THE issues before the Bench are - Whether the words and phrases of technical legislation should be construed according to the rules of grammer; Whether, in view of the amendment vide Finance Act, 2002, w.e.f 1.4.2003, the brought forward capital loss cannot be set off against short-term capital gains; Whether the relevant amendment to Sec 74(1) refers to capital loss of the current year only and not brought forward capital loss ; Whether income tax refund is chargeable to tax under the head 'income from other sources' and Whether, in view of the clarificatory amendment vide Finance Act, 2012, interest u/s 234D is leviable in the case of an assessment year commencing before the first day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date. And the verdict partly goes in favour the assessee.
Facts of the case
Assessee is a company, engaged in the business of investment banking and dealing in Government securities. The return of income for the year under consideration was filed by it on 20.11.2003 declaring total income of Rs. 45,80,01,886/-. In the said return, short-term capital gain of Rs. 2,21,91,307/- earned during the year under consideration was declared by the assessee and the same was set off against brought forward long-term capital loss to the extent of Rs. 42,91,526/- relating to A.Y. 2001-02. According to the A.O., the assessee was entitled to set off the brought forward long-term capital loss only against long-term capital gain and not against short-term capital gain by virtue of the provisions of sec.74(1) as amended w.e.f. 01.04.2003. He held that since the said provisions amended w.e.f. 1.4.2003 were applicable to the year under consideration i.e. A.Y. 2003-04, the assessee was not entitled to claim the set off of brought forward long-term capital loss relating to A.Y. 2001-02 against short-term capital gain for the year under consideration i.e. A.Y. 2003-04. He, therefore, disallowed the claim of the assessee in the assessment completed u/s.143(3). On appeal, the CIT(A) did not find merit in the submissions made by the assessee. According to him, the assessee had an option to set off the long-term capital loss against short-term capital gain only up to A.Y. 2002-03 and as per the amendment made in the provisions of sec.74(1) w.e.f. 1.4.2003 applicable to A.Y. 2003- 04 onwards, brought forward long-term capital loss could be set off only against long-term capital gain. For this conclusion, he relied on the decision of Hon’ble Supreme Court in the case of Reliance Jute Industries vs. CIT 120 ITR 921 wherein it was held that assessment for one assessment year cannot be affected by the law in force in another assessment year in the absence of a contrary provision specifically made. He held that the right claimed by the assessee under the law in force in a particular assessment year thus was available only in relation to the proceedings pertaining to that year. He noted that the amendment made in sec.74(1) w.e.f. 1.4.2003 restricted the set off of the long-term capital loss only against long-term capital gain and since the said amendment was applicable to the year under consideration i.e. A.Y. 2003-04, the assessee was not entitled for the set off.
On appeal to the Tribunal, the Division Bench found contrary views taken by the co-ordinate Benches on the issue. Thus the issue was referred to the President for setting up a Special Bench.
