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TMI Blog1978 (12) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... were huge accumulations of reserves and that dividend had been declared at the rate of 30% during the accounting year. Accordingly, the ITO had reasons to believe that the transfer was effected at a low price with the object of avoidance or reduction of the liability of the assessee under s. 45 of the I.T. Act, 1961, and, under the provisions of s. 52(1) of the Act of 1961, he determined the full value of consideration of the transfer of the said shares at Rs. 466.50 for each fully paid-up share and Rs. 186.60 for each of the partly paid-up share with the previous approval of the IAC. Being aggrieved, the assessee preferred an appeal. The AAC found that it was reasonable to hold that the purchaser-company was directly or indirectly connected with the assessee and that the first condition of s. 52(1) was satisfied. He found further that the net effect of the sale of the shares was that the assessee was transferring the benefit of the enhanced value of the shares to her husband and children through the shareholdings of the purchaser-company. But taking into account the fact of the issue of bonus shares by the E.M.C. Ltd. at the material time, the declaration of dividend by the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not attracted." On an application of the CIT (Central), Calcutta, under s. 256(1) of the I.T. Act, 1961, the Tribunal had drawn up a statement of case and has referred the following question of law for the opinion of this court : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sale of shares of E.M.C. Ltd. to M/s. Electrical Machines Corporation Pvt. Ltd. does not come within the purview of section 52 of the I.T. Act, 1961, and as such the assessee was not liable to pay any tax under section 45 of the Income-tax Act, 1961 ? " Mr. Suhas Sen, learned counsel for the revenue, has contended before us that the Tribunal had erred in holding that s. 52 of the Act was not attracted in the facts of this case. Having accepted that from the facts found it was possible to come to a conclusion that the object of the said transfer was to avoid or reduce the tax liability as was done by the ITO and the AAC, the Tribunal should not have substituted its own conclusion as an alternative. The Tribunal, he urged, erred further in holding that for the application of s. 52 the object of the assessee had to be proved. All that the section r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) : " ...... if the consideration for the transaction has been honestly agreed upon, with a view to benefit the purchaser and out of love and affection on account of the relationship, or with reference to particular circumstances, there will then be little room and there will, in our view, be no justification for imputing a motive to the vendor to avoid or reduce the tax liability. The consideration cannot be said to be the result of an honest dealing and at the same time it be dubbed as a device for avoidance or reduction of tax liability. What the proviso gets at for charge is the actual capital gain which the vendor should, in the circumstances, have made but is made to appear that the gain as shown by the consideration for the transaction to be much less or nil. We are not persuaded to think that the proviso discourages or avoids honest transactions made out of love and affection or for other conceivable reasons on pain of being on an assumption, hauled up, if we may use the expression, for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value. That s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances, the Tribunal was justified in holding that the provisions contained in s. 52 of the I.T. Act, 1961, were not applicable to the facts of the case. The High Court found that the only circumstance relied upon by the revenue for drawing an inference that the object of the assessee was to avoid liability under s. 45 of the Act was the low price for which the property in question had been sold, that the sale in question was made in favour of a company in which the assessee and his family were interested and that the object of such a transfer was not to make profit for the transferor. It was held that on the material placed before the Tribunal it was justified in coming to the conclusion that the transfer was not made with the object of avoiding the assessee's liability under s. 45 of the Act. (d) Babubhai M. Sanghvi v. CIT [1974] 97 ITR 213 (Bom). This decision was cited for the following observations of the Bombay High Court in construing s. 12B of the Indian I.T. Act, 1922 : " Before the proviso could be invoked by the Income-tax Officer the second condition that he is required to be satisfied about is that he must have reason to believe that the sale or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated in the sale deed. This decision was confirmed by the Tribunal. On a reference, the Kerala High Court, inter alia, noted the difference between sub-ss. (1) and (2) of s. 52 and, in the context of s. 52(1), observed as follows : " In what circumstances it will be possible for the Income-tax Officer to state justifiably that he had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45 it may be difficult to define for all types of cases, as the conclusion must vary depending on the facts and circumstances of each case." The High Court expressed no final opinion on the point. (f) ITO v. Buragadda Satyanarayana [1977] 106 ITR 333 (AP). Here the assessee sold certain buildings to his son at a price higher than the cost price and disclosed an amount of capital gain. The ITO applied s. 52 of the I.T. Act, 1961, and on the basis of the estimated market value determined the capital gains at a higher figure. The petitioner challenged this order of the ITO in an application under art. 226 of the Constitution on the ground that, as he had been assessed to gift-tax on the difference between the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) P. Ltd. v. Commissioner of Income-tax [1972] 83 ITR 710 the Supreme Court, construing section 52 of the Act, opined that the question whether the object of the assessee in transferring assets was to avoid or reduce his liability to tax on capital gains by making the transfer, does not involve the application of any legal principles to the facts established by the evidence and that the intention with which the particular transfer is made and the object which is to be achieved by such transfer is essentially a question of fact, the conclusion relating to which is to be arrived at on a consideration of the relevant material." To appreciate the controversy involved in this reference we have to consider the scheme of Chap. IV of the Act under the head " Capital gains ". The relevant sections are as follows Section 45 " Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54C and54D, 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 " . Section 48 " Mode of computation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferee by making over to him an asset for a consideration of less than its market value. In several cases cited it appears that the ITO having found that the market price of the asset transferred was higher than the transfer price immediately concluded that he had reason to believe that the object of the transfer was the avoidance or reduction of the liability of the assessee to pay tax on capital gains. As we construe the section, in every case the market price must be found higher than the transfer price in order that the section might apply as otherwise there would be no question of avoidance or reduction of the tax liability. This is, however, one of the preconditions which must be found to exist before the second part of s. 52(1) would become applicable but we would not like to construe the section to mean further that, in every case, where the market price is found to be higher than the transfer price, this by itself would constitute sufficient reason for the ITO to believe that the object of the transaction was to avoid or reduce the tax liability. This construction would lead to the application of the section automatically in every case where the market price would be h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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