Holding

Deductions under Section 80‑T are to be applied to the net capital gains (profits less losses) of the relevant previous year, with loss set‑off preceding the deduction.

Summary

M.S.P. Nadar Sons, a registered firm, sold shares in several companies during FY 1972‑73, realizing a gross long‑term capital gain of Rs 5,61,508 and a long‑term capital loss of Rs 96,583. The assessee computed assessable capital gains by first applying the standard deduction of Rs 5,000 and the 50% deduction under Section 80‑T(b)(ii) to the gross gain, then offsetting the loss, arriving at a net profit of Rs 1,81,671. The Income‑Tax Officer reversed this, setting off the loss first and then applying the Section 80‑T deduction to the balance, resulting in assessable gains of Rs 2,29,963. The Tribunal upheld the assessee’s method, but the Revenue obtained a reference and the Madras High Court held that loss must be set off before applying Section 80‑T deductions, agreeing with the Tribunal’s view. The Supreme Court affirmed this, stating that deductions under Section 80‑T are to be applied to the net capital gains (profits minus losses) and that assets of the same class (shares) cannot be treated separately for deduction purposes.

Issues considered

Whether deductions under Section 80‑T should be applied to each asset separately before setting off long‑term capital losses.
Whether the loss from the sale of long‑term capital assets must be set off against the gross gain before applying Section 80‑T deductions.

Legislation cited

Income Tax Act, 1961s. 70(2)(ii), s. 80-T(b), s. 80-T(b)(ii)

Subjects

capital gainslong‑term capital lossSection 80‑TSection 70set‑off of losstax assessmentshares

Judgment

A M.S.P. NADAR SONS, VIRUDHU NAGAR

v.

COMMISSIONER OF INCOME TAX (CENTRAL), MADRAS

APPRIL 28, '1993
B
[B.P.JEEVANREDDY ANON. VENK.ATACHALA,JJ.]

Income Tax Act 1961:
Sections 70 (2) (ii) and 80T-Assessee- Selling shares held in
-
companies-wng term capital gain as well as long term capital loss-Capital
c gains-Computation of

The appellant-assessee was a. Registered Firm. The assessment year
concerned was 1973-74. During the relevant previous year being the financial
year 1972-73, the assessee sold shares it held in several companies; from the
sale in three companies it secured a gross long terms capital gain ofRs.5,61,508
D However, in the sale of shares in six other companies it sustained a long term
capital loss in a sum of Rs. 96,583. The assessee computed the capital gains on
these transactions of sale of shares less the deductions under Section 80-T(b)
and Section SOT (b) (ii) (1) and showed a profit .,f Rs. 1,81,671.00.

E The Income-Tax Officer did not agree wi!'• the mode of computation
indicated by the asssessee; and set olfthe long :;.:rm capital loss against the
long term capital gain in the first instance and then applied the deductions.
provided by Section 80-T to the balance figure and ultimately computed the
capital gains included in the total income at Rs. 2,29,963 .

. F The asst;ssee aggrieved by the aforesaid ass ... ssment preferred an appeal
which was dismissed by the Appellate Assistant Commissioner.

In further appeal by the assessee the Tri bur --! agreed with the assessee's
computation.
G
Revenue asked for and obtained a refert.o;ce which the High Court
answet-ed in the negative i.e. in favour of the Re, ·~nue.

The High Court held that the ·income from capital gains constituted a
separate head ofincome under the Income Tax Ad and that cap\tal gains are
H bifurcated into. long term capital gains and short term capital gains, and
446
ual penetration c••
NADAR SONS, v. C.l.T.; 447

relying on the decision in Commi$sioner of Income Tax v. Sigappi Achi, 140 A
I.T.R. 448 held that in the instant case it was concerned only with long term
capital gains, and that Section 70 (2) (ii) prescribes the manner in which the
loss from sale of long term capital asset is to be set off.

