieved by the aforesaid order of the AAC, carried the matter in appeal before the Income-tax Tribunal. The Tribunal, however, confirmed the view taken by the AAC on this aspect. At the instance of the revenue, the Appellate Tribunal thereafter has referred the two questions of law arising from its judgment for our opinion. The said questions are already extracted by us in the earlier part of this judgment.

6. In order to decide the aforesaid two questions of law, it is necessary to have a look at the relevant provisions of the Act having direct bearing on the questions in controversy between the parties.

7. Section 2(24) of the Act defines 'income' which amongst others includes any capital gains chargeable under s. 45. Section 2(45) defines 'total income' to mean the total amount of income referred to in s. 5. computed in the manner laid down in the Act. Section 4, which is the charging section, provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person. Section 5 pertains to the scope of total income and provides : ' Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived...' Chapter IV of the Act deals with the computation of total income and lays down various heads of income. It provides :

'Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :

A-Salaries.

B-Interest on securities.

C-Income from house property.

D-Profits and gains of business or profession.

E-Capital gains.

F-Income from other sources.'

8. Section 45 of the Act deals with capital gains being a head of income as mentioned in s. 14. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 53, 54, 54B, 54D and 54E, 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 of the Act provides for the mode of computation and deductions to be effected therefrom while computing capital gains. The said section provides that 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.

9. Chapter VI provides for the aggregation of income and set off or carry forward of loss. In this chapter, s. 66 is the first section which lays down that in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chap. VII. Thereafter, in the said Chapter, are found various sections laying down the method of computing different types of income. Section 70 onwards is a group of sections in the aforesaid Chap. VI which deals with set-off or carry forward and set off of losses. These sections cater to the different situations contemplated by various sections forming part of this group of sections. Section 70(1) provides that save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income other than 'Capital gains' is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. Section 70(2) provides that where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. Section 70(2)(ii) provides that where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any capital asset other than a short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation, made for the assessment year in respect of any there other capital asset not being a short-term capital asset. Section 71 provides for a situation where in respect of any assessment year, the net result of the computation under any head of income other than' Capital gains' is a loss and visualises a situation where the assessee has no income under the head 'Capital gains' and it provides that, in these circumstances, the assessee is entitled to have the amount of such loss set off against his income, if any, assesable for that assessment year under any other head. The aforesaid ss. 70 and 71 provide for the set-off loss from one source against income from another source under the same head of income and set-off of loss from one head against income from another, respectively. The question of carry forward and set-off of business loss against different heads of income for subsequent years is dealt with by s. 72 onwards. Section 72(1) caters to the situation where for any assessment year, the net result of the computation under the head' Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and it provides that when such loss cannot be or is not wholly set off against income under any head of income in accordance with provisions of s. 71, so much of the loss as has not been so set-off or where the assessee has income only under the head 'capital gains' relating to capital assets other than short-term capital assets and has exercised the option under sub-s. (2) of that section or where he has no income under any other head, the whole loss shall, subject to the other provisions of the chapter, be carried forward to the following assessment year and that it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year, provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year. Section 74 deals with the question of carrying forward of losses under the head 'Capital gains' for any assessment year and provides as under :

'74. (1) (a) Where in respect of any assessment year, the net result of the computation under the head ' Capital gains ' is a loss, such loss shall, subject to the other provisions of this Chapter, be dealt with as follows :- (i) such portion of the net loss relating to short-term capital assets as cannot be or is not wholly set off against income under any head in accordance with the provisions of section 71 shall be carried forward to the following assessment year and set off against the capital gains, if any, relating to short-term capital assets assessable for that assessment year and, if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following assessment year and so on.'

10. Section 74(1)(a)(ii) reads as under :

'(ii) such portion of the net loss as relates to capital assets other than short-term capital assets shall be carried forward to the following assessment year and set off against the capital gains, if any, relating to capital assets other than short-term capital assets assessable for that assessment year and, if it cannot be so set off, the amount thereof not so set off shall be carried forward to the following assessment year and so on......'

11. Thereafter follows Chap. VI-A which pertains to deductions to be made in computing the total income. This chapter is divided into four broad parts. part A relates to general provisions and comprise of ss. 80A and 80B. Section 80A(1) provides that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the chapter, the deductions specified in ss. 80C to 80VV. Section 80B is the definition section. Sub-s. (5) defines 'gross total income' to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the chapter or under s. 280-0. The second part of Chap. VI-A is Part B, which pertains to deductions in respect of certain payments which the assessee may have made during the relevant assessment year. Sections 80C to 80GG are comprised in this part. The third Part C relates to deductions in respect of certain incomes. Sections 80HH to 80TT are found in this Part C, and the last part of Chap. VI-A is 'D', which relates to other deductions and s. 80U to s. 80VV are found in this part. As the very title of Chap. VI suggests, the deductions which are contemplated by Chap. VI-A are to be made in computing the total income of the assessee for the purpose of income-tax assessment. A combined reading of ss. 80A(1) and 80B shows that in computing the total income of an assessee, certain deductions provided for in the chapter are to be permitted from the gross total income of the assessee and while computing the gross total income of the assessee, as laid down by clause (5) of s. 80B, no deductions as contemplated by Chap. VI-A or under s. 280-0 are to be made from the various heads forming part of the gross total income.

