TAXAP/288/2002 1/33 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 288 of 2002 WITH TAX APPEAL No. 356 of 2002 WITH TAX APPEAL No. 357 of 2002 WITH TAX APPEAL No. 358 of 2002 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ Sd/- HONOURABLE MR.JUSTICE R.H.SHUKLA Sd/- ==================================== 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO ==================================== M/S.SERCON PRIVATE LIMITED. - Appellant Versus ASSTT.COMMISSIONER OF INCOME TAX. - Opponent ==================================== TAXAP/288/2002 2/33 JUDGMENT Appearance : MR RK PATEL for Appellant. MRS MAUNA M. BHATT for Opponent. MR SN SOPARKAR, Senior Advocate as Intervener. ==================================== CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE R.H.SHUKLA Date : 21/07/2008 COMMON ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) 1. All these four Tax appeals are filed by the different assessees under Section 260A of the Income-Tax Act, 1961 for the assessment year 1992 – 93 proposing substantial question of law arising out of the order of the Income Tax Appellate Tribunal. Tax Appeal No. 288 of 2002 was admitted by this Court on 13.09.2002 and remaining three Tax appeals i.e. Tax Appeal Nos. 356, 357 & 358 of 2002 were admitted by this Court on 29.10.2002. In all the four Tax appeals, similar substantial question of law is formulated for the consideration and determination of this Court, which is as under :- “Whether on the facts and in the circumstances of the case, the Tribunal is right in law in not holding that while computing long term capital gains, deductions under Section 48 (2) are required to be allowed before deduction under Section 54E of the Income Tax Act, 1961 ?” TAXAP/288/2002 3/33 JUDGMENT 2. Since the facts are identical in all the four Tax appeals, the relevant facts are taken from Tax Appeal No.288 of 2002 for convenience. 3. The assessee of Tax appeal No.288 of 2002 is a private limited company being regularly assessed by the Income Tax Officer at Ahmedabad. For the assessment year 1992 – 93, return of income was filed which was processed by the Income Tax department and ultimately assessment under Section 143 (3) of the Income Tax Act, 1961 was framed on 14.03.1995 after making various additions and disallowances. One of the disallowances made pertains to difference in computation of capital gains on application of various provisions under the Act whereby the Assessing Officer has disallowed the claim of the assessee and taxed the capital gain of Rs.16,90,780/-. 4. Being aggrieved by the said order of the Assessing Officer, the assessee preferred first appeal before the Commissioner of Income Tax (Appeals). He examined TAXAP/288/2002 4/33 JUDGMENT the provisions of Section 48 (2) and Section 54E of the Act along with allied provisions under the Act for comparing the workings provided by the appellant with that of Assessing Officer since the Assessing Officer was of the view that deduction under Section 48 (2) is allowable only on the taxable capital gains while the assessee claimed deduction on the entire amount without excluding the deduction under Section 54E of the Act. The Commissioner examined the issue and the decision of Bombay Tribunal and dismissed the appeal of the assessee vide his order dated 02.02.1996. 5. Being further aggrieved by the decision of the CIT (Appeal), the assessee preferred second appeal before the Income Tax Appellate Tribunal, Ahmedabad on the main issue of dispute as to whether the deduction under Section 48 (2) is required to be allowed before deduction under Section 54E of the Act. The Tribunal followed solitary decision of Kerala High Court in the case of V. V. George reported at 227 ITR 893 and dismissed the appeal of the assessee on the TAXAP/288/2002 5/33 JUDGMENT interpretation of various provisions relevant for the controversy involved in the appeal. 6. It is in the above background of the matter, the above referred substantial question of law is formulated for the consideration and determination of this Court. 