1984 (12) TMI 43 - HC - Income Tax

Summary

Issues:
Interpretation of section 52(2) of the Income-tax Act, 1961 in relation to the fair market value of shares sold by an assessee company and the applicability of provisions when assessing capital gains.

Detailed Analysis:

1. Background:
The case involved two references for the assessment year 1970-71 under sections 256(1) and 256(2) of the Income-tax Act, 1961, arising from the sale of 1,500 equity shares of a company by an assessee company at a price lower than the fair market value as determined by the Income-tax Officer.

2. Tribunal's Decision:
The Tribunal dismissed the Departmental appeal and allowed the assessee's appeal, directing the Income-tax Officer to accept the sale consideration declared by the assessee for the shares and compute capital gains accordingly.

3. Questions Referred:
The Tribunal referred two questions under section 256(1) and one question under section 256(2) regarding the applicability of section 52(2) and the burden of proof on the Revenue to establish understatement of consideration.

4. Legal Provisions:
Section 52(2) of the Act empowers the Income-tax Officer to consider the fair market value of a capital asset if it exceeds the declared consideration by 15% and to treat the fair market value as the consideration with the approval of the Inspecting Assistant Commissioner.

5. Burden of Proof:
The burden rests on the Revenue to show that the fair market value exceeds the declared consideration by 15% and that the assessee received more than declared. Merely establishing the 15% difference is not sufficient; the actual understatement must be proven independently.

6. Bona Fide Transaction:
Section 52(2) does not apply to bona fide transactions where the consideration is correctly declared, and the assessee did not receive more than declared. The provision aims to tax cases where consideration is understated, not genuine transactions.

7. Judgment:
The Court held in favor of the assessee, stating that section 52(2) was not applicable as there was no finding of understatement by the assessee. The difference in fair market value alone is not enough to invoke section 52(2) without evidence of actual understatement.

8. Conclusion:
Both questions under section 256(1) and the question under section 256(2) were answered in favor of the assessee, emphasizing the importance of proving actual understatement for the application of section 52(2) and the preservation of bona fide transactions from tax implications.

9. Costs:
The Court ordered no costs in the matter.

Judges:
The judgment was delivered by Judge Ajit K. Sengupta, with agreement from Judge Dipak Kumar Sen.