SETHURAMAN J. - These three references have been made by the Income-tax Appellate Tribunal at the instance of Additional Commissioner of Income-tax, referring the following two questions, which are common to all the three references :
'1. Whether the Tribunal was right in its construction of section 52(2) of the Income-tax Act, 1961, and in holding on the basis of that construction that the Income-tax Officer was not justified in computing the capital gains in this case on this basis of the market value of the shares as on the date of transfer ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in directing the Income-tax Officer to determine the full value of consideration received by the assessee for computation of capital gains under section 52(2) of the Income-tax Act, 1961. by setting aside the assessment ?'
The facts in T.C. No. 278 of 1972, which gave rise to the above questions, are as follows 'The assessee, a Hindu undivided family, held 20 equity shares in M/s. Premier Transports (Private) Ltd. These shares had been acquired at a cost of Rs. 2,000 and were sold in the financial year 1967-68 for Rs. 15,000. The assessee returned the capital gains of Rs. 13,000 with reference to the sale of these shares. Taking into account the balance-sheet of the company at or about the time of the transaction, the Income-tax Officer found that the break-up value of the said shares would be Rs. 2,079 per share. He, therefore, considered that since the sale price declared by the assessee was less than the market price ascertained by the break-up value method, the provisions of section 52(2) of the Income-tax Act, 1961, were applicable and after obtaining the approval of the Inspecting Assistant Commissioner as required by the said provisions, he computed the capital gains to be Rs. 39,580 as against Rs. 13,000 returned by the assessee. The appeal filed by the assessee before Appellate Assistant Commissioner was unsuccessful and when the matter came before the Tribunal the instance of the assessee, the assessee contended that the computation of the capital gains should be based on the actual consideration arising to the assessee from the transfer of the shares in question, and not on the basis of its fair market value and that section 5(2) of the Act had no application to the facts. The Tribunal held that the necessary ingredient for invoking section 52(2) had not been established. It, however, set aside the assessment, observing that the correct computation of the capital gains had not been made by the Income-tax Officer.
In T.C. No. 282 of 1972, the assessee, another undivided family, held 20 shares in M/s Trichy Town Transport Private Ltd. Karur, which were disposed of during the relevant accounting year ending on 31st March 1968, for a sum of Rs. 20,000. Deducting the cost of the said shares of Rs. 2,000, the assessee returned the capital gains of Rs. 18,000. The Income-tax Officer applied the provisions of section 52(2) of the Act, arrived at the market value of the shares at Rs. 45,520 by applying the break-up value method and determined the capital gains to be Rs. 45,520 which he brought to tax. The appeal before the Appellate Assistant Commissioner was unsuccessful. On further appeal, the Tribunal passed the same order as it did in T.C. No. 278 of 1972.
In T.C. No. 283 of 1972, the assessee held 30 equity shares in M/s. Trichy Town Transport (Private) Ltd., Karur, which were disposed of in the accounting year ending on 31st March, 1968, for Rs. 30,000. Deducting the cost of Rs. 3,000 the assessee returned Rs. 27,000 as the capital gains assessable on the scale on the sale of the said shares. The Income-tax Officer invoked the provisions of section 52(2) of the Act, arrived at the market price of the said shares at Rs. 68,280 and determined the capital gains to be Rs. 65,280 which he brought to tax; the assessees appeal to the Appellate Assistant Commissioner was unsuccessful. On further appeal, the Tribunal passed the same order as it did in T.C. No. 278 of 1972.
As already stated, the two questions referred in all the three cases are identical. It is convenient to take up the second question for consideration first. The Tribunal has set aside the assessment on the ground that the correct computation of the capital gains had not been done by the Income-tax Officer. In doing so, the Tribunal has observed as follows :
'What was the full value of the consideration received by the appellant in the instant case should be a matter of enquiry and investigation by the Income-tax Officer. Such an enquiry and investigation cannot be short-circuited by the Income-tax Officer by taking the fair market value and equalling (sic) it as the full value of the consideration received by the assessee. That would be reversing the process and since section 52(2) specifically provides that the full value of the consideration for the capital asset should be taken to be its fair market value, it is obligatory on the part of the Income-tax Officer to investigation and find out the full consideration received by the assessee for the transfer of the capital asset. If the consideration declared by the appellant was the full value of the consideration for transfer of such capital assets and if there was no understatement of consideration received with a view to dishonestly evade tax liability, section 52(2) cannot be invoked. As the necessary ground for invoking section 52(2) has not been established and since the correct computation of capital gains has not been done by the Income-tax Officer, the assessment made cannot be legally sustained.
