1970 (4) TMI 31 - HC - Income Tax

Application of section 52 in computing capital gains arising from the transfer of a capital asset for a consideration lesser than its fair market value - writ petition has been filed to quash exhibit P-5 in which Income-tax Officer overruled all the objections raised by the petitioner, and reassessed him - order of assessment was liable to be quashed

Issues Involved:
1. Applicability of Section 52 of the Income-tax Act, 1961, in computing capital gains.
2. Jurisdiction of the Income-tax Officer in reassessing escaped income.
3. Maintainability of the writ petition under Article 226 of the Constitution.

Issue-wise Detailed Analysis:

1. Applicability of Section 52 of the Income-tax Act, 1961, in Computing Capital Gains:
The primary question was whether Section 52 of the Income-tax Act, 1961, applies when a capital asset is transferred for a consideration less than its fair market value. The petitioner sold a property for Rs. 16,500, the same amount for which it was originally purchased, but the Income-tax Officer assessed the fair market value at Rs. 65,000 and included the difference of Rs. 48,500 as capital gains.

The court analyzed the relevant statutory provisions, including Sections 2(24), 4, 5, 14, 45, 48, and 52 of the Income-tax Act, 1961. Section 45 states that any profits or gains arising from the transfer of a capital asset are chargeable to income-tax under the head "Capital gains." Section 48 provides the mode of computation, and Section 52 deals with the consideration for transfer in cases of understatement.

The court concluded that Section 52 applies only to cases where the consideration is understated. It does not apply to honest transactions made out of love and affection or for other reasons. The court emphasized that income-tax is a tax on actual income, not on deemed income unless specifically provided by the statute. The court held that capital gains should be computed based on the actual consideration received, not the fair market value, and that Section 52 has no application in this case.

2. Jurisdiction of the Income-tax Officer in Reassessing Escaped Income:
The petitioner argued that the Income-tax Officer had no jurisdiction to reassess the income as escaped income since the transaction was for the same consideration as the original purchase price. The court examined the conditions under which Section 52(1) and (2) could be invoked, noting that these provisions apply only when there is an understatement of consideration with the object of avoiding or reducing tax liability.

The court found that the Income-tax Officer did not explicitly state the jurisdictional fact of avoidance or reduction of liability in the notice or the order of assessment. The court held that the Income-tax Officer cannot, by an erroneous decision, assess something that is not capital gains under the Act. Therefore, the reassessment was without jurisdiction and liable to be quashed.

3. Maintainability of the Writ Petition under Article 226 of the Constitution:
The revenue raised a preliminary objection to the maintainability of the writ petition, arguing that the petitioner had an adequate alternative remedy by way of appeal, which he had already availed. The petitioner countered that the appeal was filed after the writ petition and was subsequently withdrawn.

The court reiterated that the existence of an alternative remedy does not bar the jurisdiction of the court under Article 226 but is a material consideration in exercising discretion. The court cited several Supreme Court decisions to support the principle that the High Court can exercise its jurisdiction under Article 226 when the taxing authority acts without jurisdiction or commits a serious procedural error.

The court concluded that the question of whether the difference between the fair market value and the actual consideration is capital gains is a preliminary question affecting the jurisdiction of the Income-tax Officer. Since the facts were undisputed and the Income-tax Officer assessed something not constituting capital gains under the Act, the petitioner was entitled to invoke the jurisdiction of the court under Article 226.

Conclusion:
The court allowed the writ petition, quashing the impugned order of assessment. Capital gains must be computed based on the actual consideration received, not the fair market value, and Section 52 of the Income-tax Act, 1961, has no application in this case. The court also held that the Income-tax Officer acted without jurisdiction in reassessing the escaped income, and the writ petition was maintainable under Article 226 of the Constitution.

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