12. Against the background of the aforesaid statutory provisions, we have to construe s. 80T which is found in Part C of the said Chap. VI-A. Section 80T provides for deduction in respect of long-term capital gains in the case of assessees other than companies and it reads :

'Where the gross total income of an assessee not being a company includes any income chargeable under the head ' Capital gains ' relating to capital assets other than short-term capital assets (such income being, hereinafter, referred to as long-term capital gains), there shall be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to, - (a) in a case where the gross total income does not exceed ten thousand rupees or where the long-term capital gains do not exceed five thousand rupees, the whole of such long-term capital gains....'

13. The aforesaid statutory provisions show that the question of applicability of s. 80T and the deductions to be effected pursuant to the said provisions would arise only after the gross total income of the assessee is computed for the given assessment year as per other provisions of the I. T. Act and without making any deductions as per the provisions contained in Chap. VI-A from the various heads of income of the assessee which ultimately go to make his gross total income for the given assessment year. Section 74 of the Act as well as ss. 45 and 48 of the Act which deal with the question of capital gains and capital loss which in given contingencies can be carried forward for being set off against capital gains of subsequent years, are all found in chapters preceding Chap. VI-A. Thus, in order to determine whether capital gains have accrued to an assessee in a given assessment year, computation of such capital gains will have to be made under the provisions of s. 45 read with s. 48 of the Act. These are the sections under which computation of capital gains arising to an assessee in a given year, has to be made. Before such capital gains which are computed as aforesaid can enter the calculation of the gross total income of an assessee for the year, which after other deductions as provided by Chap. VI-A would result in the net total income of the assessee exigible to income-tax on account of the combined operation of the charging s. 4 read with ss. 5 and 14, a question can arise whether the income arising under a given head may get completely wiped off on account of the provisions of set-off as contemplated by ss. 72 to 74 to which we have made a reference earlier. Thus, it is trite to say that if the income arising from any head in a given assessment year gets completely set off, such income would naturally get excluded at the stage of computation of the gross total income of the assessee for that year. It is only in a case where the income arising under the concerned head does not get set off either because there is no such occasion for its being set off by any previous year's carry-forward loss or it gets partially set off and some balance is left of income under that head, that such income from that head can have its say in the computation of the gross total income and once it has any say in the computation of gross total income, the further question of effecting special deductions as per Chap. VI-A from gross total income for compilation of net total income for the purpose of its exigibility to tax would arise. Section 80T can operate precisely at that stage. We may mention here that the Tribunal while confirming the view of the AAC held that s. 74(1)(a)(ii) provides that carried forward capital losses have to be set off against capital gains, if any, relating to capital assets other than short-term capital assets assessable for that assessment year. In the view of the Tribunal, the aforesaid words 'capital gains assessable for that assessment year' postulate that capital gains must relate to that figure which would reflect net capital gains after necessary deductions under s. 80T have been effected. On the language of s. 74(1)(a)(ii), it is not possible to accept the said interpretation placed by the Tribunal. 'Assessable capital gains for a given assessment year' as contemplated by s. 74(1)(a)(ii) only mean that in a given year capital gains must have arisen to the assessee under the provision of s. 45 and after the due computation of such capital gains under s. 48, these capital gains would have become assessable. At the stage of assessing capital gains for the given assessment year as per the requirement of s. 45 read with s. 48, no question of effecting s. 80T deductions can ever arise. That question, as we have already mentioned earlier, would arise at the stage of computing net total income after finding out gross total income of the assessee under various heads without effecting any deduction as provided in Chap. VI-A. The Tribunal, with great respect, has ignored these settings of various sections and has also not kept in view the true concept of determination of gross total income as per s. 80B. In s. 80T, it is in the clearest terms provided by the Legislature that where the gross total income of an assessee not being a company includes any income chargeable under the head 'Capital gains' relating to capital assets other than short-term capital assets, a question arises about effecting special deductions as per that section. Thus, before s. 80T contingency can arise, it must be shown that in a given assessment year, the gross total income of the assessee includes income chargeable under the head 'Capital gains' But if because of supervening event of operation of s. 74 of the Act, the carried forward capital losses from earlier years completely drawn and wipe off the capital gains for the given year, as assessable under s. 45 read with s. 48, then, no income from that head would be left for being added as a head of income for computing the gross total income out of which special deductions could be effected under Chap. VI-A for arriving at the net total income exigible to tax. It is only in cases where the capital gains of a given assessment year are either not fully set off against carried forward capital loss of a previous year as per s. 74 or when such losses are not there at all, that the question of applicability of s. 80T would arise, as in such cases, net income chargeable under the head 'Capital gains' would squarely form part of the computation of gross total income of the assessee for that year and it is at this stage that special deductions as provided by s. 80T have to be effected. It is further pertinent to note that s. 80T provides that 'where the gross total income of an assessee not being a company includes any income chargeable under the head 'Capital gains 'relating to capital assets other than short-term capital assets (such income being hereinafter referred to as long-term capital gains), there shall be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to....' These words clearly shown that the deduction which is to be effected is from the gross total income of the assessee and that too only when such gross total income is found to have as its component income chargeable to tax 'capital gains'. But if the component of such capital gains does not form part of the gross total income of the assessee in a given year because of the supervening operation of s. 74, the stage for effecting deduction under s. 80T from such gross total income is not reached at all. If a view is taken that from the assessable capital gains accruing to the assessee in a given year, first s. 80T deductions are to be effected and then only the question of setting off of such net capital gains against carried forward capital loss of previous year as per s. 74(1)(a)(ii) is to be considered, then the very scheme envisaged by Chap. VI-A would be frustrated as, in such a case, the gross total income of the assessee would be computed after taking into consideration the net income under the head of Capital gains after actually effecting deductions under s. 80T of the Act from that head of income. Such computation would run clearly counter to the express provisions of s. 80A(1) read with s. 80B(5) and would be ex facie contrary to these statutory provisions. Again, it would amount to effecting deductions not from the gross total income but from the income under the head 'Capital gains' which itself is contra-indicated by the clear language of s. 80T as well as by the very scope, ambit and purpose of Chap. VI-A which provides for deductions to be made for computing the total income and not for computing the income arising under a given head of income. We, therefore, find that the view taken by the Tribunal and the AAC on this aspect cannot be sustained on the clear language of the relevant statutory provisions of the Act to which we have referred earlier.