In the result, the assessment order passed by the Income-tax Officer in set aside the case is sent back to his file for de novo consideration in the light of the observation made above.'
There is no suggestion in the assessment order or in the order on appeal by the Appellate Assistant Commissioner that the consideration as shown by the assessee was not the correct consideration and that the was in receipt of the additional amount not declared in the return. When there was no such suggestion, there was no scope for any further investigation by the Income-tax Officer. Even at this stage, there is no suggestion on behalf of the department that any extra amount had been received, so that the matter could be the subject of enquiry. We shall consider presently the question as to whether section 52(2) could be invoked on the facts herein. But in so far as the Appellate Assistant Commissioner has been set side for the reasons extracted above from the order of the Tribunal, we are unable to accept the correctness thereof. As the de novo enquiry is bound to be an exercise in futility, we consider that the Tribunal did not act properly in so far as it set aside the assessment. We, therefore, answer the second question in the negative in all the cases.
We now take up for the consideration the first question. Section 52(2) of the Act, as it stood at the relevant time, ran as follows :
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 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, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date 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 the 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.....' As pointed out already, in the absence of any suggestion by the department that the assessee had received any extra amount in addition to what has been declared in the assessment proceedings as the sale price of the shares, we have to proceed on the basis that the transfer of the shares was effected actually for the consideration set out in the respective transfer deeds. The question is whether section 52(2) is attracted on the above facts. We have, in this context, to examine some earlier cases under the Act of 1922.
In the Indian Income-tax Act of 1922, the corresponding provision was in the form of a proviso to sub-section (2) of section 12B. That provision ran as follows :
'12B (2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely :-
(i) expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer;
(ii) the actual cost to the of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of section 8, 9, 10 and 12 :
Provided that where a person who acquires a capita asset from the, whether by sale, exchange, relinquishment or transfer, is a person with whom the assessee is directly or indirectly connected, and the Income-tax Officer has reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange, relinquishment or transfer took place.'
It may be seen from the language of the proviso that the full value of the consideration, for which the sale, exchange relinquishment or transfer was made, had to be taken to be the fair market value. That would mean, taking the words in their ordinary sense, that the value mentioned in the particular transaction should be taken to be the fair market value. No statutory provision would be needed to state that the consideration set out in the document of transfer would be the fair market value, as that would be stating the obvious. The expression used, therefore, could only have some different meaning and this meaning was set out by the Supreme Court in Commissioner of Income-tax v. George Henderson and Co. Ltd. : [1967]66ITR622(SC) as follows :
'... and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration.'
In construing this provision, the same view was expressed by this court in Sundaram Industries Private Ltd. v. Commissioner of Income-tax [1069] 74 ITR 243 . The assessee in that case was a private limited company. On 19th August, 1954, it purchased 669 shares in the Southern Roadways Private Ltd., for a sum of Rs. 93,660. On 19th December 1958, it sold these shares to certain persons related to its directors for s sum of Rs. 66,900. The Income-tax Officer applying the proviso in section 12B(2) of the Act of 1922 considered the market value of the shares to be Rs. 1,56,064 and he treated the difference between the said market price and the cost of the shares as the capital gains on the sale of the shares made during the accounting year, relevant for the assessment year 1959-60. It is this assessment which ultimately reached this court on reference. After setting out the provisions, commenting on the language used, this court observed as follows at page 246 :
'In fact, if literal effect is given to the words actually used, it must be said that the purpose of the proviso will be otiose. The proviso refers to the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall... be taken to be the fair market value and that would mean that the value mentioned in the particular transaction as the consideration shall be taken to be the fair market value. If we give effect to these words, as we should, nothing more need be said against the revenue in this case. But we shall proceed on the basis that roughly the intention has been brought out notwithstanding the clumsy phraseology that where there is a difference between the consideration for the transaction and the fair market value, the consideration for the transaction shall be taken to be the fair market value.'
