ORDER
G.D. Agarwal, A.M.
1. This appeal by the assessee is directed against the order of CIT(A) IX, Mumbai.
2. By way of ground No. 1, the assessee has challenged the validity of the assessment order. However, at the time of hearing before us, this ground of appeal was not pressed. Accordingly, this ground is rejected.
3. Ground No. 2 is against the denial of deduction under Section 54F claimed by the assessee at Rs. 63,17,795. Ground No. 3 is only an argument in support of ground No. 2 whereby the assessee contends that the CIT(A) confirmed the disallowance on a ground totally different than the ground taken by the AO, that too, without giving an opportunity to the assessee for meeting that new ground. Ground No. 4 is against the action of the AO whereby the AO has set off long-term capital loss against long-term capital gains, while the assessee has set off the long-term capital loss against short-term capital gains.
4. Since all the above three grounds are intricately connected with each other, they are being considered together.
5. The facts of the case are that the assessee is an individual, who, in the return of income for the year under consideration, has disclosed long-term capital gain at Rs. 19,19,134 and short-term capital gains at Rs. 55,57,565. The assessee worked out the long-term capital gain as under:
Rs.
Capital gain on sale of 10,800.
10,000 & 16,100 (bonus) shares of Marico
83,65,416
Less : Exemption under s. 54F
63,17,795
20,47.621
(-) Set off of loss of asst. yr.
1994-95
1,28,487
19,19,134
Deduction under s. 54F at Rs.
63,17,795 was worked out as under:
Rs.
“For the purchase of
Residential House at EVEREST
Value of House as per agreement
70,00,000
Add: Stamp Duty Paid
5,18,750
Transfer Fees
75,000
HDFC Fees
55,000
76,48,750
Less : Adjusted in asst. yr.
1996-97
13,30,955
63,17,795
Short-term capital gain of Rs.
55,57,565 was worked out as under :
Long-term capital loss on sale of
18,100 + 1,900 shares
of Marico Industries
(-) 70,36,957
Less : Short-term capital gain on
sale of 56,900 + 17,800
both bonus shares of Marico
Industries
1,25,94,522
S.T.C.G
55,57,565
The AO determined the long-term
capital gain at Rs. 11,99,972 as under:
Capital gain as shown by the
assessee
83,65,416
Less : Long-term capital loss on
sale of shares of Marico
Industries
70,36,957
13,28,459
Less: Set off of loss of asst.
yr. 1994-95
1,28,487
11,99,972
The AO considered the short-term capital gain at Rs. 1,25,94,522 without deducting therefrom long-term capital loss because he has set off the same against the long-term capital gain. The AO also rejected the assessee’s claim of deduction under Section 54F. The assessee has purchased a residential house at Everest Bldg., Peddar Road, Mumbai, for Rs. 76,48,750 during the accounting year relevant to asst. yr. 1996-97. In that year, i.e., 1996-97, the assessee had long-term capital gain of Rs. 13,30,955: The entire amount of capital gain was claimed exempt under Section 54 of the Act in view of purchase of a new residential house at Everest Bldg. The assessee claimed the deduction under Section 54F in the year under consideration in respect of the balance out of the purchase price of residential house which was purchased during the accounting year relevant to the asst. yr. 1996-97. The AO denied the same on two grounds: (i) that on the date on which the long-term capital gain arose, the assessee was owner of a residential house, and (ii) that in respect of purchase of the same house, deduction under Section 54 has already been claimed by the assessee in asst. yr. 1996-97 and, therefore, the assessee cannot claim again deduction under Section 54F for the same house. The CIT(A) did not agree with the first reasoning of the AO because he was of the view that Section 54F prohibited deduction under Section 54F if the assessee was owner of a house other than the new asset. Since the assessee was not owner of any other house than the new house, deduction under Section 54F cannot be denied on the above reasoning. He, however, agreed with the second reasoning, given by the AO. In addition, he also pointed out that deduction under Section 54F as claimed by the assessee is not workable. He also stated that once a deduction under Section 54F cannot be worked, the same cannot be allowed. In support of above finding, he has relied upon the decision of Hon’ble apex Court in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). Being aggrieved by the order of the CIT(A), the assessee is in appeal before us.
