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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O. O. C. J.
INCOME TAX APPEAL NO.2285 OF 2009
The Commissioner of Income Tax - 21
Mumbai ..Appellant.
Vs.
Anuj A. Sheth HUF, Mumbai ..Respondent.
....
Mr. N.A. Kazi for the Appellant.
Mr. P.J. Pardiwala, Senior Advocate with Dr. K. Shivram with Mr.
A.R. Singh and Mr. P.S. Savla for the Respondent.
ig ....
CORAM : DR. D.Y.CHANDRACHUD &
J.P. DEVADHAR, JJ.
7th April, 2010.
ORAL JUDGMENT (Per DR.D.Y.CHANDRACHUD, J.):
1. Admit. The following question of law will arise in the
appeal filed by the Revenue under Section 260-A of the Income Tax
Act, 1961 :
“Whether the assessee’s claim of computation of long term
capital gains on the sale of shares, other than the bonusshares of Infosys Technologies, after giving the benefit of
indexation is in consonance with the proviso to Section
112(1) and the other provisions of the Act?”
2. The question of law has been reframed during the course of
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the hearing of the appeal since the question as formulated by the
Revenue was lacking in clarity.
3. The appeal arises out of an order passed by the Income Tax
Appellate Tribunal on 5th September, 2008. The Assessment Year is
2001-02. In the present case the assessee entered into eight sale
transactions involving the shares of four companies. Of the sale
transactions, the shares of Infosys Technologies comprised entirely of
bonus shares where the cost of acquisition was nil. The bonus shares
of Infosys Technologies were sold for a consideration of Rs.6.13
Crores. There being no cost of acquisition, the long term capital
gains were computed at Rs.6.13 Crores. Out of the remaining seven
transactions one sale resulted in a long term capital gain of Rs.9.47
lacs with indexation whereas in the remaining transactions the
assessee reported a loss of Rs.2.78 Crores with indexation. The
assessee set off the long term capital loss of Rs.2.68 Crores from the
long term capital gains of Rs.6.13 Crores and paid a tax of 10% on the
net long term capital gain of Rs.3.45 Crores.
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4. The Assessing Officer adopted the sale price realized from
the shares sold by the assessee of Rs.7.51 Crores and after deducting
the cost of acquisition of shares of Rs.3.16 Crores, assessed the long
term capital gains without indexation at Rs.4.34 Crores. In other
words, what the Assessing Officer did in effect was to deny the benefit
of indexation to the assessee while giving effect to the proviso to
Section 112(1). The appeal against the Assessment Order on this
issue failed before the CIT(A). The Tribunal came to the conclusion
that shares transferred on every occasion constitute a separate capital
asset as provided in Section 48. Moreover, the Tribunal held that
merely because the assessee had not claimed indexation on the sale of
its bonus shares of Infosys Technologies, the Revenue was not
justified in denying the benefit of indexation on the sale of shares of
other companies to the assessee. The conclusion of the Tribunal was
that the assessee’s claim of computation of long term capital gains on
the sale of shares, other than the bonus shares of Infosys
Technologies, after giving the benefit of indexation was in consonance
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with the proviso to Section 112(1) and the other provisions of the Act
and that accordingly the assessee was assessable to net long term
capital gains computed at Rs.3.45 Crores as returned. The appeal
filed by the assessee on the aforesaid ground was allowed.
5. Counsel appearing on behalf of the Revenue has assailed
the finding of the Tribunal by submitting that the Assessing Officer
was justified in denying to the assessee the benefit of indexation and
in computing the long term capital gain by deducting from the total
sale price of the listed securities (Rs.7.51 Crores) the absolute cost of
acquisition (Rs.3.16 Crores) thereby resulting in a net gain of Rs.4.34
Crores.
