TMI Blog1990 (7) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... against a returned loss of Rs. 1,22,170 the income of the assessee-company was assessed at Rs. 14,52,760. The CIT considered the assessment order to be erroneous and prejudicial to the interest of revenue and issued a notice dated nil in July 1986 to the assessee asking it to show cause why the assessment order may not be cancelled or suitably modified. The main reason why he considered the order as erroneous and prejudicial to the interest of revenue was given in para-5 of that notice as under :--- " 5. The action of the ITO in allowing the loss as claimed without working out the correct market value on the date of purchase and sale and without having regard to the provisions of section 52(1) of the IT Act, 1961 as the purchaser and seller are closely connected, is erroneous and prejudicial to the interest of revenue ". The assessee replied vide its letter dated 7-8-1986 where the CIT was informed that several of the facts given in his notice were incorrect such as the shares in the names of the three Directors had not been registered and that they had not been shown in the wealth-tax returns of the concerned Directors. The assessee sought to substantiate it with the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese factors into consideration and after that being fully satisfied that the purchases and sales of shares under consideration were genuine and were for bona fide reasons had accepted the contentions of the assessee on this point. 3. Thereafter, the assessee also tried to explain the legal position to the CIT that provisions of section 52(1) were not applicable because the assessee-company had neither suppressed the price when the shares were purchased nor suppressed the sale value and that full purchase and sale consideration were recorded correctly in the books. It was further explained that the capital gain computed by invoking section 52(1) is not on any fictional accrual or fictional receipt and that section 52(1) does not deem income to accrue or to be received which, in fact, never accrued or was never received. It was also explained that according to section 52(1), it was to be determined as to how much more consideration had been received by the assessee than what was declared by him and that if the assessee had fully declared the consideration for which the assets were actually sold then the provisions of sec. 52(1) were not applicable. It was further explained that sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase and sale value of the shares in accordance with the law/rules and re-frame the assessment after giving the assessee an opportunity of being heard and allowing to place any evidence on record in respect of its contentions." 5. Shri N.M. Ranka, the ld. counsel for the assessee, who appeared before us, submitted that the ITO, during the course of assessment proceedings, had raised a specific query on this subject as per the letter on page 1 of the paper book and the assessee had given a specific reply on this point as per page 3 of the paper book vide its letter dated 12-4-1983. Thereafter, this point was further clarified vide assessee's letter dated 21-11-1983 when it was pointed out that the correct date of sale of shares was wrongly typed in the earlier letter as 31-12-1979 instead of 17-12-1979 and, thus, it was only a short-term capital loss. He submitted that this showed that the ITO had actively applied his mind to this point and was satisfied regarding assessee's contentions. He submitted that thereafter the entire factual and legal position was explained to the CIT in his proceedings u/s 263, which we have already mentioned in the earlier part of this order. He subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n shall be taken to be the fair market value of the asset with the previous approval of the " Inspecting Assistant Commissioner ". He questioned whether in a case where the CIT had determined the value of the assets, was any scope for taking previous approval of the IAC left. He submitted that all the four requirements were cumulative and in the instant case, except perhaps the first, none other existed. He further submitted that in this case the CIT had alleged that when the assessee purchased the shares, it had paid more price than their correct market price. He questioned whether the ITO could re-compute the purchase price of the asset under any provision of Income-tax Law. In this context he referred to the provisions of sec. 55(2) regarding " cost of acquisition ". He submitted that nowhere in these provisions or anywhere-else the ITO was given powers to substitute fair market value at lower price than shown although according to the IT Act, a higher price could be substituted. He further submitted that in the instant case the seller of the shares are assessed to Income-tax and wealth-tax and the same value had been shown by them in their income-tax and wealth-tax assessments. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the assessee is one of the Companies, provided funds to wives of Companies Directors to acquire the shares of ASDC and JMDS. The loans remained un-paid till the shares were sold by the assessee-company and sale consideration was adjusted against loans advanced to acquire these shares and finally the shares were sold to the Directors of the assessee-company. These factors arouse strong suspicion. He further argued that K.P. Varghese's case was entirely on the question of capital gains and he questioned if the same could be applied to the case of loss and whether the assessee had really incurred a loss. In order to support his arguments that the CIT did have jurisdiction u/s 263, he referred us to the decisions reported in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi), Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.) and 111 ITR 302 (Guj.) (sic). He submitted that even if an assessment was completed in a routine manner, the CIT had jurisdiction u/s 263 to set-aside that assessment. He further argued that in the instant case not only the sale consideration was low but even the purchases had been inflated and hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and should have made that as one of the bases for setting aside the order of the ITO. 8. We have carefully considered the arguments from both the sides and have also perused the material on record. 