Having heard the parties, the Special Bench held that,
++ in the year under consideration, the assessee declared the short-term capital gain of Rs. 2,21,91,307/- and the brought forward long-term capital loss relating to AY 2001-02 to the extent of Rs. 42,91,526/- was set off by it against the said short-term capital gain. The claim of the assessee for such set off was disallowed by the AO as well as by the CIT (A) relying on the provisions of sec.74(1) as amended by the Finance Act, 2002 w.e.f. 1.4.2003 on the ground that by virtue of the said amended provisions, the assessee was entitled to set off the brought forward long-term capital loss relating to AY 2001-02 only against long term capital gain and not against short-term capital gain;
++ in the present case, we are concerned with the provisions of sec.74(1) as substituted w.e.f. 01.04.2003 and as already noted on the basis of highlighted words, the present tense has been used, which, in our opinion, refers to the long-term capital loss of the current year. The said provisions thus are applicable to the long-term capital loss of AY 2003-04 onwards and not to the long-term capital loss relating to the period prior to AY 2003-04. We are therefore of the view that the provisions of sec.74(1) as substituted w.e.f. 01.04.2003 are not applicable to the long-term capital loss relating to the period prior to AY 2003-04 and set off of such loss is therefore governed by the provisions of sec.74(1) as stood prior to the amendment made by the Finance Act, 2002 w.e.f. 01.04.2003;
+ it appears that the DR while analysing the provisions of section 74(1), as existed prior to amendment made w.e.f. 01.04.2003, has ignored the important words “and so on” to contend that the said provisions are silent on set off in so far as the year following the succeeding assessment year is concerned and finding no merit in this contention of the DR, we reject the same;
++ the first and most elementary rule of construction is that it has to be assumed that the words and phrases of ‘technical legislation’ should be used in their technical meaning if they have acquired one, and, otherwise, in their ordinary meaning the phrases and sentences are to be construed according to the rules of grammar. It is well settled that fiscal laws must be strictly construed, words must say what they mean, nothing should be presumed or implied. The true test must always be language used. Primarily the language employed is the determining factor of the intention of the legislature. The intention of the legislature must be found in the words used by the legislature itself. One has to look at the language employed by the legislature because no canon of construction can be said to be more firmly established than this that the legislature uses appropriate language to manifest its intention. It is a well settled rule of construction that, in the first instance, the grammatical sense of the words is to be adhered to and the elementary rule is that the words used in a section must be given their plain grammatical meaning;
++ the provisions of sec.74(1) as amended w.e.f. 1.4.2003, going by the plain language and grammatical construction used therein, make it very clear that the same would apply only to the long-term capital loss relating to AY 2003-04 and onwards and govern the carry forward and set off of such loss. In other words, the restriction imposed therein in terms of setting off the long-term capital loss only against long-term capital gain and not against the short-term capital gain is applicable only in relation to the long-term capital loss incurred by the assessee in AY 2003-04 and subsequent years and the same is not applicable to the long-term capital loss relating to and brought forward from the period prior to AY 2003-04 which shall be governed by the provisions of sec.74(1) as stood prior to amendment made w.e.f. 1.4.2003. The words used in the amended provisions of sec.74(1) clearly indicate this position and it appears to be the intention of the legislature. If that was not the intention of the legislature, nothing would have prevented the legislature from employing the appropriate language. Having regard to the language used in the provisions of sec.74(1) amended w.e.f. 1.4.2003, it seems clear that the intention was that the said provisions would deal with the carry forward and set off of long-term capital loss relating to AY 2003-04 and onwards;
++ thus, the assessee is entitled to claim set off of any brought forward long-term capital loss relating to AY 2001-02 against short-term capital gain. This is because the carry forward and set off long-term capital loss relating to AY 2001-02 would be governed by the provisions of sec.74(1) as existed prior to 01.04.2003. The assessee therefore succeeds as a result of acceptance of the first contention itself on the issue under consideration and it is really not necessary or expedient to consider the other contentions raised by the Counsel in support of the assessee’s case on this issue which have become more of a academic nature. However, keeping in view that we have already heard the elaborate submissions made by both the sides, we may touch upon the remaining aspects also for the sake of completeness;
++ the other contention raised by the Counsel in support of the assessee’s case on this issue is that the assessee was entitled to set off the long-term capital loss relating to AY 2001-02 against income of any subsequent year/years under the head “capital gains” as per the provisions of sec.74(1) prevalent at the relevant time. He has contended that the assessee thus had a vested right to set off the long-term capital loss relating to AY 2001-02 against short-term capital gain of any subsequent year including AY 2003-04 and such vested right acquired by the assessee cannot be negated or taken away except by a clear and specific legislative provision. The DR, on the other hand, has contended that the assessee cannot have any vested right against the State and /or Parliament and the parliament has the power to legislate both prospectively and retrospectively;
