TMI Blog1979 (8) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... re partners in the Firm M/s. Periwal Ice Ginning Pressing Factory, Sri Ganganager. They had equal share in the profits of the firm. For asst. yr. 1973-74 the previous year in the case of both the assessees is the financial year. During the previous year to be exact, on 10th Aug., 1972 the said firm was dissolved and on dissolution of the firm, all the assets and liabilities were divided between the aforementioned two partners. Both the partners sold 50 per cent of their respective shares in the assets of the firm, namely, land and building and plant and machinery to Smt. Parmeshwaridevi Goyal and Smt. Prameshwari Devi Sarawagi. the sale price in each case was Rs. 45,000 for the 1/4th share in the land and building and Rs. 30,000 for the 1/4th share in the plant and machinery. In other words, total value of the land and building was fixed at Rs. 1,80,000 and that of the plant and machinery at Rs. 1,20,000. On 11th Aug., 1972 the 4 ladies constituted the firm in the same name for carrying on the business. On the basis of the sale price aforementioned, the assessees worked out the profit under s. 41(2) at Rs. 24,537 in respect of the land and building and Rs. 11,495 in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he felt that the assessee's grievance about lack of proper opportunity by the valuer was correct and, therefore, in the interest of justice and equity, the learned AAC directed the ITO to refer the matter afresh to the valuer and get another valuation done so that the assessee could have proper opportunity to put across his objections before the valuer. With regard to computation under s. 41(2), the learned AAC agreed with the assessee that the sale price could not be substituted by the fair to compute the profit under s. 41(2) on the basis of the sale consideration disclosed. 6. Against the order of the learned AAC, the Revenue and also both the assessees have come up to the Tribunal with the grounds of appeal mentioned above. We taken up first the Revenue's objection against the direction of the learned AAC to the ITO to determine the profit under s. 41(2) on the basis of the actual sale consideration. As we have stated, the assessees sold 50 per cent of their respective shares in the land and building at Rs. 45,000 and the plant and machinery at Rs. 30,000. The written down value of their respective shares was Rs. 20,463 in respect of land and building and Rs. 18,505 in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration by the fair market value. The learned AAC was right in directing the ITO to work out the profit under s. 41(2) on the basis of the actual sale consideration. We sustain the AAC's order on this point. 7. We take up now the Cross-Objections of the assessee wherein the application of sub-cl. (2) of s. 52 has been challenged. This would also cover the first ground in the Revenue's appeals. As stated above, both the assessees sold 50 per cent of their respective half shares in the assets already mentioned for Rs. 45,000 (land and building) and Rs. 30,000 (Plant and machinery). Total value thus, at the relevant time, of the land and building was Rs. 1,80,000 and that of the plant and machinery was Rs. 1,20,000 according to the assessees. As against this the Departmental Valuers fixed the value of the land and building at Rs. 2,21,2000 and that of the plant and machinery at Rs. 3,97,000. As the difference between the two was more than 15 per cent ITO held that the provisions of s. 52(2) became applicable and, with the previous approval of the IAC, he applied the said provision and determined capital gain on the basis of the aforesaid fair market value of these assets determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited on both sides. The assets in question were admittedly sold by both the assessees for Rs. 45,000 (land and building) and Rs. 30,000 (plaint and machinery). The sale was evidenced by sale-deeds copies of which were furnished to the authorities. There has been no doubt about the bonafides of the transactions of sale. It is also not the case of the Revenue that the assessees received from the purchasers any amount over and above the aforesaid sale consideration. The revenue has applied s. 52(2) on the only ground that the fair market value of the assets sold as determined by the ITO exceeded the only sale consideration by more than 15 per cent. 11. The question thus is whether the authorities below have determined the capital gain arising from the sale of the assets by these assessees rightly by resorting to s. 52(2). The income from capital gain earned by an assessee has to be determined in accordance with s. 48 of the IT Act, 1961, which read as under: "The income chargeable under the head "Capital gains" shall be computed by deducting form the full value of the consideration received or accruing as a result of the transfer of the capital gain assets the following amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uine transactions of sale in case the fair market value as estimated by the taxing authorities exceeds the sale consideration disclosed by the assessee by more than 15 per cent. The Revenue's view on the authority of Kerala High Court decision in the case of ITO vs. K.P. Varghese (1) is that this provision does apply if the fair market value estimated by the ITO exceeds the sale consideration disclosed by 15 per cent or more and that it is not at all relevant to consider whether the transaction of sale is honest or genuine. In this case, their Lordships of the Kerala High Court did hold that s. 52 treats the consideration referred to in the two sub-sections therein as the fair market value and straightway attracts s. 48. The relevant observation which are at pages 59 and 60 are reproduced below: "On a conspectus of the above sections, to my mind, what flows is that profits or gains "arising from the transfer of a capital asset" shall be chargeable to tax as capital gains under s. 45; and the mode of computation provided in s. 48 shall be by deducting form "the full value of the