1972 (3) TMI 10 - HC - Income Tax

Applicability of proviso to section 12B (2) - sale of shares - There was nothing to suggest that the sales were made to avoid or reduce tax liability - The proviso is, part of the machinery or computation provision and deals with cases of under-statement of the consideration and it is not intended to impose a tax on a deemed or fictional basis - conclusion of the Tribunal that the first proviso to sub-section (2) of section 12B of the Income-tax Act, 1922, was applicable is not correct

Issues Involved:
1. Applicability of the first proviso to section 12B(2) of the Income-tax Act, 1922.
2. Determination of capital gains tax liability.
3. Validity of the Tribunal's inference regarding avoidance or reduction of tax liability.
4. Interpretation of "full value of the consideration" vs. "fair market value."

Issue-wise Detailed Analysis:

1. Applicability of the first proviso to section 12B(2) of the Income-tax Act, 1922:
The primary issue was whether the first proviso to section 12B(2) was applicable in computing capital gains on the sale of shares by the assessees. The Tribunal had held that the sales were true and genuine, and the consideration shown in the accounts was received without any under-statement. However, the Tribunal inferred that the sales were made with the object of avoiding or reducing the liability for capital gains tax, thereby applying the first proviso to section 12B(2).

2. Determination of capital gains tax liability:
The assessees sold shares at a price lower than their break-up value. The Tribunal determined the capital gains based on the break-up value, invoking the first proviso to section 12B(2), which allows the fair market value to be considered if the sale is to a connected person and there is an under-statement of the consideration.

3. Validity of the Tribunal's inference regarding avoidance or reduction of tax liability:
The Tribunal's inference that the sales were made to avoid or reduce tax liability was challenged. The court noted that the burden of proving that the sales were made with such an object was on the department. The Tribunal's conclusion was based on the non-acceptance of the assessees' explanation and a suspicion of the real motive behind the sales. The court held that suspicion alone was insufficient to justify the application of the proviso, and there was no positive evidence to suggest that the sales were made with the object of avoiding or reducing tax liability.

4. Interpretation of "full value of the consideration" vs. "fair market value":
The court referred to previous judgments, including Sundaram Industries Private Ltd. v. Commissioner of Income-tax and K. P. Varghese v. Income-tax Officer, which clarified that the first proviso to section 12B(2) is intended to address cases of under-statement of consideration to evade tax. The proviso does not create a fictional gain but aims to tax the actual capital gain that should have been realized. The court emphasized that the proviso is a machinery provision meant to aid in the assessment of real capital gains and not to impose tax on a deemed or fictional basis.

Conclusion:
The court concluded that the Tribunal was not justified in applying the first proviso to section 12B(2) based on the facts found. The sales were genuine, and there was no evidence of under-statement of consideration or intention to avoid tax. Therefore, the Tribunal's conclusion that the first proviso was applicable was incorrect. The reference was answered in the negative, in favor of the assessees, with costs awarded to them.

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