6. Section 45(1) of the Income Tax Act, 1961 stipulates that
any profits or gains arising from the transfer of a capital asset effected
in the previous year shall, save as provided in certain specific sections
referred to therein, be chargeable to income tax under the head
‘capital gains’, and shall be deemed to be the income of the previous
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year in which the transfer took place. For the purpose of sub section
(1) of Section 45 the capital gains on the transfer of each capital asset
have to be computed separately. Section 48 provides for the
computation of income chargeable under the head ‘capital gains’.
The marginal note to Section 48 is entitled ‘mode of computation’.
Section 48 stipulates that 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, viz. (i) Expenditure incurred
wholly and exclusively in connection with such transfer; and (ii) The
cost of acquisition of the asset and the cost of any improvement
thereto. The second proviso is to the effect that where long term
capital gains arise from the transfer of a long term capital asset (other
than capital gain arising to a non resident from the transfer of shares
or debentures of an Indian company) the provisions of Clause (ii)
shall have effect as if for the words “cost of acquisition” and “cost of
any improvement”, the words “indexed cost of acquisition” and
“indexed cost of any improvement” have respectively been
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substituted. The indexed cost of acquisition is computed so as to
bring the actual cost of acquisition in line with the cost of inflation
index. Section 70 provides for the set off of loss from one source
against income from another source under the same head of income.
Prior to its substitution with effect from 1st April, 2003 by the Finance
Act of 2002, Section 70 provided that save as otherwise provided in
the Act, where the net result for any Assessment Year in respect of
any source falling under any head of income 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.
7. In consonance with the provisions of Section 70, the
assessee in the present case was entitled to set off the loss sustained
on the sale of shares which constitute a long term capital asset against
the capital gains which were realized from the sale inter alia of the
bonus shares of Infosys Technologies. The net capital gain reported
by the assessee after carrying out that exercise was Rs.3.45 Crores.
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8. Section 112 of the Act provides that where the total income
of an assessee includes any income, arising from the transfer of a long
term capital asset, which is chargeable under the head of ‘capital
gains’, the tax payable by the assessee on the total income shall in the
case of an individual or a Hindu Undivided Family, being a resident,
be the aggregate of (i) the amount of income tax payable on the total
income as reduced by the amount of such long term capital gains, had
the total income as so reduced been his total income; and (ii) the
amount of income tax calculated on such long term capital gains at
the rate of 20%. The proviso to Section 112 states that “where the tax
payable in respect of any income arising from the transfer of a long
term capital asset, being listed securities or unit or zero coupon bond
exceeds 10% of the amount of capital gains before giving effect to the
provisions of the second proviso to Section 48, then such excess shall
be ignored for the purpose of computing the tax payable by the
assessee. Section 112 forms a part of Chapter 12 of the Act which
deals with the determination of tax in certain special cases. Section
112 provides for a tax on long term capital gains. Ordinarily, under
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clause (a) of sub section (1) of Section 112 the income tax calculated
on long term capital gains is 20%.
9. The opening words of sub section (1) of Section 112
contemplate a situation where “the total income of an assessee
includes any income arising from the transfer of a long term capital
asset”. This would be indicative of the fact that in computing income
for the purposes of capital gains, the assessee would be entitled to the
benefit of the normal provisions of the Act inter alia in regard to a set
off under Section 70. The effect of the proviso to Section 112 is that
in the event that the tax which is payable in respect of income arising
from the transfer of a listed security, which is a long term capital
asset, exceeds 10% of the amount of capital gains before giving effect
to indexation as provided in the second proviso to Section 48, the tax
would be liable to be capped at 10% , by ignoring the excess beyond
10%.
10. The view point of the assessee was that every transfer
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constituted a separate transfer of a capital asset on which capital
gains would be required to be computed separately. The shares of
Infosys Technologies were sold for Rs.6.13 Crores by the assessee.
These were bonus shares on which there was no cost of acquisition.
