1978 (12) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Connection between the assessee and the purchaser-company.
2. Determination of the market value of the shares.
3. Application of Section 52(1) of the Income Tax Act, 1961.
4. Object of the transfer of shares.
5. Burden of proof regarding the object of the transfer.
6. Tribunal's conclusion on the object of the transfer.
7. Relevant case laws and their applicability.

Issue-wise Detailed Analysis:

1. Connection between the assessee and the purchaser-company:
The Income Tax Officer (ITO) found that the purchaser-company was connected with the assessee as the majority of the shares in the purchaser-company were owned by the assessee, her husband, her children, or other close relatives. This connection satisfied the first condition of Section 52(1) of the Income Tax Act, 1961.

2. Determination of the market value of the shares:
The ITO determined that the market value of the shares was higher than their face value based on their break-up value and yield or return. The ITO concluded that the shares were sold at a lower price to avoid or reduce the liability under Section 45 of the Income Tax Act, 1961. The Appellate Assistant Commissioner (AAC) recomputed the fair market value of the shares, concluding that each fully paid-up share was valued at Rs. 375.

3. Application of Section 52(1) of the Income Tax Act, 1961:
The ITO applied Section 52(1) of the Income Tax Act, 1961, determining the full value of consideration for the transfer of the shares with the approval of the Inspecting Assistant Commissioner (IAC). The AAC upheld this application, but the Tribunal disagreed, concluding that the section was not attracted as it was not proven that the object of the transfer was to avoid or reduce tax liability.

4. Object of the transfer of shares:
The AAC found that the primary motive for selling the shares at face value was to avoid or reduce liability to capital gains tax. The Tribunal, however, concluded that it was possible to infer both that the object was to avoid or reduce tax liability and that the transfer was for benefiting family members. The Tribunal held that in the absence of substantial evidence proving the object of the transfer was to avoid tax liability, the conclusion favorable to the assessee must be arrived at.

5. Burden of proof regarding the object of the transfer:
The AAC placed the burden on the assessee to prove that the sale was effected for reasons other than avoiding tax liability. The Tribunal, however, held that the revenue authorities did not have sufficient evidence to prove that the object of the transfer was to avoid or reduce tax liability.

6. Tribunal's conclusion on the object of the transfer:
The Tribunal concluded that it had not been proven that the object of the assessee in transferring the shares was to avoid or reduce her tax liability under Section 45 of the Income Tax Act, 1961. Therefore, Section 52 was not applicable. The Tribunal's decision was based on the lack of substantial evidence to prove the object of the transfer.

7. Relevant case laws and their applicability:
Several case laws were cited, including Sundaram Industries P. Ltd. v. CIT, Sivakami Company P. Ltd. v. CIT, Shiv Sankar Lal v. CIT, Babubhai M. Sanghvi v. CIT, CIT v. N. S. and North Malabar Public Conveyance (P.) Ltd., ITO v. Buragadda Satyanarayana, and Addl. CIT v. S. R. Y. Ankineedu Prasad. These cases provided various interpretations of Section 52(1) and emphasized the need for the ITO to have substantial reasons to believe that the object of the transfer was to avoid or reduce tax liability. The judgment noted that the ITO must have more than just the market price being higher than the transfer price to conclude the object of the transfer was tax avoidance.

Conclusion:
The High Court concluded that the Tribunal was right in holding that the sale of shares did not come within the purview of Section 52 of the Income Tax Act, 1961, and the assessee was not liable to pay any tax under Section 45 of the Act. The question referred was answered in favor of the assessee, with no order as to costs.