++ we have carefully gone through the judgment of Supreme Court in the case of Reliance Jute & Industries Ltd. cited by the DR in support of the revenue’s case on this issue. In the said case, the unabsorbed business loss of AY 1950-51 was set off by the assessee against the business income of the assessment year 1960-61 which claim was disallowed by the AO relying on the provisions of section 24(2)(iii) of the Indian Income-tax Act, 1922 as amended w.e.f. April 1, 1957 restricting carry forward and set off of unabsorbed business loss only for 8 years. The stand of the assessee was that by virtue of section 24(2)(iii) of 1922 Act as it stood before its amendment w.e.f. April 1, 1957, it had acquired a vested right to have the unabsorbed loss carried from year to year until it was completely set off and the subsequent amendment limiting the period for carry forward the loss to 8 years can not divest the assessee from vested right which was thus accrued to him. It was pointed out by the assessee that the amendment effected in 1957 was not retrospective in operation. Hon’ble Supreme Court did not find any substance in this claim of the assessee observing that there was no question of the assessee possessing any vested right under the law as it stood before the amendment. It was held by the Supreme Court that right claimed by the assessee under the law in force in a particular assessment year is ordinarily available only in relation to the proceedings pertaining to that year. It was held by the Supreme Court the provisions of sec.24(1) as amended in 1957 would govern the assessment for the assessment year 1960-61 and the unabsorbed loss of the assessment year 1950-51 could not be carried forward for more than 8 years. The Hon’ble Supreme Court thus held that the law as prevalent on the 1st day of the relevant assessment year would be applicable to the proceedings pertaining to that year and the assessment for one assessment year cannot, in the absence of a contrary provision, be effected by the law in force in another assessment year;
++ the issue involved in the present case, in our opinion, however is different inasmuch as there is no dispute about the fact that the provisions of sec.74(1) as amended w.e.f. 1.4.2003 are applicable to the assessment year under consideration that is AY 2003-04. The dispute however is that, having regard to the language used in the said provisions, whether section 74(1) as amended w.e.f. 1.4.2003 deal with carry forward and long-term capital loss for AY 2003-04 onwards or it governs the carry forward and set off of carry forward of such loss relevant to the period prior to AY 2003-04. In this regard, we have already held that going by the language used in the amended provisions of sec.74(1), the same are applicable only in respect of carry forward and set off of long term capital loss relating to AY 2003- 04 and onwards and the carry forward and set off of such loss relating to the period prior to 2003-04 continued to govern by sec.74(1) as it stood prior to the amendment made w.e.f. 1.4.2003. In our opinion, this issue involved in the present case is more similar to the issue involved in the case of Govind Das and Others vs. ITO decided by the Supreme Court and relied upon by the Counsel for the assessee in support of the assessee’s case. It is pertinent to note here that the said decision was rendered by the bench of three judges of Supreme Court and that too on 18th December, 1975 that is well before the decision rendered by the Bench of two judges of apex Court in the case of Reliance Jute and Industries Ltd on October 10, 1979;
++ in the present case, the provisions of sec.74(1) as amended w.e.f. 1.4.2003 have been relied upon by the revenue authorities to disallow the assessee’s claim for set off of long-term capital loss relating to AY 2001-02 against short-term capital gain of the year under consideration and as already noted by us, the plain grammatical construction of the language of sec.74(1) as amended w.e.f. 1.4.2003 makes it clear that the same are applicable and deal with carry forward and set off of loss under the head “capital gain” incurred in AY 2003-04 and subsequent years. The right accrued to the assessee by virtue of sec.74(1) as it stood prior to the amendment made w.e.f.1.4.2003 thus has not been taken away either expressly by the provisions of sec. 74(1) as amended w.e.f. 1.4.2003 or even by implication;
++ the golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed. After referring to this golden rule in its judgment in the case of Maharaja Chintamani Saran Nath vs. State of Bihar & Ors. AIR 1999 SC 3609, the Supreme Court also referred to Francis Benion's Statutory Interpretation, 2nd Edn. wherein the learned author commented that the essential idea of a legal system is that current law should govern current activities. If we do something today, we feel that the law applying to it should be the law in force today, not tomorrow’s backward adjustment of it. Such is the nature of law and the true principle is that lex prospicit non respicit which means law looks forward and not back. As Willes, J. said, retrospective legislation is ‘contrary to the general principle that legislation by which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts, and ought not to change the character of past transactions carried on upon the faith of the then existing law;
++ in the present case, the provisions of sec.74(1) as amended w.e.f. 1.4.2003 have been relied upon by the revenue authorities to disallow the assessee’s claim for set off of long-term capital loss relating to AY 2001-02 against short-term capital gain of the year under consideration and as already noted by us, the plain grammatical construction of the language of sec.74(1) as amended w.e.f. 1.4.2003 makes it clear that the same are applicable and deal with carry forward and set off of loss under the head “capital gain” incurred in AY 2003-04 and subsequent years. The right accrued to the assessee by virtue of sec.74(1) as it stood prior to the amendment made w.e.f.1.4.2003 thus has not been taken away either expressly by the provisions of sec. 74(1) as amended w.e.f. 1.4.2003 or even by implication.