B
In the appeal to this Court it was submitted on behalf of the appellant-
assessee that according to the provisions and scheme of the Income-Tax Act
capital gains had to be computed in respect of each asset separately and that
Section 80-T prescribes different percentages of deduction for different types
of capital assets, and that the correct method, therefore, is to compute the
capital gains with respect to each asset transferred saparately, in accordance_ C
with Section 80-T before setting off the losses.

Dismissing the appeal, this Court,

HELD: 1. This is not a case where the assets transferred by the assessee
D
during the relevant previous year consisted of both the types of capital assets,
mentioned in sub-clauses (i) and (ii) of clause (b) of Section 80-T. They were
of only one type namely those falling under sub-clause (ii) viz. shares. From
the sale of certain shares the assessee derived profit and from the sale of
certain other shares, he suffered loss. (450-E)
E
2. The deductions provided by Section 80-T have to be applied to the -
"capital gains" arising from sale oflong term capital assets. In other words,
the deductions provided by the said section have to be applied to the amount
representing the capital gains during the relevant previous year. The amount
of capital gains during the relevant previous year means the profits derived
minus the losses suffered. (452-D) F

3.ltisnotpossibletotreatthetransferofeachassetseparatelyandapply
the deductions separately. (452-E)

Commissioner of Income Tax v. V. Venkatachalam. Civil Appeal No. 3044 G
·of 1993, dated April 13, 1993, relied on.

Commissioner of Income Tax (Central) Madras v. Canara Workshops
Private Limited, 161 I.T.R. 320, distinguished. H
448 SUPREME COURT REPORTS [1993) 3 S.C.R.

A
1990.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4851 (NT) of
-
From the Judgment and Order dated 31.1.89 of the Madras f:ligh Court in Tax
B Case No. 900 of 1979,

K.N. Shukla, R. Satish for Ms ..A. Subhashini for the Appellant.

T.A. Ramachandran and Mrs. Janaki Ramachandran for the Respondent.

c The Judgmen~ of the Court was delivered by

B.P. JEEV AN REDDY .J. This appeal is preferred by the assessee against
the judgment of the Madras High Court answering the question referred tQ it under
section 256 (1) of the Income-tax Act in favour of the Revenue and against the
D assessee. The question stated, at the instance of the High Court reads: ·

"Whether, on the facts and in the circumstances of the case. the
Appellate Tribunal was justified. in- holding that the assessable
capital gain would be only Rs. 1,81, 671 computed in the manner set
E out in paragraph 14 of the order of the tribunal?

The assessee is a registered firm. The assessment year concerned is 1973-74,
the relevant previous year being the financial year 1972-73. During the said
previous year, the assessee sold shares held by him in several companies. From the
F sale of shares in three companies, it secured a gross long-term capital gain of Rs.
5,61,508. However, in the sale of shares in six other companies, it sustained a long-
~ ..
term capital loss in a sum of Rs. 96,583. The assessee computed the capital gains
on the aforesaid transaction of sale of shares in the following manner:

Gross long-term capital gains Rs. 5,61,508.00
G
LESS, Deduction under Rs. 5,000.00
Section 80-T (b) Rs.5,65,508.00
H l:.ESS: Deduction under
section 80~T (b) (ii) at 50% Rs. 2,78,254.00
NADAR SONS, v. C.l.T. [B.P. JEEWAN REDDY,J.l 449

LESS Loss on sale Rs. 2,76,254.00 A
of shares Rs. 96,583.00

Profits: Rs. 1,81,671.00
.,

The Income-tax Officer did not agree with said mode of computation. He set 8
off the long-term capital loss against the long-term capital gain in the first instance
and then applied the deductions provided by section 80-T to the balance figure of
Rs. 4,64,925.

