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TMI Blog1977 (8) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,346, he executed a promissory note in favour of his brother. In the return filed for the assessment year 1966-67, the assessee declared a capital gain of Rs. 15,756 on the transfer of the shares of K. C. P. Ltd., which he himself had acquired earlier at Rs. 1,08,702. The Income-tax Officer, A-Ward, Vijayawada, having regard to the fact that the market value of a share of K.C. P. Ltd. was Rs. 22.30 issued a notice to the assessee to show cause why he should not be assessed to tax invoking section 52(1) of the Income-tax Act. It was explained by the assessee on December 16, 1968, that the transaction was only for the purchase of shares of Challapalli Sugars in order to acquire controlling interest of that company and for that purpose, he had also exchanged K. C. P. Ltd. shares for a value which was less than the market rate. That explanation of his was not accepted by the Income- tax Officer on the ground that there was substantial difference between the market rate and the face value of the shares of the K. C. P. Ltd. Before initiating action, the Income-tax Officer had obtained the prior approval of the Inspecting Assistant Commissioner. The Income-tax Officer determined the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset is irrelevant in construing section 52(2) of the Act. According to him, even on the assessee's own showing, he would not have transferred the shares to his brother at the face value of Rs. 10 per share, but for the advantage he would gain by purchasing the shares of Challapalli Sugars Ltd., to get the controlling interest in Challapalli Sugars Ltd. In other words, it is his case that the controlling interest, which is expected to accrue to him, makes up the difference between the face value and the market value of the assets transferred. Mr. Parvatha Rao, appearing for the assessee, contended that, in view of the findings of fact recorded by the Tribunal, the case does not fall either under section 52(1) or under section 52(2) and that there is no warrant for interfering with the construction placed upon sub-section (2) of section 52 by the Tribunal. So, what has to be considered by us in this reference is whether the transfer of equity shares of K. C. P. Ltd. by the assessee to his brother was effected with a view to avoid the tax liability or to have the tax liability reduced. We have also to see whether the fair market value of the shares transferred by the assessee exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transfer. (2) Without prejudice to the provisions of sub-section (1), if in the opinion of the Income-tax Officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent. of the value so declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer ..............." (Proviso not necessary). As already stated by us, the first question to be considered is whether the transactions in question were entered into for bona fide reasons on account of the relationship between the assessee and his brother and whether the assessee effected the transfer with the object of avoidance of tax or reduction of tax liability. For avoidance of payment of tax, it should be shown that the assessee has tried to avoid payment of tax or to have the tax liability reduced by some device or design. The Supreme Court, while approving the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. As has been pointed out by the House of Lords in Inland Revenue Commissioners v. Brebner [1970] 76 ITR 436, where there are two ways of carrying out a genuine commercial transaction, one by paying the maximum amount of tax, and the other by paying less, it would be wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects was, for the purposes of the section, avoidance of tax. It is, therefore, obvious from the findings recorded by the Tribunal that the case of the assessee does not fall under section 52( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1967] 66 ITR 622. The Supreme Court said that the expression " full consideration " in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him and that the main part of section 12B(2) provides that the amount of capital gain shall be computed after making certain deductions from the " full value of the consideration for which the sale, exchange or transfer of the capital asset is made ". Therefore, the full value of the consideration of the capital asset, in this case, " shares ", is the consideration received by the assessee for their transfer to his brother. It is not the case of the department that the assessee had received more than what was declared by him as the full value of the consideration received by him. The object of introducing sub-section (2) in the Finance Act of 1964 was to deal with cases of transfers for less than the market value with the object of avoidance of tax or reduction of tax liability. In our view, it does not cover cases where the consideration recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the income-tax authorities was invited to the speech of the Finance Minister in the Lok Sabha at the time of insertion of the provisions of section 52(2). In this circular, the Central Board of Revenue has clearly told the officers that sub-section (2) of section 52 is not to levy tax on perfectly bona fide transactions where the full value of consideration received has been correctly declared by the assessee. A circular like this issued by the Board is binding on the department. The speech of the Finance Minister which is extracted in the circular for the benefit of the taxing authorities reads : " Today practically every transaction of the sale of property is for a much lower figure than what is actually received. The deed of registration mentions a particular amount ; the actual money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted ...... It does not aim at perfectly bona fide transactions....... but essentially relates to the day-to-day occurrences that are happening before our eyes in regard to the transfer of property. I think, this is one of the key sections that should help us to defeat the free play of un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lain words in the section. We are unable to say that the words are so plain in section 52(2) as to straightaway hold that the legislative intent is amply borne out by the language employed therein. Section 52 is intended only to cover cases where the assessee does not declare the full value of the consideration received or accruing to him with the object of avoidance of tax or reduction of tax liability. There is nothing in the language of section 52(1) or 52(2) to suggest that Parliament intended to tax as income something which in no rational sense can be regarded as income by the assessee. The likely advantage which the assessee was to gain by the transfer of the shares cannot be construed as coming within the ambit of profits and gains of business or profession. The intention of Parliament could not have been to levy tax where no right to profits or gains accrues or arises on the transfer of capital assets. Section 52, therefore, applies to cases of understatement of consideration, that is to say, where consideration received is more than what was declared and not to cases of bona fide transfers of capital assets where nothing more than what was declared was received. The view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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