Ajit K. Sengupta, J.
1. These are two references for the assessment year 1970-71--one under Section 256(1) and the other under Section 256(2) of the Income-tax Act, 1961. Both the references arise out of the same order and the questions are interlinked. For the sake of convenience, both the references are heard together and disposed of by one judgment.
2. The assessee is a private limited company. On Sri Hari Charan and the members of his family are the shareholders of the assessee company. The assessee company sold 1,500 equity shares of Eastern India Cotton Manufacturing Company (P.) Limited to three persons who are the close relatives of the directors and the shareholders of the assessee company. The said shares were sold during the previous year relevant to the assessment year 1970-71 at Rs. 120 per share.
3. The Income-tax Officer was of the view that the fair market value of the said shares was Rs. 167 per share and because the assessee had sold the said shares at a rate much lower than the fair market value, the provisions of Section 52(2) of the Income-tax Act, 1961, were applicable. The Income-tax Officer accordingly determined the fair market value at Rs. 167 per share and thus computed the capital gains on the sale of the said 1,500 shares at Rs. 1,00,500. When the matter came in appeal before the Appellate Assistant Commissioner, he held that the provisions of Section 52(2) were applicable to the instant case. However, relying on the valuation report of an approved valuer filed before him by the assessee, the Appellate Assistant Commissioner held that the fair market value of each share of M/s. East India Cotton Mfg, Co. Private Ltd. should be taken at Rs. 145. On that basis, the Appellate Assistant Commissionercomputed the capital gains on the sale of 1,500 shares at Rs. 67,500. The assessee being aggrieved filed an appeal before the Tribunal. It was urged on behalf of the assessee that the provisions of Section 52(2) were not applicable to the instant case and, in the alternative, it was urged that the fair market value as determined by the Appellate Assistant Commissioner was highly excessive. The Department also had come up in appeal before the Tribunal against the relief allowed by the Appellate Assistant Commissioner. It was urged on behalf of the Department that the provisions of Section 52(2) were rightly invoked by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner. However, according to the Departmental Representative, the relief allowed by the Appellate Assistant Commissioner was not justified. The Tribunal considered the provisions of Section 52, Sub-section (1) and Sub-section (2), in detail. The Tribunal observed that there was no finding given by the Revenue authorities that there was understatement of consideration in the sale of 1,500 shares of East India Cotton Mfg. Co. Private Ltd. and, therefore, the Income-tax Officer was not justified in substituting the fair market value. In the opinion of the Tribunal, the transaction of sale was bona fide and the full value of consideration received by the assessee had been correctly declared. The Tribunal accordingly directed the Income-tax Officer to accept the sale consideration received and shown by the assessee for the sale of the said shares and to compute the capital gains accordingly. Thus, the Departmental appeal was dismissed by the Tribunal, whereas the assessee's appeal was allowed. At the instance of the Commissioner, the following two questions of law were referred by the Tribunal in Income-tax Reference No. 124 of 1977 under Section 256(1) of the Income-tax Act, 19611
'1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 52(2) of the Income-tax Act, 1961, the Tribunal was correct in holding that the provisions of Section 52(2) of the Income-tax Act, 1961, were not applicable to the instant case because the Income-tax Officer had not established that there had been an understatement in the consideration for the sale declared by the assessee in respect of sale of 1,500 equity shares of Messrs. East India Cotton Mfg. Co. Private Ltd. ?'
2. Without prejudice to question No. (1) whether, on the facts and in the circumstances of the case, the Tribunal had any evidence to come to the conclusion that the transaction of sale entered into by the assessee was a bona fide transaction and that the full value of consideration received by it had been correctly declared ?'
4. In Income-tax Reference No. 370 of 1981 the following question has been referred under Section 256(2) of the Act :--
' Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 52(2) of the Income-tax Act, 1961, the Tribunal was correct in holding that even though the other conditions laid down in the said section had been satisfied, the Income-tax Officer had the burden of establishing that there had in fact been an understatement in the consideration for the sale declared by the assessee and the Income-tax Officer had to discharge the same burden for the purpose of applying the provisions of the said section
5. It has been contended by Mr. H.M. Dhar, the learned counsel on behalf of the Revenue, that the fair market value was determined by the Income-tax Officer at Rs. 167 per share on the basis of the break-up value whereas the valuation report dated March 4, 1974, filed after the completion of assessment by the assessee shows that the break-up value of the share was computed by the valuer at Rs. 179.82. The assessee sold the shares at Rs. 120 per share. Thus, on the assessee's own showing, there is substantial difference between the fair market value of the share and the price at which the shares had been sold by the assessee. He, therefore, contends that in this case the provision of Section 52(2) of the Act was rightly invoked by the Income-tax Officer.
