Applicability of Sec.52 of IT Act & 4(1) of Gift Tax Act in case of transfer of asset for less then adequate consideration. - Income Tax - 1606/CBDT

INSTRUCTION NO. 1606/CBDT Dated: March 8, 1985 Attention is invited to Board's Instruction No.1359 from F.No.340/39/76-GT dated 23rd September 1980 wherein it was stated that where an asset is transferred for less than adequate consideration the provisions of sec.52 of the I.T.Act 1961 and sec.4(1) of the Gift-tax Act 1958 can be invoked simultaneously provided of course; the other conditions are satisfied. 2. The Supreme Court of India have in their judgement in the case of K.P.Varghese Vs. ITO Ernakulam and another (1981) 131 ITR 597 held that sub-section (2) of sec.52 cannot be invoked by the revenue unless there is understatement on the revenue. Once it is established by the revenue that the consideration for the transfer has been understated or to put it differently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub-section (2) is immediately attracted subject of course to the fulfilment of the condition of 15% or more difference, and the revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee. While pronouncing this interpretation of sec.52(2) the Supreme court have in their judgement inter-alia observed as under: This construction which we are placing on sub-sec.(2) also marches in step with the Gift-tax Act, 1958. If a capital asset is transferred for a consideration below its markets value the difference between the market value and the full value of the consideration received in respect of the transfer would amount to a gift liable to tax under the G.T. Act, 1958 but if the construction of sub-section(2) contended for on behalf of the revenue were accepted such difference would also be liable to be added as part of the capital gains taxable under the provisions of the I.T.Act, 1961. This would be an anomalous result which could never have been contemplated by the Legislature since the I.T.Act 1961 and the Gift-tax Act 1958 are parts of an integrated scheme of taxation and the same amount which is chargeable as gift could not be intended to be charged also as capital gains. 3. Accordingly in the cases of transfers for consideration below the fair market value of the capital asset, it would be necessary to find out as to whether it is a case of understatement of the actual consideration or transfer is a bona-fide transaction for inadequate consideration. In the case of former the provisions of section 52 of the I.T. Act, 1961 would be applicable whereas in the case of the latter the provisions of section 4(1) of Gift Tax Act, 1958 would be attracted provided other conditions laid down in the respective Acts are fulfilled. It may however be appropriate in certain cases to invoke, as the case may be either of the two provisions of law stated above also on a protective basis. 4. This may be brought to the notice of all officers working in your charge.