COMMISSIONER OF Income Tax Vs B. K. BIRLA.

AJIT K. SENGUPTA J. - At the instance of the Commissioner of Income Tax, the following question of law has been referred to this court u/s 256(1) of the Income Tax Act, 1961, for the assessment year 1971-72 :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 5,000 as contemplated u/s 80T of the Income Tax Act, 1961, from the long-term capital gains of Rs. 5,864 before the same are set off against the short-term capital loss of Rs. 7,792 ?"

The facts leading to this reference are that for the year under reference, the assessee suffered loss of Rs. 7,792 under the head "Capital gains - short-term" and made profit of Rs. 5,864 under the head "Capital gains -long-term". In his return of income as well as during the course of assessment proceedings, the assessee claimed that he should be granted deduction of Rs. 5,000 as contemplated u/s 80T of the Act in respect of "long-term capital gains" without setting it off first against "short-term capital loss" of Rs. 7,792. The Income Tax Officer, however, first set off the "long-term capital gains" against "short-term capital loss" and determined the loss under the head "Capital gains" at Rs. 1,928 (Rs. 7,792 minus Rs. 5,864). Moreover, he declined to give relief u/s 80T of the Act with the following remark "Relief u/s 80T is not allowable because there is no long-term capital gains after adjusting short-term capital loss against it".

In appeal, it was submitted that the Income Tax Officer should have first allowed the statutory relief of Rs. 5,000 as contemplated u/s 80T of the Act and then proceeded to make other adjustment to the total income.

The Appellate Assistant Commissioner, in his order dated July 16, 1975, accepted the assessees claim holding that in view of the provisions of section 80T (b), a sum of Rs. 5,000 should be deducted from the long-term capital gains of Rs. 5,864 and the balance set off against short-term capital loss.

Before the Tribunal, the Revenue submitted that on a correct interpretation of sections 70(2), 80B and 80T of the Act, the Appellate Assistant Commissioner was not justified in accepting the assessees submissions in this regard. Learned counsel for the assessee, on the other hand, submitted that once the total income of the assessee before giving effect to the deductions contemplated in Chapter VI-A of the Act was a positive figure, the assessee would be entitled to claim deduction u/s 80T of the Act (which is one of the sections of Chapter VI-A) in view of the definition of "gross total income" contained in sub-section (5) of section 80B of the Act. In this connection, he submitted that in the gross total income of the assessee, income chargeable under the head "Capital gains" was included and, therefore, the assessee was entitled to claim deduction of Rs. 5,000 as contemplated u/s 80T(b) of the Act. He, therefore, submitted that the order of the Appellate Assistant Commissioner was in accordance with the aforesaid section of the Act and, therefore, should be upheld.

The Tribunal upheld the order of the Appellate Assistant Commissioner holding that "long-term capital gains" of Rs. 5,864 was included in the gross total income of the assessee as contemplated under sub-section (5) of section 80B of the 1961 Act and that the mere fact that the same was adjusted against "short-term capital loss" of Rs. 7,792 would not disentitle the assessee to claim deduction of Rs. 5,000 as contemplated u/s 80T (b) of the 1961 Act.

The short question which falls for determination in this case is whether deduction u/s 80T of the Act should be allowed on the gross amount of long-term capital gains prior to setting off of short-term capital loss of the same year.

Section 80T provides for an allowance of a straight deduction in the computation of total income of any individual in respect of long-term capital gains included in the gross total income. Capital gains stand on a different footing which is computed in accordance with the provisions contained in sections 45 and 48. These two provisions do not envisage the adjustment of any other loss either of the same year or of a different year. It is no doubt true that the provisions regarding set off of the loss have a direct bearing on the computation of the total income. Accordingly, in determining the question, the provisions of sections 70 and 71 cannot be ignored. u/s 70(2)(i), if an assessee suffers loss under the head "Capital gains relating to short-term capital assets", he can set it off against the profits of the same year under the head "Capital gains relating to any other capital assets."

