TMI Blog1981 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in respect of the transfer by an amount of not less than 15% of the value so declared. The facts giving rise to the appeal are not very material but since they form the backdrop against which the question arises for consideration we may briefly state them. The assessee was the owner of a house situated in Ernakulam, which he had purchased in 1958 for the price of Rs. 16,500. On 25th December, 1965, the assessee, sold the house for the same price of Rs. 16,500 to his daughter-in-law and five of his children. The assessment of the assessee for the assessment year 1966-67, for which the relevant accounting year was the calendar year 1965, was thereafter completed in the normal course and in this assessment, no amount was included by way of capital gains in respect of the transfer of, the house since the house was sold by the assessee at the same price at which it was purchased and no capital gains accrued or arose to him as a result of the transfer. On 4th April, 1968, however, the ITO issued a notice under s. 148 of the Act seeking to reopen the assessment of the assessee for the assessment year 1966-67 and requiring the assessee to submit a return of income within thirt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of s. 52, sub-s. (2), and since in the present case there was admittedly no under-statement of consideration and it was a perfectly bona fide transaction, s. 52, sub-s. (2), had no application and the sum of Rs. 48,500 could not be brought to tax as capital gains under that provision. The revenue appealed against this decision to a Division Bench of the High Court and having regard to the importance and complexity of the question involved, the Division Bench referred the appeal to a Full Bench of three judges. The Full Bench heard the appeal but there was a difference of opinion, two judges taking one view and the third judge taking another. While Raghavan C.J. agreed substantially with the view taken by Isaac J., Gopalan Nambiar J. and Vishwanatha Iyer J. took a different view and held that in order to bring a case within s. 52, sub-s. (2), it was not at all necessary that there should be understatement of consideration in respect of the transfer and once it is found that the fair market value of the property as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reto. Then follows s. 52 which is the material section requiring to be construed in the present appeal. That section consists of two sub-sections and runs as follows: "(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 an 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out by Lord Denning, it would be idle to expect every statutory provision to be " drafted with divine prescience and perfect clarity ". We can do no better than repeat the famous words of judge Learned Hand when he said: " ...... it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning." We must not adopt a strictly literal interpretation of s. 52, sub-s. (2), but we must construe its language having regard to the object and purpose which the Legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which s. 52, sub-s. (2), appears, because, as pointed out by judge Learned Hand in the most felicitous language: ".. ...... the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him. It is difficult to conceive of any rational reason why the Legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carries out such a contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income which has neither arisen to the assessee nor has been received by him. If we may take another illustration, let us consider a case where sells his property to B with a stipulation that after some time which may be a couple of years or more, he shall re-sell the property to A for the same price. Could it be contended in such a case that when B transfers the property to A for the same price at which he originally purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of re-sale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15%. Many other similar situations can be contemplated where it would be absurd and unreasonable to apply s. 52, sub-s. (2), according to its strict literal c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer and the assessee shall be taxed on capital gains on that basis. The second condition obviously involves an under-statement of the consideration in respect of the transfer because it is only by showing the consideration for the transfer at a lesser figure than that actually received that the assessee can achieve the object of avoiding or reducing his liability to tax on capital gains. And that is why the marginal note to s. 52 reads: " Consideration for the transfer in cases of under-statement ". But, it must be noticed that for the purpose of bringing a case within sub-s. (1), it is not enough merely to show under-statement of consideration but it must be further shown that the object of the under-statement was to avoid or reduce the liability of the assessee to tax on capital gains. Now, it is necessary to bear in mind that when capital gains are computed by invoking sub-s. (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 net of taxation only that income which has accrued or is received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as far back as 1584 when Heydon's case [1584] 3 Co. Rep. 7a was decided that: " ......for the sure and true interpretation of all statutes in general ...... four things are to be discerned and considered: (1) what was the common law before the making of the Act, (2) what was the mischief and defect for which the common law did not provide, (3) what remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth. And, (4) the true reason of the remedy; and then the office of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy ...... .." In In re Mayfair Property Company [1898] 2 Ch 28 (CA), Lindley M.R. in 1898 found the rule " as necessary now as it was when Lord Coke reported Heydon's case ". The rule was reaffirmed by the Earl of Halsbury in Eastman Photographic Materials Company Ltd. v. Comptroller-General of Patents, Designs and Trade-Marks [1898] AC 571, 576 (HL) in the following words : " My Lords, it appears to me that to construe the statute now in question, it is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which the former A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, the other in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 and the third in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, where the speech made by the Finance Minister while introducing the exclusionary clause in s. 2, cl. (15), of the Act was relied upon by the court for the purpose of ascertaining what was the reason for introducing that clause. The speech made by the Finance Minister while moving the amendment introducing sub-s. (2) clearly states what were the circumstances in which sub-s. (2) came to be passed, what was the mischief for which s. 52 as it then stood did not provide and which was son lit to be remedied by the enactment of sub-s. (2) and why the enactment of sub-s. (2) was found necessary. It is apparent from the speech of the Finance Minister that sub-s. (2) was enacted for the purpose of reaching those cases where there was under-statement of consideration in respect of the transfer or to put it differently the actual consideration received for the transfer was "considerably more" than that declared or shown by the assessee, but which were not covered by sub-s. (1) because the transferee