In other words, the fair market value was to be treated as consideration for the transaction if the proviso to section 12B(2) had to be invoked. This court pointed out the circumstances to which alone the proviso could be invoked observing as follows at page 247 :
'It is obvious that the transaction should be a real one and has been acted upon. But the connection directly or indirectly between the vendor and purchaser may serve as the starting point for a probe as to the motive for the transaction. If in the search for the motive in the light of tangible material the Income-tax Officer is of opinion that the consideration recited for the transaction, which is lower than the fair market value, was a means to avoid or reduce the tax liability, all the requisites required for invoking and applying the proviso would have been satisfied. But where it is found or there is nothing to show that the consideration for the transaction, though lower than the fair market value, is not a means or device or a cloak to avoid or reduce the tax liability, the proviso will have no application. It reduces itself to this that, 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 simply, as we read the proviso, is not its purpose. It does not treat what is not an actual capital gain as a deemed capital gain. In fact, occurring as it does as the first proviso to sub-section (2) dealing with the procedural aspect of computation, it should we think, be interpreted as limited to escaped capital gain, which is so in truth and in fact, and not intended to bring about fictional gain on an assumption and charge the same.'
In Sivakami Company Private Ltd. v. Commissioner of Income-tax : [1973]88ITR311(Mad) , this decision was followed. That was also a case of a company selling certain shares held by it to persons who were directly or indirectly connected with it at prices considerably less that their break-up value. In that case also the proviso to section 12B(2) had been invoked. This court held after referring to the decision in Sundaram Industries Private Ltd. v. Commissioner of Income-tax : [1969]74ITR243(Mad) and also to a decision of the Kerla High Court (by a learned single judge) in K. P. Varghese v. Income-tax Officer : [1970]77ITR719(Ker) as follows - See : [1973]88ITR311(Mad) :
'On a reading of the entire provisions in section 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.
In the later case that came before this court in Commissioner of Income-tax v. Rikadas Dhuraji [1976] 103 (Mad) 111, this court was concerned with the assessment of capital gains under the Act of 1961 of an assessee which was a firm consisting of four partners. The firm had purchased a house property, whose cost came to Rs. 63,327. On 1st November, 1962, three of the partners executed a release deed by which they released all their rights in the said property in favour of the fourth partner and in the said document the value of the property was shown as Rs. 64,000. The Income-tax Officer applying section 52(1) of the Act of 1961, which corresponds to the first proviso to section 12B(2) of the Act of 1922, determined the market value at Rs. 1,05,000 and computed the capital gains at Rs. 41,000. It is this assessment which ultimately reached this court and this court construed the provisions of section 52(1) in the same way as the proviso to section 12B(2) of the earlier Act had been construed in the earlier decisions cited already and the scope of section 52(1) was set out as follows at page 122 :
'Thus, section 52 applies to cases of understatement of consideration where the consideration received is more and not to cases of bona fide transfers where nothing more is transfers where nothing more is received than that recited in the documents itself.'
The decisions of the other High Courts in which the same view had been taken have also been cited in the said decision.
Thus, the decisions binding on us are in favour of the construction that the provisions of section 52(1) are attracted only in cases of understatement of consideration, and not to cases where a higher gain is estimated to arise. Another point that was taken in Commissioner of Income-tax v. Rikadas Dhuraji : [1976]103ITR111(Mad) was that the provisions of section 52 were not effective to create a charge. That contention was taken on the following premises : Capital gain is taxed in accordance with the provisions of section 45 to section 55, as in force in the relevant years. For our purpose it is enough to refer to section 45 and section 48. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall 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 provides :
'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 asset 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.'
The point sought to be taken was that unless section 52 provided that the difference between the fair market value and the consideration shown in the transaction was deemed to be the consideration received or accruing as a result of the transfer of the capital asset, there would be no effective charge with reference to the said difference. In dealing with this contention this court observed at page 119 in Commissioner of Income-tax v. Rikadas Dhuraji : [1976]103ITR111(Mad) as follows :
'Now, undoubtedly, section 52(1), subject to the condition specified therein, deems the market value of the capital asset on the date of transfer as the full value of the consideration for the transfer. The result of it is that by this fiction not only the consideration agreed to between the parties but the difference between that amount and the fair market value shall be deemed to be the consideration for the transfer. Now, therefore, this deemed consideration, which is the fair market value, consists of the consideration which was actually received or accruing and the consideration which was not in fact received or accruing. While the section deemed that portion of the consideration which was not received or accruing also to be included in the full value of the consideration for the transfer, it did not deem it to have been received or accruing though it was not received or accrued. If the difference between the fair market value and full value of the consideration received or accruing as a result of the transfer shall also be taken into consideration in computing the capita gains, that portion should also have been deemed as having been received or accrued as a result of the transfer which the section failed to do... We are also unable to agree with the learned counsel that the words received or accruing as a result of the transfer in section 48 are redundant. We cannot read a section, omitting certain words used therein or inserting certain words which are not found there... That, in our opinion would amount to amending the provisions which we are not entitled to do.'