7. The bare facts giving rise to the present tax appeals are that the assessee has declared capital gain at Rs.NIL as per the statement of computation of capital gains on long term assets sold during the year 1991 – 92, relevant for the assessment year 1992 – 93. The relevant details contained in the statement are as under :- “I] Sale price of shares of A.C.C. Ltd. Rs.81,75,000/- Less : Cost of acquisition being the market value of shares as on 01.04.1974. Rs. 1,08,500/- -------------------------------- Rs.80,66,500/- II] Other Deductions :- (i) U/s. 48 (2) :- First Rs. 15,000/- @ 100% 15000 Balance Rs.80,51,500 @ 30% 2415450 Rs.24,30,450/- (ii) Deduction corresponding to investment of Rs.57,12,000/- made as envisaged by Section 54E on or before stipulated time i.e. on 29.09.1992 in Units of Unit Trust of India (Capital Gains) Unit Scheme 1983) TAXAP/288/2002 6/33 JUDGMENT Rs.57,12,000 X Rs.80,66,500 Rs.56,36,189/- Rs. 81,75,000 ---------------------- Rs.80,66,640/- ----------------------- III] Long Term Capital Gain being I – II.” 8. The Assessing Officer was of the view that the assessee has wrongly computed the capital gain in as much as 30% deduction under Section 48 (2) of the Act is allowable only on the taxable capital gain while the assessee claimed deduction on the entire amount of Rs.80,66,500/- without excluding the deduction under Section 54E of the Act. According to the Assessing Officer, the assessee has, therefore, claimed excessive deduction under Section 48 (2) of Rs.16,90,780/-. After issuing necessary show-cause notice and after considering the assessee's reply, the Assessing Officer vide his assessment order dated 14.03.1995 computed the income from capital gain as under :- Income from capital gain Full value of consideration of shares Rs.81,75,000/- Less :- cost of acquisition Rs. 1,08,500/- ________________ Rs.80,66,500/- Less :- Dedn. U/s. 54E Rs.56,36,189/- ________________ Rs.24,30,311/- TAXAP/288/2002 7/33 JUDGMENT Less :- Dedn. U/s. 48 (2) Initial deduction Rs. 15000 30% of 2430311 Rs.724593 Rs. 7,39,593/- Rs.16,90,718/-” 9. While disallowing the assessee's claim regarding NIL capital gain, the Assessing Officer has observed in his assessment order that the notes on clauses appended to Finance Bill 1987 makes it very clear that new Section 48 in replacing the old Section 80-T and statutory deductions or concessions, as the case may be, hitherto available in Section 80-T and 115 are being incorporated in Section 48 itself. This shows that so far as the level position of deduction and concession under these two Sections are concerned, there is no material change and the amendment is only with a view to introduce a uniform system of deduction from long term capital gains assessing to non- corporate as well as corporate assesses. He has further observed that Section 45 of the Act makes any profit or gain arising from transfer of capital asset “chargeable to Income Tax under the head “Capital Gain”. At the same time, this very section exempts capital gain in respect of which Sections 53, 54A, 54D, TAXAP/288/2002 8/33 JUDGMENT 54E, 54F, 54G and 54H are applicable. Therefore, before proceeding to compute the capital gain and allow deductions as provided under Section 48, capital gain which is exempt on account of provisions of Section 53, 54A, 54B, 54D, 54E, 54F, 54G and 54H should be excluded from the income “chargeable” to Income-Tax under the head capital gain. Explanation 5 to Section 54E defines “net consideration” as meaning “the full value of the consideration received or accrued as a result of the transfer of the capital assets as reduced by any expenditure incurred wholly and exclusively in connection with such transfers. The deduction under Section 54E is available out of such “net consideration” in the case the entire net consideration is not invested in to the specified asset then as per the provisions of Section 54E (1) (b), proportionate deduction is to be allowed. The provisions of Section 48 (1) (a) allow deduction in respect of cost of acquisition, improvement and expenditure incurred wholly and exclusively in connection with such transfer out of total amount of consideration received. The Income Tax Officer has, TAXAP/288/2002 9/33 JUDGMENT therefore, taken the view that the provisions of Section 48 (1) (a) are in consonance with the definition of net consideration given in Explanation 5 to Section 54E. As no deduction can be allowed out of income which is not chargeable to tax, it is only logical and as well as intended by the legislature that the deduction under Section 54B, 54D, 54E etc. should be allowed before allowing further deductions under Section 48 (2) of the Act. The Assessing Officer has also relied on the judgment of the Income Tax Appellate Tribunal, Bombay Bench – D in the case of Mrs. Pushpa B. Sheth V/s. ACIT (50 ITD 314). 10.Before the CIT (Appeal), more or less, same contentions were raised on behalf of the assessee. CIT (Appeal) has upheld the finding recorded by the Assessing Officer after following the decision of ITAT Bombay Bench – D in the case of Mrs. Pushpa B. Sheth. 