Commissioner of Income Tax vs Smt. Shantaben D. Shah

By this reference u/s 256(1) of the Income Tax Act, 1961, at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law to this court for opinion :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to set off the short-term capital loss against the income under any head other than ''capital gains'' and is also entitled to the relief u/s 80T on the gross long-term capital gains before adjustment of the short-term capital loss ?"

The facts giving rise to this reference are as follows :

The assessee is an individual having income from business, dividends and interest. During the previous year relevant to the assessment year 1976-77, the assessee suffered a short-term capital loss of Rs. 17,750 and had a long-term capital gain of Rs. 34,454. In the assessment of the assessee under the Income Tax Act, 1961 ("the Act"), for the above assessment year, the Income Tax Officer pooled together the income under all heads, as a result whereof, the short-term capital loss of Rs. 17,750 got set off against the income under other heads including the long-term capital gains of Rs. 34,454. The total income so arrived at was Rs. 46,411, from which deduction under Chapter VI-A of the Income Tax Act was allowed. One such deduction was u/s 80T. The Income Tax Officer calculated the allowable deduction under that section on the gross long-term capital gain of Rs. 34,454 which amounted to Rs. 16,781.

Subsequently, on scrutiny of the records of the assessee, the Commissioner of Income Tax ("the Commissioner") felt that the above assessment made by the Income Tax Officer was erroneous and prejudicial to the interests of the Revenue in so far as it pertained to the allowance of deduction u/s 80T of the Act. According to the Commissioner, considering the scheme of the Act and sections 70, 71 and 74, the assessee was entitled to relief u/s 80T of the Act not on the gross long-term capital gain of Rs. 34,454 but on the net amount of long-term capital gains after adjusting the short-term capital loss of Rs. 17,750 against the same. In other words, according to the Commissioner, the short-term capital loss should be set off against the long-term capital gain and deduction u/s 80T should be allowed on the resultant capital gains only. He, therefore, calculated the deduction u/s 80T of the Act on the amount of long-term capital gains reduced by the short-term capital loss at Rs. 9,681 and held that the deduction of Rs. 16,781 allowed by the Income Tax Officer was erroneous. Accordingly, in exercise of the suo motu revisional power u/s 263 of the Act, he directed the Income Tax Officer to reduce the deduction u/s 80T from Rs. 16,781 to Rs. 9,681.

The assessee appealed to the Income Tax Appellate Tribunal ("the Tribunal"). The case of the assessee before the Tribunal was that deduction u/s 80T was allowable on the entire amount of long-term capital gains without adjustment of short-term capital losses. The Tribunal accepted this contention of the assessee and held that relief u/s 80T was admissible on the amount of long-term capital gains without any deduction therefrom of short-term capital losses. In that view of the matter, the Tribunal cancelled the revisional order of the Commissioner passed u/s 263 of the Act and restored that of the Income Tax Officer. Hence, this reference at the instance of the Revenue.

Section 80T of the Act, which was in force at the material time, provides for certain deductions from the long-term capital gains. This section, as it stood at the material time, so far as relevant, reads as follows :

"80T. Deduction in respect of long-term capital gains in the case of assessees other than companies. - 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;

(b) in any other case, five thousand rupees as increased by a sum equal to -

(i) twenty-five per cent. of the amount by which the long-term capital gains relating to capital assets, being buildings or lands, or any rights in buildings or lands, exceed five thousand rupees;

(ii) forty per cent. of the amount by which the long-term capital gains relating to any other capital assets exceed five thousand rupees."

From a plain reading of this section, it is clear that the deduction is available to an assessee (not being a company) whose income includes any income chargeable under the head "Capital gains" relating to capital assets other than short-term capital assets, referred to as "long-term capital gains". It is made abundantly clear in the section itself that the capital gains referred to therein do not include short-term capital gains. The deduction is available only in respect of long-term capital gains. The expression "such income" appearing in the above section refers to the long-term capital gains included in the total income of the assessee and not to capital gains from all types of assets or the total income itself. That being so, deduction under this section has to be made from out of the long-term capital gains only. The short-term capital gains or short-term capital losses cannot be taken into account in computing the same.

In the instant case, admittedly, the long-term capital gain was Rs. 34,454. The Income Tax Officer calculated deduction on the said amount and allowed the same. The Commissioner, in exercise of his power of suo motu revision, reduced the above amount of long-term capital gain by the short-term capital loss of Rs. 17,750 and directed the Income- tax Officer to allow the deduction only on the balance amount. In our opinion, the Commissioner was not correct in doing so. In view of the clear and unambiguous language of section 80T, deduction is allowable on the long-term capital gains included in the total income of the assessee-not the long-term capital gains reduced by short-term capital losses. Hence, the question of taking into consideration the short- term capital gain or short-term capital loss for the purpose of computing deduction u/s 80T of the Act, does not arise.

We are supported in our above conclusion by the ratio of the decision of the Supreme Court in Commissioner of Income Tax Vs. V. Venkatachalam, .

So far as the entitlement of the assessee to set off the short-term capital loss against income under any head other than "capital gains" is concerned, it is clear from sections 70 and 71 of the Act that there is no bar on such adjustment. Loss relating to short-term capital assets can be set off u/s 71 against income under any other head in the same year.

In view of the above discussion, we are of the clear opinion that the Tribunal was justified in its conclusion that for the purpose of computation of deduction u/s 80T of the Act, short-term capital loss cannot be deducted from the long-term capital gain. The question referred to us, therefore, is answered in the affirmative and in favour of the assessee.

Reference is disposed of accordingly. No order as to costs.