1. The substantial question relates to the application of the first proviso to Section 12B(2) of the Income-tax Act, 1922, to the facts and we are of the view that the Tribunal was right in holding that the proviso has no application. The assessee is a private limited company with its head office at Pudukottai and a branch at Madras. The reference is concerned with the assessment year 1959-60. Out of a total income of Rs. 8,97,976 returned, Rs. 8,06,916 related to the business income. On August 19, 1954, the assessee had purchased 669 shares of the Southern Roadways Private Limited for a sum of Rs. 93,660. On December 19, 1958, the assessee sold them for a total consideration of Rs. 66,900 to three ladies. On that transaction there was a loss of Rs. 26,760. On November 11, 1959, the directors of the assessee resolved that the difference between the cost and sale prices of the shares might be treated as a gift to the purchasers. What the purpose of this resolution was is not obvious. The market value of the stock as on March 31, 1958, was determined by theIncome-tax Officer to be Rs. 1,56,064. He treated the difference between the cost and the market prices, viz., Rs. 62,404, as a capital gain on the sale of the shares made during the year of account. He also made another addition of Rs. 4,497, being the wealth-tax which had been paid by the assessee. These two matters have given rise to the two references relating to the same year, the questions being (1) whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in disallowing the claim for deduction of wealth-tax payable by the assessee for the assessment year 1959-60 as ah admissible, business expenditure, and (2) whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the first proviso to Section 12B(2) of the Income-tax Act, 1962, cannot be invoked by the department for the purpose of assessment to capital gains of the sum of Rs. 62,404.
2. As to the first question, it is not in controversy that it is covered by Travancore Titanium Products Ltd. v. Commissioner of Income-tax, : 60ITR277(SC) which is against the assessee. No further consideration of this question is therefore necessary.
3. On the second question, it has been found both by the revenue and the Tribunal that the three ladies who purchased the shares were closely related to the directors of the assessee and were thus directly connected to them by the relationship. That is one of the requisites for the application of the proviso to Section 12B(2) and that is therefore satisfied. The revenue at all stages declined to accept the assessee's contention that the object of the sale of the shares to the three ladies was to benefit them and it was not made with the object of avoidance or reduction of the assessee's tax liability to capital gains. The Tribunal differing from that view has found as a fact that the sale was a real transaction which was given effect to and acted upon by the parties thereto and that further it was not made with the object of avoidance or redaction of tax liability but made for the purpose of benefiting the ladies. As a matter of fact, even the Appellate Assistant Commissioner mentioned that the motive for the sale might have been the natural love and affection for and desire to provide the ladies. The Tribunal, therefore, held that the second condition for application of the proviso to Section 12B(2) has not been satisfied and that, therefore, the proviso could not be invoked.
4. As we observed at the outset, we accept that view of the Tribunal as correct. Section 12B which was introduced in 1947 and substituted with effect from April 1, 1957, brings to charge certain species of income, so it is deemed to be, in the form of capital gains, that is to say, gains made from sale, exchange, relinquishment or transfer of a capital asset effected in any accounting year after March 31, 1956. While Sub-section (1) of the sectioncharges such gain:--and we are not concerned with its two provisos for our present purpose--sub-section (2) prescribes the procedure for computation of a capital gain. It permits its computation after making deductions under two heads, (1) expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer and (2) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations. Then comes the proviso which reads :
' Provided that where a person who acquires a capital asset from the assessee, whether by sale, exchange, relinquishment or transfer, is a person with whom the assessee is directly or indirectly connected, and the Income-tax Officer has reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange, relinquishment or transfer took place.'
