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Commissioner of Income-tax Vs. Smt. Sethani Godwaribai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 555 of 1974
Judge
Reported in(1980)16CTR(MP)388; [1981]127ITR349(MP)
ActsIncome Tax Act, 1961 - Sections 45, 52(1) and 52(2)
AppellantCommissioner of Income-tax
RespondentSmt. Sethani Godwaribai
Appellant AdvocateP.S. Khirwadkar, Adv.
Respondent AdvocateD.C. Bhamore and ;O.P. Namdeo, Advs.
Excerpt:
.....his innocence. conviction of appellant is liable to be set aside. - (1) the person acquiring the capital asset from the assessee should be directly or indirectly connected with the assessee ;and (2) there should be reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45. if these two conditions are satisfied, the full value of the consideration for the transfer is taken to be the fair market value of the asset on the date of the transfer. the heading of section 52 'consideration for transfer in cases of under-statement 'is applicable to both section 52(1) and section 52(2). this heading clearly indicates that section 52(2) like section 52(1) is not aimed at honest and genuine transactions where the..........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 per cent. 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 on the date of its transfer.' 4. for the applicability of section 52(1) two things are necessary; (1) the person acquiring the capital asset from the assessee should be directly or indirectly connected with the assessee ; and (2) there should be reason to believe that.....
Judgment:

G.P. Singh, C.J.

1. This is a reference under Section 256(1) of the I.T. Act, 1961, referring for our answer the following questions of law :

' 1. Whether, on the facts and under the circumstances of the case, the Appellate Tribunal is right in law in its conclusion that the provisions of Section 52(2) of the Income-tax Act, 1961, would not apply to a case where the special provisions of Section 52(1) would be applicable?

2. If the answer to the first question is in the negative and in favour of the revenue, whether the Appellate Tribunal is right in its conclusion that the assessee is not liable to tax on capital gains amounting to Rs. 56,462 under Section 45 read with Section 52(2) of the Income-tax Act, 1961 '

2. The relevant assessment year is 1968-69 for which the accounting year ended on 31st March, 1968. The facts briefly stated are that on 1st September, 1967, the assessee sold one of her properties known as' Subhash Talkies ' together with furniture and fittings to a partnership firm bearing the name ' M/s. Subhash Theatres ' for a consideration of Rs. 2,50,000. The partners of the partnership firm are near relations of the assessee. The ITO estimated the fair market value of the property on 1st January, 1954, at Rs. 2,43,538 and on the date of sale by the assessee at Rs. 3,50,000. The ITO determined the capital gains chargeable to tax under Section 45 at Rs. 1,06,462. In doing so, the ITO was of opinion that the provisions of Section 52(1) and Section 52(2) were both applicable. The AAC dismissed the appeal of the assessee. The Tribunal, in second appeal, came to the conclusion that the fair market value of the property on the date of sale was Rs. 3,00,000. The Tribunal accepted the fair market value of the property on 1st January, 1954, at Rs. 2,43,538 as determined by the ITO. The Tribunal, however, held that there was no evidence or material to establish that there was any under-statement of consideration by the assessee, or that the assessee received higher offers for purchase but did not accept them, or that the transfer in question was effected with the object of avoidance or reduction of liability to tax on capital gains. The Tribunal held that neither Section 52(1) nor Section 52(2) was applicable. In this view of the matter, the Tribunal deleted the amount of the capital gains of Rs. 1,06,462 from the assessment and allowed the assessee's appeal.

3. Section 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head ' Capital gains ' and shall be deemed to be the income of the previous year in which the transfer took place. The mode of computation of income chargeable under the head 'Capital gains ' is given in Section 48. The income under this head, according to this section, is computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely ; (i) expenditure incurred wholly and exclusively in connection with such transfer ; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. Section 52(2) defines the cost of acquisition. This expression means the cost of acquisition of the asset to the assessee on 1st January, 1954, or the fair market value of the asset on that date at the option of the assessee. Section 52, the interpretation of which is involved in this case, reads as follows :

'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 to be 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 per cent. 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 on the date of its transfer.'

4. For the applicability of Section 52(1) two things are necessary; (1) the person acquiring the capital asset from the assessee should be directly or indirectly connected with the assessee ; and (2) there should be reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45. If these two conditions are satisfied, the full value of the consideration for the transfer is taken to be the fair market value of the asset on the date of the transfer. The object behind Section 52(1) is evidenced by the heading of the section which is ' Consideration for transfer in cases of under-statement '. When the transfer is effected with the object of avoiding or reducing tax under the head 'Capital gains ', there would naturally be concealment or understatement of the consideration for transfer. In such cases, when the transfer is in favour of a person connected with the assessee, the full value of the consideration is deemed to be the fair market value for purposes of computation of capital gains under Section 45. Section 52(1) left a loophole in cases where the transferee was not a person connected with the assessee. To block this loophole Section 52(2) was added by Act No. 5 of 1964. Section 52(2) keeps intact the provisions of Section 52(1) which is clear from the opening words of Section 52(2), which are ' without prejudice to the provisions of Sub-section (1) '. Section 52(2) applies when 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 the capital asset by an amount of not less than fifteen per cent. of the value so declared. The full value of the consideration for such capital asset is then taken to be its fair market value for computation of capital gains. Reading Section 52(2) literally, the only condition which is necessary for its application is that the fair market value of the capital asset should exceed the full value of -the consideration disclosed in respect of the transfer by fifteen per cent. or more. This section does not in terms provide that the object of the transfer should be avoidance or reduction of the liability for payment of the tax under the head ' Capital gains '. In our opinion, however, such a condition should be necessarily implied in thecontext in which Section 52(2) occurs. The heading of Section 52 ' Consideration for transfer in cases of under-statement ' is applicable to both Section 52(1) and Section 52(2). This heading clearly indicates that Section 52(2) like Section 52(1) is not aimed at honest and genuine transactions where the assessee has not received any extra amount over and above what is shown in the transaction between the parties. There should be an element of avoidance of tax under the head ' Capital gains ' before either of the provisions can be pressed in aid by the revenue. If the sale deed correctly shows the consideration received by the assessee, it is not possible to apply any of the sub-sections of Section 52, for, in such a case, there cannot be any intention to avoid the tax by understating the consideration. If a bona fide transfer is made for inadequate consideration, the transaction may be regarded as a gift to the extent of the shortfall in consideration for purposes of liability to pay gift-tax. But this shortfall in consideration, when the transaction is genuine and when the assessee does not receive more than what is stated in the deed of transfer, cannot be deemed to be capital gains by invoking Section 52(2). The view taken by us is shared by the Madras, Karnataka and Andhra Pradesh High Courts. [See Addl. CIT v. Kuppuswamy : [1978]112ITR1012(Mad) , Addl. CIT v. M. Ranga Pai : [1975]100ITR413(KAR) and Addl. CIT v. S. R. Y. Ankineedu Prasad : [1978]115ITR78(AP) . We are aware that a contrary view has been taken by the Kerala High Court in ITO v. K. P. Varghese : [1973]91ITR49(Ker) . But with great respect we are unable to accept the view taken by the majority judgment in the Kerala case. We may point out that the Direct Tax Laws Committee has made recommendations which are in line with our view [See Sundaram's Law of Income Tax in India, 11th Edn., Vol. 2, pp. 1640, 1641].

5. For the reasons given above, we answer the questions referred as follows :

(1) The Tribunal was right in holding that neither Section 52(1) nor Section 52(2) was applicable.

(2) The Tribunal was right in its conclusion that the assessee was not liable to pay tax on the capital gains amounting to Rs. 56,462.

6. There will be no order as to costs of this reference.


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