T.c.(A) v. The Commissioner Of Income Taxtamil Nadu Ii, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE MR.JUSTICE P.JYOTHIMANIAND THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A).No.982 of 2004 Vs. The Commissioner of Income TaxTamil Nadu II, Chennai...Respondent Appeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal Madras 'A' Benchdated 13.12.2000 made in ITA No.209/Mds/1995 for the assessmentyear 1992-1993 against the order of the Commissioner of Income Tax(Appeals) V, Madras - 600 034 dated 25.8.1994 and made in IT.AppealNo.237/93-94 aainst the order of the Assistant Commissioner CityCircle -I(2) Madras - 34 dated 22.3.1993 and made in G.I.No.348-S/92-93. For Appellant:Mr.T.N.SeetharamanFor Respondent :Mr.Patty B.JegannathanSenior Standing CounselJ U D G M E N T P.JYOTHIMANI,J. The assessee has filed the present appeal challenging theorder of the Income Tax Appellate Tribunal Madras 'A' Bench dated13.12.2000 made in ITA No.209/Mds/1995 for the assessment year1992-1993 and the same was admitted on the following question oflaw: "Whether on the facts and circumstances of the caseand having regard to the provisions of Section 67(2),the Appellate Tribunal was right in law in holdingthat the appellant is not entitled to the deductionunder Section 48(2) of the Income Tax Act, 1961 on theshare of capital gains allocated to him on the basisof the computation in the assessment of a firm ofwhich the appellant is a partner?" 2.1. The assessee is a partner of a firm – The Foundry andEngineering Services. In respect of the assessment year 1992-1993,he admitted share income from the firm comprised of loss ofRs.1,75,537/- under the head "business", long term capital gains ofRs.3,97,680/-, and short term capital gains of Rs.30,179/-. From thelong term capital gains, the assessee claimed deduction under Section48(2) of the Income Tax Act, 1961 (for brevity, "the Act"). TheAssessing Officer has completed the assessment without consideringthe plea for deduction on long term capital gains. 2.2. On appeal, the Commissioner of Income Tax (Appeals) heldthat the assessee was not entitled to deduction under Section 48(2)of the Act in respect of the capital gains received from the firm, onthe basis that in the hands of the firm the deduction has alreadybeen allowed under Section 48(2) of the Act while assessing thecapital gains of the firm. 2.3. It was against the order of the Commissioner of Income Tax(Appeals), a further appeal was filed by the assessee before theTribunal. The Tribunal, by the impugned order, has dismissed theappeal holding that the long term capital gains having been assessedalready in the hands of the partnership firm, the assessee cannot beonce again granted deduction, while rejecting the contention of theassessee that under Section 67(2) of the Act for the assessment inthe hands of the partner of a firm the income is apportioned undervarious heads in the same manner as it was in the firm's name. It isas against the impugned order of the Tribunal, the assessee has filedthe present appeal on the above said substantial question of law. 3.1. Mr.T.N.Seetharaman, learned counsel for the appellant wouldsubmit that under Section 48(2) of the Act, which came into effectfrom 1.4.1988, the long term capital gain after deduction when itcomes to the hands of the partner as his share, it retains thecharacter of capital gain in the hands of the shareholder and,therefore, the shareholder is entitled to deduction under the abovesaid sub-section. To substantiate his claim, he would rely uponSection 67(2) of the Act, which, while speaking about the method ofcomputing a partner's share in the income of the firm, permits theapportionment under various heads of income in the same manner inwhich the income or loss of the firm has been determined under eachhead of income. 3.1. Mr.T.N.Seetharaman, learned counsel for the appellant wouldsubmit that under Section 48(2) of the Act, which came into effectfrom 1.4.1988, the long term capital gain after deduction when itcomes to the hands of the partner as his share, it retains thecharacter of capital gain in the hands of the shareholder and,therefore, the shareholder is entitled to deduction under the abovesaid sub-section. To substantiate his claim, he would rely uponSection 67(2) of the Act, which, while speaking about the method ofcomputing a partner's share in the income of the firm, permits theapportionment under various heads of income in the same manner inwhich the income or loss of the firm has been determined under eachhead of income. 3.2. He would compare the deduction in respect of long termcapital gains in the case of assessees other than companies asprovided under Section 80T of the Act and would submit that acombined reading with Section 80A(3) of the Act negatives anydeductions in the hands of a partner while computing the total incomefrom the firm and, therefore, according to him, impliedly it meansthat even if the partnership firm has been given deduction on the long term capital gain, that will not effect the right of a partnerafter receiving his share from the capital gain from the firm toclaim such deductions. He would rely upon the judgment inCommissioner of Income Tax (Central), Madras v. Express NewspapersLtd., (1980) 124 ITR 117 to substantiate his contention. 