11.Before the Tribunal, over and above the decision of Bombay Tribunal in the case of Mrs. Pushpa B. Sheth, TAXAP/288/2002 10/33 JUDGMENT a decision of Kerala High Court in the case of CIT (Appeal) V/s. V. V. George, 227 ITR 893 and another decision of Bombay Bench Tribunal in the case of Motilal Hathibhai (HUF) V/s. Assistant Commissioner of Income Tax, (2002) 82 ITD (Mumbai) were relied upon on behalf of the revenue and accordingly, the Tribunal has confirmed the order of the Assessing Officer and the CIT (Appeal). 12.Before us, Mr. R. K. Patel, learned advocate appearing for the assessee has relied on the decision of the Delhi High Court in the case of A. S. Chhachhi V/s. Commissioner of Income Tax, 2008 (7) DRT Judgments 169 wherein the Delhi High Court has taken the view that deduction specified under sub- Section (2) of Section 48 is with reference to the gross capital gains calculated under Clause (a) of sub- Section (1) only. Nowhere in the Act, it is specified that this deduction is subject and restricted to the deductions to be allowed under Sections 53 & 54. This is so in order that the assessee would get the full benefit of the deduction on the gross capital gains as TAXAP/288/2002 11/33 JUDGMENT otherwise, the deduction would be allowed only after the capital gains have been computed as per Section 48 i.e. both sub-Sections (1) and (2). However, no such explanation or proviso is given in Section 48, that the deduction to be allowed under sub-clause (b) of sub-Section (1) of Section 48 is subject to the deduction allowed under Sections 53 & 54. When the deduction is calculated under Section 48, it has to be calculated under both sub-Sections (1) (a) and (1) (b) of the same section. The Delhi High Court, therefore, took the view that deduction under Section 48 (2) will have to be allowed on the amount calculated under Section 48 (1) (a) and before giving deduction under Sections 53 & 54. 13.Mr. Patel has further submitted that before the lower authorities, the decision of Bombay Tribunal as well as Kerala High Court which are in favour of the revenue are available. Now, the Delhi High Court has taken the view in favour of the assessee and hence, there are two views on the same issue. As per the settled legal position, when there are two views, the view in favour TAXAP/288/2002 12/33 JUDGMENT of the assessee is required to be adopted. In support of this submission, he relied on the decision of the Hon'ble Supreme Court in the case of Mysore Minerals Limited V/s. Commissioner of Income- Tax, 239 ITR 775 wherein the Hon'ble Supreme Court has held that Section 32 of the Income-tax Act, 1961, confers a benefit on the assessee. The provision should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee to secure the benefit intended to be given by the Legislature to the assessee. It is also well-settled that where there are two possible interpretations of a taxing provision, the one which is favourable to the assessee should be preferred. 14.Mr. Patel also relied on the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-Tax, Amritsar V/s. Strawboard Manufacturing Company Limited, 177 ITR 431 for the proposition that when a provision is made in the context of a law providing for commission of rates of tax for the purpose of encouraging an industrial TAXAP/288/2002 13/33 JUDGMENT activity, liberal construction should be put upon the language of the statute. He has, therefore, submitted that no capital gain is chargeable to tax. 15.Mrs. Mauna M. Bhatt, learned Standing Counsel appearing for the revenue, on the other hand, has strongly relied on the orders of the authorities below which are based on the correct interpretation of the relevant statutory provisions and also the decision of Kerala High Court in the case of CIT (Appeal) V/s. V. V. George (Supra). On the basis of the decision of the Kerala High Court, she has submitted that the subject of capital gains gets codified as a separate situation from Section 45 of the Act, onwards. “Capital gains” basically relate to a situation of transfer of a capital asset, resulting in either profits or gains as a result thereof. Section 45 of the Act itself makes it clear that even though this is the ordinary position, the statutory provisions of sections 53, 54, 54B, 54D, 54E, 54F and 54G are in the nature of exceptions thereto. Section 54E is in the nature of an exception from the plain language of the statute. Section 48 (1) (a) speaks of TAXAP/288/2002 