Sections 112, 115A, 115AC, 115AD, 115B and 115BBA
Circular No. 721 was issued by the Central Board of Direct Taxes on 13 September 1995. Its subject is Sections 112, 115A, 115AC, 115AD, 115B and 115BBA.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Settles how tax on long-term capital gains under section 112 is to be computed where there is a loss under another head. Two readings had grown up: that section 112 overrides section 71, so the flat rate applies to the whole of the long-term capital gains without set-off; or that set-off is allowed but the flat rate still applies to the whole gain, with the loss set off not being carried forward. The Board takes neither. Because section 112 speaks of gains 'included' in total income, and set-off under sections 70 to 80 is a step in computing total income, only the gain surviving set-off is taxed at the special rate.
Doubts had been expressed about the opening words of section 112, which was inserted by the Finance Act, 1992 with effect from 1-4-1993.
SECTIONS 112, 115A, 115AC, 115AD, 115B AND 115BBA
Determination of Tax in certain Special Cases
SECTION 112 l TAX ON LONG-TERM CAPITAL GAINS
731. Clarification regarding computation of tax in respect of long-term capital gains under section 112
1. Section 112 was inserted in the Income-tax Act by the Finance Act, 1992 with effect from 1-4-1993. It provides that where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains; and
(ii) the amount of income-tax calculated on such long-term capital gains at appropriate rates.
2. Doubts have been expressed in some quarters about interpretation of the provisions of section 112. Some people are interpreting the provisions of section 112 in such a manner that the tax payable on long-term capital gains is to be computed on the entire amount of long-term capital gains without applying the provisions of set-off of loss contained in section 71(2) where there is loss under any other head. As a result, it has been interpreted that the provisions of section 112 will override those of section 71, effectively denying the benefit of set-off of loss from a source other than "capital gains" with income from long-term capital gains. It is also interpreted that even if the facility of set-off of loss under any other head is allowed with the long-term capital gains, the flat rate of tax will be applicable to the whole of the long-term capital gains. That means while the whole of long-term capital gains will be subject to tax, the amount of loss which has been set-off in terms of section 71(2) will not be allowed to be carried forward.
3. The confusion in interpreting the provisions of section 112 is arising mainly from the interpretation of the initial part of section 112 :
‘Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains"...’
The above phraseology contains two significant expressions, "total income" and "includes any income". The total income is to be computed in the manner prescribed in the Income-tax Act. Set-off of loss as per the provisions of sections 70 to 80 is a stage which is part of this procedure. When this procedure is adopted for computing gross total income or total income, only the amount of income after set-off remains under a head as part of gross total income or total income. Only that amount of long-term capital gains which is included in the total income would be subject to tax at a prescribed flat rate. Thus, if there was a loss of Rs. 10,000 from business and there is long-term capital gains of Rs. 30,000, then after setting off of loss of Rs. 10,000 with long-term capital gains, only Rs. 20,000 would remain under the head "Capital gains" to be included in the gross total income or total income. The flat rate of tax will be applicable in respect of Rs. 20,000 and not Rs. 30,000, since the amount of long-term capital gains included in that total income is Rs. 20,000. (Here it is assumed that the total income ignoring, long-term capital gains, is above the exemption limit).
4. The following illustrations will clearly show the correct interpretation of the provisions of section 112 :Illustration - 1 (for individuals)
Case 1
Case 2
Case 3
Income from business
(-)5,00,000
(-)5,00,000
(-)5,00,000
Long-term capital gains
5,00,000
10,00,000
3,00,000
Computation of tax on
long -term capital gains
Nil
1,00,000
Nil
(The amount of long-term
(Nil )
(5,00,000)
(Nil )
capital gains included
in total income given in brackets)
Illustration - 2 (for an individual)
Profits and gains of business
(-)1,00,000
Long-term capital gains
90,000
Total income
Nil
Business loss c/f
10,000
Computation of tax on long-term capital gains :
There would be no income under the head "Capital gains" after business loss has been set-off with long-term capital gains. Hence, there would be no tax in this case.
Circular : No. 721, dated 13-9-1995.
In an intimation under section 143(1) or a scrutiny assessment where the Department has charged the special rate on the gross long-term gain without allowing set-off.
Business loss of Rs. 5,00,000 and long-term capital gains of Rs. 10,00,000 leaves Rs. 5,00,000 of gains in total income, and it is that Rs. 5,00,000 that bears the special rate. If the business loss were Rs. 1,00,000 and the long-term gains Rs. 90,000, nothing survives under the head capital gains, no tax arises under section 112, and Rs. 10,000 of business loss is carried forward.
Source: the Income Tax Department’s own published text — its page for this instrument.