14. Now has reached the stage when it becomes necessary to refer to certain decisions to which our attention was drawn by the learned advocates of both the sides. In H. H. Sir Rama Varma v. CIT (See App. I, p. 156 infra) a similar question had arisen before the Kerala High Court. The question that was posed for consideration before the Kerala High Court was whether s. 80T relief is to be given only for the amount of capital gains after the capital loss is set off. The facts of the case were that in the assessment year in question, the assessee had long-term capital loss brought forward from earlier assessment years to be set off against the capital gains of the assessment year in question. The assessee was entitled to relief under s. 80T of the Act. The question was how the amount of capital gains had to be quantified, on which the relief under s. 80T had to be worked out. The ITO reckoned the capital gains at the net figure after setting off the capital loss for the previous years against the capital gains of the assessment year. It was the assessee's contention that for the purpose of working out the relief under s. 80T, the amount of capital gains should be taken at the very same figure before setting off the loss of the previous assessment years. On appeal by the assessee, the AAC agreed with the assessee's catenation and allowed the appeal. On appeal by the revenue, the Tribunal found against the assessee and allowed the department's appeal. It was thereafter that the aforesaid question was referred for the opinion of the High Court. A Division Bench of the Kerala High Court confirming the view of the Tribunal after consideration of the statutory provision of s. 80T, held that relief under s. 80T is to be given only for the amount of capital gains after the capital loss is set off. Reliance was placed on the earlier decision of the Kerala High Court in I. T. R. No. 17 of 1972 (Emeete & sons (Travancore) P. Ltd. v. CIT (See App. II, p. 163 infra). In the aforesaid decision, the learned judges noticed the definition of gross total income under s. 80B(5) of the Act and observed that it is to be computed in accordance with the provisions of the I. T. Act. It includes the different heads of income categorised under s. 14 of the Act. Dividend income would come under the category of other sources provided for in that section. In the determination of dividend income certain deductions had to be made under s. 57 of the Act. The earlier judgment of the Kerala High Court in I. T. R. No. 17 of 1972 (Emeete & Sons (Travancore) P. Ltd. v. CIT) was concerned with the provisions of s. 80M of the Act. It was held that the principle enunciated by the Kerala High Court in I. T. R. No. 17 of 1972 was proper and that it applied to the case on hand and, accordingly, the aforesaid view was taken by the Kerala High Court. As we have already shown above, the aforesaid view of the Kerala High Court is quite in consonance with the relevant statutory provisions of the Act to which we have already referred.

