ORDER
Shri Vimal Gandhi, Vice-President
1. This appeal by the assessee for the assessment year 1985-86 is directed against order of the CIT (Appeals)-I, Mumbai. In the first ground of appeal the assessee has challenged computation and adjustment of capital gains without properly considering the benefit claimed under section 54E of the Income-tax Act.
2. The assessee in the return and during the course of assessment proceeding before the Assessing Officer claimed that the profit accruing to the assessee on the transfer of the long-term capital asset was invested in terms of section 54E and, therefore, the assessee first be allowed benefit of the above section and only then capital loss suffered by the assessee should be adjusted. There is no dispute on the amount on capital gain or capital loss suffered by the assessee. The Assessing Officer, however, refused to allow the benefit of section 54E as claimed. The learned revenue authorities held the view that net capital gain or loss has to be determined under section 45 of the Income-tax Act and then if there is any capital gain, deduction permissible under section 54E is to be allowed out of such gain. For the above view, the authorities relied upon and took support from provisions of sections 70 and 71 of the Income-tax Act. Section 70 provides set off of loss from one source against income from another source under the same head of income. Clause (ii) of sub-section (2) of section 70, as it existed at the relevant time, provided that where the result of computation made for any assessment year under sections 48 to 55 in respect of any capital asset other than a short-term capital asset is a loss, the assessee would be entitled to have the amount of such loss set off against income, if any, as arrived at under a similar computation made available for assessment year in respect of any other capital asset not being a short-term capital asset. On the basis of the above provision, the revenue authorities deducted the amount of long-term capital loss from the long-term capital gain before applying provisions of section 54E.
3. Being aggrieved, the assessee has come up in appeal. The principal arguments advanced by Shri D. Vyas, the learned Senior Counsel for the assessee, in support of the claim were to the following effects :-
The provision of section 54E is a special provision and where this provision is applicable, the capital gain is to be computed as provided by this section. The provision of section 45 has been made specifically subject to this section. Section 45 of the Act, as it stood at the relevant year, provided “save as otherwise provided under sections 53, 54, 54B, 54D and 54E of the Act”. Thus, there is no question of making computation under section 45 of the Income-tax Act in total disregards of section 54E. In support of the above contention Shri Vyas relied upon the following decisions :
(i) CIT v. V. V. George [1997] 93 Taxman 257 (Ker.);
(ii) CIT v. Sarda Trading Corpn. [1993] 204 ITR 138 (Gau.);
(iii) CIT v. V. Venkatachalam [1993] 201 ITR 737/70 Taxman 231 (SC).
3.1 The learned Departmental Representative opposed the above submission and relied upon the impugned order of the CIT (Appeals).
4. We have given careful thought to the rival submissions of the parties. It is true that under general scheme of the Act, the loss from one source is to be set off against income from another source under the same head of income. The long-term capital gain is to be set off against long-term capital loss and so on. This is specifically provided under section 70 of the Income-tax Act. But then section 70 has been made subject to other provisions of the Act. The opening line of section 70 states “save as otherwise provided in this Act”. It is, therefore, imperative to look into the other provisions and the language employed in those provisions. In this case, we are to take into account provisions of sections 45 and 54E of the, Income-tax Act and read section 70 along with and subject to provisions of above sections. Section 45 as already mentioned, states that any profit or capital gains arising from transfer of a capital asset effected in the previous year shall, save as otherwise provided in …. 54E …. be chargeable to income-tax under the head “Capital gain”. Thus where provisions of section 54E are applicable, the effect has first to be given to that section and section 45 is to be applied in the modified form as altered by section 54E. Again where section 54E is applicable and investment of consideration is made within a period of 6 months after the date of transfer of capital asset, the capital gain “shall” be dealt with in accordance with the provisions stated in the said section. The scheme of section 54E relating to chargeability of capital gain is different from the one provided under section 45 of the Income-tax Act. The special provision is to be applied in supersession of what is stated in section 45 as also in section 70. In fact, the provision of section 54E specifically states that, “the whole of such capital gain shall not be charged under section 45”. In fact, to apply provision of section 45 simpliciter, where section 54E is applicable is to do what is specifically prohibited under section 54E. Therefore, where provisions of section 54E are attracted, the said section is to be first applied and then other provisions of the Statute.