His computation was in the following terms:
c
Gross long-term capital
gain : Rs. 5.61,508
LESS: Long-term capital
loss of the same year : Rs. 96,583

Balance of long-term D
capital gains of the year : Rs. 4,64,925

LESS: Deduction under
section 80 T (b) (ii) at 50% : Rs. 2,29,962
' E
Capital gains included in
the total income : Rs. 2,29,963

Aggrieved by the order oC assessment, the assessee preferred an appeal
which was dismissed by the Appellate Assistant Commi.ssioner. On further
appeal, however, the Tribunal agreed with his mode ofcomputation. Thereupon F
the Revenue asked for and obtained the said reference. The High Court answered
t.J:ie__said question in the negative i.e., in favour of the Revenue, on the following
reasoning: the income from capital gains constitutes a separate head of income
under the Act. Capital gains are bifurcated into long-term capital gains and shurt-
term capital gains. In this case the Court is concerned only with long-term capital
G
gains. Section 70 (2) (ii) prescribes the manner in which the loss from sale oflong-
term capital asset is to be set off. According to the said provision, the assessec
"shall be entitled to have the amount of such loss set off against the income, if any,
as arrived at underthe similar computation made for the assessment year in respect
of any other capital asset not being a short-term capital asset". Support for the said
proposition was derived from the decision in Commissioner of Income Tax v. ff
SUPREME COURT REPORTS (1993} 3 S.C.R.

-
450

A SigappiAchi, i40 I.T.R. 448. The correctness of the view taken by the High Coun
is questioned in this appeal.

Shri T.A. Ramachandran. learned counsel for the appellant submitted that
according to the provisions and scheme of the Act, capital gains have to be
computed in respect of each asset separately. Section 80-T prescribes different
B percentages of deduction for different types of capital assets: If the capital asset
sold consists of "buildings or land or any rights in buildings or lands", the
deduction provided is 35% in addition to the standard deduction of Rs. 5,000
Whereas in the case of any other capital asset, the percentage of deduction
provided is 50%, in addition to the standard deductjon of Rs. 5,000/-. The
c deductions have to be worked out separately where the capital assets transferred
during a previous year fall in both the categories. Even the proviso to section 80-
T shows that the gains arising from the transfer of these two tyges of capital assets
must be treated as separate and distrinct. If the capital gains arising from the
transfer of both the types of capital assets are clubbed together, it wpuld not be
possible to work out the provisions of seer.ion 80-T. The correct method, therefore,
D is to compute the capital gains with respect to each asset transferred separately, in
accordance with section 80-T. before setting off the losses.

We are afrai,!!.the arguments advanced by Mr. Ramachandran travel far
beyonf the controversy involved herein. This is not a case where the assets
transferred by the assessee during the relevant previous year consisted both the
E
types of capital assets. They were of only one type namely- shares. From the sale
of cenain shares the assessee derived profit and froqi the sale of cenain other
shares, he suffered loss. The simple question is how to work out and apply the
deductions provided by section 80-T in such a case. For answering this question,
it is necessary to notice the provisions of section 80-T and section 70, as they stood
F during the relevant previous year.

"80-T. Where the gross total income of an assessee not being a
company includes any income chargeable under the head "Capital
gains" relating to capital assets other than shon-terrn capital assets
(such income being, hereinafter • referred to as long-term capital
G gains), there shall be allowed, in computing the total income of the
assessee, a deduction from such income of an amount equal to,-

(a) in a case where the gross total income does not exceed ten
thousand rupees or where the long-term capital gains do not exceed
. five thousand rupees. the whole of such long-term capital gains~
-
H
NADAR SONS."· C.l.T. (B.P. JEEWAN REDDY.J.I 451

(b) in any other case, five thousand rupees as increased by a sum A
equal to,-

(i) (thirty five percent) of the amount by which the long-term capital
gains relating to capital assets, being buildings or lands, or any
rights in buildings or lands, exceed five thousand rupees;
B
(ii) (fifty per cent.) of the amount by which the long-term capital
gains relating to any other capital assets exceed five thousand
rupees:

Provided that in a case where the long-term capital gains relate to buildings c
or lands, or any rights in buildings or lands, as well as to other assets, the sum
referred to in sub-clause (ii) of clause (b) shall be taken to be-