15. Our attention was also invited to the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) . The Supreme Court was concerned with the question of computation of total income of the assessee carrying on business of an industry specified under s. 80E of the Act prior to its amendment by the Finance (No. 2) Act of 1967 for the purpose of the special deduction permissible thereunder. The question before the Supreme Court was whether in computing the profits of the assessee for the purpose of special deduction provided under s. 80E, items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years have to be deducted before arriving at the figures from which the 8 per cent. Contemplated by s. 80E is to be deducted or not. The Supreme Court noted the important words in s. 80E(1) and stated that the words appearing in parenthesis, that is, 'as computed in accordance with the other provisions of the Act' have to be given effect and since it is the income from business that has to be computed, the same, in view of s. 29, has to be computed in accordance with ss. 30 to 43A, which would include s. 41(2). The supreme Court also considered the question of applicability of s. 72(1) to such computation and held that s. 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession'. In order to fully appreciate the ratio of the decision of the Supreme Court in the aforesaid case, it is necessary to have a look at the relevant facts of that case. The assessee, Cambay Electric Supply and Industrial Co. Ltd., carried on the business of generation and distribution of electricity at Cambay and, as such, was covered by the provisions of s. 80E(1) and was entitled to claim the deduction contemplated by the said section. The assessment in question related to the assessment year 1967-68, the accounting year for which was the financial year ending March 31, 1967. During the accounting period which ended on March 31, 1967, the assessee-company earned an income of Rs. 46,319 from its said business. It appeared that during this period it had sold some of its old machinery and buildings resulting in the balancing charge contemplated by s. 41(2), which the ITO worked out at Rs. 7,55,807. It further appeared that there was unabsorbed depreciation of Rs. 1,42,955 and unabsorbed development rebate of Rs. 1,11,658 aggregating to Rs. 2,54,613 of the earlier years which were required to be set off against the profits of that period. The ITO, while completing the assessment, determined the deduction admissible to the assessee under s. 80E(1) of the Act in the following manner :

Rs.Income from business as computedin the assessment order 46,319Add : Profit under section 41(2) in respectof sale of machinery and buildings 7,55,807-----------8,02,126Less : 8% deduction under s. 80D(1) onRs. 8,02,126 64,170-----------7,37,956Less : Unabserbed depreciation anddevelopment rebate :Rs.Depreciation 1,42,955Development rebate 1,11,658 2,54,613----------- ----------4,83,343

16. Thus, the ITO computed the relief/deduction admissible to the assessee under s. 80E(1) at 8% on the amount of Rs. 8,02,126, that is to say, on the income before adjusting or setting off the unabsorbed depreciation and development rebate carried forward from the earlier year. The Addl. Commissioner treated this type of computation on the part of the ITO to be prejudicial to the revenue and in exercise of his powers under s. 263 of the Act, sought to revise the same after giving an opportunity to the assessee-company to show cause. According to the Addl. Commissioner, the manner of computing the deduction admissible to the assessee under s. 80E(1) was erroneous and prejudicial to the interests of the revenue. He held that the deduction of 8%on the item of profits of Rs. 7,55,807 arising under s. 41(2) had been wrongly allowed and that for the purpose of calculating the deduction of 8%the items in respect of the unabsorbed depreciation and development rebate should not have been excluded. He, therefore, set aside the order of the ITO and directed that a fresh assessment be made in accordance with law. The assessee being aggrieved by the decision of the Addl. Commissioner, carried the matter in appeal to the Tribunal which took the view that the unabsorbed depreciation and development rebate could not be deducted in computing the deduction admissible under s. 80E of the Act, relying on the decision of the Mysore High Court in CIT v. Balanoor Tea and Rubber Co. Ltd. : [1974]93ITR115(KAR) , and thus held against the revenue on this question. That brought the revenue to this High Court by way of a reference under s. 256(1) of the Act. We are directly concerned with the second question which was referred to this court in that case and that was :

'Whether unabsorbed depreciation and development rebate amounting to Rs. 2,54,613 is not deductible in computing profits under section 80E(1) of the Act ?'

17. This court by its judgment dated 11th/24th December, 1975, reported in : [1976]104ITR744(Guj) (CIT v. Cambay Electric Supply Industrial Co. Ltd.), answered the aforesaid question in favour of the revenue by taking the view that the unabsorbed depreciation and development rebate had to be deducted before arriving at the figure that would be exigible to the deduction of 8% under s. 80E and, therefore, after deducting the aggregate amount of Rs. 2,54,613 from Rs. 8.02,126, the balance of Rs. 5,47,513 was held exigible to the deduction of 8% under the said provision. Being dissatisfied, the assessee carried the matter to the Supreme Court See [1978] 113 ITR . The Supreme Court in the aforesaid decision, speaking through Tulzapurkar J. confirmed the view of this High Court on this aspect. The Supreme Court construed the provisions of s. 80E(1) as they stood at the relevant time and held that the said sub-section contemplated three steps to be taken for granting special deduction permissible thereunder. The first step was to compute total income of the assessee in accordance with the provisions of the Act except s. 80E; secondly, it was to be ascertained as to what part of the total income so computed represented the profits and gains attributable to the business of the specified industry; and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. The Supreme Court further observed that s. 80E(1) thus contemplated three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contained the legislative mandate as to how the total income, of which the profits and gains attributable to the business of the specified industry formed part is to be computed, and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of the Act except s. 80B and since in that case, it was an income from business the same had to be computed in accordance with ss. 30 to 43A which would include s. 32(2) (which provides for carry forward of depreciation) and s. 33(2) (which provides for carry forward of development rebate for eight years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8% contemplated by s. 80E(1). The Supreme Court, in this connection, negatived the contention of the assessee that the words 'total income' as mentioned in s. 80E(1) had been used in the commercial sense and held that in sub-s. (1) of s. 80E, the expression 'total income' is followed by the words 'as computed in accordance with the other provisions of this Act' in parenthesis and the mandate of these words clearly negatived the argument that the expression 'total income' had been used in the sense of commercial profits. The Supreme Court further noted that the expression 'total income' has been defined in s. 2(45) of the Act as meaning 'the total amount of income referred to in section 5, computed in the manner laid down in this Act', and observed that when this definition has been furnished by the Act itself, that expression appearing in s. 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with such definition. The Supreme Court disapproved the view of the Kerala High court in Indian Transformers Ltd. v CIT : [1972]86ITR192(Ker) and held that the Kerala High Court had regarded s. 72, appearing in Chap. VI, as a provision unconnected with the computation of the total income of an assessee and a provision which comes into operation at a stage subsequent to the computation of the total income arising from business done in accordance with ss. 30 to 43A occurring in Chap. IV of the Act and, therefore, had held that the unabsorbed losses cannot be set off before calculating the deduction under s. 80E. The Supreme Court ruled that it is not possible to accept the view that s. 72 has no bearing on, or is unconnected with the computation of the total income of an assessee under the head 'Profits and gains of business or profession'. Actually, s. 72(1) provides that 'where the net result of the computation under the head ' Profits and gains of business or profession ' is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of s. 71, so much of the loss as has not been so set off, subject to the other provisions of the chapter shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year'. It was further observed (p. 97 of 113 ITR) :

