781/CBDT. - Income Tax - 781/CBDT

INSTRUCTION NO. 781/CBDT Dated : November 6, 1974 Section(s) Referred: 52(2) Statute: Income - Tax Act, 1961 It has come to the notice of the Board that in a number of cases writ petitions have been filed wherein the vires of section 52(2) of the IT Act, 1961 has been challenged alleging it to be unconstitutional and/or violative of the fundamental right to acquire, hold and dispose of property guaranted under Article 19(1) (f) of the Constitution of India. The question relating to the constitutional validity of section 52(2) has been examined in consultation with the Additional Solicitor General. A note on the subject is printed below, which may be made use of if in any case the vires of section 52(2) is challenged. NOTE REGARDING THE CONSTITUTIONAL VALIDITY OF SECTION 52(2) OF INCOME-TAX ACT, 1961. Section 52(2) of the I.T.Act was incorporated by the Finance Act, 1964 with a view to countering evasion of tax on capital gains through the device of understatement of the full value of the consideration received or receivable on the transfer of a capital asset. Section 52(2) was incorporated to defeat the free play of the unaccounted money as well as to counter the cheating of Government by evasion of tax by deliberately understating the full value of the consideration. The margin of difference of 15% of the declared value of the consideration for the capital assets has been provided in sub-section (2) to make allowance for various circumstances in which a sale may be made and also for genuine difference in opinion in regard to the determination of fair market value of the capital asset which has been transferred. Parliament having decided to charge tax on capital gains, it also felt that the charge would not be effective unless full value of the consideration was taken at the market value of the transferred. Parliament having decided to charge tax on capital gains, it also felt that the charge would not be effective unless full value of the consideration was taken at the market value of the transferred asset subject to enactments which impose a tax or a fee, the market value is taken as the basis for evaluating the tax or the fee and the same has never been held to be illegal or even unreasonable but has been treated as a provision properly to effectuate the proposed charge or market value of the asset. All that is prescribed is that for the purpose of effectively determining the quantum of the capital gain, the full value of the consideration will be taken as the market value. Such a provision is not uncommon. 2. The words "full value of the consideration" used in section 48 of the I.T.Act, pre-suppose a normal bonafide transaction in which full value is in fact received. There are circumstances in which the consideration shown or received may not represent the full value of the consideration for transaction. In some cases the value of the consideration, the balance having been paid surreptitiously in black money. Section 52(1) has been introduced shown or received may in fact constitute the value of the consideration actually received but may not represent the full value of the consideration for the asset in question. Section 52(2) has been introduced to cover such cases with a built-in-safeguard that the ITO should obtain the concurrence of the IAC before invoking the provisions of the section. This ensures that there is no arbitrariness on the part of the assessing authorities. Even in a case where the consideration shown or received represents the value actually received, section 52(2) merely casts an obligation on the assessee that in the event of the assessee voluntarily deciding to receive something less than the full value of the consideration of an asset, he is called upon to pay an additional amount of capital gains tax on the difference between the consideration actually received and the full value of the consideration of the asset on the date of transfer. Any profits or gains arising from transfer of a capital asset is to be charged to income-tax under the head 'capital gains' and this is real profits or gains. Section 52(2) only ensures that what is intended to be taxed u/s.45 and 48 does not escape taxation. 3. While section 52(2) has been incorporated to prevent evasion of tax, care has been taken that the powers conferred are not used arbitrarily and do not affect bonafide transactions. For instance, the prior approval of the Inspecting Assistant Commissioner is necessary. The Inspecting Assistant Commissioner is a senior, experienced and responsible officer of the Department. Normally, only after several years' nservice of Class I Income-tax Officer is a person promoted as an Assistant Commissioner. The necessity of taking his prior approval ensures against arbitrary and frivolous invokation of section 52(2) by the Officer. Under Section 55A of the Act provision has been made for reference if necessary to a Valuation Officer for ascertaining the fair market valur of a capital asset for the purpose of taxation of capital gains arising from the transfer of such asset. Prior to this remedies were also provided u/s 254(1-A) of the Act for determining such fair market value at the stage of the 2nd appeal before the Tribunal. In the interest of natural justice the assessee is given a reasonable opportunity to be heard. 