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Issues Involved
1. Applicability of Section 52(2) of the Income-tax Act, 1961, in cases of bona fide transactions without understatement of consideration. 2. Interpretation of the term "gift" under Section 47(iii) of the Income-tax Act, 1961. Detailed Analysis 1. Applicability of Section 52(2) of the Income-tax Act, 1961 The primary issue was whether Section 52(2) of the Income-tax Act, 1961, applies to bona fide transactions where there is no understatement of consideration. The Tribunal held that Section 52(2) is intended to apply only in cases of understatement of consideration done with a view to dishonestly escape tax liability. The Tribunal relied on the decision in K.P. Varghese v. Income-tax Officer and a circular from the Central Board of Direct Taxes (CBDT), which explained that the provision aims to counter tax evasion through the device of understatement of consideration. The Tribunal found no material to hold that the assessee had declared a lower price as the consideration for the transfer of the property. The reconveyance was done in accordance with an oral understanding between the parties to the original sale transaction. The Tribunal affirmed the order of the Appellate Assistant Commissioner, who had held that there were no capital gains arising on the reconveyance of the property by the assessee since there was no understatement of the sale price. The High Court agreed with the Tribunal's interpretation, stating that Section 52(2) does not apply to bona fide transactions not involving any understatement of consideration. The court emphasized that the object of Section 52 is to levy tax on profits or gains arising out of a transfer of a capital asset, and not on transactions where the full value of consideration received has been correctly declared by the assessee. 2. Interpretation of the Term "Gift" under Section 47(iii) of the Income-tax Act, 1961 The alternative issue was whether the transfer in question could be considered a "gift" under Section 47(iii) of the Act, thereby exempting it from capital gains tax. The term "gift" is not defined in the Act, and the court had to look to its ordinary meaning, which is a voluntary transfer of property without valuable consideration. The department argued that transfers treated as "deemed gifts" under the Gift-tax Act are not exempt under Section 47(iii). However, the court found that if a transfer is made without valuable consideration, there is no question of capital gains accruing or arising by the transfer. Therefore, such transfers are inherently excluded from the purview of Section 45. The court further reasoned that the transaction in question, where the property was reconveyed for the same price, could be construed as a sale of a portion of the property and a gift of the remaining portion. This interpretation aligns with the substance of the transaction, which does not attract capital gains tax. Conclusion The High Court concluded that on the facts and circumstances of the case, the Tribunal was right in law in holding that there were no capital gains arising to the assessee on the sale of property for the assessment year 1964-65. The question was answered accordingly, and the assessee was entitled to costs.
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