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TMI Blog1974 (1) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... r share: 1,24,458 The ITO observed that K.C.P. Ltd. was a flourishing concerned and there was no reason for the assessee to transfer shares of that company to his brother at Rs. 10,00 per share only. Considering the close relationship between the transferor and the transferee, the ITO proposed to apply s. 52(1) of the IT Act, 1961, and called upon the assessee to explain why the market rate of Rs. 22,30 per share should not be adopted for computing the full value of the consideration for the transfer of the shares of K.C.P. Ltd. The assessee contended that the transfer of the shares of K.C.P. Ltd. was made in exchange for the shares in Challapalli Sugars Ltd., in order to acquire control of the latter company and that was the reason why the former shares were transferred at a price less than the market price. The ITO did not accept the contention. In view of the substantial difference between the market rate and the face value of the shares of K.C.P. Ltd., he applied the provisions of s. 52(1) for the IT Act, 1961, and with the prior approval of the IAC, took the fair market value of the shares of K.C.P. Ltd., as the full value of the consideration for the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that under s. 52(2), it was necessary for the ITO to obtain the prior approval of the IAC before substituting the fair market value of the asset for the full value of the consideration and that requirement was not complied with as the AAC himself invoked the provisions of that section. It is also pleaded that the consideration received for the transfer was not merely the rate of Rs. 10,00 per share, but also the controlling interest in Challapalli Sugars Ltd., and it is therefore, not correct to say that the consideration declared fell short by 15 per cent of the fair market value of the asset so as to bring the case within the mischief of s. 52(2). It is next submitted that the computation of capital gain has to be made as laid down in s. 48 of the IT Act, which speaks of only the full value of the consideration received or accruing as a result of the transfer of the capital asset and not the fair market value which has to be deemed to be the full value of the consideration under s. 52(2) of the Act. In other words, according to him, the capital gain has to be computed by deducting from the actual consideration received the cost of acquisition of the asset and the cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further, we quote below the relevant sections of the IT Act. " 45. Capital Gains: (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 53 and 54, be chargeable to income-tax under the head Capital gains , and shall be deemed to be the income of the previous year in which the transfer took place". "48. Mode of computation and deductions: The Income chargeable under the head Capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." "52. Consideration for transfer in cases of understatement : (1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the ITO has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under s. 45, the full value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in the case of CIT, West Bengal vs. George Honderson Co. Ltd. 66 ITR 622 (SC), the two conditions required for the application of s. 52(1) are (i) that the transferor was directly or indirectly connected with the transferee and (ii) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under s. 45. If these conditions are not satisfied, then, s. 48 applies and the ITO must take into account the full value of the consideration received or accruing as a result of the transfer. In this case, it can be said that the transferor and the transferee were directly connected, being real brothers. We do not, however, think that the second condition is satisfied. As submitted by the assessee, which is not controverted by the Department, the transfer of the shares in question was made in exchange for certain shares of another company called Challapalli Sugars Ltd., is order to acquire controlling interest in that company. To acquire controlling interest is to acquire a benefit or a privilege in the said company, that could certainly from a part of the consideration for the transfer of the shares. In other words, what the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Act, we consider that it is also a part of the machinery or computation provision and as a machinery provision it is intended merely to provide for the method of assessment or collection of the tax and not to increase or vary it. "On a reading of the entire provisions in s. 12B of the Act, we are of the opinion that what is intended to be taxed is the real capital gain and not a fictional gain ". We do not think that the full bench decision of the Kerala High Court in ITO vs. K.P. Varghese reported at, really supports the Department s case. There the main issue before their Lordships was whether the provisions of s. 52 militated against the provisions of the s. 48 which was the section dealing with the computation of capital gains. Their Lordships held that there was no conflict. This decision is actually relevant for the purpose of meeting the contention raised on behalf of the assessee before us which we shall deal with presently. In so far as the application of the provisions of s. 52(1) is concerned, the following observation of their Lordship is relevant: "Counsel for the respondent contended that the case was really governed by s. 52(1) of the Act and there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would recoil from any construction of the statute which not only robs s. 52 of its contents and effectiveness, but even makes it dead and otiose. And such is the effect of holding that the consideration defined by s. 52 is not the same as the one dealt with in s. 48." We have quoted the observations only to meet the contention of the assessee s representative, but in the view we have taken viz., that the requirements of s. 52(1) are not satisfied in this case, the above contention is actually not of any consequence. 12. For the reasons mentioned here it is clear that the provisions of s. 52(2) are also not applicable in this case. As we have noted, the transfer of the shares of K.C.P. Ltd., took place in exchange for the shares of Challapalli Sugars Ltd. with a view to the assessee obtaining controlling interest in the latter company. This controlling interest was, in our opinion, a valuable consideration. Sec. 52(2) says that the ITO has to adopt the market value of the transferred asset as full value of the consideration if the actual consideration declared by the assessee falls short of the fair market value by more than 15 per cent. The actual consideration received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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