4. As regards the argument that section 52(2) of the Act is unconstitutional and/or violative of the petitioner's fundamental right to acquire, hold or dispose of property guaranteed under Article 19(1)(f), it may be stated that any concealment of income (capital gains) or reduction in the quantum thereof or enhancement of loss under the head "capital gains" result in escapement of tax and loss to the exchequer and a consequential loss to the public, i.e., the community in general. It is submitted that any provision intended against such evasion or escapement of tax is a provision intended against such evasion or escapement of tax is a provision in the interest of the general public. The provisions contained in section 52(2) do not constitute any restriction whatsoever on the enjoyment of the right to property under Article 19(1)(f). Section 52(2) has been inducted into the Income-tax Act as a logical corollary to the general scheme of taxation of capital gains arising out of the transfer of a capital asset. But for this provision it was open to the assessees at large to claim a bogus book loss as arising out of the transfer of a capital asset by transferring the same at less than the cost thereof as well as the market value thereof on the date of transfer. Thus section 52(2) is not at all a restriction on the rights conferred by Article 19(1)(f) but is essential for effectuating the charge of tax on capital gains, the constitutionality of which charge has been upheld by the Supreme Court in Navinchandra Mafatlal Vs. C.I.T. 26 I.T.R. 658. Assuming but not admitting that the provisions of section 52(2) constitute a restriction it may be stated that in so far as the provision seeks to prevent tax evasion and escapement of tax it is undoubtedly a restriction in the interests of the general public and thus in any event constitutes a reasonable restriction in the interest of the general public within the meaning of Article 19(5) of the Constitution. The provision is, therefore, in any event saved by Article 19(5) as a reasonable restriction in the interest of the general public. 5. With a view to avoiding loss to the public revenue, it was perfectly open to Parliament to enact section 52(2) in order to see that tax is properly paid on the full amount of capital gains. In any event and without prejudice to the above, a provision of the type of section 52(2) is most essential and necessary in the present day condition in India where it is well known that most transactions of transfer take place for declared as well as undeclared consideration. It is a well konown fact of our economic life that large sums of unaccounted money are in circulation endangering its very fabric. In the interest of the community it is only right that the fiscal authorities should have sufficient powers to prevent tax evasion. Even drastic measures to get at the tax evaders, would stand justified in themselves. The mere fact that an assessee who may not have received a consideration over and above that which has been declared has to pay tax on the basis of the capital gains being determined by taking the market value as the full value of the consideration does not mean that section 52(2) violates Article 19(1)(f) or constitutes restriction which is not reasonable or in the public interest. The social evil to be remedied is always a relevant factor in this behalf. The results that flow from section 52(2) to the public, nacely the prevention of evasion of Income-tax which evil has today assumed frightening propertions far off-sets any other consideration. 6. While making a law it is competent for the legislature to make all such incidental and ancillary provisions as may be necessary to effectuate the law; particularly it cannot be disputed that in the case of a taxing statute it is open ot the legislature to enact provisions which would check evasion of tax. 7. Section 52(2) does not violate the fundamental right to equality granted by Article 14 of the Constitution. The equality caluse in the Constitution does not predicate mathematically precise or logically complete or symmetrial classification. The equal protection clause under Article 14 only hits at dissimilar treatment under similar circumstances. Article 14 does not prevent the State from making a law based on a reasonable classification founded on an intelligible differentia having rational relation to the objects sought to be achieved by the law. Tax laws are aimed at dealing with complex problems of infinte variety necessitating adjustment of several disparate elements. While enacting taxing law the legislative discretion is wider in the matter of classification and the power to classify may be exercised so as to adjust the system of taxation in selecting persons, properties, transactions and objects and applying different methods and even rates of tax. Section 52(2) is based on rational classification and does not offend any provision of the Constitution. 8. Section 52(2) is neither confiscatory nor un-constitutional. This section provides for the method of quantification of capital gains under certain circumstances. The charging section 45 has been held to be constitutionally valid by the Supreme Court in Navinchandra Mafatlal Vs. C.I.T. (1954) 26 ITR 658. Section 52(2) is clearly and patently a provision for effectively implementing the charging section and making a tax on capital gains workable. 9. No help can be derived from the decision of the Supreme Court in the case of George Henderson and Co. Ltd. (66 I.T.R. 622) as it was based on the law as it stood in the assessment year 1947-48 when there si no provision corresponding to section 52(2) of the Income-tax Act, 1961. The decision of the Full Bench of the Kerala High Court in writ Appeal No. 127/1970 in I.T.O. Vs. K.P. Verghese (91 ITR 49) is relevant. Section 52(2) would be rendered otiose and ineffective and completely emasculated if the declared sale price is to be equated with the "Full value of the consideration for such capital asset" used in the latter part of section 52(2).