'Therefore, section 72(1) has a direct impact upon the computation under the head ' Profits and gains of business or profession. In other words, the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head ' Profits and gains of business or profession '. Further, the question whether special benefit under section 80E as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other must dependupon the intention of the Legislature and such intention has to be gathered from the language employed. In this view of the matter it is extremely doubtful whether in spite of the legislative mandate contained in the three steps provided for by sub-section (1) of section 80E, the carried forward losses would not be deductible before working out the 8% deduction contemplated by section 80E and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed development rebate and unabsorbed depreciation should be held to be non-deductible before working out the 8% deduction under section 80E(1) cannot be accepted. As observed earlier, on a proper construction of the provision contained in sub-section (1) of section 80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of 8% under section 80E(1).'

18. The aforesaid decision of the Supreme Court, in our view, squarely answers the question which has been posed for our consideration in the present case. It may be noted that s. 80E(1) which the Supreme Court construed, included in parenthesis the mandatory words, viz, 'total income as computed in accordance with the other provisions of the Act.' So far as the facts of the present case are concerned, s. 80T even though not containing these words is controlled by these very words as found in the definition provision of s. 80B(5) which are general provisions which apply to the interpretation of 'gross total income'. It is further pertinent to note that the Supreme Court was concerned with the interpretation of s. 72(1) read with s. 80E(1). Section 72(1) to which we have referred in the earlier part of this judgment represents a scheme which is analogous to the scheme represented by s. 74. Section 72(1) provides that where for any assessment year, the net result of the computation under the head' Profits and gains of business or profession' is a loss to the assessee, then under the circumstances contemplated by the said section, it can be carried forward to the following assessment year and can be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year. Under s. 74(1) also, a similar scheme of carrying forward of losses under the head 'Capital gains' to a future assessment year is contemplated. Consequently, the reasoning of the Supreme Court in the case of s. 80E in the light of the statutory provisions in parenthesis as read with s. 72(1) would squarely apply to the construction of s. 74(1)(a)(ii) in the light of s. 80T read with s. 80B(5).

19. In this connection, we may also refer to the judgment of this court in CIT v. Amul Transmission Line Hardware P. Ltd. : [1976]104ITR771(Guj) , wherein this court was concerned with the question of working out 8% deduction in respect of profits and gains from priority industries contemplated by s. 80I of the I. T. Act, 1961. It was held by this court that the deduction should be made after setting off unabsorbed losses, depreciation and development rebate carried forward from earlier years. The contention raised on behalf of the assessee was that whatever be the position as regards the deduction on account of carried forward development rebate and carried forward depreciation, the deduction on account of carried forward loss contemplated by s. 72(1) stands on an altogether different ground, because this deduction of carried forward development rebate does not enter into the concept of computation of total income under the Act. The said contention was repelled by this court in the aforesaid case and it was held that the provisions of s. 80I can be worked out only after computing the total income 'in accordance with the provisions of the Act' and before making any deduction under Chap. VI-A. It is, therefore, necessary to see whether while working out the figure of total income in accordance with the provisions of the Act, it is necessary to give effect to the provisions contained in s. 72(1) of the Act or not. It was further observed (p. 777) :

'Now, if a reference is made to section 72(1), it will be found that it provides that where the net result of computation under the head 'profits and gains of business or profession ' is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year. Thus, section 72(1) has a direct impact upon the computation under the head of `profits and gains of business or profession '. It is thus obvious that the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be obtained without working out the net result of computation under the head `Profits and gains of business'..... In principle, therefore, it is not possible to make any distinction as between carried forward loss and carried forward development rebate or carried forward depreciation allowance so far as section 80I is concerned.'