14/33 JUDGMENT the ways of computation of capital gain and the first step in the process of computation is by deduction from the full value of the consideration received, two items, viz., expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition in regard thereto. Incidentally, Section 48 (1) (b) speaks of the statutory provision relating to the transfer of a long term capital asset providing for further deductions specified in Section 48 (2). Thus, it would be found that after knowing about the concept of capital gains, the statutory provision speaks of consequential mode of computation and deductions in regard thereto. The Explanation to Section 53 provides that “In this section and in Sections 54, 54B, 54D, 54E, 54F and 54G, references to capital gain shall be construed as references to the amount of capital gain as computed under Clause (a) of sub- Section (1) of Section 48.” She has, therefore, submitted that in computing capital gains, the provisions of Section 48 (2) should not be given effect to before giving effect to the provisions of Section 54E of the Act. She has, therefore, submitted that the TAXAP/288/2002 15/33 JUDGMENT capital gain is rightly computed by the Assessing Officer and the same is confirmed by the CIT (Appeal) as well as Tribunal. Since there is a concurrent finding of all the three authorities below, no interference is called for by this Court while exercising its appellate jurisdiction. 16.Mrs. Mauna Bhatt, learned Standing Counsel has further submitted that the Central Board of Direct Taxes has issued Circular No.45 dated 22.09.1987 explaining the provisions contained in the Finance Act, 1987. Prior to the amendment, under the provisions of Section 48 of the Income Tax Act, computation of capital gains resulting from the transfer of capital asset is made by deducting the cost of acquisition, the cost of improvement and the expenditure incurred in connection with transfer from the consideration received on such transfer. In addition to these deductions, Section 80T provided for certain deductions in respect of long term capital gains in the case of non-corporate tax payers. In the case of corporate tax payers, concessional term in respect of TAXAP/288/2002 16/33 JUDGMENT long term capital gains was allowed not by way of deduction but through lower rates prescribed in Section 115 of the Act. With the amendment of Finance Act, 1987, the statutory deductions or Concessional rates available in Section 80T and 115 have been incorporated in Section 48 itself and Sections 80T and 115 have been omitted. After prescribing the deductions available under Section 48 (2) in paragraph 25.5, it is stated that the above deductions referred to in Section 48 (2) will be given after providing for the exemptions specified in Sections54, 54B, 54D, 54E, 54F and 54G. On the basis of this Circular, she has stated that deductions allowable under Section 54E can be considered first before granting deductions under Section 48 (2) of the Act, while computing the capital gains. 17.She further relied on the decision of the Gauhati High Court in the case of Commissioner of Income Tax V/s. Sarda Trading Corporation, (1993) 204 ITR 139 wherein it is held that a reading of Sections 45, 54E and 80T of the Income-tax Act, 1961, makes it TAXAP/288/2002 17/33 JUDGMENT clear that any profits and gains on the 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. Therefore, the assessing authority has to declare under Section 54E as to whether the whole or any part of the capital gain on the transfer of a long term capital asset is 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. Therefore, for computing capital gains on the transfer of a long term capital asset, deduction under Section 54E is to be given before giving deduction under Section 80T. On the basis of this decision, she has submitted that after the amendment, by virtue of TAXAP/288/2002 18/33 JUDGMENT Finance Act, 1987, Section 80T was deleted and deduction allowable therein to a non-corporate assessee was clubbed in Section 48 (2) and hence, deduction allowable under Section 54E should be considered first before granting deduction under Section 48 (2) of the Act. 18.She has further submitted that the language of the Section is clear and unambiguous. The Court should interpret the section in such a manner so as to achieve the object envisaged by the Legislature. In support of this proposition, she relied on the decision of the Hon'ble Supreme Court in the case of Standard Chartered Bank and others V/s. Directorate