Commissioner of Income Tax vs Sarda Trading Corpn.

Manisana, J.—At the instance of the Commissioner, the following question of law has been referred to this Court u/s 256(1) of the income tax Act, 1961 (''the Act''): Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for computation of income under the head ''Capital gains'' deduction u/s 80T of the income tax Act, 1961, is to be given before giving deduction u/s 54E of the Act?

The assessee is a registered firm. The assessment year involved is 1979-80. During the previous year, the assessee sold a flat at Bombay. The assessing authority (''the ITO''), after deducting the written down value and sale expenses from the net consideration, decided u/s 54E of the Act as to what extent capital gain on the transfer of the capital asset shall not be chargeable to income tax in respect of the sum of Rs. 75,000 which formed part of sale proceeds and deposited with the United Commercial Bank at Dibrugarh in fixed deposit. Thereafter, the assessing authority made a deduction allowable u/s 80T of the Act from the income chargeable in computing the total income of the assessee under the head ''Capital gains''. On appeal by the assessee, the AAC set aside the manner of calculation made by the assessing authority by holding that "section 80T deduction would be allowed on the capital gains before the exemption u/s 54E is allowed". The Tribunal confirmed the findings of the AAC.

Section 45 of the Act, as it stood in the relevant year, provides that save as otherwise provided in sections 53, 54, 54B, 54D and 54E of the Act, any profits or gains arising from the transfer of a capital asset effected in the previous year shall be deemed to be the income of the previous year in which the transfer took place and shall be chargeable to income tax under the head ''Capital gains''.

u/s 54E, where the capital gain arises from the transfer of a long-term capital asset and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or part of the net consideration in any specified asset, the whole of such capital gain, or a part of it, shall not be charged u/s 45 of the Act. Therefore, if section 54E is applied, the whole or any part of the capital gain would not be chargeable to income tax.

u/s 80T, where the gross total income of an assessee not being a company includes any income chargeable under the head Capital gains'' relating to long-term capital asset, there shall be allowed, in computing the total income of the assessee, a deduction from such income as is provided thereunder. This being the position, for the application of section 80T, there must be an income chargeable under the head ''Capital gains'' relating to long-term capital asset. If there is no such income, section 80T is not attracted.

What emerges from a reading of sections 45, 54E and 80T of the Act is this. Any profits or gains on transfer of a long-term capital asset in the previous year shall be deemed to be income of the previous year and shall be chargeable to income tax under the head ''Capital gains''. But the whole or any part of the capital gain to which the provisions of section 54E apply would not be chargeable to income tax. In other words, if section 54E is attracted, such income shall be ''tax-exempt income''. Therefore, the assessing authority is to decide u/s 54E as to whether the whole or any part of the capital gain on the transfer of a long-term capital asset shall be exempt from taxation. If the whole of such income is not exempt, the assessing authority shall determine the income chargeable under the head ''Capital gains'', and, thereafter, there shall be deduction as provided u/s 80T, that is to say, if there is no such income chargeable to tax after exemption u/s 54E, the application of section 80T does not arise.

For the reasons stated above, section 54E shall be applied first, and thereafter section 80T may or may not be applicable depending upon the quantum of exemption u/s 54E. Under these circumstances, the question is answered in the negative, i.e., in favour of the revenue and against the assessee. Reference is disposed of accordingly. No costs.