Govinda Bhat, C.J.
1. This reference under section 256(1) of the Income-tax Act, 1961, hereinafter called 'the Act', made at the instance of the Commissioner of Income-tax, Mysore, relates to the assessment year 1965-66. The question of law referred by the Income-tax Appellate Tribunal, Bangalore Bench, is :
'Whether, on the facts and circumstance of the case, the Tribunal was right in holding that the order of the Commissioner of Income-tax cannot be sustained ?'
2. For the assessment year 1965-66, an assessment order was made by the Income-tax Officer on June 8, 1966, on a total income of Rs. 29,062, which include share of profits from various firms and also dividends and interest on securities. On March 27, 1965, in the year of account relevant to the assessment year 1965-66, the assessment had sold 4,735 partly paid 'B' class ordinary shares of Rs. 10 each (Rs. 7.50 paid) of the Syndicate Bank Ltd., Manipal, to Dr. T. M. A. Pai Benevolent Fund Trust at the cost price. The Commissioner of Income-tax issued under section 263 of the Act a notice dated April 19, 1968, requiring the assessee to show causes as to why the assessment order darted June 8, 1966, should not be revised and the Income-tax Officer asked to re-do the assessment by assessing capital gains arising out of the sale of the shares by applying the provisions of section 52 of the Act. The assessee, through his authorised representative, filed objections to the proposed revision. It was contended in the said objections that the provisions of sub-section (1) of section 52 of the Act are not applicable to the instant case and that the provisions of sub-section (2) of the said section are also not applicable in view of the fact that partly paid up share of the Syndicate Bank Ltd. are not quoted in the market and they also do not find ready buyers and, therefore, there is no basis to hold that their fair market value on the date of transfer was Rs. 16.90 per share as stated in the notice of the Commissioner. The objection raised by the assessee were rejected by the Commissioner, and by order dated May 4, 1968, he set aside the assessment order of the Income-tax Officer and directed him to re-do the assessment in accordance with law.
3. The assessee appealed to the Income-tax Appellate Tribunal, Bangalore Bench. The Tribunal, after hearing the parties, set aside the order of the Commissioner on the ground that there was no definite material for the Commissioner on which he could have come to the conclusion that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the revenue. The department, being aggrieved by the order of the Tribunal, sought a reference to this court.
4. Section 263 of the Act confers on the Commissioner the power of revision; he is empowered to call for the record of any proceeding under the Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or using to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the assessment and directing a fresh assessment. The section requires that two conditions should be satisfied in order to entitle the Commissioner to set aside an order passed by the Income-tax Officer. The said conditions are : (1) that the order proposed to be revised is erroneous; and (2) that such order has resulted in prejudice to the interests of the revenue. The satisfaction of theses two conditions is essential for setting aside the order proposed to be revised.
5. The question now is whether the tribunal was right in the view it has taken that there was no material for the Commissioner of Income-tax to the conclusion that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue.
6. The assessee had not suppressed the fact of sale of the shares in question. When the assessment order was passed that fact was before the Income-tax Officer. According to the assessee the sale was at cost price and there were no profits. According to the Commissioner, the Income-tax Officer ought to have, by applying the provisions of section 52 of the Act, assessed the capital gains arising out of the sale of the shares.
7. Section 52 of the Act consists of two sub-sections. Sub-section (1) can be invoked where the person who acquires a capital asset from no 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 order of the Commissioner of Income-tax does not show that the transferee of the shares was directly or indirectly connected with the assessee, nor that their transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45. Therefore, the Commissioner could not have come to the conclusion that the order of the Income-tax Officer was erroneous for not applying the provisions of sub-section (1) of section 52 of the Act.
8. While sub-section (1) deals with the case of transfer for less than the market value with the object of tax avoidance, sub-section (2) has no pretensions whatever to a case of tax avoidance or tax reduction. The provisions of sub-section (2) is to be effect that if in the opinion of the Income-tax Officer the fair market value of the capital asset transferred by an assessee on the date of transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by not less than 15% of the value so declared, the full value of the consideration shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value on the date of the transfer. In other words, the provisions confers power on the Income-tax Officer to levy tax on the assessee on what may be called as 'deemed capital gains' when the assessee in fact does not earn any capital gains or make profits, if in the opinion of the Income-tax Officer the fair market value of the capital asset on the date of transfer exceeded the declared value of the consideration by more than 15 per cent. of the value declared.
9. It is an extra ordinary provision intended to levy tax not on actual capital gains but on what is deemed as capital gains. The transfer may be a bon fide transaction and the assessee might have declared the actual value of the consideration received for the transfer of the capital assets and yet the assessee can be taxed on 'deemed capital gains' if, in the opinion of the Income-tax Officer, the fair market value of the capital assets was more than the value received by the assessee.
10. The Commissioner could have exercised his jurisdiction under section 263 of the Act if there was material to come to the conclusion that to the case of the assessee sub-section (2) of section 52 was attracted and the Income-tax Officer had failed to apply the said provisions. But if there was no material to come to any such conclusion, the Commissioner could not have revised the order of the Income-tax Officer.
11. The Commissioner in the notice issued to the assessee had stated that the market value of the shares was Rs. 16.90 per share; but that assertion was disputed by the assessee in his objection to the show-cause notice and it was submitted that the shares in question were partly paid-up shares which were not quoted in the market and that there were no ready buyers for the said shares. The Commissioner has not recorded any finding to the effect that the consideration declared by the assessee was not the fair market value on the date of transfer and that the fair market value as estimated by him was more than 15 per cent. of the value declared, so as to attract the provisions of sub-section (2) of section 52. Dealing with the contention of the assessee that the fair market value was not Rs. 16.90 per share as asserted by the Commissioner in his show-cause notice, this is what the Commissioner has stated in his order :
'If the shares are not quoted in the market (which statement remains to be checked by the Income-tax Officer), it is open to the Income-tax Officer to value the shares at their fair price.'
12. The Commissioner has left open the question as to the fair market value of the shares to be decided by the Income-tax Officer without coming to the conclusion that the value declared was less than the fair market value. In our opinion, the Tribunal was right in setting aside the order of the Commissioner.
13. Accordingly, we answer the question referred in the affirmative and against the department. The assessee is entitled to their costs of this reference.
14. Question answered in the affirmative.