Govinda Bhat, C.J.
1. The Income-tax Appellate Tribunal, Bangalore Bench, has stated a case under section 256(1) of the Income-tax Act, 1961, (hereinafter called 'the Act'), and referred the following question of law for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there were no capital gains arising to the assessee on the sale of property for the assessment year 1964-65 ?'
2. The assessment is for the year 1964-65 and the relevant accounting year is the year ending on December 31, 1963. The assessee is a Hindu undivided family. Sri M. Ranga Pai is the karta of the said family. His father, M. Ventkatesha Pai, purchased a house property in Mangalore Town from Manel Raghunatha Naik for a sum of Rs. 25,000 on March 25, 1950. Venkatesha Pai died in the year 1951, and Manel Raghunatha Naik died some time thereafter. In the year 1963, the assessee reconveyed the said property to Manel Mukunda Naik, son of Manal Raghunatha Naik, for the same consideration amount of Rs. 25,000. According to the assessee, the reconveyance was done in accordance with the oral understanding between the parties to the sale transaction which had been entered into to help Manel Raghunatha Naik, then in financial difficulties.
3. In the proceedings for assessment to gift-tax for the assessment year 1964-65, the Gift-tax Officer being of the opinion that the market value of the property in the year 1963 was Rs. 55,000 whereas it had been acquired for Rs. 25,000, the difference, viz., Rs. 30,000 should be brought to tax as 'deemed gift' and, therefore, included the said sum in the gift-tax assessment of the assessee by an order dated October 22, 1965.
4. In the assessment for the year 1964-65 to income-tax, the Income-tax Officer did not levy income-tax on capital gains on the transaction in question. The Commissioner of Income-tax, acting under section 263 of the Act, set aside the assessment order being of the opinion that section 52(2) of the Act, was attracted to the transaction as the market value of the property was found to be Rs. 55,000 in the gift-tax assessment proceedings whereas the purchase was for Rs. 25,000. He directed the Income-tax Officer to make a fresh assessment after giving the assessee on opportunity of being heard. The assessee challenged the said order before the Income-tax Appellate Tribunal on various grounds. One of the grounds was that section 52(2) of the Act was not attracted to the transaction in question. The Tribunal was of the view that prima facie the provision was attracted, but it left the question open and directed the Income-tax Officer to determine the fair market value of the property as on January 1, 1954, and on the date of reconveyance and to compute the capital gains. Pursuant to the order of the Tribunal, the Income-tax Officer determined the fair market value of the property in the year 1953 at Rs. 55,000 and its value as on January 1, 1954, at Rs. 30,000. The difference between the two sums, viz., Rs. 25,000, was held to be the capital gains liable to income-tax under the Act.
5. The assessee appealed to the Appellate Assistant Commissioner who, on the view that section 52(2) of the Act will be attracted only when there is an understatement of the sale price and as in the instant case there was no dispute as to the correct amount of consideration received by the assessee on reconveyance and there was no understatement of the sale price, held that there were no capital gains arising on the reconveyance of the property by the assessee.
6. The department went up in appeal before the Income-tax Appellate Tribunal, Bangalore Bench. The department's representative contended that the Appellate Tribunal Assistant Commissioner had exceeded the directions given by the Tribunal by going into the question of the applicability of the provisions of section 52(2) as the Tribunal in its order of remand had held that the said provisions are applicable and the Income-tax Officer was directed to make a computation of the capital gains on the basis of the fair market value of the property on the two relevant dates. The Tribunal rejected the contention holding that in the earlier appeal when it remanded the case it had not finally decided the question of the applicability of section 52(2) and that question had been left open.
7. The main question urged and considered by the Tribunal was whether section 52(2) is attracted to a case when there is no understatement of the price by the assessee with the object of avoiding tax. The Tribunal came to the conclusion that it found no material to hold that the assessee had declared a lower price as the consideration for the transfer of the property. It relied on the decision of Isaac J. in K. P. Varghese v. Income-tax Officer, wherein the learned judge had taken the view that section 52(2) is intended to operate only in cases of understatement of consideration done with a view to dishonestly escape tax liability, and also on the circular of the Board of Direct Taxes explaining the scope and object of the said provision. The Tribunal, taking the view that section 52(2) operates only in cases of understatement of consideration, affirmed the order of the Appellate Assistant Commissioner and dismissed the department's appeal.
