CAPITAL GAINS

The assessee earned long-term capital gain of Rs. 233,49,65,341 and claimed a deduction of Rs. 124,54,00,000 under s 54EC on account of investment in specified bonds of NABARD. The assessee had also brought forward long-term capital loss amounting to Rs. 111,06,47,369, which was set off against long-term capital gain after allowing a deduction under s 54EC. The assessee first claimed a deduction under s 54EC and then, against the balance, set-off the brought forward losses. The CIT, in exercise of power under s 263, revised the assessment on the ground that the AO, by allowing deduction under s 54EC prior to setting off long-term capital loss brought forward, committed an error which has rendered the assessment erroneous and also prejudicial to the interest of the revenue. The commissioner held that an exercise of setting off brought forward long-term capital loss is to be done before granting a deduction under s 54EC. Being aggrieved, the assessee has filed the present appeal.

 

The issue is at what stage the exercise of set off of brought forward long-term capital losses is to be carried out — before or after granting a deduction under s 54EC.

While s 54EC is an exemption provision which exempts capital gains and takes them outside the purview of chargeable “capital gains”, s 74 which deals with carry forward and set off of loss under the head “capital gains” provides that when a long-term capital loss is carried forward, “it shall be set off against income if any, under the head “capital gains” assessable for that assessment year in respect of any other capital asset not being short-term capital asset”. The stage at which set off of carried forward long-term capital loss is to be given is subsequent to the stage at which income under the head capital gains is computed, and a deduction under s 54EC is to be given in the course of the latter. Thus, the question of setting off brought forward long-term capital loss arises only after the income under the head “capital gains” is computed and that the processing in computing the income under the head “capital gains” must also take into account s 54EC as well. There was thus no infirmity in the stand of the AO while allowing the claim of the assessee.

Deduction under s 54EC is allowable prior to setting off of brought forward long-term capital losses — as held by MumTrib in The Tata Power Co. Ltd. v Addl.CIT — In favour of: The Assessee ; ITA No. 3382/ Mum/2010 : Assessment year: 2005–2006

Decided on: 31 May 2011