Section 54F Relief Not Be Diluted By LTCL Set-off Under Section 70

BACKGROUND OF THE CASE

• The Assessee¹ an individual, filed a return for AY 2022-23 declaring total income of about INR 49.54 Lakhs. During the year, he earned Long-Term Capital Gain (‘LTCG’) of about INR 69.84 lakh from sale of equity shares and claimed exemption under section 54F of the Income-tax Act, 1961 (‘the Act’). He also incurred Long-Term Capital Loss (‘LTCL’) of about INR 37.72 Lacs on sale of other equity shares and carried it forward in the return.
• The Centralized Processing Centre (‘CPC’), while processing the return u/s 143(1) of the Act, did not allow the carry-forward of LTCL to subsequent years.
• Aggrieved with the order of CPC, the Assessee preferred an appeal before CIT (Appeals) [‘CIT(A)’].
• CIT (A) held that section 70(3) of the Act mandates adjustment of intra-head losses first and therefore allowed exemption under section 54F of the Act only on the net LTCG of about INR 32.12 Lacs and upheld the disallowance of carry forward of LTCL of INR 37.72 Lacs processed by CPC u/s 143(1) of the Act.
• Aggrieved with the decision of CIT(A), Assessee preferred an appeal before Hon’ble Mumbai Tribunal.

TRIBUNAL’S OBSERVATIONS

• Chargeability u/s Section 45: Any profit or gain arising from transfer of capital asset becomes chargeable only after accounting for the provisions contained in sections 54 to 54H of the Act, which includes section 54F. Thus, the chargeability itself factors in the benefit available to the assessee u/s 54F.
  
  Under clause (a) of section 54F(1) of the Act, no capital gain is chargeable u/s 45 where the cost of the new asset exceeds the net consideration received for the transferred original asset, which generated the capital gain. Thus, the scheme of sections 45 and 55A provide for computation of capital gains, requiring that the effect has to be given first as per series of exemption section of 54.
• Interplay of Section 70(3) and Section 54F: Section 70(3) of the Act permits the Assessee to set off a loss, computed under Sections 48 to 55, against income derived from a similar computation for any other capital asset that is not a short-term capital asset. This provision becomes operative only after capital gains have been determined in accordance with sections 48 to 55 of the Act, wherein exemption available u/s 54F is subsumed for the purpose of computation.
  
  As a consequence, the provisions of section 54F will prevail over the provisions of section 70(3) of the Act.
  
  No such compulsion exists for the Assessee to first apply section 70(3) before investing the capital gain or net consideration from a long-term capital asset transaction as required u/s 54F. Capital gains must be computed after giving effect first to provisions of sections 45 to 55A before the provisions of section 70 can be brought into operation. In other words, section 70 enters the total income computation only after capital gains have been fully determined in accordance with sections 45 to 55A of the Act.
• To buttress its observations, the Tribunal drew force from the decision of Hon’ble Madras High Court² and Coordinate Bench of Hon’ble Jaipur Tribunal³ to affirm that section 70 becomes applicable only once capital gains are computed in accordance with provisions of sections 45 to 55A and thus allowed the appeal of the Assessee.

AURTUS COMMENTS

• This decision reaffirms the scheme of the Act and highlights the primacy of charging section and computation provisions under the relevant head of income.
• It strengthens the position that exemption provisions embedded within the charging mechanism should take precedence over subsequent computational provisions relating to loss adjustment.

Footnotes

1 Nikesh Bhagwandas Mehta v. ITO [2026] 185 taxmann.com 711 (Mumbai - Trib.)

2 CIT v. Vijay M. Mahtaney [2013] 35 taxmann.com 228/217 Taxman 15 (Madras)

3 Naresh Jain v. Asstt. CIT [2020] 118 taxamann.com 519 (Jaipur-Trib.)