Dipak Kumar Sen, J.
1. The facts found and/or admitted in these proceedings are, inter alia, as follows : Mrs. Leela Nath, the assessee, sold 1,100 fully paid-up shares and 294 partly paid-up shares of E. M. C. Ltd. on the 25th July, 1962, at their face value in the assessment year 1963-64, the previous accounting year ending on the 31st March, 1963, to another company named Electrical Machines Corporation (P.) Ltd. During the assessment, the ITO found that the purchaser-company was connected with the assessee. The majority of the shares in the purchaser-company were owned by the assessee, her husband, her children or other close relatives, the said company being thus controlled by the assessee and her family. The ITO further found that the market value of the shares sold was more than their face value on the basis of their break-up value as also on the basis of their yield or return inasmuch as there were huge accumulations of reserves and that dividend had been declared at the rate of 30% during the accounting year. Accordingly, the ITO had reasons to believe that the transfer was effected at a low price with the object of avoidance or reduction of the liability of the assessee under Section 45 of the I.T. Act, 1961, and, under the provisions of Section 52(1) of the Act of 1961, he determined the full value of consideration of the transfer of the said shares at Rs. 466'50 for each fully paid-up share and Rs. 186.60 for each of the partly paid-up share with the previous approval of the IAC.
2. Being aggrieved, the assessee preferred an appeal. The AAC found that it was reasonable to hold that the purchaser-company was directly or indirectly connected with the assessee and that the first condition of Section 52(1) was satisfied. He found further that the net effect of the sale of the shares was that the assessee was transferring the benefit of the enhanced value of the shares to her husband and children through the shareholdings of the purchaser-company. But taking into account the fact of the issue of bonus shares by the E.M.C. Ltd. at the material time, the declaration of dividend by the said company, the break-up value of the shares and several advertisements publishing the financial position of the company offering its shares to the public, the AAC came to the conclusion that the primary motive for selling the said shares at their face value which was much less than the fair market value was prima facie the avoidance or reduction in liability to capital gains tax. It was for the assessee to prove otherwise that the sale was effected for other reasons. The AAC did not accept the explanation of the assessee that she was constructing a house at Dehra Dun and that she sold the said shares to meet the cost of such construction. The AAC, however, recomputed the fair market value of the shares and held that such value for each fully paid-up share would be Rs. 375 per share.
3. Both the assessee and the revenue preferred appeals from the order of the AAC to the Income-tax Appellate Tribunal. It was contended on behalf of the assessee in her appeal that there was no material on record to show that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45 of the I.T. Act, 1961. The Tribunal held that the explanation given by the assessee for the said transfer was not the real reason for the transaction. The finding of the AAC that the object of the transfer was to pass the benefit of the enhanced value of the said shares to the family members of the assessee was mooted and the Tribunal concluded as follows :
' We do not agree with the Appellate Assistant Commissioner that unless the assessee proves by substantial evidence that the sale was effected for other motives, the only conclusion to be arrived at from the facts would be that the object of the transfer was to avoid of reduce the tax liability. From the facts proved, two conclusions are possible, viz., that the object was to avoid or reduce the tax liability and the contrary, viz., she transferred the shares for benefiting her family members or for some other conceivable reasons which have not been disclosed. That being the position, the conclusion favourable to the assessee has to be arrived at. We are, therefore, of the opinion that it has not been proved that the object of the assessee in transferring the shares of E.M.C. Ltd. was to avoid or reduce her tax liability under Section 45 of the I.T. Act. That being the position, Section 52 was not attracted.'
4. On an application of the CIT (Central), Calcutta, under Section 256(1) of the I.T. Act, 1961, the Tribunal had drawn; up a statement of case and has referred the following question of law for the opinion of this court :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale of shares of E.M.C. Ltd. to M/s. Electrical Machines Corporation Pvt. Ltd. does not come within the purview of Section 52 of the I.T. Act, 1961, and as such the assessee was not liable to pay any tax under Section 45 of the Income-tax Act, 1961 '
5. Mr. Suhas Sen, learned counsel for the revenue, has contended before us that the Tribunal had erred in holding that Section 52 of the Act was not attracted in the facts of this case. Having accepted that from the facts found it was possible to come to a conclusion that the object of the said transfer was to avoid or reduce the tax liability as was done by the ITO and the AAC, the Tribunal should not have substituted its own conclusion as an alternative. The Tribunal, he urged, erred further in holding that for the application of Section 52 the object of the assessee had to be proved. All that the section required was that the ITO should have reason to believe that the object of the assessee was to avoid or reduce the liability under Section 45.