6. Mr. Manas Banerjee, the learned counsel appearing for the assessee, has, however, submitted that unless there is a finding that the assessee received more as consideration than what the assessee had shown, Section 52(2) of the Act could not be invoked solely on the basis of the fair market value. He has placed reliance on the judgment of the Supreme Court in the case of K. P. Varghese v. ITO : 131ITR597(SC) . He has also relied on a judgment of this court in the case of Brijmoni Devi v. CIT : 142ITR427(Cal) .
7. Section 52(2) of the Act was inserted by the Finance Act, 1964, with a view to countering evasion of tax on capital gains through the device of an understatement of the full value of the consideration received or receivable on the transfer of capital assets. Section 52(2) is in the following terms :--
'52. (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 AssistantCommissioner, be taken to be its fair market value on the date of its transfer. '
8. The Minister of Finance made the following observation in respect of the provisions of Section 52(2) of the Act during his reply to the debate in the Lok Sabha at the time of clause by clause consideration of the Finance Bill, 1964 :
' Today, practically every transaction of the sale of property is for a much lower figure than what is actually received. The deed of registration mentions a particular amount, the actual money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted.....It does not aim at perfectly bona fide transaction...but essentially related to the day-to-day occurrences that are happening before our eyes in regard to the transfer of property. I think, this is one of the key sections that should help us to defeat the free play of unaccounted money and cheating of the Government.'
9. Thus, it is evident that Section 52(2) was enacted for the purpose of reaching those cases where there was understatement of consideration in respect of transfer. In other words, the object is to bring those transactions within the net of taxation where the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee so that they do not escape the charge of tax on the capital gains by understatement of the consideration.
10. Under Section 52(2), the Income-tax Officer is enabled to compute the amount of capital gains arising on the transfer of a capital asset with reference to its fair market value as on the date of transfer, if, in his opinion, such fair market value exceeds the full value of the consideration for it as declared by the assessee by 15% of the value so declared. The fair market value of the capital asset is to be taken to be the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date and where such price is not ascertainable, such price as may be determined in accordance with the rules made under the Act.
11. There are two requisite conditions of Section 52(2) which must be satisfied by the Revenue, The first condition is that the Revenue must show that the fair market value of the 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. The second condition is that the consideration has been understated and the assessee has actually received more than what is declared by him, The burden of showing that these two conditions are satisfied rests on the Revenue. The burden is not discharged by merely establishing that the first condition of 15% differenceis satisfied. The second condition has to be established independently of the first condition.
12. Even if the condition of 15% difference between the fair market value of a capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied, Section 52(2) would have no application if the transaction is a bona fide transaction where the full value of consideration for the transfer is correctly declared by the assessee and the assessee has not actually received a larger consideration for the transfer than what is declared in the instrument of transfer.
13. Sub-section (2) of Section 52, therefore, can be invoked only when the consideration actually received by the assessee is more than what is declared by him. The burden of proving such an understatement and concealment is on the Revenue. It may be difficult, if not impossible, for the Revenue to discharge such onerous burden but unless the burden is discharged, the provision of Section 52(2) cannot be invoked. It is no doubt true that the object and purpose of Section 52(2) is not to strike at honest and bona fide transactions but to bring within the net of taxation those transactions where the transferors have actually received larger consideration for the transfers than what is declared in the instruments of transfer. But by throwing an almost impossible burden upon the Revenue to establish such understatement, Section 52(2) has failed to achieve its object and purpose. This is, however, a matter for Parliament.
14. In this case, there is no finding by any of the authorities that the assessee had actually received more as consideration than what the assessee had declared. The difference in the fair market value and the price received by the assessee cannot by itself be a ground for invoking the provisions of Section 52(2) unless it can be shown by the Revenue that there are circumstances from which a reasonable inference can be drawn that the assessee had not correctly declared or disclosed the consideration received by him and there is understatement or concealment of the consideration in respect of the transfer. Sub-section (2) of Section 52 has no application in the case of an honest and bona fide transaction. The transaction would be honest and bona fide where the consideration received by the assessee has been correctly declared or disclosed by him and there is no concealment or suppression of the consideration. The Tribunal has found as a fact that the transaction of sale entered into by the assessee was a bona fide transaction and that the full value of consideration received by it has been correctly declared. No case has been made out that the shares were sold by the assessee for a consideration which was more than the sum declared by the assessee. If the Revenue could have established that the assessee has received more than it had declared, thenthe difference between the market value of the capital asset sold and the price received therefor or any portion of such difference might be assessed to tax depending on the facts and circumstances of the case.
15. For the reasons aforesaid, both the questions in the Income-tax Reference No. 124 of 1977 are answered in the affirmative and in favour of the assessee. The only question in the Income-tax Reference No. 370 of 1981 is also answered in the affirmative and in favour of the assessee.
16. There will be no order as to costs.
Dipak Kumar Sen, J.
17. I agree.