6. At the time of hearing before us, the learned counsel for the assessee argued at length. He stated that the assessee has duly fulfilled all the requirements prescribed for getting the exemption under Section 54F, i.e., the assessee had income from capital gain arising from long-term capital asset and the assessee. had purchased a residential house within a period of one year before the date of transfer of the capital asset. Section 45 provides for charging of capital gain, save as provided in Section 54F. Thus, Section 54F has an overriding effect and whatever exemption is provided under Section 54F, is excluded from the charge, of capital gain as per Section 45 itself. According to him, there is no bar for claiming the exemption under Sections 54 and 54F on the same asset. In support of this contention, he relied upon the commentary of Chaturvedi and Pithisaria and also Circular No. 667, dt. 18th Oct., 1993. He further contended that whenever the legislature wants to prohibit allowability of two deductions simultaneously, it has specifically provided in the legislation. To support this contention, he referred to the prohibition in Section 10A(6)(iii). Since there is no prohibition for claim of deduction under Sections 54 and B4E in respect of one asset, the CIT(A) was not justified in denying the exemption to the assessee.
6.1 According to the assessee’s counsel, the CIT(A) sustained the order of the AO denying exemption under Section 54F on altogether different grounds than those taken by the AO. While doing so, the CIT(A) relied upon the decision of Hon’ble apex Court in the case of B.C. Srinivasa Setty (supra). However, the CIT(A) did not allow any opportunity to the assessee to explain that the decision of Hon’ble apex Court in the case of Sriniyasa Setty was not applicable to his case. The CIT(A) denied the exemption mainly on the ground that the deduction under Section 54F as claimed by the assessee is not workable. He never asked the assessee to explain how it is properly workable. He, therefore, contended that the order of the CIT(A) is bad in law. He also stated that the decision of Hon’ble apex Court in the case of B.C. Srinivasa Setty heavily relied upon by the learned CIT(A) was on altogether different grounds and facts and will not be applicable to the case under appeal before us.
6.2 The learned counsel for the assessee further stated that as per Section 70 as it stood at the relevant time, income from any source under any head of income can be adjusted against loss from any other source under the same head; that prior to 1st April, 1988, adjustment of loss from long-term capital gain was prohibited to be adjusted against short-term capital gain. However, Section 70 was amended w.e.f. 1st April, 1988 and now there is no prohibition against adjustment of loss from long-term capital gain against profit from short-term capital gain. He further stated that while setting off of loss from one source against income of other source, the option is with the assessee to decide, against which income to set off the loss. The AO cannot compel him to set off against a particular income. In support of this argument, he relied upon Circular No. 26 (LXXVI-3) (F. No. 4(53)-IT/54), dt. 7th July, 1955. He further contended that the CIT(A) has confused himself while adopting the meaning of the words “source of income”. He has opined that there are two sources of income–long-term capital gain and short-term capital gain; that long-term capital gain or short-term capital gain is not the source of income but the source of income is the asset, on the transfer of which capital gain arises. Therefore, it was the assessee’s option to adjust loss from sale of shares against profit from sale of other shares. He also submitted that the assessee never pleaded before the CIT(A), as mentioned by him in para 15 of his order, that there are four sources under the head “capital gain”. He accordingly submitted that the assessing office should be directed to accept the working of long-term capital gain and short-term capital gain made by the assessee.
7. The learned Departmental Representative, on the other hand, heavily relied upon the order of the CIT(A). He contended that the burden is upon the assessee to prove that he falls under a particular exemption clause. The provision granting exemption to the assessee should be interpreted in a manner without causing any violation to the plain meaning of the section. In support of this contention, he relied upon the following decisions :
(1) Petron Engg. Construction (P) Ltd. and Anr. v. CBDT and Ors. (1989) 175 ITR 523 (SC)
(2) CIT v. Mirza Ataullaha Baig and Anr. (1993) 202 ITR 291 (Bom) .
