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TMI Blog1977 (2) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... uildings and the land described in the schedule were said to have been transferred to the Company for Rs. 2,90,000. The firm consisted of four partners namely; (i) Shri Ch. Chalamaiah, (ii) Shri Ch. Venkataratnam, (iii) Shri Ch. Ramaiah and (iv) Shri Ch. Hanumaiah. The registered document was dated 30th May, 1973. On 26th June, 1973, a notice under s. 269D(1) of the IT Act, 1961 (hereinafter referred to as the Act) was issued to the transferor and the transferee by the IAC of Income-tax Acquisition Range, Kakinada. It was stated in the notice that the fair market value of the property exceeded the apparent consideration thereof by more than 25 percent and that the full consideration had not been shown in the sale deed and, therefore, proceedings were being initiated under s. 269C of the Act for the acquisition of the aforesaid property. The transferor and the transferee were required to file objections, it any, within a period of 45 days from the date of publication of the notice in the official gazettee or within a period of 30 days from the date of service of the notice on them whichever period expired later. M/s. Chebrolu Hanumaiah and Bros. Pvt. Ltd. submitted a reply and the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by certain partners, so as to carry on the business in one form rather than in another form and hence the transfer of the assets of the firm to the company did not amount to sale or exchange. The decision of the Supreme Court in CIT, Gujarat II vs. B.M. Kharwar(1), has formulated the juristic principle that the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction." This principle applies to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence, oral or documentary, and conduct of parties to the transaction. The question that arises for our consideration in the present case is whether the transaction that took place on 30th May, 1973 amounts to a sale or an exchange. A firm carrying on business may agree with a company that the assets belonging to it shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay money consideration shares of a certain face value shall be allotted to it. In that case there are two transactions; namely, a transaction of sale and a contract under which the shares are allotted in sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence shares in a sugar company of the face value of Rs. 1,20,000 and the Zamindar and Zamindarini, in consideration of the transfer of the assets of the cinema house, transferred the shares held by them to the respondent-company. The question was whether the transaction was a sale and the second proviso to s. 10(2) (vii) of the Indian IT Act, 1922, could be applied and the excess over the written down value upto the original cost in relation to the assets of the cinema house be deemed to be profits. The Supreme Court held that in essence the transaction between the respondent-company and the Zamindar and Zamindarini was one of exchange and there was no sale of the asset of the cinema house for any money consideration and therefore the provisions of s. 10(2)(vii) did not apply. We do not think that this decision has any direct bearing on the facts of the present case. On behalf of the department, Mr. Swaminathan has contended that the money consideration was fixed at Rs. 2,90,000 and the mode of payment was by transfer of shares, and the transactions was really a sale. We think that this argument of the learned representative for the department is well founded. In the first place, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 26th Nov., 1973 to the effect that the value of the property in question was Rs. 4,54,000 On the basis of this report Shri K. Subba Roa the IAC, passed the following order: "The property has been personally inspected by me along with the Inspector. Here the transferor is a firm which transferred the land and buildings to a company floated by the same partners. The parties contended that there is no sale involved in the transaction because according to them the transferor transferred the property to itself in a different name. This is a very interesting legal issue but all the same there is transfer effected through an instrument of sale and registered with the Registrar. The property consists of extensive land of about 5 acres and godown buildings several in number and of varying sizes and extents. The transfer is made only for the book values and the same is far less than the fair market value which is worked out to Rs. 4,54,000 There is a prime facie case of under valuation as the difference between the two is more than 25 percent of the recorded consideration. I am satisfied in this case that all the three conditions laid down by s. 269-C are applicable.................. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. It is well settled that the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The belief must be held in good faith; it cannot be merely a pretence. No authority is needed for this proposition and if any authority is needed, it is found in the decision of the Supreme Court in s. Narayanappa & Others vs. CIT, Bangalore(5). We have to reject this technical objection raised on behalf of the appellants. 