5. It is rather curious that this proviso is made part of the procedural part of the section which deals with computation and deductions. The proviso really has the effect of an addition subject to what may follow in this judgment. The main requisites for application of the proviso are : (1) acquisition by a person from the assessee of a capital asset by one of the modes mentioned in Section 12B(1); (2) connection directly or indirectly of the purchaser with the assessee who is the vendor ; (3) consideration for such a transaction as expressed or found being less than the fair market value; and (4) the motive for the transaction, namely, avoidance or reduction of liability to tax, impliedly with reference to the difference in price not reflected in the transaction. The language employed by the proviso in order to express the difference in price in relation to the market value has not been happily worded. In fact, if literal effect is given to the words actually used, it must be said that the purpose of the proviso will be otiose. The proviso refers to ' the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall............ betaken to be the fair market value ' and that would mean that the value mentioned in the particular transaction as the consideration shall be taken to be the fair market value. If we give effect to these words, as we should, nothing more need be said against the revenue in this case. But we shall proceed on the basis that roughly the intention has been brought out notwithstanding the clumsy phraseology that where there is a difference between the consideration for the transaction and the fair market value, the consideration for the transaction shall be taken to be the fairmarket value. When can this assumption be made It is obvious that the transaction should be a real one and has been acted upon. But the connection directly or indirectly between the vendor and purchaser may serve as the starting point for a probe as to the motive for the transaction. If in the search for the motive in the light of tangible material the Income-tax Officer is of opinion that the consideration recited for the transaction, which is lower than the fair market value, was a means to avoid or reduce the tax liability, all the requisites required for invoking and applying the proviso would have been satisfied. But where it is found or there is nothing to show that the consideration for the transaction, though lower than the fair market value is not a means or device or a cloak to avoid or reduce the tax liability, the proviso will have no application. It reduces itself to this that, if the consideration for the transaction has been honestly agreed upon, with a view to benefit the purchaser and out of love and affection on account of the relationship, or with reference to particular circumstances, there will then be little room and there will, in our view, be no justification for imputing a motive to the vendor to avoid or reduce the tax liability. The consideration cannot be said to be the result of an honest dealing and at the same time it'be dubbed as a device for avoidance or reduction of tax liability. What the proviso gets at for charge is the actual capital gain which the vendor should, in the circumstances, have made but is made to appear that the gain as shown by the consideration for the transaction to be much less or nil. We are not persuaded to think that the proviso discourages or avoids honest transactions made out of love and affection or for other conceivable reasons on pain of being on an assumption, hauled up, if we may use the expression, for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value. That simply, as we read the proviso, is not its purpose. It does not treat what is not an actual capital gain as a deemed capital gain. In fact, occurring as it does as the first proviso to Sub-section (2) dealing with the procedural aspect, of computation, it should, we think, be interpreted as limited to escaped capital gain, which is so in truth and in fact, and not intended to bring about fictional gain on an assumption and charge the same.
6. Mr. Balasubrahmanyan strenuously urged before us that even if the consideration for the transaction mentioned is not fraudulent but an honest one representing the truth, if the consideration lower than the fair market value has the effect of avoiding or reducing the tax liability, that in itself would be sufficient for invoking the proviso. On the view of the scope and effect of the proviso we have just now mentioned, we cannot accept this point of view of the revenue. Neither the language of the proviso nor its context nor the structure of Section 12B as a whole enables us to come tosuch a conclusion. We are wholly unable to read the proviso in the sense in which Mr. Balasubrahmanyan would desire us to do.
7. Our attention was drawn to Section 10A of the Excess Profits Tax Act, 1940 as well as to Karumuthu Thiagaraja Chetty and Co. v. Commissioner of Excess Profits Tax, : 42ITR788(Mad) .but we find no assistance from them in construing the scope and effect of the proviso to Section 12B(2) except that Section 10A of the Excess Profits Tax Act has a resemblance in language to the proviso to Section 12B(2). But beyond that the analogy should not, in our opinion, be carried further, as the circumstances and the ambit in which the Excess Profits Tax Act revolve are different from those attending Section 12B. Apart from that we do not think that Karumuthu Thiagaraja Chetty and Co. v. Commissioner of Excess Profits Tax. meant to lay down that Section 10A of the Excess Profits Tax Act would hit even an honest transaction actually involving no gain, though it happens to be for a consideration lower than the fair market value.
8. The first question in T. C. No. 106 of 1965 is answered against the assessee and the question in T. C. No. 107 of 1965 against the revenue with costs in each and counsel's fee of Rs. 250 also in each.