1. This order will dispose of two references, one (Income-tax Reference No. 20 of 1971) under Section 256(1) of the Income-tax Act, 1961, and the other (G.T. Ref. No. 21 of 1971) under Section 26 of the Gift-tax Act, 1958. These references have been made by one and the same referring order and the questions referred to are as follows :
'(1) Whether, on the facts and circumstances of the case, the transaction was properly subjected to gift-tax under Section 4(1)(a) of the Gift-tax Act?
(2) Whether, on the facts and circumstances of the case, the transaction was liable to be taxed under Section 52(1) of the Income-tax Act?
(3) Whether, on the facts and circumstances of the case, the transaction was liable to simultaneous taxation to gift-tax as well as to tax on capital gains '
2. The facts leading to these references briefly are that for the assessment year 1965-66, i.e., during the year ending 31st March, 1965, Sardarni Ahilya Raghbir Singh of Raja Sansi, Amritsar (hereinafter referred to as'the assessee'), transferred 100 shares of Simbhaoli Sugar Mills Private Ltd. of which she was the owner, to her step-son, S.B.S. Harinder Singh. These shares had the face value of Rs. 1,000 each and the sale price was also the same; Similarly, another 100 shares were transferred by her to Sardarni Bhajan Kaur, wife of the aforesaid Harinder Singh, for the same consideration. The paid-up value of these shares was Rs. 800 per share and that was 'the cost price' for the purpose of capital gain and as the shares were sold for Rs. 1,000 each, the assessee declared a capital gain of Rs. 200 per share, i.e., a total of Rs. 40,000, on these transfers. In the earlier years for the purpose of wealth-tax the assessee had also valued these shares at Rs. 1,000. The Wealth-tax Officer, during the assessment year 1957-58 and thereafter, arrived at the market value of these shares by taking the break-up value and the figure arrived at by him was Rs. 2,351 per share for 1957-58 or a higher figure in the subsequent year up to 1964-65 in which year he assessed the value at Rs. 2,938. In some years no appeal was filed while in others when appeals were filed, either before the Appellate Assistant Commissioner or before the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal'), the figure was reduced to Rs. 2,450, which was the figure for the assessment year 1959-60 and also for the assessment year 1964-65. In view of this consistent valuation taken by the Wealth-tax Officer, the Income-tax Officer felt that the assessee had deliberately adopted a low valuation in the sale and, taking the proper value, i.e., the market value as Rs. 3,362, calculated the difference and added the same as income derived out of capital gains. He further charged the assessee to gift-tax for the difference in the sale price, i.e., Rs. 1,000, and the market value arrived at by him.
3. The assessee appealed to the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer regarding levy of capital gains tax as well as gift-tax, but reduced the valuation of the shares to Rs. 2,850 each. In the further appeal, the Tribunal, relying on the past valuations, computed the value of the shares at Rs. 2,450 per share, but otherwise upheld the order of the subordinate authorities and imposed income-tax on the difference between the cost price and the computed market value, and gift-tax on the difference between the price charged and the market value.
4. On an application being made by the assessee for certain questions to be referred for decision by this court, the Tribunal declined to refer the question of valuation of the shares observing as follows :
'As is well-known, the question of valuation is a pure question of fact. The Tribunal had ample materials on basis of which they arrived at the valuation of the shares and, therefore, no question of law arises :
(i) on the question of valuation, and
(ii) on the question of intention.'
The Tribunal, however, referred the three questions mentioned above.
The learned counsel for the assessee tried to argue before us the question of valuation as well as the question of intention. He tried to take shelter behind the words 'properly subjected to gift-tax' as incorporated in question No. 1 and urged that he should be allowed to argue that the proper market value of each share did not exceed Rs. 1,000, because it was a private limited company in which shares could not be transferred to anybody that the holder liked and that the shares could be transferred only with the permission or consent of the directors. We are afraid, we cannot allow this to be done, because of a clear finding of the Tribunal, reproduced above, that no question of law arises either with regard to the question of valuation or with regard to the question of intention and the assessee felt satisfied and did not come to this court for mandamus to be issued to the Tribunal to refer these questions also. We must, therefore, proceed on the basis that the market value of each share was Rs. 2,450 on the date of the transfer and also that the intention of the assessee in making such transfers was 'avoidance or reduction of the liability'.
5. Sub-section (1) of Section 52 of the Income-tax Act is in the following terms:
' Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall,......be taken to bethe fair market value of the capital asset on the date of the transfer.'
6. Now the two conditions precedent for the application of this section are: (1) that the person acquiring the capital asset from the assessee is directly or indirectly connected with the assessee; and (2) that the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability to pay tax on capital gains as provided under Section 45 of the Income-tax Act.
7. The connection of the transferees and the assessee is obvious, the transferees being the step-son and the daughter-in-law of the assessee. As already indicated, the Tribunal, being the last court of fact, has come to the conclusion that the object of the transfer was 'avoidance or reduction of the liability'. Both the conditions precedent are consequently satisfied. That being so, the consequence follows and this consequence is that 'the full value of the consideration shall....be taken to be the fair market value of the capital asset on the date of the transfer. 'In other words, although, on the face of it, the consideration for the transfer is mentioned as only Rs. 1,000 per share, this consideration, in view of the two conditions, already mentioned, having been satisfied, 'shall be taken to be'Rs. 2,450 which is the market value as found by the Tribunal. If that be so, the capital gain would be arrived at by deducting the cost price, being Rs. 800, from the market value, being Rs. 2,450. This amount being the capital gains shall be liable to be taxed as income and this is what has been done by the Tribunal and the authorities subordinate to it. The answer to question No. 2, therefore, has to be given in the affirmative. Hardly any arguments were addressed against this.