++ in our opinion, the position in the present case is similar to the one involved in the case of S.S.C. Shoes Ltd. in as much as provisions of sec.74(1) as amended w.e.f. 1.4.2003, going by the language used therein, expressly provide for and deal with carry forward and set off of loss under the head “capital gains” for assessment year 2003-04 and subsequent years and the right accrued to the assessee by virtue of sec.74(1) as it stood prior to the amendment made w.e.f. 1.4.2003 to set off brought forward long-term capital loss relating to the period prior to AY 2003-04 against shortterm capital gain of subsequent year/s has not been taken away by the provisions of sec.74(1) substituted w.e.f. 1.4.2003;
++ in view of the discussion, we are of the view that the provisions of sec.74 which deal with carry forward and set off of losses under the head “capital gains” as amended by Finance Act, 2002, will apply only to the unabsorbed capital loss for the assessment year 2003-04 and onwards and will not apply to the unabsorbed capital losses relating to the assessment years prior to the assessment year 2003-04. Accordingly, we answer the question referred to this Special Bench in favour of the assessee holding that the assessee is entitled to set off the long-term capital loss incurred in AY 2001-02 against the short-term capital gain made by it in AY 2003-04. Ground no.2 of the assessee’s appeal is accordingly allowed;
++ as regards ground no. 1, it is observed that the issue involved therein relating to the head of income under which interest received by the assessee u/s 244A on income tax refund is chargeable to tax is covered against the assessee by the decision of Madras High Court in the case of Smt. B. Seshamma vs. CIT 119 ITR 314 wherein it was held that the interest paid being a statutory obligation with respect to an amount found refundable, it would be assessable under the head “ Income from other sources”. Following the said decision of Madras High Court, the coordinate bench of this Tribunal at Pune in the case of Sala Mining Industries Ltd. vs. Dy. CIT 61 ITD 105 held that once the income-tax has been paid by the assessee, it ceases to be the money of the assessee and whatever refund is issued after final adjustment it would be a general debt due to the assessee arising under the statute. It was held that the interest arising on such debt cannot be said to have any connection with the business activities carried on by the assessee and therefore such interest is assessable as income from other sources. Keeping in view these judicial pronouncements, we uphold the impugned order of the CIT (A) confirming the action of the AO in assessing the interest received by the assessee on income-tax refund as income from other sources and not as business income as claimed by the assessee. Ground no.1 of the assessee’s appeal is accordingly dismissed;
++ as regards the issue involved in ground no.3 relating to levy of interest u/s.234D, it is observed that Explanation 2 has been inserted in sec.234D by the Finance Act, 2012 with retrospective effect from 1.6.2003 clarifying that the provisions of sec.234D shall also apply to the assessment year commencing before the first day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date. In the present case the assessment year involved is AY 2003-04 and since the proceedings in respect of the said year has been completed on 30.11.2005, we are of the view that the assessee is liable to pay an interest u/s.234D as per Explanation 2 to sec.234D inserted by the Finance Act, 2012 with retrospective effect from 1.6.2003.
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