1. This court is called upon to express an opinion on two questions which are referred to us by the Income-tax Appellate Tribunal and they are as under :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Sushiladevi, wife of Natwerlal Kabra, first cousin of partner Govinddas, was directly or indirectly connected with the assessee-firm and, therefore, the transactions with her would come within the purview of section 52(1) of the Act
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transactions with Gayatridevi, Keshardevi, Sushiladevi and Govindlal were made with the object of avoiding or reducing the liability of the assessee-firm under section 45 of the Act and that they were hit by section 52(1) of the Act ?'
2. It is required to be stated that the assessment year is 1965-66 and the assessee is a partnership firm consisting of five partners, viz., Goverdhandas, Ghanshyamdas, Damodardas, Brijbhushandas and Satyanarayandas. The partnership firm had purchased land bearing survey Nos. 11 and 15 admeasuring about 27,000 square yards situated at Pahadi, near Goregaon in Greater Bombay, for a sum of Rs. 1,21,000 somewhere in the middle of 1953. Thereafter, it appears that the land was plotted out and there were sales in favour of two societies and also in favour of Gayatridevi, Govindlal, Keshardevi, Ghanshyamdas, Sushiladevi Natwerlal and Govindlal Hemantkumar. It appears that these individuals were in one way or the other related or connected with one or the other of the partners of the firm. It was also on record that so far as the plots ultimately sold to the co-operative societies were concerned, they were sold at a price of Rs. 20 per square yard, while to these relatives or connected persons, the plots were sold at the rate of Rs. 7 per square yard. It may be stated here that in the year 1962, there were some agreements of sales with which we are not concerned at present, because the transactions were not in the relevant assessment year. The ITO thought that because the market rate of the land in question at the relevant time was Rs. 20 per square yard, sales to the above persons was with the object of avoidance or reduction of the liability of the assessee. Under these circumstances, the ITO came to the conclusion that s. 52(1) of the I.T. Act, 1961, would be attracted and the assessee was required to be assessed accordingly for the purpose of capital gains. That led to the filing of an appeal which was heard by the AAC who confirmed the view taken by the ITO. The same view was confirmed by the Tribunal also. Therefore, on an application, two questions came to be referred to this court by the Income-tax Appellate Tribunal. To answer question No. 2, one has only to look at s. 52(1) of the I.T. Act, which reads as under :
'(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.'
3. Therefore, the real question which is required to be answered is whether the 'transfer', meaning thereby the completed sales as required by s. 54 of the Transfer of Property Act, which took place during the relevant assessment year in favour of Gayatridevi, Keshardevi, Sushiladevi and Govindlal were made with the object of avoiding or reducing the liability of the assessee-firm. Now, this object could only be achieved if the assessee in fact receives a larger amount than what is stated in the document, meaning thereby that in the document a correct statement in regard to the consideration is not made and the statement which is made is an understatement and the assessee receives some more amount. Then only the question arises as to what would be the fair market value of the capital asset. Now, in this particular case, it is not the case of the Revenue that the consideration mentioned in the document is less than that actually received. In fact, what has been done is that transfer entries are made at the rate of Rs. 7 per square yard. It is not the case of the Revenue that the assessee could either achieve the object of avoiding or reducing the liability so far as he is concerned.
4. The learned counsel for the Revenue, Mr. B. R. Shah, tried to mix up the transaction with the co-operative societies and suggested that because the fair market value in sales to them was Rs. 20 per square yard, it was required to be assumed here also and an inference is required to be drawn. This cannot be done without facts on record. The Supreme Court in the case of Varghese v. ITO : 131ITR597(SC) decided that on such facts s. 52 of the I.T. Act, 1961, shall not be attracted. The facts in that case were that the assessee had purchased in 1958 a house for Rs. 16,500 and on December 25, 1965, he sold the house for the same price to his daughter-in-law and five of this children. The ITO by action taken under s. 148 of the I.T. Act estimated the fair market value of the house sold by the assessee at Rs. 65,000 and proceeded to assessee the difference of Rs. 48,500 as capital gains in the hands of the assessee by invoking sub-s. (2) of s. 52. The assessee filed a writ petition challenging the validity of the order of reassessment in so far as it brought the sum of Rs. 48,500 to tax relying on sub-s. (2) of s. 52 of the I.T. Act, 1961. The petition was allowed, the learned judge holding that there was no allegation of understatement of consideration and the transaction was a clear one. Section 52(2) had no application. There was an appeal by the Department. The Full Bench of the Kerala High Court construed the sub-section literally. The Supreme Court restored the decision of the single judge and the court laid down the propositions by which not only s. 52(2) but the whole scheme of that section was considered and s. 52(1) was also considered and the view expressed was that the second condition obviously involved an understatement of the consideration in respect of the transfer and this is also indicated by the marginal note to s. 52. It was observed (p. 606) :
'..... when capital gains are computed by invoking sub-s. (1), it is not any fictional accrual or receipt of income which is brought to tax. Sub-section (1) does not deem income to accrue or to be received which in fact never accrued or was never received. It seeks to bring within the net of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the capital asset.'
5. But, since the actual consideration received by the assessee is not 'declared' or disclosed, in most of the cases, if not all, it would not be possible for the ITO to precisely determine what is the actual consideration received by the assessee. The Supreme Court further observed (p. 607) :
'The net effect of this provision is as if a statutory best judgment assessment of the actual consideration received by the assessee is made, in the absence of reliable materials.'
6. The scope of sub-s. (1) was, however, restricted and sub-s. (2) was enacted with a view to extending its coverage to sub-s. (1) and to other cases of understatement of consideration. Sub-s. (2) is also a provision for computation of gain and not a charging provision seeking to tax what never accrued or was received. The Supreme Court also considered the two circulars issued by the Central Board of Direct Taxes : one of July 7, 1964, and another on January 14, 1974, and, thereafter, having considered everything which was possible, the Supreme Court came to the conclusion that unless an understatement in regard to the consideration is made in the document, resort cannot be had to s. 52 of the I.T. Act and that conclusion was reached after not only reading the section, not only reading the two circulars, not only reading the marginal note but also referring to the speech made by the Finance Minister in Parliament at the relevant time. We cannot take a different view and, therefore, the answer to question No. 2 must be in the negative. We must say that the provisions of s. 52(1) cannot be applied to the transactions with Gayatridevi, Keshardevi, Sushiladevi and Govindlal.
7. So far as question No. 1 is concerned, the learned counsel on both sides agree that as soon as question No. 2 is answered, the answer to question No. 1 would be an academic exercise which need not be done. Under these circumstances, question No. 1 is not answered.
8. We answer question No. 2 referred to us in favour of the assessee and against the Revenue and the answer to question No. 1 would be an academic exercise in view of the answer to question No. 2. Under the circumstances, question No. 1 is not answered. These will be no order as to costs.
9. A copy of this judgment shall be sent under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Ahmedabad Bench 'A'.