consideration received or accruing as a result of the transfer of the capital asset," certain amounts p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t pages 560 and 561 of Vol. I of the Commentary on the Law and Practice of Income-tax by the said author:- "On a strictly literal construction and divorced from the other relevant provisions, this sub-section is a singularly irrational provision. While sub-s. (1) fairly deals with the case of a transfer for less than the market value with the object of tax avoidance sub-s. (2) has no pretentions whatever to reason or justice. It contains the unprecedented provision that if in the opinion of the ITO the fair market value of the capital asset on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer by not less than fifteen per cent of the value so declared. The full value of the consideration shall with the previous approval of the IAC, be taken to be the fair market value on the date of the transfer. It stands to reason that if the owner of an asset transfers it for less than the full market value he should be assessed to gift-tax but it is an arbitrary flat to impose on him a tax in respect of capital gains he has not made when he transfers the asset bona fide at the price of his choice without any object of tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts from tax on capital gains "any transfer of a capital asset under a gift." (d) If sub-s. (2) is literally construed as applying even to cases where the full consideration is bonafide disclosed, it would result in an amount being taxed which from no view point can be rationally considered as capital gains or any other type of income. That construction should be avoided which attributes irrationality to the legislature. Besides, under entry 82 in List I in the Seventh Schedule to the Constitution which deals with 'taxes on income", Parliament cannot "choose to tax as income an item which in no rational sense can be regarded as a citizen's income." (e) The Minister of Finance speaking in the Lok Sabha on the Finance Bill 1964 which inserted s. 52(2) gave an assurance that the sub-section is intended to hit only dishonest dealings with property and that "it does not aim at perfectly bona fide transactions. The Supreme Court has recently held that even the speech of a Minister moving an amendment may be used as an aid to correct construction (a dangerous innovation in the cannons of interpretation). (f) A general circular of the Central Board made it expressly clear that s. 52( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal gains but when a person reconveys the property for the same price in pursuance of an agreement or understanding at the time of the sale in his favour, no right to any gains or profits accrues to him. 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 legislating within the scope of its legislative powers. Parliament could not have intended to leave income-tax when no right to profits or gains accrues or arises on the transfer of a capital asset. The heading to s. 52 can be read as preamble to the section. The provisions are intended to apply only to cases under-statement of consideration for a transfer of a capital asset and not where the full consideration is shown in the deed itself. When so construed sub-s. (2) of s. 52 can be invoked only to the class of transfers where the ITO has come to the conclusion on the materials before him that it is a case of under-statement of the consideration. Once he comes to that conclusion, then, the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date on which it was transferred was, say Rs.3,50,000, the capital gains arising on the transfer will be computed by taking the full value of the consideration for the purpose of s. 48 of the IT Act to be Rs. 3,50,000 instead of the declared amount of Rs. 3 lakhs. Before making an order under this provision, the ITO is required to obtain the previous approval of the IAC. The margin of difference of 15 per cent of the declared value of the consideration for the purpose of s. 48 of the IT Act to be Rs. 3,50,000 instead of the declared amount of Rs. 3 lakhs. Before making an order under this provision, the ITO is required to obtain the previous approval of the IAC. The margin of difference of 15 per cent of the declared value of the consideration for the capital assets has been provided in sub-s. (2) to make allowances for various circumstances in which a sale may be made and also for differences in opinion in regard to the determination of fair market value of a capital asset, so that genuine or bonafide transactions where the full value of the consideration received for the capital asset has been correctly declared may not be brought within the purview of this provision. 65. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and after obtaining the approval of the IAC, he computed the capital gain at Rs. 39,580 against Rs. 13,000 declared by the assessee. Their Lordships held that in order to support the assessment to capital gain under s. 52(2) there must be material to show that some amount in excess of that is shown under the transaction as receipt has been either received or accrued. In other words. In applied to cases of understatement by the assessee but where the taxing authorities are of the view that the property would have fetched a higher amount. Their Lordships further observed that s. 52(2) would not apply to cases of honest and genuine transactions. The view taken by Karnataka High Court in 100 ITR 413 seems to have been followed by their Lordships of the Madras High Court in their case. 17. Yet another case which has been relied upon the assessee's behalf is the decision of the Andhra Pradesh High Court in Addl. CIT vs. SRY Ankineedu Prasad (4). Their Lordships took the same view as in the case of M. Rangapai (2). "We are unable to say that the words are so plain in s. 52(2) as to straightway hold that the legislative intent is amply borne out by the language employed therein. s. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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