Capital gain to be computed first applying exemption then provisions for set off for capital loss

Capital gain to be computed first applying exemption and then provisions for set off of capital loss

ABACUS Case Law Citation
ABCAUS 3369 (2020) (08) ITAT

Important case law relied upon by the parties:
CIT vs Vijay M. Mahtaney [2013] 35 taxmann.com 228 (Mad)

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) disallowing the benefit of carry forward of long term capital loss.

The main issue in this case was whether it is lawful to first compute capital gain after doing intra head adjustments and whether the deductions u/s 54F should be allowed from the net income computed after intra head adjustments.

The assessee was an individual and filed his return of income. During the year under consideration, the assessee sold a property and after deducting indexed cost of acquisition and the expenditure incurred in connection with transfer of property the amount of resultant long term capital gains was transferred to capital gain account which was used for purchases of flat.

The assessee claimed deduction u/s 54F of the Income Tax Act, 1961 (the Act). During the year, the assessee has suffered long term capital loss on sale of shares which he claimed carried forward as long term capital loss for the current year.

However, the AO firstly set off the long term capital loss suffered from shares from the long term capital gain from  sale of property and after intra-head adjustment the AO computed net long term capital gain and from this remaining amount, AO allowed deduction U/s 54F and disallowed the carry forward the long term capital loss for the current year on sale of shares.

The Tribunal observed that the law prescribes the computation of income in respect of each source under the head capital gain separately which should be calculated after giving deductions under section 48 to 55 of the Act.

Capital gain to be computed first applying exemption and then provisions for set off of capital loss

The Tribunal noted that as per provisions of section 54F(1) on fulfilment of certain conditions the capital gain  is not chargeable under section 45 of the Act. The scheme of Sections 45 to 55A provide for the computation of capital gains, and the effect has to be given first to the  provision of capital gains as given under the said scheme  and then only apply the provisions of Section 70 related to set off. 

The Tribunal opined that Section 70 would come into play only when the capital gains have been computed in accordance with the provisions contained in Sections 45 to 55A.

It is not necessary to first apply Section 70(3) before assessee could invest capital gains

The Tribunal stated that if, after work out of deduction u/s 54F if the capital gain arose on sale of assets is not chargeable to capital gain than the loss arose to assessee on sales of another assets cannot set off from gain of such assets. It is not necessary that one should first apply Section 70(3) and thereafter only, the assessee could invest the capital gain arising from the long term capital asset

The Tribunal further noted that this issue was also covered by the decision of Hon’ble High Court of Madras

For claiming exemption, capital gain from sale of property to be computed by not doing intra-head adjustment

Accordingly, the ITAT set aside the orders of lower authorities  and directed the AO to compute the capital gain from sale of property by not doing intra-head adjustment for the loss suffered from sale of shares and allow to carry forward the long term capital loss.

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