5. It was then contended by Mr. Swamy that the consideration recorded in the sale deed was fair and true and there was no valid reason to understate the price in the sale deed because, according to the appellant, the partners were allotted shares in the Limited Company of the face value of Rs. 2,90,000 in lieu of the money consideration. It is true that the field of investing black money and evading disclosure of income and tax by buying large properties after disclosing in the sale deed only a fraction of the sale consideration has distorted our entire economy and undermined the very basis of an egalitarian society. The parliament, in its intrinsic wisdom, thought it fit to use a more drastic remedy to curb the twin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that whatever may be the construction of the words "conclusive proof", clause (a) also raises a rebuttable presumption. Learned Counsel for the assessee has relied upon the decision of the Delhi High Court in Mahavir Metal Works (P) Ltd. and another vs. Union of India and another(6). In the striking words of Deshpande J; "Though the words "conclusive proof" are used in s. 269C(2), a reading of the above provisions together does not show that the parties to the transaction are precluded from showing that the consideration for the transfer was truly stated in the instrument of transfer. This idea is made very clear by s. 262E(3). During the enquiry that is to be held by the Assistant Commissioner the transferor and/or the transferee or any other person interested may show that the provisions of clause (a) of sub-s. (2) of s. 269C do not apply to the case concerned. The presumptions under both clauses (a) and (b) of sub-s. (2) of S. 269 are therefore, rebuttable". In view of the judicial dicta, we are of the opinion that the presumption under clause (b) as to the object of tax evasion is clearly the rebuttable presumption in every case including the case falling under clause (a) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instant case. Even assuming for a moment that the consideration was understated as was sought to be contended on behalf of the department, there was no material to induce the department to, come to the conclusion that the transaction entered into between M/s. Chebrolu Hanumaiah and Bros. Pvt. Ltd. Guntur was with the nefarious object of avoidance of capital gains tax. To recapitulate the facts, the property consisted of extensive land of about five acres and godown buildings several in number varying sizes and extents. The transfer was made only for the book value. The partners in the firm of M/s. Chebrolu Hanumaiah are the only shareholders in the Private Limited Company. The sale consideration was paid by giving 725 shares to each (Rs. 100 paid up for each share). In such circumstances, if a transfer was made to a person as a matter of business arrangement and as a result of such transfer the consideration was received in the form of shares in a Limited Company, it cannot be, by any stretch of reasoning, for avoiding liability of capital gains, unless there were factors indicating that. In the present case there was no material indicating to that effect. But the Competent Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to treat the excess over the written down value upto the original cost of the plant and machinery as profit under the second proviso to s. 10(2) (vii) of the IT Act, 1922, and it was contended on behalf of the assessee that the vendor and the vendee being the same, the profits arising therefrom were not taxable. The Supreme Court, rejecting the contention, held that the transaction which gave rise to the receipt sought to be brought to tax was of the nature of sale and that therefore the excess would be assessed under the second proviso to s. 10(2) (vii) of the IT Act, 1922. Basing himself on this decision and the decision in B.M. Kharwar's case (1) Mr. Swaminathan has strenuously urged before us that even if the consideration for the transaction mentioned in the sale deed is not fraudulent, but an honest one representing the truth, if the consideration which is lower than the fair market value has the inevitable effect of avoiding or reducing the tax liability including the tax under s. 41 (2) of the Act, that in itself would be sufficient for invoking the acquisition proceedings under s. 269C of the Act. In view of the scope and effect of s. 269C we have just now mentioned, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pparent consideration recorded in the instrument of transfer. If so much is clear, we find no difficulty in holding that the order of acquisition is vitiated in law. After all, right to property is enshrined as a fundamental right in the Indian Constitution. The Competent Authority has to be very circumspect in exercising this overriding power of acquisition when he deprives a person of such a basic right to property. We wish to say nothing more on this aspect. 6. Learned counsel for the transferee has also contended that the value of the shares arrived at by the transferee at Rs. 2,90,000 represents the fair market value, if the classical theory of the break-up method is adopted. He has contended that under s. 3 of the Wealth-tax Act, the hypothetical value as on the relevant valuation date has to be reached and under the Wealth-tax Rules, 1957, under rule ID, provision has been made for market value of unquote equity shares of companies, other than investment companies, and managing agency companies. Rule ID provides that the market value of an unquote enquity share of any company, other than an investment company or managing agency company has to be determined in the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding or reduction of tax liability; (vi) The ingredients of s. 269'C to empower the Competent Authority to acquire the property are not satisfied; (vii)The question of estoppel does not arise. (viii)the order of acquisition made by the Competent Authority is not valid in law. Since Mr. Swamy has succeeded on the main point, he must succeed in all the appeals. 