1.3 Thus, the AO effectively exhausted the long-term capital loss, leaving nothing to be carried forward. The assessee argued that before the loss could be set off against the gain, effect should be given to S. 54EC. The assessee also relied on the decision in the case of ICICI Ltd. v. Dy. CIT, 70 ITD 55 (Mum.). The assessee argued that S. 70 or S. 71 should be applied only after giving effect to S. 54EC. The AO rejected this argument and distinguished the ICICI Ltd. case by stating that S. 54E, which was involved in the ICICI case, was one of the Sections named in S. 45(1) as having an overriding effect. S. 54EC, as applied by the assessee in the present case, was not named in S. 45(1). This can be seen from the language of the Section which is as under?:
“Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in S. 54, S. 54B, S. 54D, S. 54E, S. 54EA, S. 54EB, S. 54F, S. 54G and S. 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.”
Thus, according to the AO, since there is no reference made to S. 54EC in S. 45(1), S. 54EC cannot have an overriding effect unlike S. 54, S. 54F, et al., named in S. 45(1). The AO was of the view that the net result under the head ‘Income from Capital Gain’ should be first found out after application of S. 70 and if there is any LTCG found taxable thereafter, it is in respect of such gain that the exemption mentioned in S. 54EC should be granted. In the result, the AO denied carry forward of the LTCL.
1.4 The assessee seeks your opinion.
2.0 Opinion:
2.1 It is true that S. 45(1) does not name S. 54EC like S. 54, S. 54F, et al. It is an admitted position that the Sections (S. 54, S. 54F, etc.) named in S. 45(1) have an overriding effect and capital gains u/s.45 have to be computed subject to those Sections. S. 45(1) does not name S. 54EC and, therefore, S. 45(1), apparently, is not subject to S. 54EC.
2.2 However, it must be remembered that capital gain or loss has to be worked out in respect of each capital asset separately. A useful reference may be made here to support this proposition to the case of Jt. CIT v. Montgomery Engineering Markets Fund, 100 ITD 217. The Mumbai Bench of the Tribunal upheld the plea that each capital asset is a separate source of capital gain or loss. Similar view is also taken by the Mumbai ITAT in the case of ACIT v. Nemish S. Shah, 36 BCAJ, P. 645, No. 29, March 2004 issue where the Tribunal held that each share in a company is a separate capital asset. Thus, transfer of each asset constitutes a source of capital gain. Once this position is conceded, the law does not provide about the specific gain against which exemption granted in S. 54EC should be claimed. In other words, it is left to the assessee to decide against which long-term capital gain or gains he wants to claim exemption. The aggregation of long-term capital gains in respect of each asset will be done only after the process of computation of capital gain, including granting exemption in respect of each individual capital asset, is completed, and it is the residue from each source that will be aggregated to arrive at the total figure of capital gain chargeable under the head ‘Income from Capital Gain’. It must be stated here that S. 70(3) states that when the result of computation made u/s.48 to u/s.55 is a loss arising from the transfer of a long-term capital asset the assessee shall be entitled to have the loss set off against any other gain arising from the transfer of a long-term capital asset. However, this provision talks of intra-head adjustment and for the purpose of this section, each capital asset constitutes a separate source of gain (or loss). It is only after the gain from a source is worked out in accordance with the provisions of S. 48 to S. 55 that one has to proceed further.
2.3 It is true that S. 45(1) does not explicitly mention S. 54EC as it mentions other Sections that have an overriding effect. Yet, one must not lose sight of the fact that S. 54EC grants exemption, and before the question of application of S. 70 and S. 71 would arise, net taxable capital gain from each source, i.e., transfer of each capital asset, should be worked out. Thus, omission of S. 54EC from being referred to in S. 45(1) is academic, without any significant effect as far as the present controversy is concerned.
2.4 Further, if the AO’s interpretation is accepted, it may frustrate S. 54EC. For example, a LTCG may arise to an assessee on 1st April of a financial year. As per S. 54EC he should make investment in an eligible instrument within six months form the date of transfer. Accordingly, he makes the investment. Now, the assessee incurs a long-term capital loss, say, in the month of December, that is, after making the investment. As per the AO’s interpretation, the investment made may become redundant as the long-term capital loss may take care of the long-term capital gain. However, this is a little absurd, as the assessee cannot wait till December to know whether he will have to make investment in the eligible instrument or not. If he does, and there is no loss incurred in December, unlike in the present case, he will have missed the bus of making investment. Though this logic is not entirely watertight, yet, we must try to give the provisions a meaningful purpose by resorting to purposive interpretation. On such an approach being adopted and on consideration of all the relevant provisions, one can say that S. 54EC operates in respect of capi-tal gain arising on transfer of each individual long-term capital asset and once an eligible investment is made it operates effectively so as to exclude the underlying gain from being considered for any purpose of taxation.
2.5 In ICICI Ltd.’s case (supra) the Tribunal interpreted S. 45(1) as being subservient to S. 54E. In order to make such interpretation, the Tribunal put weight on the language of S. 54E besides putting such weight on the language of S. 45(1) by ob-serving?: “In fact, the provision of S. 54E specifically states that, ‘the whole of such capital gain shall not be charged u/s.45’.” One may notice that S. 54EC also uses the same language. Thus, ICICI Ltd.’s case can be taken as an authority for the proposition that S. 54, S. 54F and other Sections referred to in S. 45(1) have an overriding effect on S. 45. But, the reverse may not necessarily be true. That is, the ICICI Ltd. case is not the authority for the proposition that if an exemption section is not mentioned is S. 45(1), it will not have an overriding effect.
3.0 To conclude, one can say that the exemption sections have an overriding effect on the main computational provisions as far as the charging S. 45 is concerned.
