1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred at the instance of the CIT, West Bengal-1 :
' Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of Section 52 were not applicable '
2. The material facts relating to these proceedings as found and/or admitted are, inter alia, as follows: Lionel Edwards Ltd., Calcutta, the assessee, sold 2,500 non-cumulative preference shares of Khemka Propertiges P. Ltd. in the assessment year 1962-63 at the rate of Rs. 48.50 per share. The shares were of the face value of Rs. 100 each. The ITO held that the shares had been sold at a value less than the value which would have obtained in a normal transaction and, therefore, concluded that Section 52(2) of the I.T. Act, 1961, applied to the facts. With the approval of the IAC he held that the face value of the shares was their market value and accordingly he disallowed the loss claimed by the assessee,
3. Being aggrieved, the assessee preferred an appeal. The AAC on the basis of the W.T. (Amend.) Rules, 1967, computed the value of the said shares to be Rs. 81'51 each. He further found that there was a direct connection between the assessee and the purchaser of the shares. This according to him established that the obvious intention of the assessee was to avoid liability under Section 45, because had the sale been made at market value, there would have been either no or a less capital loss than that declared and the assessee would have been entitled to carry forward a lesser amount as loss. The liability to pay capital gains was reduced either in the year in question or in a subsequent year by the assessee's action. He, however, proceeded on the basis that Section 52(1) of the Act had been invoked and applied by the ITO.
4. Being aggrieved, a further appeal was preferred by the assessee before the Income-tax Appellate Tribunal. It was contended before the Tribunal that neither Section 52(2) nor Section 52(1) of the I.T. Act, 1961, were in existence at the material time, the same having been incorporated by the Finance Act, 1964, with effect from the 1st April, 1964. Section 52, prior to the amendment, read as follows :
' 52. Consideration for transfer in cases of understatement.--(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.'
5. The Tribunal found that the language of the original Section 52 was similar to the amended Section 52(1) and held that the finding of the AAC that by the impugned transaction the assessee has sought to avoid or reduce future capital gains that may become chargeable in subsequent years by claiming a carry forward and the set-off of the capital loss was neither sound nor correct. The Tribunal held that the liability contemplated by Section 45 was a present and existing liability to be charged to capital gains and was not a potential or prospective liability that might arise in future. The Tribunal concluded that, in the facts, Section 52 of the I.T. Act, 1961, had no application. The appeal of the assessee was allowed.
6. Mr. B. K. Bagchi, learned counsel for the revenue, contended at the hearing that the liability of the assessee under Section 45 meant chargeability to tax on capital gains under Section 45 whether the figure was positive or negative. Mr. Bagchi cited CIT v. Harprasad & Co. P. Ltd. : 99ITR118(SC) for the following observations of the Supreme Court (p. 124) :
' From the charging provisions of the Act, it is discernible that the words ' income ' or ' profits and gains ' should be understood as includinglosses also, so that, in one sense, profits and gains' represent ' plus income ' whereas losses represent ' minus income '. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee.'
7. Mr. Bagchi contended that in the instant case, the AAC has found that the object was to carry forward a loss so that liability to capital gains would be reduced in future and therefore the conclusion of the Tribunal that Section 52 of the Act did not apply in the facts of this case was patently erroneous.
8. In the facts and circumstances as found it cannot be said that Section 52 was applicable even if we accept the contentions of the revenue. It is a matter of record that the ITO proceeded on the basis of a non-existent section, i.e., Section 52(2) of the I.T. Act, 1961, which was not there in the statute at the time he made the assessment. It also appears that the IAC gave sanction to the proposed action by the ITO on the basis of this non-existent section. To make matters worse, in appeal, the AAC applied another nonexistent Section 52(1). The AAC arrogated to himself the jurisdiction of the ITO and recorded his own reasons purporting to discover for the first time that it was the intention of the assessee to avoid liability under Section 45. The IAC did riot come into the picture at all.
9. The purported reasons of the AAC on which he formed his belief as to the intention of the assessee is equally unsound. He assumed that the assessee's capital loss would be carried forward. He did not consider whether the capital assets were short-term capital assets or not or whether the loss could be set off in the relevant year itself under Section 71 of the Act.
10. The Tribunal while noting that neither Section 52(1) nor Section 52(2) were in existence at the material time proceeded on the basis as if the unamended Section 52 was in the contemplation of the authorities below and that they did apply the same.
11. In the earlier proceedings neither the ITO nor the AAC considered or applied Section 52. In that view of the matter the question as referred can be answered only in one way, that is, in favour of the assessee on the ground that the ITO did neither obtain the approval of the IAC for his proposed action under Section 52, nor did he have any reason to believe that the transfer was effected with the object of avoiding or reducing any liability under Section 45 of the Act. In any event, no such reasons were recorded. We dispose of this reference on this limited ground. We make it clear that we are expressing no opinion on the points canvassed by Mr. Bagchi. The question is answered in the affirmative. There will be no order as to costs.
C.K. Banerji, J.
12. I agree.