1974 (1) TMI 31 - AT - Income Tax

Issues Involved:
1. Applicability of Section 52(1) of the IT Act, 1961.
2. Applicability of Section 52(2) of the IT Act, 1961.
3. Computation of capital gains under Section 48 of the IT Act, 1961.
4. Powers of the Appellate Assistant Commissioner (AAC) in upholding the Income Tax Officer's (ITO) order on different grounds.

Detailed Analysis:

1. Applicability of Section 52(1) of the IT Act, 1961:
The primary issue was whether the transfer of shares by the assessee to his brother at a value significantly lower than the market rate was done with the object of avoiding or reducing liability to capital gains tax, thus attracting Section 52(1). The ITO applied Section 52(1) due to the close relationship between the transferor and transferee and the substantial difference between the market value and the transfer value of the shares. However, the AAC held that Section 52(1) was not applicable as the ITO did not establish that the transfer was effected with the object of avoiding or reducing capital gains tax liability, relying on the Madras High Court decision in Sundaram Industries Pvt. Ltd. vs. CIT 74 ITR 243 (Mad).

2. Applicability of Section 52(2) of the IT Act, 1961:
The AAC, while rejecting the applicability of Section 52(1), invoked Section 52(2), stating that the full value of the consideration declared by the assessee fell short of the fair market value by more than 15%. The AAC observed that the consideration for the transfer included not only the value of the shares but also the acquisition of controlling interest in Challapalli Sugars Ltd., which was not declared. The assessee argued that Section 52(2) was not applicable as it was not the case of the ITO and that the controlling interest in Challapalli Sugars Ltd. was a valuable consideration. The Department contended that Sections 52(1) and 52(2) are not mutually exclusive, and the transaction could fall under both sections.

3. Computation of Capital Gains under Section 48 of the IT Act, 1961:
The assessee argued that the computation of capital gains should be made as per Section 48, which considers the full value of the consideration received or accruing as a result of the transfer, not the fair market value as deemed under Section 52(2). The Department, however, argued that the consideration under Sections 48 and 52 should be harmoniously construed as the same.

4. Powers of the Appellate Assistant Commissioner (AAC):
The Department contended that the AAC was empowered to uphold the ITO's order on different grounds, citing the Andhra Pradesh High Court decision in Parameswara Oil Mill vs. CIT, A.P. 85 ITR 151 (AP). The Tribunal agreed that the AAC's powers were co-extensive with those of the ITO, allowing him to make inquiries and uphold the assessment on different grounds.

Tribunal's Decision:
The Tribunal concluded that the requirements of Section 52(1) were not satisfied as the transfer was made to acquire controlling interest in Challapalli Sugars Ltd., which formed part of the consideration. The Tribunal also held that Section 52(2) was not applicable, as the transaction was bona fide, and the actual consideration included the controlling interest in Challapalli Sugars Ltd. The Tribunal noted that Section 52(2) was intended to cover cases where the actual consideration was understated, which was not the case here. Consequently, the Tribunal set aside the AAC's order and held that the capital gain declared by the assessee was correctly computed and should be accepted.

Conclusion:
The appeal was allowed, and the capital gain declared by the assessee on the transfer of shares was accepted as correctly computed.

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