6. Dr. Debi Pal, learned counsel for the assessee, has urged various contentions in support of the order of the Tribunal. He submitted that the scheme for taxing . capital gains was that the actual gains and not any notional or deemed gains should be taxed and before any particular amount could be taxed as capital gains it had to be established that such gain in fact had accrued to the assessee. He contended that Section 52 provided nothing more than a method of computation and it would only apply read with Section 45, which was the charging section. Dr. Pal next contended that the Tribunal had found as a fact that it had not been proved that the object of the assessee in transferring the said shares was to avoid or reduce her tax liability. This finding, not having been challenged, the matter stood concluded.
7. In support of the respective contentions a large number of decisions have been cited at the Bar but for the purposes of the case only the following need be considered inasmuch as the more fundamental arguments advanced before us not having been canvassed before the Tribunal we do not propose to go into the same.
(a) Sundaram Industries P. Ltd. v. CIT : 74ITR243(Mad) . The facts in this case were that the assessee, a private limited company, sold at the material time a number of shares in another company at a loss. Subsequently, the directors of the assessee passed a resolution that the difference between the cost and the sale price of the shares should be treated as a gift to the purchasers. The ITO found that the market value of the said shares on the date of the transfer exceeded both the acquisition price in the hands of the assessee as also the sale price. He treated the difference between the cost and the market price as capital gains in the hands of the assessee. The Tribunal held that the sale was a real transaction and had been effected not with the object of avoidance or reduction of tax liability but for the purpose of benefiting the purchasers and, therefore, the condition for application of Section 12B(2) of the Indian I.T. Act, 1922 (corresponding to Section 52 of the Act of 1961), was not attracted. On a reference, the Madras High Court upheld the decision of the Tribunal and observed, inter alia, as follows (p. 247) :
' ......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.' (b) Sivakami Company P. Ltd, v. CIT : 88ITR311(Mad) . The facts in this case were that the assessee, a private limited company, sold certain unquoted shares in other companies to persons directly or indirectly connected with the assessee at prices less than their break-up value. The Tribunal found that the sales were genuine and that there was no understatement of the consideration received, but the Tribunal did not accept the explanation furnished by the assessee that the object of the transfer was to safeguard the assets from being proceeded against by the Government in respect of the tax dues of the assessee. Accordingly, it was held that the proviso to Section 12B(2) of the Indian I.T. Act, 1922 (corresponding to Section 52(1) of the I.T. Act, 1961), was attracted. On these facts the Madras High Court held that avoidance or reduction of liability referred to in the proviso to the section was the avoidance of tax on the gain actually received. The High Court further held that under the said section it was intended to be taxed. The High Court held further that the burden of proving that a sale was effected with the object of avoidance or reduction of liability for capital gain was on the revenue. Apart from the explanation offered by the assessee which was not acceptable to the Tribunal, there was nothing positive to suggest that the sales were effected with the object of avoidance or reduction of liability.
(c) Shiv Sankar Lal v. CIT : 94ITR433(Delhi) . The facts in this case were that the assessee sold some land to a private limited company, in which the assessee and his family were substantially interested, at a loss. The ITO estimated the market value of the property, found the same to be much higher than both the cost and the transfer price thereof and held that the assessee had made capital gains.
One of the questions referred to the Delhi High Court at the instance of the assessee was whether, in the facts and in the circumstances, the Tribunal was justified in holding that the provisions contained in Section 52 of the I.T. Act, 1961, were not applicable to the facts of the case. The High Court found that the only circumstance relied upon by the revenue for drawing an inference that the object of the assessee was to avoid liability under Section 45 of the Act was the low price for which the property in question had been sold, that the sale in question was made in favour of a company in which the assessee and his family were interested and that the object of such a transfer was not to make profit for the transferor. It was held that on the material placed before the Tribunal it was justified in coming to the conclusion that the transfer was not made with the object of avoiding the assessee's liability under Section 45 of the Act.