20. The aforesaid decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. : [1978]113ITR84(SC) and the decision of this court in the case of Amul Transmission : [1976]104ITR771(Guj) clearly lay down the proposition that before computing total income as per the provisions of Chap. VI-A, the overriding effect of sections like s. 72(1) have got to be given due weight and full play. It is only after that type of computation that it can be said that the concerned total income is computed in accordance with the provisions of the Act without making any deductions as per the provisions of Chap. VI-A or under s. 280-0. It is necessary to recall that in the case of Amul Transmission : [1976]104ITR771(Guj) , this court had directly decided the question as to whether carried forward losses can be set off against the income of the subsequent year as per s. 72(1) and whether such type of exercise has to be done first without going into the question of special deduction as provided by s. 80I. The Supreme Court has in terms approved the reasoning of this court that for the computation of total income for the purpose of the special deductions under Chap. VI-A, the provisions of s. 72 have got to be given full effect. As we have already shown earlier, the scope of s. 72(1) is quite akin to that of s. 74(1)(a)(ii) and hence, by parity of reasoning, the aforesaid decision of the Supreme court and this court would squarely apply to the facts of the present case.

21. We may now turn to a decision of the Supreme Court on which strong reliance was placed by the learned advocate for the assessee. The said decision is Cloth Traders P. Ltd. v. Addl. CIT : [1979]118ITR243(SC) . In the aforesaid decision, the Supreme Court was concerned with the question of computation of eligibility for special deductions under s. 80M of the Act. The question before the Supreme Court was whether while interpreting the words 'dividend from an Indian company 'as employed by that section, what was contemplated was the full amount of dividend received from an Indian company or whether dividend income was to be taken into consideration for the purpose of the said section after making deductions provided under the Act. While construing the statutory provisions of that section, the Supreme Court observed that where the gross total income includes this particular category of income, whatever be the quantum of such income included, the condition would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of 'such income', as the case may be. It was further observed (p. 258) :

'The words 'such income' cannot have reference to the quantum of the income included but refer only to the category of the income included, viz., income by way of dividends from a domestic company.'

22. In that connection, it was observed that the deduction permissible under s. 80M is to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, i.e., after making the deductions provided under the Act. The aforesaid decision of the Supreme court proceeded to consider a question which was quite difference from the one which is posed for our consideration in the present proceeding and which squarely arose for consideration of the Supreme Court in Cambay Electricity Co.'s case : [1978]113ITR84(SC) . It is pertinent to not that the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) was not at all concerned with the question of computation of gross total income after setting off of income under any head during any assessment year against the balance of carried forward losses as per the provisions of s. 72 of s. 74. In Cloth Traders' case : [1979]118ITR243(SC) , the Supreme court was only concerned with the interpretation of the provisions of s. 80M and its forerunner, s. 85A of s. 99(1)(iv) of the Act, and the Supreme Court while interpreting these provisions laid down the criterion for computation of eligibility under these provisions for necessary relief. While interpreting s. 80M, the Supreme court held that s. 80M occurs in Chap. VI-A which headed 'Deductions to be made in computing total income'. Section 80M, sub-s. (1), provides that in computing the total income of an assessee, the deductions specified in ss. 80C to 80VV shall be made from his gross total income and gross total income, according to the definition in s. 80B, clause (5), means the total income computed in accordance with the provisions of the Act before making any deduction under Chap. VI-A or under s. 280-O. What s. 80A sub-s. (1), requires is that, first, the total income of the assessee must be computed in accordance with the provisions of the Act without taking into account the deductions required to be made under Chap. VI-A or under s. 280-O and then from the gross total income thus computed, the deductions specified in ss. 80C to 80VV must be made in order to arrive at the total income. In the context of this statutory background, the Supreme Court interpreted the words of sub-s. (1) of s. 80M, viz., where the gross total income of an assessee includes any income by way of dividends from a domestic company, deduction shall be allowed to the assessee in computing the total income from such income by way of dividends of an amount equal to the whole of such income or 60 per cent. of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is received. It is in aforesaid setting of the relevant words as juxtaposed in the said section that the Supreme court observed that the words 'includes any income by way of dividends from a domestic company' are intended only to provide that a particular category of income, namely, income by way of dividends from a domestic company, should form a component part of the gross total income. These words merely prescribe a condition for the applicability of the section namely, that the gross total income must include the category of income described by the words 'income by way of dividends from a domestic company'. If the gross total income includes this particular category of income, whatever be the quantum of such income included, the condition would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of 'such income'. The Supreme court observed that the words employed by the Legislature in s. 80M clearly prescribed a criterion of eligibility for the benefit of the said section and one of the conditions of such eligibility was that the gross total income must include that particular category of income which was contemplated by s. 80M. In the present case also, it is clear that if the gross total income of the assessee included for any assessment year any capital gains chargeable in that year, then certainly s. 80T benefits would be attracted and the deductions contemplated by that section would have to be effected, though while deciding the applicability of the provision, the quantum of income under a given head is not very relevant as decided by the Supreme Court while interpreting s. 80M, and what is relevant is only the existence of a given category of income as a part and parcel of the gross total income and it is this existence without reference to the quantum of the concerned head of income that would invoke applicability of the concerned deduction provision. But the question which has been posed for our consideration did not arise before the Supreme court in cloth Traders' case : [1979]118ITR243(SC) . This question is, when the income arising from a given head once gets completely drowned and set off by carried forward losses from previous years because of the operation of s. 72 or 74, as the case may be, and when income from such head does not get reflected in the gross total income at all, are the special deductions, contemplated by s. 80T in the present case or by s. 80E(1) in the case before the Supreme Court in Cambay Electric Supply Co.'s case : [1978]113ITR84(SC) and in the case before this court in Amul Transmission's case : [1976]104ITR771(Guj) , to be of any avail to the assessee concerned Such question having not been on the anvil before the Supreme Court in Cloth Trader's case : [1979]118ITR243(SC) , the said decision cannot be of any assistance to the assessee in the present case. On the contrary, the decision of the Supreme Court in Cambay Electric Supply Co.'s case : [1978]113ITR84(SC) squarely applies to the facts of the present case as we have already shown earlier.