9. So far as the question as to whether the provisions of section 52 would cover a question of loss also, we are of the opinion that this would be only of academic interest and no useful purpose would be served for the revenue if the arguments of ld. D/R are considered on the subject. We agree with Shri Ranka that in case the word " gains " does not include losses also as argued by the ld. D/R, the order of the ld. CIT will loose its very basis because it had been passed on the premises that the ITO had not taken into consideration the provisions of section 52(1) and sec. 52(1) deals only with the question of capital gains and not capital loss. However, we are of the opinion that since the consideration of profits or gains from any source would also include consideration of losses also from that source, the question of short-term capital loss cannot be said to be beyond the scope of consideration of section 52 of gm IT Act. Taken in that light, it would be obvious that all the can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r inadequate consideration, the transaction may be regarded as a gift to the extent of the shortfall in consideration for purposes of liability to gift-tax. But this short-fall in consideration, when the transaction is genuine and when the assessee does not receive more than what is stated in the deed of transfer cannot be deemed to be capital gains by invoking Sec. 52 (2). 11.2 There-after came the final exposition on section 52 in the decision of the Hon'ble Supreme Court in the case of K.P. Varghese where their Lordships of the Supreme Court, inter alia, laid down that the onus of establishing that the conditions of taxability are fulfilled, is always on the revenue. On pages 606 to 607 of the report, Their Lordships observed as under :---- " Now, it is necessary to bear in mind that when capital gains are computed by invoking sub-sec. (1) it is not any fictional accrual or receipt of income which is brought to tax. Sub-section (1) does not deem income to accrue or to be received which in fact never accrued or was never received. It seeks to bring within the not of taxation only that income which has accrued or is received by the assessee as a result of the transfer of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of consideration has to be established by the revenue and the assessment of capital gains cannot be made dependent only on the fair market value as determined by the departmental valuer. Therefore, where no material existed to support the actual under-statement of consideration on transfer of property except the determination of the fair market value by the Departmental valuer, there could be no capital gain assessable under sec. 52 of the IT Act, 1961. 12. We would presume that when the ITO completed the assessment on 13-8-1984, the legal expositions of Section 52 of the IT Act reported upto Ramkrishna Ramnath Properties (P.) Ltd.'s case were available with him and he became aware of the fact that although he had raised a query with the assessee with an intention to reject the claim of short-term capital loss claimed by the assessee, he could not do it legally and hence although he made substantial additions to the income of the assessee. On other points he did not disallow the claim of short-term capital loss of Rs. 4.5 lacs, which it is obvious he contemplated when he had raised the query during the course of assessment proceedings to which the assessee replied vide his lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned CIT issued the notice u/s 263 and finally passed his order u/s 263 setting aside the assessment order, Their Lordships of the Hon'ble Supreme Court again laid down in the case of Shivakami Co. (P.) Ltd. with reference to section 12B of the IT Act, 1922, which is in pari materia with section 52 of the IT Act, 1961 (which provisions were also actively considered by Their Lordships in Their judgment) that though the Legislation in question is to remedy a social evil and should be read broadly and should be so read that the object is fulfilled, yet the onus of establishing a condition of taxability must be fulfilled by the revenue. Secondly, unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains. Thirdly, that capital gains tax was intended to tax the gains of an assessee, not what an assessee might have gained and that what is not gained cannot be computed as gained. They further laid down that all laws fiscal or otherwise, must be both reasonably and justly interpreted whenever possible. Capital gains tax is not a tax on what might have been received or could have been taxed. 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o apply his mind to the legal aspects of those submissions. 17. The result of what we have discussed is obvious it would show that whereas the order passed by the ITO allowing short-term capital loss to the assessee was in accordance with the provisions of law as interpreted by various High Courts so also by the Hon'ble Supreme Court and although there might have been a situation where the helplessness of the Revenue might have been staring the ITO in the face yet in the circumstances as contemplated in the case of Shivakami Co. (P.) Ltd., he had to pass a legally correct order, which he did and thus, there was no error in the order of the ITO on this point. We need not mention that in view of what we have mentioned in this order the error lies in the order of the ld. CIT, who has completely ignored not only the provisions of section 52(1) of the IT Act but has ignored the written submissions of the assessee which were based on the decisions of various High Courts and of the Hon'ble Supreme Court. 18. We further agree with the ld. counsel for the assessee that the directions of the ld. CIT to consider the question of the purchase price of the shares is beyond his jurisdiction b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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