Commissioner of Income Tax vs Moosa and Abu, Engineering Contractors

V.V. Kamat, J.—In this reference the following three questions expect our answer :

"1. Whether, on the facts and in the circumstances of the case and also in view of the decision of the Kerala High Court in H.H. Sir Rama Varma Vs. Commissioner of Income Tax, , the deduction u/s 80T has to be allowed on the gross income from the capital gains ?

Whether, on the facts and in the circumstances of the case, is not the Commissioner of Income Tax justified in law in directing the Income Tax Officer to recompute the deduction u/s 80T on capital gains after adjusting the business loss ?

Whether, on the facts and in the circumstances of the case,--

(i) the Tribunal is right in law in relying on a circular issued u/s 80M for interpreting and understanding the scope of Section 80T?

(ii) the circular being one interpreting the scope of Section 80M in a particular way is binding on the Revenue in the instant case where the interpretation of Section 80T arises for consideration ?"

The assessment year is 1981-82, for which the relevant accounting year would end on March 31, 1981. The assessee is a firm of contractors and filed a return showing total income of Rs, 70,400. In the return long-term capital gains are shown at Rs. 3,45,416.

The Income Tax Officer allowed deduction u/s 80T of the Income Tax Act on this amount of Rs. 3,45,416 taking it to be the gross income from long-term capital gains.

The first appellate authority--the Commissioner of Income Tax (Appeals)--felt this to be erroneous and prejudicial to the interests of the Revenue. The order was modified and the Income Tax Officer was directed to recompute the deduction u/s 80T only on the net amount of capital gains included in the total income in accordance with the provisions of Section 80AB.

In reaching this conclusion, the Commissioner of Income Tax, Cochin, acted u/s 263 of the Income Tax Act. The Commissioner felt that the deduction would be required to be recomputed u/s 80T only with reference to the net amount of capital gains included in the total income and not the gross amount.

Further travel of the proceedings to the Income Tax Appellate Tribunal shows that the Tribunal considered the question as to whether deduction u/s 80T is to be allowed either on the gross income or on the net income from the capital gains of Rs. 3,65,416 as returned by the assessee. The Tribunal relied on the Hyderabad Bench decision in the case of Ram Kumar Soni v. ITO [1988] SCT 1764. In the order the entire passage from the judgment is quoted.

Additionally, the Tribunal also relied on Circular No. 58/F-167/24/70-ITA (A-1), dated April 15, 1971. The Tribunal took the view that the deduction u/s 80T has to be allowed on the gross income from the capital gains. Accordingly, the error committed by the Commissioner acting u/s 263 of the Income Tax Act was corrected and the decision of the Income Tax Officer was restored. It is in this position, the three questions are brought before us by the Revenue. It would be seen that the two decisions, of the apex court in H.H. Sir Rama Varma Vs. Commissioner of Income Tax, Kerala, and Commissioner of Income Tax Vs. V. Venkatachalam, , succinctly declared the law for guidance in the context. In H.H. Sir Rama Varma Vs. Commissioner of Income Tax, Kerala, , the decision of this court in H.H. Sir Rama Varma Vs. Commissioner of Income Tax, is affirmed. In fact, the judgment of the apex court explains in necessary minute detail by posing the questions and laying the necessary legal matrix in connection. Referring to Section 14 of the Income Tax Act, 1961, it is observed that all income for the purposes of charge of Income Tax and computation of total income is classified under the heads of income therein mentioned. After introducing the situation in this manner, it is almost inevitable to reproduce the further observations of the apex court in the context and they are as follows (page 437) :

"Capital gains is one such head of income. Section 45 deals with capital gains and says that any profits or gains arising from the transfer of a capital asset effective in the previous year shall, except as provided in the provisions therein mentioned, 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 sets out the mode of computation of income chargeable under the head ''Capital gains''. It refers to long-term capital gains as being capital gains arising from the transfer of long-term capital assets and it makes provision for certain deductions therefrom. Section 74 provides for losses under the head ''Capital gains''. It says that where in respect of any assessment year, the net result of the computation under the head ''Capital gains'' is a loss to the assessee and such loss cannot be or is not wholly set off against income under any other head of income, so much of the loss as has not been so set off or, where the assessee has no income under any other head, the whole loss shall be carried forward to the following assessment year and shall be set off against income, if any, under the head ''Capital gains'' assessable for that assessment year and if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year, and so on for a maximum of eight assessment years immediately succeeding the assessment year for which the loss was first computed. Chapter VI-A is titled ''Deductions to be made in computing total income''. Sub-section (1) of Section 80A therein states that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with arid subject to the provisions of Chapter VI-A, the deductions specified in sections 80C to 80U. Sub-section (2) of Section 80A makes it clear that the aggregate amount of the deductions under Chapter VI-A shall not exceed the ''gross total income of the assessee. Sub-section (5) of Section 80B defines ''Gross total income'' for the purposes of Chapter VI-A to mean the total income computed in accordance with the provisions of the said Act, before making any deduction under Chapter VI-A. Section 80T falls under Part C of Chapter VI-A, which deals with deductions in respect of certain incomes. Section 80T, so far as it is relevant, reads thus :

''80T. 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,--. . .''

Section 80T opens with the words ''Where the gross total income of an assessee .... includes any income chargeable under the head "Capital gains" ....''. This clearly indicates that the gross total income of an assessee has to be determined before the provisions of Section 80T can be applied. This is clear also from the provisions of Section 80A which says that in computing the total income of an assessee, there shall be allowed from his gross total income, the deductions specified in, inter alia, Section 80T. Where the gross total income of an assessee, determined in accordance with the provisions of the said Act, includes any income by way of long-term capital gains a deduction is permissible therefrom under the provisions of Section 80T in computing his total income. The deduction is from ''such income''. As aforementioned, ''such income'' has been held by this court to be the assessee''s long-term capital gains and there can be no doubt, having regard to the context, of the correctness of this interpretation."

It would be seen that the entire discussion quoted above would show, in a proper perspective, as to how the term "such income" has to be understood as has been held to be the assessee''s long-term capital gains in regard to which there can be no doubt.

Specifically on the same aspect are the observations of the apex court in the case of Commissioner of Income Tax Vs. V. Venkatachalam, , after quoting the applicable text of Section 80T of the Income Tax Act. It is also noted that Section 80T has been deleted from the Act with effect from April 1, 1988, observing that its provisions are substantially incorporated in Section 48 thereafter. The apex court had also an occasion to consider the term "such income" as appearing in the text of Section 80T of the Act in the said decision in Commissioner of Income Tax Vs. V. Venkatachalam, . It is specifically observed that the words "such income" meant and referred to the capital gains and not to the total income of the assessee in any sense of the situation. The apex court observes that the language of Section 80T, reasonably understood, is not capable of and does not admit of any other construction. In the context reference is also made to the reasoning that by the Finance Act, 1987, with effect from April 1, 1988, Section 80T has been omitted and its provisions with certain changes have been placed in Section 48 emphasising further that this Section 48 also has been totally recast with effect from April 1, 1993, by the Finance Act, 1992. It is on the basis of this reasoning referring to the proper place of the said situation, the apex court has understood the correct and legal meaning of the words "such income".

In view of the above situation, the order of the Income Tax Appellate Tribunal needs to be stamped as proper and correct.

However, in view of the above discussion, in our judgment, we need to answer only question No. 2 which is in the proper context of the above discussion. Accordingly, we decline to answer questions Nos. 1 and 3 and we answer question No. 2 in the negative, against the Revenue and in favour of the assessee.

A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, for passing consequential orders.