Jagannatha Shetty, J.
1. This is a reference under section 256(2) of the Income-tax Act, 1961. The following questions have been referred :
'(i) On the facts and in the circumstances of the assessee's case, whether there is material on record for the Tribunal to hold that there was understatement of consideration and
(ii) On the facts and in the circumstances of the assessee's case, whether the Tribunal was justified in holding that section 52(2) of the Income-tax Act, 1961, is attracted to the assessee's case ?'
2. The facts are these :
The assessee was a contractor. In 1967, he was allotted site No. 328, Palace Upper Orchards, Bangalore, by the City Improvement Trust Board, Bangalore, for Rs. 19,274. In 1968, he started construction of a building and when it was nearing completion, he sold it to Mr. and Mrs. Mehta, for Rs. 2,51,101. The purchasers then spent about Rs. 52,720, on improvement and finishing touch up.
3. The assessee did not offer any capital gains for tax.
4. Before the assessing officer, there were at least two valuation reports, one at the instance of the assessee and another at the instance of the Department. After examining the matter, the assessing officer took the valuation of the land at Rs. 60 per sq. yd. and determined the fair market value of the building at Rs. 3,56,000 for purposes of capital gains under section 52(2) of the Income-tax Act. He obtained the prior approval of the Inspecting Assistant Commissioner for that purpose and assessed Rs. 89,722 as short-term capital gains.
5. The assessee preferred an appeal before the Appellate Assistant Commissioner, who gave no relief in respect of the questions with which we are considered.
6. Thereupon the assessee appealed to the Tribunal. The Tribunal slightly reduced the fair market value of the land. It held that the value of land should be determined at Rs. 50 per sq. yd. and the fair market value of the property at Rs. 3,27,330. Since this market value admittedly exceeded the declared consideration by more than 15 per cent. the Tribunal held that section 52(2) of the Income-tax Act is attracted.
7. In the course of the order, the Tribunal has observed that there was no direct evidence of any understatement of consideration in this case but that cannot be expected because things like these are carried out in secrecy and not with witnesses who may depose against the parties. It proceeded on the probabilities of the case and also took into account the common course of human conduct in business affairs. It noticed that the property was not advertised for sale and if it had been advertised, there would not have been dearth of purchasers since the property is situated in a good locality in Bangalore. It appears that it was argued for the assessee that the sale was a distress sale, because a firm of which the assessee was a partner owed money to Syndicate Bank. But the Tribunal found that there was no such acceptable evidence in proof of the distress sale. The Tribunal also observed that in the normal course, the contractor could not have forgone the benefit of the increase in the price of land and increase in the cost of construction and personal supervision effected by him, for no reason whatsoever. On these circumstances, the Tribunal came to the conclusion that there was understatement of consideration and a part of the consideration must have been paid under the table.
8. At the outset, it must be stated that the scope of section 52(2) of the Income-tax Act has not been properly understood either by the assessee or by the Department. We are justified in commenting so in view of the observations made by the Appellate Assistant Commissioner in para 5 of his order. He has stated :
'It is not the Income-tax Officer's case that in selling the property for Rs. 2,51,101 as against the estimated cost of Rs. 2,47,000 as assessed by the Income-tax Officer, the appellant had received any undisclosed consideration from the vendors, Mr. K. P. Mehta and Mrs. Jyothi Mehta. His only case is that the fair market value on the date of sale is Rs. 3,56,000 and the sale consideration is Rs. 2,51,101 only and, therefore, the provisions of section 52(2) are attracted. It is not the Income-tax Officer's case also on the basis of any material before him that there is any specific understatement of consideration and an attempt to suppress the resultant capital gains.... It is not necessary to show that some extra consideration was actually received or realised.'
9. It must be also stated that apart from the estimates made by the valuers on the fair market value of the property, there is no other evidence on record. The Tribunal, however, relied upon the course of conduct and the human nature of the assessee and reached the conclusion that there was understatement and the assessee must have received something more than the declared consideration.
10. These findings have been recorded obviously without proper understanding of the true scope of section 52(2) of the Income-tax Act. We can understand the difficulty of these authorities. The Tribunal rendered the decision on December 31, 1976. Till then, there was no authoritative pronouncement on the scope of section 52(2) of the Income-tax Act either of this court or of the Supreme Court. The Supreme Court delivered the judgment in K. P. Varghese v. ITO : 131ITR597(SC) on September 4, 1981, and this court in Sanjiv V. Kudva v. CIT : 127ITR354(KAR) , delivered judgment on August 7, 1980.
11. In Varghese's case : 131ITR597(SC) , the Supreme Court has observed (at pp. 614 & 615) :
'If, therefore, the Revenue seeks to bring a case within sub-section (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15% of the value so declared, but also that the consideration has been understated and the assessee has actually received more than what is declared by him. These are two distinct conditions which have to be satisfied before sub-section (2) can be invoked by the Revenue and the burden of showing that these two conditions are satisfied rests on the Revenue. It is for the Revenue to show that each of these two conditions is satisfied and the Revenue cannot claim to have discharged this burden which lies upon it, by merely establishing that the fair market value of the capital asset as on the date of the transfer exceeds by 15% or more the full value of the consideration declared in respect of the transfer and the first condition is, therefore, satisfied. The Revenue must go further and prove that the second condition is also satisfied. Merely by showing that the first condition is satisfied, the Revenue cannot ask the court to presume that the second condition too is fulfilled, because even in a case where the first condition of 15% difference is satisfied, the transaction may be a perfectly honest and bona fide transaction and there may be no understatement of the consideration. The fulfilment of the second condition has, therefore, to be established independently of the first condition and merely because the first condition is satisfied, no inference can necessarily follow that the second condition is also fulfilled.'
12. The court then went on to state (at p. 618) :
'We must, therefore, hold that sub-section (2) of section 52 can be invoked only where the consideration for the transfer has been understated by the assessee or, in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such an understatement or concealment is on the Revenue. This burden may be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is an understatement or concealment of the consideration in respect of the transfer.'
13. Since the Tribunal has not considered the evidence on record in the light of these principles enunciated by the Supreme Court in Varghese's case : 131ITR597(SC) , it is not possible to answer the questions referred to us.
14. Apart from that, there are other infirmities in the order of the Tribunal. It has proceeded on the ground that the departmental valuer has adopted different rates for the construction of the ground floor and the first floor. But, we find from the report that he has applied the same rate as Rs. 45 per sq. ft. The Tribunal has also not considered the objections filed by the assessee against the report of the valuation officer, which objections were based on the rates prescribed by the public works department.
15. For these reasons we decline to answer the questions. The Tribunal may dispose of the matter in the light of the observations made and in accordance with law. No costs.