11. The assessee was entitled to indexation by virtue of the
second proviso to Section 48. Moreover, in view of the provisions of
Section 70 the assessee was entitled to set off the loss sustained in
respect of one source falling under the same head of income from its
income against any other source under the same head. In the present
case, as a matter of fact, the question of indexation in relation to the
shares of Infosys Technologies would not arise since the cost of
acquisition of the shares, being bonus shares was nil. Where the cost
of acquisition is nil, the indexed cost would necessarily be nil. While
computing the loss sustained in respect of the six transactions and the
profit sustained in one of the other transactions the assessee sought
indexation. For the purposes of working out the application of the
proviso to Section 112, there is nothing in the section which would
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deprive the assessee of the indexation claimed on the sale of shares
where there was a resultant loss. What the proviso to Section 112
essentially requires is that where the tax payable in respect of income
arising from a listed security, being a long term capital asset, exceeds
10% of the capital gains before indexation, then such excess beyond
10% is liable to be ignored. The assessee reported a net capital gain
of Rs.3.45 Crores which was computed after setting off the loss
sustained in the sale of shares in certain transactions relating to the
sale of listed securities against capital gains arising inter alia out of
the sale of the bonus shares of Infosys Technologies. The proviso to
Section 112 requires a comparison to be made on the one hand
between the tax payable in respect of income arising from the transfer
of listed securities, computed at 20% with the tax payable at the rate
of 10% on the capital gains before giving effect to indexation. We are
not dealing in the present case with a situation where the assessee
had acquired at a cost, shares on the sale of which a capital gain had
arisen. Were the assessee to acquire those shares on which a capital
gain was to arise, at a cost, then it would have been necessary for the
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purposes of the proviso to Section 112(1) to compute the capital
gains before giving effect to indexation under the second proviso to
Section 48. That, however, would not arise in the facts of this case
inasmuch as the bonus shares of Infosys Technologies on which the
assessee realized a capital gain of Rs.6.13 Crores were acquired at no
cost. There is nothing in the provisions of Section 112 which would
lead to the acceptance of the contention of the Revenue that the
assessee would be entitled to a set off of the loss under Section 70,
but without the benefit of indexation. No such requirement is
legislated upon by Parliament either under Section 70 or in Section
112.
12. The fact that an assessee is entitled to a set off of the loss
sustained on the sale of certain shares is clarified in a circular issued
by the Central Board of Direct Taxes on 13 th September, 1995
(Circular 721). The circular notes that Section 112 includes two
significant expressions viz. “total income” and “includes any income”.
The circular states that the total income is to be computed in the
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manner prescribed by the Act and the set off of a loss, in accordance
with the provisions of Sections 70 to 80, is a stage which is part of this
procedure. The circular then states that when this procedure is
adopted for computing the gross total income or total income, only
the amount of income after set off remains under the head as part of
the gross total income or total income. Consequently, only that
amount of long term capital gains which is included in the total
income would be subject to tax at a prescribed flat rate. A subsequent
circular of the CBDT dated 14th September, 1999 (Circular 779)
clarifies that “the benefit of cost inflation index shall continue as
before but where the tax on long term capital gains without
adjustment of cost inflation exceeds 10%, such excess shall be
ignored”.
13. Both these circulars are of significance because they clearly
reflect the Revenue’s understanding that (i) The benefit of a set off
would be available while computing the income arising from the
transfer of a long term capital asset, which is part of the total income
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of an assessee; and (ii) The benefit of the cost inflation index or
indexation would continue to be available subject to the condition
that where the tax on long term capital gains without adjustment for
indexation exceeds 10%, such excess shall be ignored.
14. In the circumstances, we are of the view, on the balance,
that the Tribunal was justified in coming to the conclusion that the
assessee’s claim of computation of long term capital gains on the sale
of shares other than the bonus shares of Infosys Technologies, after
giving the benefit of indexation was in consonance with the proviso to
Section 112(1) and that the assessee was assessable to net long term
capital gain of Rs.3.45 Crores. In this view of the matter, the question
of law as framed is answered against the Revenue and in favour of the
assessee. The appeal shall accordingly stand dismissed. In the
circumstances, there shall be no order as to costs.
(Dr. D.Y.Chandrachud, J.)
(J.P. Devadhar, J.)
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