1973 (7) TMI 28 - HC - Income Tax

Transfer of capital assets to a person connected with the assessee for less than share market value of the assets- (1) Whether the first proviso to section 12B(2) of the Indian Income-tax Act, 1922, properly became applicable? - It must be observed that in the instant case it has not even been suggested that it is a case of under-statement of consideration in the transfer deed or that higher consideration than mentioned in the transfer deed was received by the transferors ; on the other hand, since the transfers were between close relations the object could be to make a gift of the shares to the transferees or having regard to the circuitous method adopted for effecting cross-transfers the object could be avoidance of liability under section 16(3) of the Act Question answered in negative

Issues Involved:
1. Applicability of the first proviso to section 12B(2) of the Indian Income-tax Act, 1922.
2. Proper basis for fixing the 'fair market value' of shares.
3. Deductibility of proposed dividends in fixing the 'fair market value' of shares.
4. Computation of capital gains considering the full value of consideration.

Issue-wise Detailed Analysis:

1. Applicability of the First Proviso to Section 12B(2) of the Indian Income-tax Act, 1922:
The main contention was whether the first proviso to section 12B(2) was applicable. The proviso applies when the transferee is directly or indirectly connected with the assessee, and the transfer is made with the object of avoiding or reducing the tax liability under section 12B. The assessees conceded that the first condition was met as the transferees were directly or indirectly connected with them. However, they argued that the second condition, which requires the Income-tax Officer to believe that the transfer was made to avoid or reduce tax liability, was not satisfied. The Tribunal had inferred that since the sale was not at the full market value, it must have been made with the object of avoiding tax liability. The court disagreed, stating that mere sale at less than market value does not necessarily imply tax avoidance. The court emphasized that the proviso could only be invoked if it was shown that the actual consideration received was higher than what was stated in the transfer deed, indicating an understatement of consideration.

2. Proper Basis for Fixing the 'Fair Market Value' of Shares:
The Income-tax Officer used the balance-sheet as of October 31, 1959, to determine the fair market value of the shares, arguing it was closer to the sale dates and reflected the company's improved financial condition. The Appellate Assistant Commissioner, however, preferred the balance-sheet as of October 31, 1958, as it was published before the sales. The Tribunal sided with the Income-tax Officer, stating that the later balance-sheet provided better evidence of the shares' value. The court did not directly address this issue due to its negative answer to the first question.

3. Deductibility of Proposed Dividends in Fixing the 'Fair Market Value' of Shares:
The assessees claimed deductions for provisions for taxation and proposed dividends in computing the net wealth of the company to determine the shares' value. The Income-tax Officer denied both deductions, while the Appellate Assistant Commissioner allowed the deduction for taxation but not for proposed dividends. The Tribunal upheld this view. The court did not address this issue due to its negative answer to the first question.

4. Computation of Capital Gains Considering the Full Value of Consideration:
The Income-tax Officer computed the capital gain based on a fair market value of Rs. 375 per share, while the Appellate Assistant Commissioner computed it at Rs. 171.50 per share, and the Tribunal at Rs. 264 per share. The court emphasized that the incidence of tax under section 12B(1) is on actual capital gains, not deemed gains. Therefore, if the conditions of the proviso are not met, the computation must be based on the actual consideration received. The court found no evidence that the assessees received more than the stated consideration, thus negating the applicability of the proviso.

Conclusion:
The court concluded that the second condition for invoking the first proviso to section 12B(2) was not satisfied, as there was no evidence of understatement of consideration or receipt of higher consideration than stated. Consequently, the first question was answered in the negative, favoring the assessees. Due to this negative answer, the court found it unnecessary to address the remaining questions. The revenue was directed to pay the costs of the reference to the assessees.

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