(d) Babubhai M. Sanghvi v. CIT : 97ITR213(Bom) . This decision was cited for the following observations of the Bombay High Court in construing Section 12B of the Indian I.T. Act, 1922 (p. 224) :
' Before the proviso could be invoked by the Income-tax Officer the second condition that he is required to be satisfied about is that he must have reason to believe that the sale or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section : in other words, the sale must have been effected with the object of avoiding the liability to pay tax on the capital gains. It is quite possible that though the fair market value of a particular capital asset may be high, the transferor may transfer the capital asset to the transferee who is related directly or indirectly to him for more than one reason and such reasons cannot partake of the object mentioned in the second condition. If the transferee happens to be a close relative of the transferor, the transferor may take a nominal value of the capital asset from the transferee which would normally be very much less than the fair market value, in which event normally an inference could be drawn that he wanted to make a gift of that asset to the transferee. It is also conceivable that the transferor may, with a view to avoid the liability arising under Section 16(3) of the Act, effect such transfer at such rate which would be less than the fair market value of the particular asset. In order that the transfer must be with the object of avoiding or reducing the liability of the assessee under Section 12B, it must be a case where the consideration mentioned in the deed has been understated and actually the transferor has received much more than what is stated in the document. It is only then that the second condition mentioned in the proviso could be said to have been satisfied.' (e) CIT v. N. S. and North Malabar Public Conveyance (P.) Ltd. : 102ITR36(Ker) . The facts of this case were that the assessee, a private limited company, sold two buildings to one of its shareholders. In the assessment of the assessee for the relevant year, the ITO found that the market value of the buildings was more than the consideration received by the assessee. He also found that the value of the said buildings in the sale deed had been understated with the object of reduction of the liability of the assessee for income-tax under Section 45 of the I.T. Act, 1961. Accordingly, the difference between the market price and the sale price was included in the assessee's income. The-AAC allowed the assessee's appeal on the ground that Section 52 of the I.T. Act, 1961, did not apply as it had not been established that the assessee received anything more than what had been stated in the sale deed. This decision was confirmed by the Tribunal. On a reference, the Kerala High Court, inter alia, noted the difference between Sub-sections (1) and (2) of Section 52 and, in the context of Section 52(1), observed as follows (p. 39) :
' In what circumstances it will be possible for the Income-tax Officer to state justifiably that he had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45 it may be difficult to define for all types of cases, as the conclusion must vary depending on the facts and circumstances of each case.' The High Court expressed no final opinion on the point.
(f) ITO v. Buragadda Satyanarayana : 106ITR333(AP) . Here the assessee sold certain buildings to his son at a price higher than the cost price and disclosed an amount of capital gain. The ITO applied Section 52 of the I.T. Act, 1961, and on the basis of the estimated market value determined the capital gains at a higher figure. The petitioner challenged this order of the ITO in an application under Article 226 of the Constitution on the ground that, as he had been assessed to gift-tax on the difference between the market value and the actual sale consideration, it was not permissible to levy tax on capital gains in respect of the same transaction. The assessee succeeded at the first instance before the High Court. On appeal the revenue succeeded before the appellate court which, inter alia, observed as follows (p. 341) :
' Apart from the fact that there was gross under-valuation of the property at the time the sale deed was executed, the relationship of the parties would not leave any one in doubt that the sale deed was effected, apart from trying to avoid the payment of stamp duty and registration charges, also to avoid or in any case to reduce the liability of the assessee under Section 45 of the Act. It could not be shown to us as to what further finding was required for the Income-tax Officer to act under Section 52 of the Act. In our opinion, the order of the Income-tax Officer and the counter clearly establish that the requirements of Section 22 were fully satisfied '. (g) Addl. CIT v.'S. R. Y. Ankineedu Prasad : 115ITR78(AP) . Here the Andhra Pradesh High Court construed Section 52(1) of the I.T. Act, 1961, and, inter alia, observed as follows (p. 84) : 'Section 52(1) postulates two main conditions before it could be invoked : (1) the transferee should be a person directly or indirectly connected with the assessee ; and (2) the Income-tax Officer should have reason to believe that the transfer effected by the assessee was with the object of avoidance of tax or reduction of his tax liability under Section 45 on capital gains.'
8. On the facts of the case it was held that there was no controversy as to the existence of the first condition in view of the direct relationship between the transferor and the transferee. As to the second requirement of the section it was held that the Tribunal had come to a finding that the transfer of shares was not effected by the assessee with the object of reducing tax liability under Section 45. The High Court observed that this finding of fact could not be interfered with as it was final and unchallenged. The High Court observed further as follows (p. 84) :
' The fact that the finding of fact is an inference from other basic facts will not alter its character as one of fact (see Sree Meenakshi Mitts Ltd. v. Commissioner of Income-tax : 31ITR28(SC) and I.C.I. (India) P. Ltd. v. Commissioner of Income-tax : 83ITR710(SC) ). In I.C.I. (India) P. Ltd. v. Commissioner of Income-tax : 83ITR710(SC) the Supreme Court, construing Section 52 of the Act, opined that the question whether the object 'of the assessee in transferring assets was to avoid or reduce his liability to tax on capital gains by making the transfer, does not involve the application of any legal principles to the facts established by the evidence and that the intention with which the particular transfer is made and the object which is to be achieved by such transfer is essentially a question of fact, the conclusion relating to which is to be arrived at on a consideration of the relevant material.'
