1972 (1) TMI 3 - SC - Income Tax

Capital Gains Tax - sale of properties at less than market value - Issue if the object of transfer was to avoid or reduce liability to tax does not involve application of any legal principles to the facts established by the evidence - hence it is not a question of law - Appeal of assessee s allowed - order of the High Court is hereby set aside

Summary

Issues Involved:
1. Applicability of Section 52 of the Income-tax Act, 1961.
2. Whether the transfer of shares was effected with the object of avoidance or reduction of liability to capital gains tax.
3. Whether the Tribunal's findings were based on proper construction of documents and evidence.
4. Whether the High Court was justified in directing the Income-tax Appellate Tribunal to refer certain questions of law.

Detailed Analysis:

1. Applicability of Section 52 of the Income-tax Act, 1961:
The primary issue was whether Section 52 of the Income-tax Act, 1961, applied to the transfer of shares by the assessee to Imperial Chemical Industries Ltd. (I.C.I.). Section 52 stipulates that if there is a direct or indirect connection between the person who acquires a capital asset and the assessee, and if the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability to capital gains, the full value of the consideration for the transfer shall be taken to be the fair market value of the capital asset on the date of the transfer.

2. Whether the transfer of shares was effected with the object of avoidance or reduction of liability to capital gains tax:
The Tribunal examined the correspondence and material regarding investments in three Indian companies-Indian Explosives Ltd. (I.E.L.), Alkali & Chemical Corporation of India (A.C.C.I.), and Atic Industries Private Ltd. (A.T.I.C.). The Tribunal found that the scheme for advancing loans to the assessee for investment in these companies was conceived and approved before the reintroduction of capital gains tax. The Tribunal concluded that the transfers were not made with the object of avoiding or reducing liability to capital gains tax. The Tribunal emphasized that the intention behind the transactions was to enable I.C.I. to invest in India and take advantage of tax reliefs available to new enterprises.

3. Whether the Tribunal's findings were based on proper construction of documents and evidence:
The Tribunal's findings were based on a detailed examination of the correspondence and agreements between the assessee and I.C.I. The Tribunal noted that the scheme involved I.C.I. making loans to the assessee for investing in shares of the three companies, with an understanding that the shares would be transferred to I.C.I. at par in satisfaction of the loans. The Tribunal found that this arrangement was made with the approval of the Government of India and the Reserve Bank of India. The Tribunal also considered affidavits and other evidence, concluding that the transactions were not motivated by an intention to avoid capital gains tax.

4. Whether the High Court was justified in directing the Income-tax Appellate Tribunal to refer certain questions of law:
The High Court directed the Tribunal to refer four questions of law, but the Supreme Court found this direction to be unjustified. The Supreme Court noted that the Tribunal's findings were based on facts and evidence, and there was no question of law involved. The Supreme Court emphasized that the jurisdiction in the matter of reference can be exercised when the point for determination is a pure question of law or a mixed question of law and fact. However, the findings of the Tribunal in this case were purely factual and supported by evidence. The Supreme Court criticized the High Court for not recording a speaking order and for directing the reference without proper justification.

Conclusion:
The Supreme Court allowed the appeal and set aside the order of the High Court. The Supreme Court held that the findings of the Tribunal were based on facts and evidence, and there was no question of law that warranted a reference to the High Court. The Supreme Court emphasized that the applicability of Section 52 of the Income-tax Act depended on certain factual findings, which were not established in this case. The assessee was entitled to its costs in the Supreme Court.