4.1. On the other hand, it is the contention of Mr.PattyB.Jegannathan, learned Senior Standing Counsel for the respondentthat when once in the hands of the partnership firm the long termcapital gain has been granted deduction, the remaining amount whichcomes to the hands of each partner will not retain the character ofcapital gain and allowing of deduction once again in the hands of thepartner will amount to granting double benefit, which cannot be theintent of the lawmakers. 4.2. It is also his submission that the assessee cannot rely uponSection 80T of the Act. In any event, it is submitted that the saidsection which has been relied upon by the learned counsel for theappellant has been repealed with effect from 1.4.1989. 5. We have heard the learned counsel for the assessee as well asthe Department and considered the entire factual matrix. 6. Chapter VI-A of the Act allows deductions to be made incomputing total income. Section 48 of the Act which stood during therelevant point of time is as follows:"Section 48. Mode of computation and deductions. (1) The income chargeable under the head “Capital gains”shall be computed,- (a) by deducting from the full value of theconsideration received or accruing as a result of thetransfer of the capital asset the following amounts,namely :— (i) expenditure incurred wholly and exclusively inconnection with such transfer; (ii) the cost of acquisition of the asset and thecost of any improvement thereto: Provided that in the case of an assessee, who is a non-resident Indian, capital gains arising from the transferof a capital asset being shares in, or debentures of, anIndian company shall be computed by converting the costof acquisition, expenditure incurred wholly andexclusively in connection with such transfer and thefull value of the consideration received or accruing asa result of the transfer of the capital asset into thesame foreign currency as was initially utilised in thepurchase of the shares or debentures, and the capital gains so computed in such foreign currency shall bereconverted into Indian currency so however, that theaforesaid manner of computation of capital gains shallbe applicable in respect of capital gains accruing orarising from every re-investment thereafter in, and saleof, shares in, or debentures of, an Indian company. Explanation: For the purposes of this clause,- gains so computed in such foreign currency shall bereconverted into Indian currency so however, that theaforesaid manner of computation of capital gains shallbe applicable in respect of capital gains accruing orarising from every re-investment thereafter in, and saleof, shares in, or debentures of, an Indian company. Explanation: For the purposes of this clause,- (i)"non-resident Indian" shall have the same meaning asin clause (e) of section 115C;in clause (e) of section 115C; (ii)“foreign currency” and “Indian currency” shall havethe meanings respectively assigned to them in section 2of the Foreign Exchange Regulation Act, 1973 (46 of1973);the meanings respectively assigned to them in section 2of the Foreign Exchange Regulation Act, 1973 (46 of1973); (iii)the conversion of Indian currency into foreigncurrency and the reconversion of foreign currency intoIndian currency shall be at the rate of exchangeprescribed in this behalf; (b) Where the capital gain arises from the transfer of along-term capital asset (hereinafter in this sectionreferred to, respectively, as long-term capital gain andlong term capital asset) by making the furtherdeductions specified in sub-section (2). (2) The deductions referred to in clause (b) of sub-section (1) are the following, namely :— (a) where the amount of long-term capital gain arrivedat after making the deductions under clause (a) of sub-section (1) does not exceed fifteen thousand rupees, thewhole of such amount; (b) in any other case, fifteen thousand rupees asincreased by a sum equal to,— (i) in respect of long-term capitalgain so arrived at relating to capital assets, beingbuildings or lands or any rights in buildings or landsor gold, bullion or jewellery,— (A) in the case of a company, ten percent of the amount of such gain in excess of fifteenthousand rupees; (B) in the case of any other assessee,fifty per cent of the amount of such gain in excess offifteen thousand rupees; (ia) in respect of long-term capital gainso arrived at relating to equity shares of venturecapital undertakings,— (A) in the case of a company, other thanventure capital company, thirty per cent of the amountof such gain in excess of fifteen thousand rupees; (B) in the case of venture capitalcompany, sixty per cent of the amount of such gain inexcess of fifteen thousand rupees; (C) in any other case, sixty per cent ofthe amount of such gain in excess of fifteen thousandrupees; (ii) in respect of long-term capitalgain so arrived at relating to capital assets other thancapital assets referred to in sub-clauses (i) and (ia),— (A) in the case of a company, thirty percent of the amount of such gain in excess of fifteenthousand rupees; (B) in any other case, sixty per cent ofthe amount of such gain in excess of fifteen thousandrupees: Provided that where the long-term capital gain relatesto both categories of capital assets referred to in sub-clauses (i) and (ii), the deduction of fifteen thousandrupees shall be allowed in the following order, namely:— (1) the deduction shall first beallowed against long-term capital gain relating to theassets mentioned in sub-clause (i); (2) thereafter, the balance, if any, ofthe said fifteen thousand rupees shall be allowed asdeduction against