(A) where the amount of the long-term capital gains relating to the
capital assets mentioned in sub-clause (i) is less than five thousend
D
rupees, (fifty percent.) of the amount by which the long-term capital
gains relating to any other capital assets exceed the difference
between five thousand rupees and the amount of the long-term
capital gains relating to the capital assets mentioned in sub-clause
(i); and
E
(B) where the amount of the long-term capital gains relating to the
capital assets mentioned in sub-clause (i) is equal to or more than
five thousand rupees, (fifty per cent.) of the long-term capital gains
relating to any other capital assets.

F
70. (I) 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 other
than 'Capit.tl gains' 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.

G
(2) (i) Where the result of the computation made for any assessment year
under sections 48 to 55 in respect of any short-term capital asset is a loss, the
assessee shall be entitled to have the amount of such loss set off against the income,
if any, as arrived at under a similar computation made for the assessment year in
respect of any other capital asset. R
452 SUPREME COURT REPORTS [1993) 3 S.C.R.

A (ii) Where the result of the computation made for any assessment year under
sections 48 to 55 in respect ofany capital asset otherthan a short-term capital asset
is a loss, the asses see shall be entitled to have the amount of such loss set off against
the income, if any, as arrived at under a similar computation made for the
assessment year in respect of any other capital asset not being a short-term capital
asset."
B
The opening words of section 80-T are relevant. If the gross total income of
an assessee (not being a company) "includes any income chargeable under the
head "capital gains" relating to capital assets (referred to as long-term capital
gains) there shall be allowed in computing the total income of the assessee a
c deduction from such income of an amount equal to ....................... "

In our Judgment delivered on April 13, 1993 in Civil Appeal No. 3044 of
1983 (Commissioner of Income Tax v. V. Venkatachalam) we have held that the
deductions provided by section 80-T have to be applied to the "capital gains"
arising from sale of long-term capital assets. In other words, the deductions
D provided by the said section have to be applied to the amount representing the
capital gains during the relevant previous year. The amount of capital gains during
the relevant previous year means the profits derived minus the losses suffered. This
is precisely the opinion of the High Court, with which view we agree. It is not
possible to treat the transfer of each asset separately and apply the deductions
E separately. If the argument of the learneo counsel for the appellant is logically
extended it would mean that even the deduction of Rs. 5,000 should be applied in
each case separately. Learned counsel, however, did nottake that stand. He agreed
that the standard deduction of Rs. 5,000 must be applied to the totality of the capital
gains. At the same time, he says, the deductions provided in clause (b) should be
applied separately to each asset. We have not been able to appreciate the logic
F behind the contention of the learned counsel.

This is not a case where the capital assets tranUerred consist of two types
mentioned in sub-clauses (i) and (ii) of clause (b) of section 80-T. They are only
of one type namely those falling under sub-clause (ii). We need not, therefore, deal
with or answer the hypothetical contention raised by the learned counsel. Further
G as pointed out by the High Court the provision contained in clause (ii) of sub-
section (2) of section 70, as it stood at the relevant time, supports the conclusion
arrived at by us.

The learned counsel for the appellant relied upon the decision of this Court
H in Commissioner of Income Tax (Central), Madras v. Canara Workshops Private
NADAR SONS, v. C.l.T. [B.:'. JEEWAN REDDY,J.] 453

Limited, 161 I.T.R. 320. That was a case arising under section 80-E of the Act, as A
it stood during the assessment years 1966-67 and 1967-68. On the language of
\ section 80-E, it was held that in computing the profits for the purpose of deduction
under the said section, each 'priority industry' must be treated separately. We do
not see how the principle of the said decision has any application to the facts of this
case, which has to be tlecided on the language of a different provision namely
section 80-T read with section 70 (2) (ii). B

For the above reasons, we agree with the opinion expressed by the High
Court and dismiss this appeal. No order as to costs.

N.V.K. Appeal dismissed.

I