23. To recapitulate, the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) 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 : [1979]118ITR243(SC) , as the Supreme Court was not concerned with such a situation in that case. But such a question is clearly answered by the previous decision of the Supreme Court in Cambay Electric Supply co.'s case [1973] 113 ITR 84 and also by a Division Bench of this court in Amul Transmission's case : [1976]104ITR771(Guj) .

24. Mr. Patel, for the assessee, also invited our attention to the decision of the Madras High Court in CIT v. V. Venkatachalam : [1979]120ITR688(Mad) . Mr. Patel submits that this is a solitary judgment of the Madras High Court which has taken a view on this very question in favour of the assessee. The question posed for decision of the Madras High Court in the aforesaid case was as to whether the Tribunal was correct in holding that the assessee was entitled for the assessment year 1973-74, to relief under s. 80T of the I. T. Act, 1961, on an amount calculated in terms of the aforesaid provisions with reference to the gross capital gains of Rs. 1,02,740. The departmental authorities as well as the Tribunal in that case took the view that the business loss of the assessee for the previous year which amounted to Rs. 41,892 was required to be deducted from set-off against capital gains of the relevant year and, thereafter, relief under s. 80T should be granted. This view of the departmental authorities and the Tribunal was not approved by the Madras High Court in the aforesaid decision in the light of the decision of the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) . In the view of the Madras High Court, there was close similarity in the language of s. 80M and that of s. 80T and hence the decision of the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) would apply to a claim under s. 80T as well, as, except for the difference in the category of income, there is no other distinction between these two provisions and the scheme of allowance is also identical according to the Madras High Court, relief under s. 80T will have to be worked out on the gross amount of capital gains, that is, without first deducting therefrom the business loss. As we have already discussed in detail earlier, the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) did not deal with the question which has been posed for our consideration in the present proceedings and which arose for the consideration of the Madras High Court in V. Venkatachalam's case : [1979]120ITR688(Mad) . Under these circumstances, with respect, it is not possible for us to accept the reasoning of the Division Bench of the Madras High Court in the aforesaid decision. It is apparent that the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) was concerned with the interpretation of s. 80M of the Act and it laid down a criterion of eligibility for the benefit under that provision. In that context, the Supreme Court observed that the quantity of the income under the concerned head was not relevant for the applicability of s. 80M, but what was necessary to be shown was that such income belonging to that given category did arise and form part of the gross total income of the assessee for the relevant year. We have already shown above how this reasoning cannot apply to a case in which the income arising under the given head gets completely set of on account of carried forward losses as contemplated by s. 72 and s. 74 of the Act. As such, the ratio of the Supreme Court decision Cloth Traders' case : [1979]118ITR243(SC) and the reasoning of the Supreme Court therein would clearly not apply to the interpretation of s. 80T as was assumed by the Madras High Court in V. Venkatachalam's case : [1979]120ITR688(Mad) . It is further interesting to note that in V. Venkatachalam's case, the Madras High Court was not concerned with a case of setting off of capital gains against the carried forward capital losses as per s. 74(1)(a)(ii). The Madras High Court was mainly concerned with the case of setting off of capital gains arising in the relevant assessment year against business loss for the same year. Hence the decision of the Madras High Court cannot be of any assistance to the assessee. Even otherwise, it is not possible to agree with the reasoning of the Madras High Court in the aforesaid decision and to hold that the decision of the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) fully covers the question of interpretation of s. 80T read with s. 80B(5) and s. 74(1)(a)(ii) as contended by the learned advocate for the assessee. It is further pertinent to note that in the aforesaid decision of the Madras High Court an earlier judgment of the Madras High Court in T. C. No. 408 of 1975 [CIT v. M. Seshasayee - see p. 166 infra (App. III)] has been referred to and it is observed that the said decision is impliedly overruled by the decision of the Supreme Court in Cloth Traders' case : [1979]118ITR243(SC) . We have already shown earlier that the Cloth Traders' case does not cover the question which was posed for the decision of the Madras High Court in V. Venkatachalam's case : [1979]120ITR688(Mad) Hence, it is not possible to agree with the view of that the Madras High Court in v. venkatachalam`s case that the earlier judgment of the same High Court in T. C. No. 408 of 1975 [CIT v. M. Seshasayee-see p. 166 infra (App. III)] was not correctly decided. At this stage, it is necessary to turn to the aforesaid decision of the Madras High Court in T C. No. 408 if 1975 (CIT v. M. Seshasayee). The said judgment has been reported in Current Tax Reporter, 1979, vol. 12, at page 360 (see p. 166 infra (App. III). It is delivered in the case of CIT v. M. Seshasayee. The facts of that case were that in computing the relief due to the assessee under the provision of s. 80T, the assessee took her gross capital gains at Rs. 38,780 and after deduction of the exemption of Rs. 5,000 under s, 80T, there was a balance of Rs. 33,780 and, according to the assessee, the 50% rate that is provided under s. 80T should be on this sum of Rs. 33,780. The ITO, though he accepted the figure of capital gains as Rs. 3,780, adjusted against it a sum of Rs. 11,395, determined as capital loss in an earlier year and available for adjustment in the relevant year, he further deducted a sum of Rs. 5,000 which was the exemption available under s. 80T. This left a balance of Rs. 22,385 as capital gains and the 50 per cent. deduction available under s. 80T(b) was thus computed to be Rs. 11,192 and not the 50% amount of Rs. 33,780 as contended by the assessee. The aforesaid view of the ITO was not accepted by the AAC in appeal and by the Tribunal in further appeal. Thereafter, the revenue came by way of reference before the Madras High Court. The Division Bench of the Madras High Court accepted the contention of the revenue and held that the decision of the Supreme Court in Cambay Electric Supply Co. Ltd. : [1978]113ITR84(SC) clearly applied to the facts of the case which had arisen before it under s. 80T. In that connection, it was observed (see p. 168 of App. III infra) :

