1979 (8) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Direction to ITO to refer valuation of assets afresh to Department Valuation Officer.
2. Direction to ITO to compute profit under Section 41(2) based on sale consideration instead of fair market value.
3. Application of provisions of Section 52(2) of the Income Tax Act, 1961.

Detailed Analysis:

1. Direction to ITO to Refer Valuation of Assets Afresh to Department Valuation Officer:
The brief facts reveal that the assessees, partners in a firm, sold their shares in the firm's assets and disclosed profits based on the sale price. The ITO felt the sale price was undervalued and referred the matter to the Departmental Valuation Officer, who estimated higher market values. The assessees contended that they were not given proper opportunity by the Valuation Officer. The AAC agreed that the assessees were not afforded proper opportunity and directed the ITO to refer the matter afresh to the Valuation Officer.

2. Direction to ITO to Compute Profit Under Section 41(2) Based on Sale Consideration Instead of Fair Market Value:
The ITO substituted the actual sale consideration with the fair market value determined by the Departmental Valuation Officer for computing profit under Section 41(2). The AAC directed the ITO to compute profit based on the actual sale consideration, not the fair market value. The Tribunal upheld the AAC's direction, stating that Section 41(2) requires computation based on "moneys payable," which refers to the actual sale price. The Tribunal clarified that Section 52(2) allows substitution of sale consideration by fair market value only for determining capital gains under Section 48, not for Section 41(2) purposes.

3. Application of Provisions of Section 52(2) of the Income Tax Act, 1961:
The ITO applied Section 52(2) as the fair market value exceeded the sale consideration by more than 15%, leading to the determination of capital gains based on the fair market value. The assessees challenged this, arguing that Section 52(2) applies only to cases of understatement of sale consideration to avoid tax, not to bona fide transactions. The Tribunal considered various High Court and Supreme Court decisions, including the Kerala High Court's decision in ITO vs. K.P. Varghese, which supported the Revenue's view, and decisions from Karnataka, Madras, and Andhra Pradesh High Courts, which supported the assessees' view.

The Tribunal concluded that Section 52(2) does not apply to bona fide transactions where the sale consideration is fully disclosed. It emphasized that the section is intended to counter evasion of tax through understatement of sale consideration. The Tribunal noted that the Revenue did not prove that the assessees received more than the sale consideration recorded in the sale deeds. Therefore, it directed the exclusion of the capital gains determined based on the fair market value and upheld the AAC's direction to compute profits based on the actual sale consideration.

Conclusion:
The Tribunal sustained the AAC's order directing the ITO to compute profit under Section 41(2) based on the actual sale consideration and not the fair market value. It also held that Section 52(2) was not applicable to the bona fide transactions in question, thereby excluding the capital gains computed based on the fair market value. The cross-objections of the assessees were allowed, and the appeals of the Revenue were dismissed.