long-term capital gain relating to theassets mentioned in sub-clause (ii), and the provisions of sub-clause (ii) shall apply as ifreferences to fifteen thousand rupees therein werereferences to the amount of deduction allowed inaccordance with clauses (1) and (2) of this proviso: Provided that where the long-term capital gain relatesto both categories of capital assets referred to in sub-clauses (i) and (ii), the deduction of fifteen thousandrupees shall be allowed in the following order, namely:— (1) the deduction shall first beallowed against long-term capital gain relating to theassets mentioned in sub-clause (i); (2) thereafter, the balance, if any, ofthe said fifteen thousand rupees shall be allowed asdeduction against long-term capital gain relating to theassets mentioned in sub-clause (ii), and the provisions of sub-clause (ii) shall apply as ifreferences to fifteen thousand rupees therein werereferences to the amount of deduction allowed inaccordance with clauses (1) and (2) of this proviso: Provided further that, in relation to the amountreferred to in clause (b) of sub-section (5) of section45, the initial deduction of fifteen thousand rupeesunder clause (a) of this sub-section shall be reduced bythe deduction already allowed under clause (a) ofsection 80T in the assessment for the assessment yearcommencing on the 1st day of April, 1987, or any earlierassessment year or, as the case may be, by the deduction allowed under clause (a) of this sub-section in relationto the amount of compensation or consideration referredto in clause (a) of sub-section (5) of section 45 andreferences to fifteen thousand rupees in clauses (a) and(b) of this sub-section shall be construed as referencesto such reduced amount, if any. Explanation : For the purposes of this section,— (a) “venture capital company” meanssuch company as is engaged in providing finance toventure capital undertakings mainly by way of acquiringequity shares of such undertakings or, if thecircumstances so require, by way of advancing loans tosuch undertakings, and is approved by the CentralGovernment in this behalf; (b) “venture capital undertaking” meanssuch company as the prescribed authority may, havingregard to the following factors, approve for thepurposes of sub-clause (ia) of clause (b) of sub-section (2), namely :— (1) the total investment in the companydoes not exceed ten crore rupees or such other higheramount as may be prescribed; (2) the company does not have adequatefinancial resources to undertake projects for which itis otherwise professionally or technically equipped; and (3) the company seeks to employ anytechnology which will result in significant improvementover the existing technology in India in any field andthe investment in such technology involves high risk. (3) The deductions specified in sub-section (2) shall bemade also for the purposes of computing any loss underthe head “Capital gains” in so far as it pertains to anylong-term capital asset and, for the this purpose, anyreference in that sub-section to the amount of long-termcapital gain arrived at after making the deductionsunder clause (a) of sub-section (1) shall be construedas reference to the amount of loss arrived at aftermaking the said deductions." 7. Under Section 48(1) of the Act, the deduction in respect ofthe full value of the consideration received or accrued regarding theexpenditure incurred wholly, etc. and cost of acquisition of assetand the cost of improvement are granted. This deduction hasadmittedly been granted from the capital gain in the hands of the https://hcservices.ecourts.gov.in/hcservices/ partnership firm. Section 48(1)(b) of the Act, extracted above,shows that the capital gain arising from the transfer of a long termcapital asset is entitled to further deduction specified in sub-section (2). 7. Under Section 48(1) of the Act, the deduction in respect ofthe full value of the consideration received or accrued regarding theexpenditure incurred wholly, etc. and cost of acquisition of assetand the cost of improvement are granted. This deduction hasadmittedly been granted from the capital gain in the hands of the https://hcservices.ecourts.gov.in/hcservices/ partnership firm. Section 48(1)(b) of the Act, extracted above,shows that the capital gain arising from the transfer of a long termcapital asset is entitled to further deduction specified in sub-section (2). 8. Mr.T.N.Seetharaman, learned counsel for the appellant contendsthat Sections 48(1) and 48(2) of the Act have to be read separatelyand according to him, what is contemplated under Section 48(1)(b) ofthe Act regarding further deduction as enumerated under Section 48(2)of the Act is in addition to what has already been granted underSection 48(1) of the Act. His specific insistence is about the words"further deductions" that find place under Section 48(1)(b) of theAct. 