8. This now brings us to the matter which is in controversy. Having treated the sale as for a consideration of full market value, can this transaction be treated as a transaction of gift under Section 4 of the Gift-tax Act Relevant part of Section 4 runs as under:
'4. (1) For the purposes of this Act,-- (a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor. .....'
9. No doubt the transaction, as it originally stood, on the face of it, was not for adequate consideration. However, by the operation of Sub-section (1) of Section 52 of the Income-tax Act, the consideration for the transfer has been 'taken to be the fair market value of the capital asset' so transferred. That being the case, the property cannot be deemed to have been transferred 'otherwise than for adequate consideration'. The argument of the learned counsel for the revenue was that, in fact, the transfer was not for full consideration, it is only deemed to be for full consideration under Section 52(1) of the Income-tax Act and, for the purpose of the Gift-tax Act, it cannot be said that the consideration was fair market value of the asset. We are afraid, we cannot agree with this. In this connection, as noticed by the Tribunal in its judgment, reference may be made to East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] A.C. 109; [1951] 2 All E.R. 587 (H.L.) where, at page 132 of the report, it was observed as follows:
'If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs ; it does not say that, having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.'
10. Now, in the present case, the assessee made the transfer for consideration of Rs. 1,000. This he treated to be the proper consideration. The Income-tax Officer came to the conclusion that the transferees being directly connected with the assessee, the transfer has been made for an inadequate consideration with a view to avoid his liability to payment of tax on capital gains or to reduce such liability, and having come to that conclusion, notwithstanding that the consideration in the transaction was mentioned to be inadequate, i.e., Rs. 1,000 per share, the Income-tax Officer has taken the fair market value as 'the consideration', namely, Rs. 2,450. The result, therefore, is that the Income-tax Officer has treated the transaction as if it was for Rs. 2,450 per share. Once this transaction is treated as such by the Income-tax Officer for imposing the capital gains tax, this transaction must continue to be treated for full consideration for all purposes. When once this transaction is for full consideration, the idea of any gift being involved in the transaction does not arise.
11. 'Gift' is denned in clause (xii) of Section 2 of the Gift-tax Act as under:
''Gift' means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth, and includes the transfer or conversion of any property referred to in Section 4, deemed to be gift under that section.'
12. Relevant part of Section 4 of the Gift-tax Act has already been reproduced above. In the present case, the transaction is 'taken to be' for full consideration and that being the case, the transfer, as taken by the Income-tax Officer, cannot be treated to be one for inadequate consideration.
13. The learned counsel for the revenue referred to Stevens (Surveyor of Taxes) v. Durban-Roodepoort Gold Mining Company Ltd., [1909] 5 T.C. 402 (K.B.).This was a case where an English company, carrying on a gold mining business in Transvaal, paid a tax in Transvaal at 10 per cent. on the net produce obtained from working the mines. This was a tax which was paid in the third year for the three years of which average income was to be taken for the purpose of tax according to the statute. It was held that, in arriving at the liability of the company, the tax paid in Transvaal should be deducted from the profits of the year to which it related before arriving at the average. All that the learned counsel wanted to refer was to the following observations made by the learned judge at 407 of the report:
'There could be double taxation if the legislature distinctly enacted it, but upon general words of taxation, and when you have to interpret a taxing Act, you cannot so interpret it as to tax the subject twice over to the same tax. But it all depends upon its being the same tax......'
14. The contention of the learned counsel was that, inasmuch as the income-tax is distinct from the gift-tax, both the taxes could be imposed.One cannot, however, forget that what is being taxed is one and the same taxable transaction, namely, the transfer of shares of the Simbhaoli Sugar Mills by the assessee to her step-son and daughter-in-law. Either this transaction can be treated to be for Rs. 1,000 per share and taxed accordingly or this transaction can be taken to be for a consideration equivalent to the fair market value. The circumstances in this case being such as are covered by the provisions of Section 52 of the Income-tax Act, this transaction has been 'taken to be' for a consideration equivalent to the market value. Once this transaction is taken to be for Rs. 2,450 per share, the idea of any gift being involved in the transaction vanishes and there being no gift, there can be no gift-tax. The department has to be consistent. Either it should treat the transaction as one for consideration of Rs. 2,450 or it can treat the transfer to be one of Rs. 1,000 per share only. Having treated it as a transaction for Rs. 2,450, the department cannot treat it to be a gift subject to gift-tax.
15. The only authority relied upon on behalf of the revenue was Commissioner of Income-tax v. Vadilal Lallubhai, where it was observed as follows :
'Legal fictions are only for a definite purpose; they arc limited to thepurpose for which they are created and should not be extended beyondtheir legitimate field.' This authority is hardly of much use to therevenue.
16. In view of the above the answer to questions Nos. 1 and 3 is given in the negative. There will be no order as to costs.