The result following from a consideration of the above case is that honest and genuine transaction are not hit by the proviso to section 12B(2) or section 52(1) and that the full value of the consideration for the transfer which is to be taken to be the market value (or vice versa) is the amount which has been actually received by or which has accrued to the assessee though not received by him. Thus, in order to support an assessment to to capital gains under section 52(1), there must be materials to show that some amount in excess of what is shown under the transaction as receipt has been either received or has accrued. In other words, section 52(1) applies to cases of understatement and not to cases where there is no understatement by the assessee, but where the tax authorities are of the view that the property would have fetched a higher price. This view that the provision is intended to apply on to cases of understatement is also supported by the observations of the Supreme Court in Killick Nixon and Co. v. Commissioner of Income-tax : [1967]66ITR714(SC) , running as follows :
'It is open to the Income-tax Officer, it it appears to him, that with the object of avoiding or reducing the liability of the assessee to pay tax, the full value of the consideration for which the sale, exchange or transfer is made is understated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected, to determine the fair market value of the capital asset on the date on which the sale, exchange or transfer took place. : (Underlinong oues).
Though the above observations were made in the context of the proviso to section 12B(2), as pointed out already, section 52(1) is identically worded and, therefore, the same construction should apply to that provision.
The question that now arises is whether the above interpretation holds good for section 52(2) also. Sub-section (2) of section 52 was inserted by the Finance Act of 1964 with effect from the 1st April, 1964. Section 52(1) was intended to apply to cases where the transferee was a person who was directly or indirectly connected with the assessee and where the Income-tax Officer had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to tax on capital gains. This provision left a loophole in cases where the transfer was effected in favour of strangers. In order to block this loophole, sub-section (2) was enacted. That starts with the words 'without prejudice to the provisions of sub-section (1)'. The meaning of these words is not. If sub-section (1) is intended apply to transaction in favour of persons with whom the transferor is directly or indirectly connected, and sub-section (2) has been enacted to apply to cases where the transfer was in favour of strangers, the two provisions would apply to two different and independent situations. But, the words 'without prejudice to the provisions of sub-section (1)' suggest the sub-sections (1) and (2) would be invoked in one and the same case and this assumption does not appear to be correct. Sub-section (2) employs a rough and ready test to find out how much of the understatement of consideration would call for the application of the provision. If the fair market value of a capital asset transferred by the assessee as on the date of the transfer exceeded the full value of the consideration declared by the assessee by not less than 15% of the value so declared, then the full value of the consideration for such capital asset had to be taken to be its fair market value on the date of its transfer. In other words, if the declared value was Rs. 1,00,000, unless the fair market value exceeded Rs. 1,15,000, sub-section (2) of section 52 could not be invoked. However, the words used in sub-section (2), in providing the consequences following the fair market value exceeding 15% of the declared value, run as follows :
'the full value of the consideration for such capital asset shall,... be taken to be its fair market value on the date of its transfer.'
In sub-section (1) also the words used are :
'the full value of the consideration for the transfer shall,... be taken to be the fair market value of the capital asset on the date of the transfer.' When identical words are used in both the provisions, the same interpretation should govern both of them. Therefore, the decision of this court in Commissioner of Income-tax v. Rikadas Dhuraji : [1976]103ITR111(Mad) has to be applied. In the absence of the difference between the fair market value and the full value of the consideration being deemed to be the capital gain received by or accruing to the assessee, it will not be possible to tax the assessee to capital gains under section 52(2). It is true that though the same words occur in both the provisions, they need not be given the same interpretation if the context suggests the contrary. We were not referred to any special feature in sub-section (2) so as to justify a departure from the construction placed on sub-section (1).