8. Sri Rajasekhara Murthy, learned counsel for the department, submitted that the decision of Isaac J. in K. P. Varghese v. Income-tax Officer has been reversed on appeal by a Full Bench of the Kerala High Court in Income-tax Officer v. K. P. Varghese by a majority of two against one and pressed for our acceptance the reasoning of Gopalan Nambiyar J. with whom Viswanatha Iyer J. agreed.
9. Sri S. P. Bhat, learned counsel for the assessee, contended that so far as the Kerala High Court is concerned, Raghavan C.J., who dissented from the majority opinion, has agreed with the view of Isaac J. and, therefore, the opinion is equally divided in the Kerala High Court. He further submitted that the High Courts of Delhi and Andhra Pradesh have taken the same view as Isaac J. in holding that where a transfer is taxed as a deemed gift under the Gift-tax Act, the same cannot be charged to capital gains tax by virtue of section 47(iii) of the Act. He also contended that as the Tribunal as to the scope of the Appellate Assistant Commissioner as well as the Tribunal as to the scope of sub-section (2) of section 52 of the Act, viz., that it does not aim at genuine or bona fide transactions where the full value of consideration received for the capital assets has been correctly declared by the assessee, is in accordance with the circular issued by the Central Board of Direct Taxes under section 119 and as the circular of the Board is binding on the department, it is not open to the Commissioner contend in this reference that the view of the law taken by the Tribunal is not right on the facts and circumstances of the case.
10. The undisputed facts are, the capital asset in question originally belonged to Manel Raghunatha Naik who on March 25, 1950, conveyed the same by sale to M. Venkatesha Pai, father of the present karta of the assessee, for a sum of Rs. 25,000. The transaction was apparently entered into by Venkatesha Pai for the purpose of helping M. Raghunatha Naik, then in financial difficulties. At that time, there was an oral understanding between the parties that the property will be reconveyed to the vendor on payment of the same amount. The vendor and the vendee having died, their successors effected a reconveyance on August 28, 1963. The Tribunal has further could that there is no material to hold that the assessee has declared a lower price as the consideration for the property. The difference in the amount between the fair market value of the property in 1963 and its actual cost to the assessee has been treated by the Gift-tax Officer as a 'deemed gift' and assessed to gift-tax.
11. The question is whether the Tribunal was in error in holding that there were no capital gains arising to the assessee on the resale of the property on August 28, 1963
12. Section 2(24) of the Act defines the term 'income'; it includes any capital gains chargeable under section 45. Section 45 to 55 deal with capital gains. Section 45 states that any profits or gains arising from the transfer of a capital assets effected in the previous year shall, save as otherwise provided in section 53, 54, 54B, 54C and 54D, be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year which the transfer took place. Section 47(iii) states that section 45 shall not apply to any transfer of a capital asset under a gift. Section 48 provides for the mode of computation of capital gains. According to the said section, the income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the expenditure incurred wholly and exclusively in connection with such transfer together with the costs of acquisition of the capital assets and the cost of any improvement thereto.
13. Section 52, which is the relevant section, reads thus :
'52. Consideration for transfer in cases of under-statement. - (1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken the fair market value of the capital asset on the date of the transfer.
(2) Without prejudice to the provisions of sub-section (1), if in the opinion of the Income-tax Officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen percent. of the value so declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value of the Inspecting Assistant Commissioner, be taken to be its fair market value of the date of its transfer.'
14. Sub-section (2) was inserted by the Finance Act of 1964 with effect from April 1, 1964. The provision existing in section 52 of the Act before the amendment was renumbered as sub-section (1). It empowers the Income-tax Officer to compute the capital gains arising on the transfer of a capital asset with reference to its fair market value as on the date of its transfer, ignoring the amount of consideration declared by the assessee, if the following two conditions are satisfied, (a) the transferee is a person who is directly or indirectly connected with the assessee, and (b) the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to tax on capital gains. It does not apply to cases of under-statement of consideration for transfer where the parties are not connected with each other directly or indirectly.