According to him, as per Section 54F, the exemption is to be allowed on the basis of cost of the new asset, Once the assessee has already availed the exemption regarding the cost of the new asset in the preceding year under some other section, the question of claiming the exemption again does not arise. The assessee, while claiming the exemption under Section 54F for the year under consideration, has reduced from the cost of the asset the exemption claimed and allowed to him in the preceding year. According to him, there is no such provision in the Act according to which the cost of asset can be reduced by the exemption already availed. There is no provision under Sections 54 or 54F to carry forward the unavailed benefit in respect of the cost of the asset purchased by an assessee. In the absence of any specific provision to carry forward unavailed benefit, the assessee was not entitled to claim any benefit in respect of the remaining portion of cost of asset, for which the benefit was availed last year partly. Before the CIT(A), the assessee submitted two different calculations for claiming exemption under Section 54F at Rs. 61,89,967 and Rs. 61,10,011 as against the deduction claimed in the computation of income at Rs. 63,17,795. This clearly proves that the exemption under Section 54F as claimed by the assessee cannot be worked out as per the provisions of IT Act with certainty. If the claim of exemption cannot be worked out, the deduction cannot be allowed. In support of this contention, he relied upon the decision of Hon’ble apex Court in the case of B.C. Srinivasa Setty (supra). He has also submitted that the order of the CIT(A) is perfectly justified. He had allowed enough opportunity to the assessee. The CIT(A) has not decided the appeal on any new ground. According to the learned Departmental Representative, the AO had rejected the assessee’s claim for exemption under Section 54F on two grounds. The CIT(A) did not agree with the first ground but he did agree with the second ground taken by the AO. He also stated that if the CIT(A) has relied upon the decision of Hon’ble apex Court, it cannot be said to be an illegal action on the part of the CIT(A).
7.1 Regarding set off of long-term capital loss against short-term capital gain, the learned Departmental Representative submitted that for the purpose of levy of capital gain, long-term capital gain and short-term capital gain are to be determined separately. Therefore, as per natural connotation, first long-term capital gain and long-term capital loss are to be adjusted against each other so as to determine the net long-term capital gain or long-term capital loss. Similarly, short-term capital gain/loss is to be determined separately. When there is long-term capital gain, long-term capital loss and also short-term capital gain, it would be unjust and unlawful to adjust short-term capital gain against long-term capital loss where long-term capital gain is still available. He, therefore, submitted that the order of the CIT(A) should be sustained.
8. The learned counsel for the assessee, in the rejoinder, submitted that the various decisions relied upon by the learned Departmental Representative have no application to the facts of the case under appeal. According, to him, the deduction under Section 54F can be very well worked out and it is incorrect to say that the amount of deduction is unascertainable. He also submitted that Section 70 was amended w.e.f. 1st April, 1988, to permit set off of long-term capital loss against short-term capital gain which was prohibited earlier. He, therefore, reiterated that exemption under Section 54F be allowed as claimed by the assessee.
9. We have carefully considered the arguments of both sides and perused the material placed before us. The main controversy in this appeal is whether the assessee is entitled to exemption under Section 54F as claimed by him. It is not in dispute that exemption under Section 54F is being claimed for purchase of a residential house which was purchased during the accounting year relevant to asst. yr. 1996-97. It is also not in dispute that in asst. yr. 1996-97 the assessee had income from long-term capital gain at Rs. 13,30,955. The above long-term capital gain was claimed to be exempt under Section 54 against the purchase of residential house for Rs. 76,48,750. The above claim was accepted by the AO. Section 54 provides different provisions where the cost of new asset is more than the amount of capital gain or is less than the amount of capital gain. It reads as under:
“54 (1)** ** **
(i) if the amount of capital gain is greater than the cost of the residential house so purchased or constructed (hereinafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under this Section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under Section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.”
Thus, if the amount of capital gain is more than the cost of new asset the exemption under Section 54 would be limited to the extent of cost of new asset and for the purpose of computing the capital gain which may arise from the transfer of new asset, the cost shall be taken at nil. However, where the cost of the new asset is more than the amount of capital gain, the entire capital gain is exempt and for the purpose of capital gain which may arise from the transfer of new asset, the cost of new asset shall be reduced by the amount of capital gain. In our opinion, the above provision for determining the cost of new asset should be applied not only for considering the capital gain arising from the transfer of new asset but also for all other purposes where the cost of new asset is relevant. The legislature is not expected to provide for each and every contingency and it would only be logical to extend the above provision defining the cost of “new asset” for all other purposes under the head ‘capital gain’ unless there is any contrary provision.