was not directly or indirectly c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But apart from these considerations, the placement of sub-s. (2) in s. 52 does indicate in some small measure that Parliament intended that sub-section to apply only to cases where the consideration in respect of the transfer is understated by the assessee. It is not altogether without significance that the provision in sub-s. (2) was enacted by Parliament not as a separate section, but as part of s. 52 which, as it originally stood, dealt only with cases of under-statement of consideration. If Parliament intended sub-s. (2) to cover all cases where the condition of 15% difference is satisfied, irrespective of whether there is understatement of consideration or not, it is reasonable to assume that Parliament would have enacted that provision as a separate section and not pitchforked it into s. 52 with a total stranger under an inappropriate marginal note. Moreover, there is inherent evidence in sub-s. (2) which suggests that the thrust of that subsection is directed against cases of understatement of consideration. The crucial and important words in sub-s. (2) are: " the full value of the consideration declared by the assessee ". The word " declared " is very eloquent and revea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at sub-s. (2) was not aimed at perfectly honest and bona fide transactions where the consideration in respect of the transfer was correctly disclosed or declared by the assessee, but was intended to deal only with cases-where the consideration for the transfer was understated by the assessee and was shown at a lesser figure than that actually received by him. It appears that despite this circular, the I.T. authorities in several cases levied tax by invoking the provision in sub-s. (2) even in cases where the transaction was perfectly honest and bona fide and there was no understatement of the consideration. This was quite contrary to the instructions issued in the circular which was binding on the tax department and the CBDT was, therefore, constrained to issue another circular on 14th January, 1974, whereby the Central Board, after reiterating the assurance given by the Finance Minister in the course of his speech, pointed out: " It has come to the notice of the Board that in some cases the Incometax Officers have invoked the provisions of section 52(2) even when the transactions were bona fide. In this context reference is invited to the decision of the Supreme Court in Navnit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st authority entrusted with the execution of the provisions of the Act, understood sub-s. (2) as limited to cases where the consideration for the transfer has been understated by the assessee and this must be regarded as a strong circumstance supporting the construction which we are placing on that sub-section. But the construction which is commending itself to us does not rest merely on the principle of contemporanea expositio. The two circulars of the CBDT to which we have just referred are legally binding on the revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of subs. (2) and they depart or deviate from such construction. It is now well settled as a result of two decisions of this court, one in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 and the other in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 that circulars issued by the CBDT under s. 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. The question which arose in Navnit Lal C. Javeri's case was in regard to the constitutional val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sen, Appellate Assistant Commissioner [1965] 56 ITR 198, 203 (SC): 'It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision.' The directions given in that circular clearly deviated from the provisions of the Act, yet this court held that the circular was binding on the Income-tax Officers. " The two circulars of the CBDT, referred to above, must, therefore, be held to be binding on the revenue in the administration or implementation of sub-s. (2) and this sub-section must be read as applicable only to cases where there is understatement of the consideration in respect of the transfer. Thus, it is not enough to attract the applicability of sub-s. (2), that the fair market value of the capital asset transferred by the assessee as on the date of the transfer e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also fulfilled. Each condition has got to be viewed and established independently before sub-s. (2) can be invoked and the burden of doing so is clearly on the revenue. It is well-settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the revenue and the second condition being as much a condition of taxability as the first, the burden lies on the revenue to show that there is an understatement of the consideration and the second condition is fulfilled. Moreover, to throw the burden of showing that there is no understatement of the consideration, on the assessee would be to cast an almost impossible burden upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him. But the question then arises, why has Parliament introduced the first condition as a pre-requisite for the applicability of sub-s. (2)? Why has Parliament provided that in order to attract the applicability of sub-s. (2), the fair market value of the capital asset as on the date of the transfer should exceed by 15% or more the full value of the consideration for the transfer declared by the assessee ? The answe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub-s. (2) is immediately attracted, subject of course to the fulfilment of the condition of 15% or more difference, and the revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee. That would in most cases be difficult, if not impossible, to show and hence sub-s. (2) relieves the revenue of all burden of proof regarding the extent of understatement or concealment and provides a statutory measure of the consideration received in respect of the transfer. It does not create any fictional receipt. It does not deem as receipt something which is not in fact received. It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him. This approach in the construction of sub-s. (2) falls in line with the scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be rationally considered as capital gains or any other type of income. It is a well settled rule of interpretation that the court should as far as possible avoid that construction which attributes irrationality to the Legislature. Besides, under entry 82 in List I of the Seventh Schedule to the Constitution, which deals with "Taxes on income other than agricultural income" and under which the I.T. Act, 1961, has been enacted, Parliament cannot "choose to tax as income an item which in no rational sense can be regarded as citizen's income or even receipt. Sub-section (2) would, therefore, on the construction of the revenue, go outside the legislative power of Parliament and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax. Sub-section (2) would also be violative of the fundamental right of the assessee under art. 19(1)(f) which fundamental right was in existence at the time when sub-s. (2) came to be enacted-since on the construction canvassed on behalf of the revenue, the effect of sub-s. (2) would be to penalise the assessee for transferring his capital asset for a consideration lesser by 15% o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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