15. Section 52 was intended to bring in to tax transactions of under-statement of consideration for transfer of capital assets; but the provision existing before its amendment had limited application. Therefore, Parliament considered it necessary to amend the provision to bring within its scope every transaction of under-statement of consideration for transfer of capital assets. That is clear from the fact that the amendment was introduced not as an independent section but as a sub-section of section 52.
16. Sri Rajasekhara Murthy wants us to ignore the heading given to the section and hold that sub-section (2) is attracted even to perfectly bona fide transactions where there is no under-statement of consideration for transfer as in the instant case. If sub-section (2) is to be construed independently without reference to the section heading and the object of section 52, it undoubtedly is capable of the interpretation passed for by the learned counsel for the department, viz., that even in the case of perfectly bona fide transactions or where there is no material to hold that the assessee has declared a lower price than what he has actually received, the transfer attracts capital gains tax if its fair market value as on the date of transfer exceeds the full value of consideration declared by the assessee.
17. Let us take a case where an assessee transfer a property and contemporaneously enters into an agreement for reconveyance for the same value, and the actual consideration that passes is shown in the sale deed as also the deed of reconveyance. Let us also suppose that the fair market value of the property as estimated by the Income-tax Officer exceeds the sale price as shown by fifteen per cent. In such a case, can it be said that the vendor as well as the vendee make a gain or profit by the transfer and the reconveyance respectively If sub-section (2) of section 52 is interpreted in the manner suggested by the learned counsel for the department, the vendor will be liable to assessment to capital gains tax when he makes the transfer and the vendee will be liable to the same tax when he reconveys the property in accordance with the agreement between the parties although no profit or gain accrued to either party by the transfer and reconveyance. Could Parliament have intended levy income-tax when there is no element of profit or gains arising out of a transfer of a capital asset Parliament has power to treat capital gains as income liable to income-tax under the Act. It has also the power to make appropriate provision empowering the Income-tax Officer to determine the amount of capital gains when he is of the opinion that there is an under-statment of the price as declared and that the actual consideration that passed is not shown in the document. That will be a case of making an assessment of the capital gains which has been suppressed by the parties or which escapes assessment. The object of section 52 when it was introduced was to enable the computation of capital gains arising on the transfer of a capital assets where the Income-tax Officer has reason to believe that a transfer is effected with the object of a avoidance or reduction of the liability of the assessee to tax on capital gains. When it was realised that the provision had a limited operation only and did not apply to cases where the parties are not directly or indirectly connected with each other, sub-section (2) was introduced by an amendment. It was not introduced as an independent section with a separate section heading but was introduced as a sub-section under the section heading 'Consideration for transfer in cases of under-statement'. When Parliament enacted the provision in sub-section (2) of section 52, the presumption is that the object of the legislature is to levy tax on profits or gains arising out of a transfer of a capital asset. Income-tax is levied by Parliament in the exercise of its taxing power conferred by entry 82 of List I of Schedule VII read with article 246 of the Constitution. While the said entry confers a very wide power on Parliament and it is an elementary rule of construction that the widest possible construction must be put on the words in the legislative entries, it does not, however, mean that Parliament can choose to tax as income something which in no rational sense can be regarded as a citizen's income. Gajendra Gadkar C. J. in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax, while dealing with the constitutional validity of section 12 (1B) of the Indian Income-tax Act, 1922, as introduced by the Finance Act 15 of 1955, has stated thus :
'In dealing with this point, it is necessary to consider what exactly is the denotation of the word 'income' used in the relevant entry. It is hardly necessary to emphasise that the entries in the Lists cannot be read in a narrow or restricted sense, and as observed by Gwyer C.J. in United Provinces v. Atiqa Begum, 'each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it. What the entries in the Lists purport to do is to confer legislative powers on the respective legislatures in respect of areas or fields covered by the said entries; and it is an elementary rule of construction that the widest possible construction must be put upon their words. This doctrine does not, however, mean that Parliament can choose to tax as income an item which in no rational sense can be regarded as a citizen's income. The item taxed should rationally be capable of being considered as the income of a citizen.'