In Punjab Produce and Trading Co. Ltd. Vs. Commissioner of Income Tax, , the question arose whether an assessee, who suffers loss in respect of short-term capital assets and made gains in respect of assets other than short-term capital assets, has to set off first the short-term capital loss against long-term capital gains. The Income Tax Officer deducted the loss on account of short-term capital assets against the gains in respect of other capital assets in the first instance and thereafter the balance was set off against the income of the assessee from other heads. The assessee preferred an appeal contending, inter alia, that the loss relating to short-term capital assets should have been set off first against other heads of income and not against gains in respect of assets other than short-term capital assets. This contention was rejected by the Appellate Assistant Commissioner. The assessee preferred a further appeal before the Income Tax Appellate Tribunal and contended that the loss in respect of its short-term capital assets was required to be set off against income other than capital gains u/s 71 (3) of the Income Tax Act, 1961. It was contended on behalf of the Revenue that loss in respect of short-term capital assets was required to be set off first against the gains in respect of other capital assets u/s 70 (2) (i) of the Act. The Tribunal held that section 71 (3) was subject to the other provisions of the relevant chapter of the Act including section 70 (2) (i). It was held further that a loss suffered on short-term capital assets had to be set off first against the gains from other capital assets and thereafter the balance if any, could be set off against other heads of income. The contentions of the Revenue were upheld and the appeal of the assessee was rejected.

In that context, the question arose whether, on a proper interpretation of section 70 (2) (i) and section 70 (3) of the Income Tax Act, the Tribunal was justified in holding that the short-term capital loss should be first set off against the long-term capital gains. The court, after referring to the provisions of section 70 (2) (i) and section 71 (3) and other connected provisions, held as follows :

In that case, one of the questions raised was whether the assessee was entitled to set off the short-term capital loss first against the long-term capital gains and against income and other gains. The court after considering the provisions of the Act held that (at p. 380) :

"From the said sections, it appears that the Legislature intended to draw a distinction between short-term capital assets and other capital assets and income or loss arising out of the two types of capital assets have been treated as if falling under different heads.

Under section 70(2)(i) of the Act, on a computation made under sections 48 to 55 in respect of any short-term capital asset resulting in loss, the assessee becomes entitled to set off such loss against the income arising out of any other capital asset on a similar computation. u/s 71 (3) of the Act, where the net result of computation under sections 48 to 55 of the Act relating to short-term capital assets is a loss, the assessee is entitled to have such loss set off against the income under any head except capital gains.

To construe section 70 (2) (i) and section 71 (3) harmoniously, it must be held that the expression any other capital asset in section 70 (2) (i) refers only to a short-term capital asset. The set-off provided u/s 70 appears to be item-wise or source-wise whereas the set-off of the loss u/s 71 appears to be head-wise.

Under section 71(2), it appears that a choice has been given to the assessee in respect of loss arising from any other head except capital gain to set off the same either against the entire capital gain or only against its income relating to short-term capital assets. Similar choice has not been made available to an assessee u/s 71(3).

In any event, two several and separate rights have been conferred on the assessee under sections 70(2)(i) and 71(3) and, in case of any ambiguity the construction beneficial to the assessee should be adopted."

The position that emerges is this that short-term capital loss should not be set off first against the long-term capital gains of the same year u/s 70(2)(i). If that be the position, then the short-term capital loss shall be first set off against the other income of the assessee of the same year. The gross total income in this case before any deduction was made under Chapter VI was a positive figure. The Income Tax Officer, however, set off the short-term capital loss against the long-term capital gains and the resultant loss was set off against the positive income from other heads. The Income Tax Officer, therefore, did not allow the relief u/s 80T as there were no long-term capital gains after adjustment of short-term capital loss.

Where the gross total income of an assessee is a positive figure and even after set off of the short-term capital loss against other income, there would be still a positive income, in such a case, loss on short-term capital assets should not be set off first against the long-term capital gains so as to deprive the assessee of the relief available u/s 80T (b). The position would be different when the gross total income is a negative figure.

In our view, the Income Tax Officer was not right in deducting from the long-term capital gains, loss on short-term capital assets in determining the relief available u/s 80T (b).

We, therefore, reframe the question as follows :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 5,000 as contemplated u/s 80T of the Income Tax Act, 1961 ?"

For the reasons aforesaid, we answer this question in the affirmative and in favour of the assessee.

There will be no order as to costs.

K. M. YUSUF J. - I agree.