9. On a careful reading of Section 48 of the Act, we are unableto agree with the contention of the learned counsel for theappellant. In our considered view, Sections 48(1) and 48(2) of theAct cannot be read separately. Unless an assessee gets benefit underSection 48(1) of the Act, he cannot independently claim the right ofdeduction under Section 48(2) of the Act. In other words, whileSection 48(1) of the Act confers substantial right of deduction, whatis done in Section 48(2) of the Act is granting further deduction.If the contention of the learned counsel for the appellant isaccepted, then the partner after obtaining his share as a long termcapital gain from the firm, in the hands of which deduction hasalready been granted, will be again entitled to claim the rightswhich are conferred under Section 48(1) of the Act, which is not eventhe case of the appellant and that cannot be the interpretation, for,such construction would mean that the right of deduction which hasalready been enjoyed in the hands of the partnership firm in the longterm capital gain will be again made to be available in the hands ofthe partner in respect of his share, which will certainly amount togranting double benefit and that can never be the intent of thelawmakers. 10. The reliance placed on Section 67(2) of the Act prescribingthe method of computing a partner's share in the income of the firm,which is as follows: "Section 67. Method of computing a partner’s share inthe income of the firm. (1) *** (2) The share of a partner in the income or loss of thefirm, as computed under sub-section (1) shall, for thepurposes of assessment, be apportioned under the variousheads of income in the same manner in which the incomeor loss of the firm has been determined under each headof income.", is certainly not in relation to any independent right under Section48(2) of the Act. 11. It is not in dispute that in the hands of the partner theamount of long term capital gain is entitled to apportionment undervarious heads. But, the question here is whether the deductionalready claimed under Section 48(2) of the Act by the firm can beclaimed by the partner once again in his hands in respect of hisshare of long term capital gains. (2) The share of a partner in the income or loss of thefirm, as computed under sub-section (1) shall, for thepurposes of assessment, be apportioned under the variousheads of income in the same manner in which the incomeor loss of the firm has been determined under each headof income.", is certainly not in relation to any independent right under Section48(2) of the Act. 11. It is not in dispute that in the hands of the partner theamount of long term capital gain is entitled to apportionment undervarious heads. But, the question here is whether the deductionalready claimed under Section 48(2) of the Act by the firm can beclaimed by the partner once again in his hands in respect of hisshare of long term capital gains. 12. The analogy made by the learned counsel to Sections 80A(3)and 80T of the Act cannot be made applicable to the facts of thepresent case. The present assessment being of the year 1992-1993,after the Direct Tax Laws (Amendment) Act, 1989 came into effect from1.4.1989 by which Section 80T of the Act came to be omitted, thetaxing structure in respect of the firm and individual partner weredifferent when compared to the legal position after the said date,namely 1.4.1989. Simply because by change of law nominal tax hasbeen imposed on the firm and in the hands of the partner differenttax amount has been imposed, there can be no comparison between thesame. Therefore, we do not agree with the contention raised by thelearned counsel for the appellant by relying upon the said provisionsthat the negative provision should be read in favour of the assessee. 13. The reliance placed on the judgment of this Court in ExpressNewspapers Ltd. case, supra, has no application to the facts of thepresent case. That was a case relating to the deduction of interestpaid on equitable mortgage and whether the same can be claimed againunder Section 24(1)(iii) of the Act as it stood at the relevant pointof time. We are unable to compare the facts of the said case withthe facts of the present case. 14. On the other hand, from a perusal of the orders of all thethree authorities it is clear that in the hands of the firm, inrespect of the capital gain, deduction under Section 48(2) of the Acthas already been considered and the same amount simply because ithas come to the hands of the partner it will not continue to be along term capital gain so as to enable the partner to claim deductiononce again. In fact, the Tribunal has elaborately discussed aboutthe implications of Sections 80T and 80A(3) of the Act as contendedby the learned counsel for the appellant and distinguished the sameholding that Section 48(2) of the Act allows deduction whilecomputing the capital gains and not from the capital grains includedin the gross total income, while Section 80T of the Act provides fordeduction from the gross total income and observed that theLegislature has intentionally provided in Section 80A(3) of the Actthat when once the deduction was allowable in the case of a firm, nosuch deduction would be allowed in the hands of the partner. For the foregoing reasons, we do not see any reason to interferewith the impugned order of the Tribunal. Accordingly, thesubstantial question of law is answered against the assessee and theappeal stands dismissed. No costs. Sd/Asst.Registrar /true copy/Sub Asst.RegistrarsasiTo:1.The Assistant Registrar,Income Tax Appellate TribunalChennai Bench "A",Rajaji Bhavan, III Floor,Besant Nagar, Chennai - 902.The Commissioner of IncomeTax (Appeals)-V, Chennai.3.The Commissioner of Income Tax (Tamil Nadu)II, Chennai. 4.The Assistant Commissioner of Income Tax City Circle-I(2), Chennai.1 CC to Mr.T.N.Seetharaman, Advocate, SR.70314 2 CC to Mr.Patty B.Jegannathan, Advocate, SR.66488 and 70435 T.C.(A).No.982 of 2004 NG(CO)SRA(14/12/2011) https://hcservices.ecourts.gov.in/hcservices/