18. From the above statement it is clear that income-tax can be levied on an item which can rationally be termed as income, but no otherwise. If no right to any income accrues or arises, income-tax cannot be levied. In enacting a law for levy income-tax for capital gains, it is open to Parliament to provide for computation of income when there is escapement of income. If an assessee makes on under-statement of the price for the transfer of a capital asset it is a case of escapement of capital gains; but when a person reconveys the property for the same price in pursuance of an agreement or understanding at the time of the sale in his favour, no right to any gains or profit accrues to him. When it is not the case of the department that there has been an under-statement of the price by the assessee, no tax can be levied on such a transfer by treating the difference between the fair market value and the actual consideration for the transfer as capital gains. The presumption is that a legislature of limited jurisdiction is legislating within the scope of its legislative powers. Parliament could not have intended to levy income-tax when no right to profits or gains accrues or arises on the transfer of a capital asset. The heading to section 52 can be read as a preamble to the section. The provisions are intended to apply only to cases of under-statement of consideration for transfer of capital asset and not where the full consideration is shown in the deed itself. When so construed, sub-section (2) of section 52 can be invoked only to the class transfers where the Income-tax Officer has come to the conclusion on the materials before him that it is a case of under-statement of consideration. Once he comes to that conclusion, then, the case being one of escapement or suppression of capital gains, the difference between the fair market value and the cost of the assets can be treated as capital gains accruing to the assessee. In our judgment, sub-section (2) of section 52 does not apply to a bona fide transfer not involving any under statement of consideration for the transfer.
19. The Central Board of Direct Taxes, in exercise of the powers vested under section 119 of the Act, has issued circulars explaining the scope and object of sub-section (2) of section 52. The said circular is found in the Income-tax Circular & Letters, etc. (Part II, pages 142 & 143). The same is reproduced below :
'62. Section 13 of the Finance Act has introduced a new sub-section (2) in section 52 of the Income-tax Act with a view to countering evasion of tax on capital gains through the device of an under-statement of the full value of the consideration received or receivable on the transfer of a capital asset.
The provision existing in section 52 of the Income-tax Act before the amendment (which has now been renumbered as sub-section (1) enable the computation of capital gains arising on transfer of a capital asset with reference to its fair market value as on the date of its transfer, ignoring the amount of the consideration shown by the assessee, only if the following two conditions are satisfied :
(a) the transferee is a person who is directly or indirectly connected with the assessee; and
(b) the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to tax on capital gains.
In view of these conditions, this provision has a limited operation and does not apply to other cases where the tax liability on capital gains rising on transfer of capital assets between parties not connected with each other, is sought to be avoided or reduced by an under-statement of the consideration paid for the transfer of the asset.
63. Under the new provision in sub-section (2), the Income-tax Officer is enable to compute the amount of capital gains arising on the transfer of the date of its transfer, if in his opinion, such fair market value exceeds the full value of the consideration for it as declared by the assessee by 15% of the value so declared. Thus, if the full value of the consideration for the transfer of a house property has been declared by an assessee at, say, Rs. 3 lakhs, but in the opinion of the Income-tax Officer, the fair market value of the house property as on the date on which it was transferred was, say, Rs. 3,50,000, the capital gains arising on the transfer will be computed by taking the full value of the consideration for the purpose of section 48 of the Income-tax Act to be Rs. 3,50,000 instead of the declared amount of Rs. 3 lakhs. Before making an order under this provision, the Income-tax Officer required to obtain the previous approval of the Inspecting Assistant Commissioner. The margin of difference 15% of the declared value of the consideration for the capital assets has been provided in sub-section (2) to make allowances for the various circumstances in which a sale may be made and also for differences in opinion in regard to the determination of fair market value of a capital asset, so that genuine or bona fide transactions where the full value of the consideration received for the capital asset has been correctly declared may not be brought within the purview of this provision.....
65. The Minister of Finance made the following observations in regard to the provisions of section 55(2) of the Income-tax Act during his reply to the debate in the Lok Sabha at the time of clause by clause consideration of the Finance Bill, 1964 :
'To-day, practically every transaction of the sale of property is for a much lower figure than what is actually received. The deed of registration mentions a particular amount : the actually money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted...... It does not aim at perfectly bona fide transaction...... but essentially relates to the day-to-day occurrences that the happening before our eyes in regard to the transfer of property. I think, this is one of the key sections that should help up to defeat the free play of unaccounted money and cheating of the Government.'