4.1 The view that we are taking is supported by the decision of Hon’ble Gauhati High Court in the case of Sarda Trading Corpn. (supra) which is as follows :-
“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 under section 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 under section 80T, that is to say, if there is no such income chargeable to tax after exemption under section 54E, the application of section 80T does not arise.”
4.2 The other decisions cited by the assessee also support the above view.
4.3 In the light of the above decision and discussion, we accept the arguments advanced by Shri Vyas and direct the revenue authorities to first apply provisions of section 54E and then set off capital loss and apply other provisions of the Act and allow necessary benefit to the assessee.
5. In the second ground of appeal, the assessee has challenged disallowance of Rs. 60,890 written off as bad debt on account of its subsidiary M/s. Indian Standard Metal Co. The amount in question was part of interest charged by the assessee in earlier years. There is no dispute that on above interest assessee paid income-tax. On request from the debtor company that it had suffered heavy losses and was not in a position to pay interest, the assessee company passed resolution on 25-3-1985 and waived the interest due and claimed the same as bad debt in the year ending 31st March, 1985. The revenue authorities disallowed the claim as assessee did not waive the principal amount and could not explain as to how waiver was in the interest of the assessee. The claim of bad debt was accordingly disallowed. The disallowance was upheld on appeal by the CIT (Appeals). The assessee has come up on appeal by the CIT (Appeals). The assessee has come up in appeal. We have heard both the parties.
6. Shri D. Vyas, learned Counsel for the assessee, brought to our notice the confirmation letter dated 28-9-1990 filed from the debtor company. He also drew our attention to the fact that debtor company suffered tax on this waiver of interest under section 41(2) of the Act. A copy of assessment order of the debtor company for the relevant period dated 20th January, 1989 has been placed on record. Shri Vyas also drew our attention to the Balance Sheet of the debtor company to show that it had accumulated losses of Rs. 1,81,08,351 on 31st May, 1985. The total capital of debtor company was only Rs. 50 lakhs. Thus, liabilities of debtor company far exceeded its asset and there was no question of realisation of interest. Shri Vyas further submitted that Revenue cannot insist on demonstrative and infallible evidence in support of claim of bad debt. He cited decision of Hon’ble Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas v. CIT [1979] 120 ITR 792.
6.1 The learned Departmental Representative supported the impugned order. He further argued that the assessee did not take any steps to recover the amount in question and, therefore, writing off the debt was rightly disallowed.
7. We have given careful thought to the rival submissions of the parties. In our considered opinion, there is sufficient evidence with the assessee to show that debtor company was not in a position to pay the amount in question. The assessee, therefore, bona fidely waived the interest and claimed the same as a bad debt. The assessee had already paid tax on the amount in question. The same amount was also charged to tax under section 41(2) in the hands of the debtor company. The claim having been made in a bona fide manner was to be allowed. We direct accordingly.
8. The last ground pertains to charging of interest under section 139(8) for the delay in the submission of the return. The assessee filed its return of income on 30th September, which was due to be filed on or before 31st July. It was claimed that, interest for one month of default only could be charged. The Revenue authorities rejected this contention and held that “month” in this case meant a period of 30 days, as held by the Allahabad High Court in the case of CIT v. Laxmi Rattan Cotton Mills Co. Ltd. [1974] 97 ITR 285. Accordingly, interest under section 139(8) was charged for two months and thus levy was upheld on appeal.
9. The assessee being aggrieved has come up in appeal. Shri Vyas, learned Counsel for the assessee, contended that the view of Allahabad High Court relied upon by the revenue authorities has been dissented by Hon’ble Madras High Court, Hon’ble Calcutta High Court and Hon’ble Karnatka High Court in the following cases :-
1. CIT v. Kadri Mills (Coimbatore) Ltd. [1977] 106 ITR 846 (Mad.);
2. CIT v. Brijlal Lohia & Mahabir Prosad Khemka [1980] 124 ITR 485/[1981] 5 Taxman 93 (Cal.); and
3. B. V. Aswathaiah & Bros. v. ITO [1985] 155 ITR 422/[1986] 27 Taxman 560 (Kar.).
9.1 Having regard to divergence of opinion on the point in issue, we take a view favourable to the assessee. We hold that there is delay of one month and assessee is liable to pay interest only for that month i.e. for August only. The Assessing Officer shall charge interest for one month and shall revise assessment as per the above directions.
10. In the result, the assessee’s appeal is allowed.