9.1 As per Section 54F, where the assessee, being an individual, derives income from
transfer of long-term capital asset and the assessee has, within a period of one
year before or two years after the date on which the transfer took place,
purchased a residential house, there is exemption under Section 54F which is to be
computed as under :
“(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under Section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under Section 45;”
It is not disputed by the Revenue before us that the assessee fulfils all the conditions as provided in Section 54F, i.e., the assessee is an individual, he had income from long-term capital gain and he had purchased a residential house one year before the transfer of the capital asset took place. The only ground on which deduction under Section 54F is being denied is that computation of exemption under Section 54F is not possible. It was contended by the learned Departmental Representative that the assessee has claimed exemption by reducing the exemption under Section 54F allowed in asst. yr. 1996-97 from the cost of new asset. According to the Revenue, it is not permissible; either the exemption under Section 54F to be worked out on cost of the new asset or no exemption under Section 54F can be allowed. We are unable to agree with the above contention of the Revenue. We have already stated that Section 54(1)(ii) itself provides how the cost of new asset is to be considered where the cost of new asset is more than the amount of capital gain. Though the above provision is with reference to determination of capital gain which may arise from the transfer of new asset within a period of 3 years, in our opinion, it would be logical to extend the above provision for determination of cost of new asset for all other purposes under the head ‘capital gain’ which may be applicable within a period of 3 years. We, therefore, have no hesitation in holding that the assessee is entitled to exemption under Section 54F and we direct the AO to work out the exemption by taking the cost of new asset at Rs. 63,17,795. We may mention that the various decisions relied upon by the parties before us are not applicable as the facts in the case under appeal before us are altogether different than the facts in those cases.
10. The next issue before us is whether the assessee was justified in setting off the long-term capital loss against the short-term capital gain while the assessee was also having income from long-term capital gain.
10.1 We have carefully considered the arguments of both the parties. Section 70 as it stood at the relevant time reads as under :
“70. Save as otherwise provided in this 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”.
As per Section 70, income from any source falling under any head of income can be adjusted against the loss in any other source under the same head. We also notice that Section 70 is amended w.e.f. 1st April, 1988 and prior to the said amendment long-term capital loss could have been adjusted only against the long-term capital gain. However, even after the amendment, for the purpose of IT Act, long-term capital gain and short-term capital gain are to be worked out separately because various exemptions are provided against long-term capital gain under the head ‘capital gain’. Similarly, as per Section 112, tax on long-term capital gain is chargeable @ 20 per cent, while the short-term capital gain is to be considered along with other income, i.e., income under any other head. Therefore, it is essential to determine long-term capital gain and short-term capital gain separately. While determining long-term capital gain, if there is a profit from the transfer of one asset and loss from transfer of another asset, then both should be set off against each other and the net result would be long-term capital gain/capital loss, as the case may be. When after the determination of long-term, capital gain and short-term capital gain separately it is found that there is profit from long-term capital gain and loss from short-term capital gain, it can be adjusted against each other. However, it would be inappropriate, when the assessee has long-term capital gain from one asset, short-term capital gain from another asset and also has long-term capital loss from a third asset, to adjust long-term capital loss against short-term capital gain. In other words, under the head ‘capital gain’, the assessee has to first work out “long-term capital gain” and “short-term capital gain” separately. Thereafter, if need be there, i.e., if there is profit from long-term capital gain and loss from short-term capital gain or vice versa, they can be adjusted against each other.
10.2 The learned counsel for the assessee has relied upon Circular No. 26 (LXXVI-3) (F.No. 4(53)-IT/54), dt. 7th July, 1955, to support his contention that option is with the assessee to set off loss in one head against the income in any other head. However, in our opinion, the above circular is not applicable for setting off the loss within the same head. In the above example, the assessee has loss under the head “business”, profit under the head “income from house property” and also has income under the head “interest on securities” which was tax-free. The assessee was permitted as per above circular to set off business loss against the income from house property. However, as we have noted, for the purposes of income-tax, long-term capital gain and short-term capital gain are to be separately worked out. While determining long-term capital gain, naturally, if there is loss from transfer of one asset and profit from transfer of other asset, both have to be set off against each other and then only the net long-term capital gain/long-term capital loss can be determined. We accordingly uphold the finding of the lower authorities that the long-term capital loss is to be adjusted against the long-term capital gain. The AO will re-determine the exemption under Section 54F accordingly.
11. Ground No. 5 is against the charging of interest under Section 234B. At the time of hearing before us, both the parties fairly conceded, that the charging of interest would be consequential. We accordingly direct the AO to re-work out the interest under Section 234B, if any, after the final determination of income.
12. Ground No. 6 is not pressed at the time of hearing. Accordingly, the same is rejected being not pressed.
13. In the result, the assessee’s appeal is partly allowed.