To appreciate the controversy involved in this reference we have to consider the scheme of Chap. IV of the Act under the head ' Capital gains '. The relevant sections are as follows :
' Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54C and 54D, 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 '. Section 48
' Mode of computation and deductions.--The income chargeable under the head ' Capital gains ' shall be 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 ;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. '
Section 52 ' (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 liabilityof 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. '
9. We have noted the various observations of the different High Courts and several constructions of Section 52(1). The first part of the section causes hardly any difficulty. All that has to be established is whether the person who is acquiring a capital asset from the assessee is directly or indirectly connected with the latter. In the instant case this connection has been established and there is no controversy on that. The section further lays down that thereafter the ITO must have reason to believe that the transfer has been effected with the object of avoidance or reduction of the liability of the assessee to pay tax on capital gains under Section 45. This part of the section has to be understood in its context. Apparently, the primary object in effecting a transfer is carrying out the transaction itself and nothing more. Again, if the only object of a transfer is to avoid or reduce the liability of the transferor to pay tax on capital gains then there can be no reason for entering into the transaction at all. If the transferor refrains from transferring the asset there can be no question of payment of any tax on capital gains. Obviously, the ITO has to determine a further or ulterior motive of avoidance or reduction of capital gains tax liabilities in a particular transaction. In our view, there may be more than one such secondary motive or reason for effecting a transfer. One of them might be the conferring of a benefit to the transferee by making over to him an asset for a consideration of less than its market value.
10. In several cases cited it appears that the ITO having found that the market price of the asset transferred was higher than the transfer price immediately concluded that he had reason to believe that the object of the transfer was the avoidance or reduction of the liability of the assessee to pay tax on capital gains. As we construe the section, in every case the market price must be found higher than the transfer price in order that the section might apply as otherwise there would be no question of avoidance or reduction of the tax liability. This is, however, one of the preconditions which must be found to exist before the second part of Section 52(1) would become applicable but we would not like to construe the section to mean further that, in every case, where the market price is found to be higher than the transfer price, this by itself would constitute sufficient reason for the ITO to believe that the object of the transaction was to avoid or reduce the tax liability. This construction would lead to the application of the section automatically in every case where the market price would be higher than the transfer price. In our view, only after it is established that the market price is higher than the transfer price, the ITO has to ascertain and determine what was the object of making the transfer.
11. On further and proper material the ITO may come to have reason to believe that the object of the transfer was avoidance or reduction of payment of tax and then only the section would apply.
12. We, however, refrain from going into the more fundamental question as to whether, in the absence of a rinding that there has been an actual understatement of the consideration received, Section 52(1) can at all be applied.
13. In the instant case, the ITO has found that there was an indirect connection between the assessee and the transferee. The ITO also found that the market value of the assets transferred was higher than the price at which the same was transferred. We do not find any other material before the authorities to indicate the object of this transfer. The AAC came to the conclusion that one of the objects of this transfer was to pass on the benefit of the enhanced value of the shares to the assessee's family through the transferee-company.
14. In the instant case, the Tribunal has rightly noted that from the facts and evidence before it, it was possible to come to different conclusions as to the object of the transfer, one being that the object was to avoid or reduce the tax liability and the other being that of benefiting the assessee's family members. On such facts no definite conclusion being possible the Tribunal held that it was not possible to establish that the object of the assessee was to avoid or reduce the tax liability. The observations of the Tribunal though not expressed very clearly, appear to conform with our view. It appears to us that, apart from the fact that the market price of the asset transferred was higher than the transfer price, the ITO had no further material or evidence before him so that he could have reason to believe that the object of the assessee in making the transfer was to avoid or reduce the tax liability. The Tribunal held that the revenue authorities had no other proof to come to the said conclusion and without any further evidence or material the conclusion arrived at by them could not be sustained. We see no reason to interfere with the decision of the Tribunal.
15. For the above reasons the question referred is answered in favour of the assessee and in the affirmative. There will be no order as to costs.
Bimal Chandra Basak, J.