of Enforcement and others, (2005) 275 ITR 81, wherein it is held that when a Parliament has taken note of a situation and resolved the difficulty by a suitable amendment in legislation, the Court must hold that its decision has correctly interpreted the law and accords with Parliament's intent in enacting the law as it stood prior to the enactment. TAXAP/288/2002 19/33 JUDGMENT 19.She further relied on the decision of the Apex Court in the case of M/s. Girdhari Lal & Sons V/s. Balbir Nath Mathur and others, AIR 1986 S.C. 1499 wherein it is held that the primary and foremost task of a Court in interpreting a statute is to ascertain the intention of the Legislature, actual or imputed. Having ascertained the intention, the Court must then strive to so interpret the statute as to promote and advance the object and purpose of the enactment. For this purpose, where necessary the Court may even depart from the rule that plain words should be interpreted according to their plain meaning. There need be no meek and mute submission to the plainness of the language. To avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law, the Court would be well justified in departing from the so-called golden rule of construction so as to give effect to the object and purpose of the enactment by supplementing, the written word if necessary. 20.Mr. S. N. Soparkar, learned Senior Counsel appearing as an intervener for Shri Vinaychandra C. Shah has TAXAP/288/2002 20/33 JUDGMENT submitted that the Circular is not binding to this Court and Circular is always for the benefit of the tax payers. It cannot curtail the benefits which are granted to the tax payers under the statutory provisions. In support of this submission, he relied on the decision of the Hon'ble Supreme Court in the case of Uco Bank V/s. Commissioner of Income Tax, (1999) 237 ITR 889 wherein it is held that the Central Board of Direct Taxes under Section 119 of the Income Tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of the Act which are binding on the authorities in the administration of the Act. Under Section 119 (2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. The power is given for the purpose of just, proper and efficient management of the work of assessment and in public interest. It is a beneficial power given to the Board for proper administration of fiscal law so that undue hardship may not be caused to the assessee and the fiscal laws may be correctly TAXAP/288/2002 21/33 JUDGMENT applied. Hard cases which can be properly categorized as belonging to a class, can thus be given the benefit of relaxation of law by issuing circulars binding on the taxing authorities. 21.Mr. Soparkar has further submitted that the assessee's computation of the capital gains strictly adhers to the mode of computation and deduction prescribed by Section 48 of the Act. The plain reading of Section 48 and the Explanation to Section 53 of the Act does not warrant that the exemption under Section 54E should take precedence over the provisions under Section 48 (2). There is absolutely no authority in law. Section 48 is a complete code in itself so far as the computation of capital gains are concerned. The ambit of the Section cannot be curtailed by resorting to the provisions of Section 54E and thereby reducing the amount from which deductions under Section 48 (2) are available to the assessee. The deductions under Section 48 (2) are to be given at a stage when the figure of capital gains is arrived at by deducting the expenditure in connection with the transfer and the TAXAP/288/2002 22/33 JUDGMENT cost of acquisition or improvement in respect of the asset, from the full value of the consideration received on transfer of the capital assets. There is no reference in Section 48 to the provisions of Section 53 or Section 54 etc. While considering the Explanation under Section 53 which says that in this Section and under Section 54E (among other sections), references to capital gains shall be construed as reference to the amount of capital gains as computed under Clause (a) of sub-Section (1) of Section 48. It is, therefore, apparent that this Explanation has very limited scope. Sections 53, 54 & 54B etc. including Section 54E are sections which provide for exemption of the capital gains where the assessee makes prescribed investments. In order to give maximum benefit to the assessee to make the prescribed investments, it has been provided in the Explanation that these exemptions have to be applied with respect to the amounts of capital gains