In fact, in the only other case where sub-section (2) came in for consideration, the Karnataka High Court has held that it would not apply to cases of bona fide transfer not involving any understatement of consideration for the transfer in Additional Commissioner of Income-tax v. M. Ranga Pai : [1975]100ITR413(KAR) . That case has considered all the earlier cases. We are in agreement with the view taken by the Karnataka High Court, though we may observe that some of the reasons given therein do not appeal to us. We would rest our decision on the uniform construction that section 52(1) has received in all the above cases. viz., that it applies only to transactions of understatement. Sub-section (2) cannot stand out and apply to different categories of transactions, as Parliament has, apart from providing a rough and ready test as to when the provisions should apply, used identical language. While sub-section (1) deals with cases of the transferor being connected directly or indirectly with the transferee, sub-section (2) does not import such a requirement. The transferor and transferee may be strangers. While sub-section (1) would apply to cases of transfer effected with the object of avoidance or reduction of the liability of the assessee under section 45, more or less the same requirement is postulated by the assessee under section 45, more or less the same requirement is postulated by the assessee effecting the transfer for an amount, which does not represent the fair market value, the fair market value exceeding the stated consideration by more than 15%. This arithmetical test also shows that the transaction intended to be hit by it is one with a view to avoidance of tax. Thus, both the provisions are designed for the same purpose, viz., to stop avoidance of the capital gains. Therefore, the same construction which applies to sub-section (1) would also have to be applied to sub-section (2). The result is that sub-section (2) also would not apply to those cases of honest and genuine transactions as the case before us is.
We would also attach significance to the word 'declared' occurring in sub-section (2). The word 'declared' has been used in contradistinction to 'received by' or 'accruing to the assessee'. It will not apply to cases where the assessee had not received any extra amount over and above what is shown in transaction between the parties.
The learned standing counsel drew our attention to two decisions of the Kerla High Court. The first decision is that of the Full Bench in Income-tax Officer v. K. P. Varghese : [1973]91ITR49(Ker) . In that case, the assessee transferred a property in favour of his daughter-in-law and his children for a sum of Rs. 15,500. The Income-tax Officer considered that the fair market value of the property was Rs. 65,000 and invoked the provisions of section 52(1). The transaction had already been subjected to gift-tax. The majority of the Full Bench held, disagreeing with the single judge, Isaac J., whose decision is reported as K. P. Varghese v. Income-tax Officer : [1970]77ITR719(Ker) , that section 52(1) could be applied. Raghavan C. J. has taken a different view, which is in conformity with the earlier decisions of this court in Sundaram Industries Private Ltd. b. Commissioner of Income-tax : [1969]74ITR243(Mad) . This Full Bench decision has been dissented from. We do not think that it is necessary to go further into the majority judgment in that case, as it has already been dissented from.
Another decision to which our attention was drawn is that in Commissioner of Income-tax v. N.S. and North Malbar Public Conveyance (P.) Ltd. : [1976]102ITR36(Ker) . That was a case, where the assessee, a company, sold two non-residential buildings to one of its shareholders for a sum of Rs. 80,000, while according to the Income-tax Officer the market value was Rs. 1,20,000. The question referred to the Kerala High Court was whether the provisions of section 52(1) had any scope for application thereto. The learned judges have, at the close of the judgment, referred to section 52(2) and have upheld the assessment on the basis of the provision. As the question in that case shows that the only provision sought to be applied by the Income-tax Officer was section 52(1), there was no need to go into section 52(2). The contentions that have been urged before us do not appear to have been taken before the Kerala High Court. Further, the attention of the court was not even drawn to the Full Bench decision in Income-tax Officer v. K. P. Varghese v. Income-tax Officer : [1970]77ITR719(Ker) , while reference has been made to the decision of the learned single judge in : [1970]77ITR719(Ker) in the course of the judgment. In the absence of any discussion of the points taken before us being considered in the said case, we consider that it is not possible to apply the conclusion drawn in that case to the facts herein.
For the reasons given above, we consider that the first question requires to be reframed, as it does not bring out clearly the dispute between the parties properly. the question is reframed as follows :
'Whether, on the facts and in the circumstances of the case, section 52(2) of the Income-tax Act, 1961, was properly applied ?'
We answer the said question in the negative and against the revenue. The respondents will be entitled to their costs. Counsels fee Rs. 250 each in T.C. Nos. 278 and 282 of 1972.