Order of set off of brought forward loss or Exemption claim is of prime importance when the assessee have earned LTCG and have suffered loss also on sale of long term capital assets in the same financial year. The same question may be relevant even when the assessee have brought forward loss from earlier years and the assessee have earned LTCG followed by its investment in the way stipulated u/s 54 or 54F.

Similar issue comes under consideration before Jaipur ITAT wherein the issue was whether it is proper 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?

It may be noted that as per provision of section 54F(1), capital gain arose on sales of long term capital gain will not be chargeable to capital gain under the section 45 of the Act if investment or utilization is done in a prescribed way.

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 above scheme and then apply the provisions of adjustment of losses as contained in Section 70.

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.

If the capital gain arose on sale of certain assets is not chargeable to capital gain after exemption than the loss which 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 exemption claim could be made.

Assessee could invest the capital gain arising from the long term capital asset even if there is a loss from sale of other assets. As a result, the assessee would be eligible for capital gain exemption as well as benefit of carry forward of the loss as well.

In Shri Naresh Jain Vs ACIT, Jaipur ITAT has set aside the orders of lower authorities and direct the AO to compute the capital gain from sale of commercial property by not doing intra-head adjustment first

 

Here is a copy of the full judgment:

Shri Naresh Jain Vs ACIT

Jaipur ITAT

ITA No. 159/JP/2019

Order Dated : 11/08/2020

 

This is an appeal filed by the assessee against the order of ld. CIT(A), Alwar dated 18.12.2018 for the A.Y. 2015-16, in the matter of order passed by the A.O. 143(3) of the Income Tax Act, 1961 (in short, the Act). The ground taken by the assessee reads as under.

“On the facts and in the circumstances and in law the ld. CIT(A) erred in sustaining the action of the AO regarding disallowing the benefit of carry forward of long term capital loss of Rs.14,76,729/- on the sale of shares for the current year.’’

2.1 Rival Contentions have been heard and records perused. The facts in brief are that the assessee is an individual and filed his return of total income on 29-08-2015, declaring income of Rs. 74,69,570/-. During the year under consideration, the assessee sold a commercial property being a showroom for a total consideration of Rs. 1,40,00,000/-. The indexed cost of acquisition was Rs. 36,74,643/-. The expenditure in connection with transfer of property was Rs. 24,165/- and thus the long term capital gain from sale of property was Rs. 1,03,01,192/-. The amount of sale consideration so received was transferred to capital gain account and such amount was used for purchases of flat. The assessee claimed deduction of Rs. 1,03,01,192/- u/s 54F of I.T. Act. During the year, the assessee has suffered long term capital loss of Rs. 14,76,730/- on sale of shares which the assessee claimed carried forward as long term capital loss for the current year A.Y 2015-16. The AO firstly set off the long term capital loss suffered from shares from the long term capital gain from sale of commercial property and after intra-head adjustment the AO computed net long term capital gain at Rs. 88,24,461/- and from this amount he allowed deduction U/s 54F and disallowed the carry forward the long term capital loss of Rs. 14,76,729/- for the current year on sale of shares.

2.2 By the impugned order, the ld. CIT(A) confirmed the action of the AO against which the assessee is in further appeal before us.

2.3 We have considered the rival contentions and carefully gone through the orders of the authorities below. The main issue in this appeal is 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 law prescribes the computation of income in respect of each source under the head capital gain separately which should be calculated after giving deduction under section 48 to 55 of the Act.

2.4 The relevant provisions of Sections 45(1), 54F and 70 of the Income-tax Act, relevant to the assessment years read as follows:-

“45(1) Capital gains.—Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54 EA, 54EA, 54 EB, 54F, 54G and 54H, be chargeable to income tax under the head “capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

“54F. (1)[Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original 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, or has within a period of three years after that date [constructed, a residential house] (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(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:”

“70. Set off of loss from one source against income from another source under the same head of income.—1) 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 “Capital 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.

(2) 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.

(3) Where the result of the 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 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.’’

Thus as per provisions of section 54F (1) on fulfilment of certain conditions the capital gain arose on sales of such assets will not be chargeable to capital gain under the 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 above scheme and then apply the provisions of Section 70. 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. Thus, if, after work out of deduction u/s 54F if the capital gain arose on sale of certain 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.

2.5 This issue is also covered by the decision of Hon’ble High Court of Madras in the case of CIT, Circle-XIV vs Vijay M. Mahtaney [2013] 35 taxmann.com 228 (Mad) wherein it has been held that (Copy at PB 9-14):-

‘’Section 54EC, read with sections 70 and 74, of the Income-tax Act, 1961 – Capital gains – Not to be charged on investment in certain bonds [Set off of capital loss] – Assessment year 2003-04 – Whether, assessee can first compute capital gains by claiming exemption under section 54EC and then apply provisions for set off of capital loss as per sections 70 and 74 – Held, yes [Para 11] [In favour of assessee]’’

2.6 In view of the above discussions, we set aside the orders of lower authorities and direct the AO to compute the capital gain from sale of commercial 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 of Rs. 14,76,729/- for the current year on sale of shares.

3.0 In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 11/08/2020