7.In the result, the appeals succeed and are allowed. A. Satyanarayana, A.M I have gone through the order of my learned brother, the judicial Member, and I am in complete agreement with the reasoning and conclusions reached by him. I would, however, like to add the following observations in respect of one of the arguments put forward by Shri M.J. Swamy, the learned counsel for the transferor and transferee viz., that in order to attract the provisions of s. 269C the Revenue should establish that the actual consideration for the transfer was much more than what was shown in the instrument of transfer. 2. s. 269C reads as follows : "269-'C'. Immovable property in respect of which proceedings for acquisition may be taken. (1) Where the competent authority has reason to believe that any immovable property of a fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration must not have been truly stated in the instrument of transfer with the object of-- (a) facilitating the reduction or evasion of the liability of the transferor to pay tax under the IT Act in respect of any income arising from the transfer; or (b) facilitating the concealment of any income or wealth by the transferee for the purposes of the IT Act or the Wealth-tax Act. Sub-s (2) says that where the fair market value of such property exceeds the apparent consideration therefore by more than twenty five per cent of such apparent consideration, it shall be conclusive proof that the consideration for the transfer has not been truly stated in the instrument. It further says that where the apparent consideration is less than the fair market value, it shall be presumed, unless the contrary is proved, that the consideration for such transfer has not been truly stated in the instrument of transfer with the object of avoiding tax as referred to in clauses (a) and (b) sub-s (1). 3. It must be noted that the clause (a) of sub-s (2) speaks about the conclusiveness regarding the consideration but not regarding the objects referred to in clauses (a) and (b) of sub-s.(1) with which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the transferor had for some reason or other sold the property for a certain consideration which was less than the fair market value and received only that amount from the transferee and had shown the same correctly in the transfer deed, it cannot be said that the consideration was not truly stated in the instrument of transfer in terms of s.269C merely because it was less than the fair market value. On the other hand, if there is any evidence or material pointing to the conclusion that the transferor has really received a larger consideration than what was shown in the transfer deed then it would be a case of a consideration not being truly stated. Only in such cases the provisions of s. 269C become applicable and certainly not to cases where the consideration has been truly stated though it happens to be less than the fair market value of the property transferred. 6. In this case it is not the Department's contention that the transferor received a larger consideration than what was shown in the transfer deed. It is an admitted fact that the transfer was made at the book value of the asset as shown in the account books of the transferor. It cannot, therefore, be said that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act under Chapter XXA with a view to fight the twin evils of evasion of taxation and black money. Referring to this their Lordships of the Delhi High Court in Mahavir Metal Works Pvt. Ltd. And Another vs. Union of India and Another(6) have observed as under:-- "The acquisition of the property instead of being merely an imposition of a monetary penalty also becomes necessary because the immovable property has this peculiar quality of serving as a medium or a conduit pipe to facilitate concealment of income and evasion of taxes. People do not mind paying black money consideration though it is not stated in the sale deed because they get the full value for the consideration paid by them in the share of the immovable property. The intention of the Act is to take away this facility for being used for concealment of income and evasion of taxes. Indeed, this is the most distinctive feature of the Act." Thus, checking of black money and tax evasion being the objects for which the provisions in question are brought into the statute, they cannot apply to cases where the consideration for transfer of the properties truly shown in the transfer deed and there is no hint or suggestion of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons apply equally to any capital gain that the transferor might have denied himself from the transfer of the properly in question. Under s. 52(2) of the IT Act the transferor can be made liable to tax on a capital gain if the transfer is made for a consideration less than fair market value of the asset in question. This is one provision in the IT Act which attempts to check avoidance of tax. Cases covered by this provision do not therefore come within the ambit of s. 269C of the Act. That apart, Courts have held that even s. 52 does not apply to case of bona fide transfers. Reference is invited to the decision of the Karnataka High Court in Addl. CIT Mysore vs. M.Ranga Pai and Others. This is what their Lordships have observed: "xxxx when it is not the case of the department that there has been an under-statement of the price by the assessee, no tax can be levied on such a transfer by treating the difference between the fair market value and the actual consideration for the transfer as capital gains. The presumption is that a legislature of limited jurisdiction is legislating within the scope of its legislative powers. Parliament could not have intended to levy income-tax when no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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