TMI Blog1972 (3) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... State and now a company under the Companies Act, 1956. The paid up capital of the assessee-company consists of 50 shares of the face value of Rs. 1,000 each, fully paid up and the shareholders during the material time were Padmanabha Private Ltd. holding 25 shares and Pudukottah Corporation Private Ltd. holding the remaining 25 shares. On March 14, 1957, the assessee sold 800 shares held by it in East India Corporation Ltd. and 1,000 shares held by it in Madura Insurance Company Ltd. to Pachnayaki Private Ltd., Coimbatore, for a sum of Rs. 60,000 and Rs. 75,000, respectively. The cost price of the 800 East India Corporation Ltd. shares was Rs. 81,201 and that of the 1,000 Madura Insurance Company Ltd. was Rs. 1,00,000. On the same day the assessee also sold its 499 shares in pudukottah Company Private Ltd, to Padmanabha Company Private Ltd. for the cost price of Rs. 4,990. The shares in East India Corporation Ltd., Madura Insurance Company Ltd. and Pudukottah Company Private Ltd. are not quoted in stock-market. It has now been ascertained in the order of the Tribunal that the break-up value on the date of sale of the 800 shares in East India Corporation Ltd. was Rs. 1,72,800 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price being Rs. 100. The cost price of 100 East India Corporation Ltd. was Rs. 10,189,450 Sree Rajendra Mills Ltd. was Rs. 2,700 and the 940 ordinary and 1,486 preference shares in Sree Meenakshi Mills Ltd. was Rs. 73,279. In respect of these sales also, on the basis of the break-up value of the shares on the date of sale, the Tribunal held that the assessee was liable to pay tax on the capital gain under the first proviso to section 12B(2) of the Act. In T.C. No. 99/66 the assessee is Pudukottah Corporation Private Ltd., which is a private limited company with a paid up capital of 4,250 shares of the face value of Rs. 100 each with Rs. 50 per share paid up and the shareholders during the material time Were Padmanabha Private Ltd. holding 1,100 shares, Saroja Mills Ltd. holding 2,125 shares and Sree Meenakshi Mills Ltd. holding 1,025 shares. On March 14,1957,the assessee sold its 800 shares in East India Corporation Ltd.for a sum of Rs. 60,000 to Maragadavalli Private Ltd., the cost price of these shares was Rs. 80,919. The break-up value as on the date of sale of these shares was found to be Rs. 1,72,800 and after deducting the cost price of Rs. 80,919 the capital gain was ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settlement of or for the recovery of taxes due by the asscssee-companies. It was stated that the assessments for 1947-48 and 1948-49 of the assessee-companies were completed on January 31, 1957. which raised a total demand of Rs. 1,50,314 payable on March 5, 1957, and the assessee had effected the sales a few days thereafter on March 14, 1957, in order to put these shares beyond the reach of the income-tax department and that the sales were not effected with the object of avoidance or reduction of the liability of the assessees for capital gain. This explanation was not accepted by the Tribunal and it was characterised as an afterthought. The assessees in T.Cs. Nos. 98 and 99 of 1966 have repurchased the shares sold at a later date for the same price but in the case of the other assessees in T.Cs. Nos. 79 and 83 of 1966 there was no such repurchase. In all these cases the shares sold were not quoted in stock market but the break-up value of the shares were much more than the consideration for which they were sold. On these material facts found, the Tribunal inferred that " there was some premeditation and concerted action in regard to these transactions " and that the department wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gain ? The Tribunal, though specifically did not find that the sales were effected with the object of avoidance or reduction of the liability for capital gain, concluded that the department was justified in applying the first proviso to section 12B(2) of the Act. We are of opinion that the Tribunal was not justified in law on the facts proved in drawing the inference that the sales were effected with the object of avoidance or reduction of the liability for capital gain. In this connection we have to keep in mind that the burden of proving that the sales were effected with the object of avoidance or reduction of liability for capital gain was on the department. Except for the fact that the explanation offered by the assessees was not acceptable to, the Tribunal and a strong suspicion on the real motive which prompted the assessee to sell the shares, there was nothing positive to suggest that the sales were eftected with the object of avoidance or reduction of liability for capital gain. The next point that arises for consideration is whether, on the facts and circumstances of the case, the first proviso to section 12B(2) applies. The scope of the proviso came up for cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -statement of the consideration done with a view to dishonestly escape from the liability to capital gain and that the section does not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being on an assumption hauled up for having attempted to avoid or reduce the tax liability. These two decisions really conclude the issue. But the learned counsel for the revenue wanted to reargue the point on the basis of certain observations of the Supreme Court in Commissioner of Income-tax v. George Henderson Co. Ltd. He contended that in cases falling under the first proviso to section 12B(2) if the sale consideration was less than the fair market value then the difference between the fair market value and the cost price shall be deemed to have been received by the assessee, and taxable as such. In other words, according to the learned counsel, " deemed gain " is the subject-matter of the proviso. In our opinion, the observations of the Supreme Court do not warrant such a contention. In that case the share's book value was Rs. 136 and the same was sold on April 1, 1946, for Rs. 136 though the market value as on that date was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B(1) itself does not seek to charge " deemed " or " fictional " gain admits of no doubt. That the main provision of sub-section (2) of section 12B is a computation or machinery provision also admits of no doubt. A proviso normally deals with the subject dealt with in the main part though it is recognised that in certain exceptional cases a proviso may be a substantive provision itself It is true that it is a matter of style. In fact in the Income-tax Act, 1961, the proviso is dealt with as a separate provision in section 52. But, in the context in which the proviso is placed in section 12B of the Act, we consider that it is also a part of the machinery or computation provision and as a machinery provision it is intended merely to provide for the method of assessment or collection of the tax and not to increase or vary it. 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. The first proviso to section 12B(2) deals with cases of avoidance of the tax liability. In this connection we may also usefully refer to the decision in Commissioner of Income-tax v. Sakarlal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll value of the consideration. If the proviso is not applicable, then, under the main provision of sub-section (2) of section 12B, the full value of the consideration will have to be ascertained. It may be difficult to ascertain the real of full value of the consideration paid in the case of transfers to a person with whom the assessee is directly or indirectly connected. The proviso in such a case helps or enables the department by providing to determine the fair market value. The proviso also is in the nature of a penalty for understatement of the consideration in cases where the transfer was to a person who is intimately connected with the vendor. The following passage in the judgment of the Supreme Court in Commissioner of Income-tax v. George Hendersons Co. Ltd., in our view, also supports the above construction of the proviso: " If the conditions of this proviso are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer." The proviso is, therefore, part of the machinery or computation provision and deals with cases of under-statement of the consideration and it is not i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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