'In construing this provision, the Supreme Court held that in computing the profits of the assessee for the purpose of the special deduction provided under the above provision, items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years will have to be deducted before arriving at the figure from which the 8 per cent. contemplated by the above provision is to be deducted. The Supreme Court did not approve of a decision of this court in CIT v. L. M. Van Moppes Diamond Tools (India) Ltd. : [1977]107ITR386(Mad) .'

25. It was further observed (p. 168 of App. III infra) :

'The only difference between s. 80E considered by the Supreme Court and s. 80T now under consideration, is that in s. 80E itself the definition, which is now provided in s. 80B(5).'

26. The question was accordingly answered in favour of the revenue.

27. The aforesaid decision of the Madras High Court in M. Seshasayee's case (see p. 166 of App. III infra) thus takes the same view which we are inclined to take in the present proceedings. We fully concur with the view of the Madras High Court in the aforesaid decision and hold that the ratio laid down in Cambay Electricity Co. : [1978]113ITR84(SC) by the Supreme Court applies with all force to the situation which has been posed for our consideration in the present proceedings.

28. As a result of the aforesaid discussion, it must be held that while arriving at the figure of capital gains assessable under s. 45 of the Act, the computation is to be made under s. 45 read with s. 48 and after the said capital gains have been set off against carried forward balance of capital losses, from previous year as per the provisions of s. 74(1)(a)(ii), a further question would arise as to whether any balance, of capital gains arising during the accounting years is left, which can be brought within the fold of gross total income for that year as contemplated by s. 80A(1) read with s. 80B(5) and it is only in that eventuality that the question of effecting further deductions as contemplated by s. 80T can arise for consideration. It goes without saying that if there is no such balance of capital gains left for being included in the gross total income for the relevant assessment year as the entire capital gains arising during that year have got fully set off against the balance of carried forward capital losses of previous years, no such capital gains will be reflected as a head of income making up the gross total income and consequently no question of s. 80T deductions would arise in such a case. If on the contrary some balance of capital gains is still left after the working out of the adjustments and set off against the carried forward capital losses of previous year as per s. 74(1)(a)(ii), such balance of capital gains will be reflected in the gross total income of the concerned assessee for the relevant year and on that basis at that stage s. 80T deductions can be worked out.

29. As a result of the aforesaid discussion, the questions referred to us for our consideration will have to be answered as follows :

Question No. 1. - In the affirmative, that is, in favour of the revenue and against the assessee.

Question No. 2. - In the negative, that is, in favour of the revenue and against the assessee.

30. The assessee shall pay the costs of this reference to the Commissioner.

31. At this stage, Mr. K. C. Patel, learned advocate for the assessee, makes an oral application for leave to appeal to the Supreme Court under s. 261 of the I. T. Act. Having heard Mr. Ravel for the revenue, we find that this is a case in which a substantial question of law does arise, particularly in view of the fact that both the sides rely upon different judgments of the Supreme Court in support of their rival contentions an din view of the further fact that there is a conflict of decisions between the Madras High Court and the Kerala High Court. We, therefore, certify this case to be a fit one for appeal to the Supreme Court. Orders accordingly.


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