20. The circular of the Board is not binding on the court or the assessee but is binding on the department. The statement of the Minister of Finance made in Parliament, no doubt, cannot be looked into by the court for the purpose of interpreting a statute but when that statement is incorporated as part of the Board's circular if can be looked into by the court.
21. From a perusal of the circular set out above it is clear that, according to the department, the object of the provisions of sub-section (2) of section 52 is not to levy tax on perfectly bona fide transactions where the full value of consideration received has been correctly declared by the assessee. In the instant case, the view taken by the Appellate Assistant Commissioner as well as the Tribunal is in accordance with the interpretation of the provisions given in the circular of the Board of Direct Taxes issued under section 119.
22. The learned counsel for the department did not contend that the circular is not binding on the department or that the view taken by the Tribunal is not accordance with the said circular. If that be so, we fail to understand as to how in this reference it is open to the Commissioner to contend that the view taken by the Tribunal is erroneous in law.
23. We will briefly deal with the alternative submission made by the learned counsel for the assessee, viz., that in view of section 47(iii), section 45 does not apply to the transfer in question. Section 47 reads :
'47. Transactions not regarded as transfer. - Nothing contained in section 45 shall apply to the following transfers :- .....
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust;......'
24. The word 'gift' is not defined under the Act. The learned counsel for the department submitted that transfers which are treated as 'deemed gifts' under the Gift-tax Act, are not exempt under section 47 and that we should not look into the definition of the word 'gift' under the GIft-tax Act for the purpose of interpretation of the word 'gift' in section 47(iii) and that the said provision operates only in cases of transfers made without valuable consideration. In support of that contention he relied on the majority judgment in Income-tax Officer v. K. P. Varghese.
25. Sri S. P. Bhat, learned counsel for the assessee, sought support for his submission in the decision in Shiv Shankar Lal v. Commissioner of Income-tax, Buragadda Satyanarayana Murthi v. Income-tax Officer and the dissenting judgment of Raghavan C.J. in Income-tax Officer v. K. P. Varghese.
26. When the word 'gift' is not defined in the Act, we have to look to its ordinary meaning and not to any definition given in the Gift-tax Act or any other Act. According to Webster's International Dictionary, the word 'gift' means a 'voluntary transfer of real or personal property without any consideration or more strictly without a valuable consideration.' When the capital assets is transferred without any valuable consideration, there is no question of any capital gains accruing or arising by the transfer, because capital gains have to be computed under section 48 by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the said asset. To a case of transfer made without valuable consideration, there is no question of capital gains tax being attracted at all and, as such, there was no purpose served in providing for the exclusion of such transfer from the operation of section 45. If the contention of the learned counsel for the department and the reasoning of the majority judgment in Varghese's case are accepted as sound, the provision of section 47(iii) excluding gifts from the purview of section 45 becomes otiose. What then are the transfers intended to be excluded by section 47(iii) The class of transfers involving under-statement of consideration does not come under the class of gifts pure and simple. Where a transferor does not show the actual consideration but makes an under-statement of the price, it is not a case of transfer of property for inadequate consideration either; such a transfer is for adequate consideration but the transferor suppresses the real consideration to avoid the tax. Learned counsel for the department was unable to suggest the class of transfers to which section 47(iii) can conceivable be applied.
27. Where a person as in the instant case effects a bona fide transfer of property for Rs. 25,000 when its fair market value on the date of recoveyance was Rs. 55,000, the transaction can be construed as a sale of 25/55ths share and gift of 30/55ths share in the property transferred. On the same date the assessee could have executed two deeds of conveyance, a sale deed of a half share of Rs. 25,000 and a gift deed of the other moiety. If the assessee had executed two such deeds, could the department have contended that capital gains tax is attracted to the transfer by virtue of section 55(2) Admittedly, to a case of gift pure and simple, section 55(2) is not attracted. What we have to look into is the substance of the transaction. If the substance is looked into it is really a case of sale of 25/55ths share and gift of 30/55ths share in the property and the extent of the gift is a pure and simple gift which does not attract capital gains tax. So construed, the transaction does not come within the scope of section 45.
28. For the reasons stated above, we are of the opinion that, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the were no capital gains arising to the assessee on the sale of property for the assessment year 1964-65.
29. Question answered accordingly. The assessee is entitled to his costs. Advocate's fee, Rs. 250.