1972 (2) TMI 25 - HC - Income Tax

Petitioner and his sons constituted a Hindu undivided family. There was a partition between the members of the family - Assessee sold buildings to his divided sons. The difference was offered as capital gains. ITO estimated fair market value at higher figure and the difference was treated as capital gains- whether assessee can also be assessed to gift-tax on the difference

Issues Involved:
1. Capital gains tax liability.
2. Application of Section 52(1) of the Income-tax Act.
3. Validity of proceedings under Section 52(1) of the Income-tax Act.
4. Principles of natural justice.
5. Double taxation under the Gift-tax Act and Income-tax Act.

Detailed Analysis:

1. Capital Gains Tax Liability:
The petitioner, part of a Hindu undivided family, underwent a partition in 1952. He later sold a site and structures for Rs. 80,000 to his sons in 1963. For the assessment year 1964-65, he declared Rs. 10,958 as capital gains. The Income-tax Officer (ITO) estimated the property's value at Rs. 1,14,000 and fixed the capital gains at Rs. 44,960. The petitioner contested this valuation, arguing that the sale price was reasonable.

2. Application of Section 52(1) of the Income-tax Act:
The ITO invoked Section 52(1), which allows for the fair market value to be considered as the sale price if the transfer is to a related person and is aimed at tax avoidance. The petitioner argued that Section 52(1) was inapplicable as there was no evidence of tax avoidance intent.

3. Validity of Proceedings under Section 52(1) of the Income-tax Act:
The petitioner contended that the ITO's proceedings under Section 52(1) were illegal and lacked jurisdiction, as the show-cause notice did not mention any belief of tax avoidance. Moreover, the ITO's finding was not based on evidence but on his own assertion.

4. Principles of Natural Justice:
The petitioner argued that the proceedings violated natural justice principles, as he was not given an adequate opportunity to contest the ITO's findings under Section 52(1).

5. Double Taxation under the Gift-tax Act and Income-tax Act:
The petitioner was also assessed gift-tax on the difference between the fair market value (Rs. 1,14,000) and the sale price (Rs. 80,000). He argued that the same transaction being taxed under both the Gift-tax Act and the Income-tax Act was impermissible. The court agreed, stating that the same amount cannot be treated simultaneously as a gift and as a transfer resulting in capital gains.

Judgment Summary:

The court analyzed the relevant provisions of the Income-tax Act, including Sections 2(24), 14, 45, 47, 48, and 52(1), and the Gift-tax Act. It concluded that no tax under "Capital gains" can be levied on a transfer under a gift as per Section 47(iii). The court noted that the difference between the market value and the sale price, treated as a gift and subjected to gift-tax, cannot also be treated as capital gains.

The court cited a Kerala High Court decision (K.P. Varghese v. Income-tax Officer) supporting this view, emphasizing that the legislature did not intend for the same amount to be taxed under both heads. The court held that the tax on capital gains should be computed based on the actual sale price (Rs. 80,000) and the cost of the asset (Rs. 64,042), with the difference being refundable to the petitioner.

The court dismissed the department's arguments regarding the availability of alternative remedies and the delay in filing the writ petition, considering the unique circumstances and the recent judicial pronouncement clarifying the legal position.

Conclusion:
The writ petition was allowed to the extent that the capital gains tax should be computed on the sale price of Rs. 80,000, and any excess tax levied should be refunded. The court did not find it necessary to address other contentions, as the petitioner conceded that capital gains tax was leviable based on the sale price declared. No order as to costs was made, and the advocate's fee was set at Rs. 10.

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