TMI Blog1973 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessees the following four questions have been referred for our determination: "(1) Whether, on the facts and in the circumstances of the case, the first proviso to section 12B (2) of the Indian Income-tax Act, 1922, properly became applicable? If the answer to the question No. 1 is in the affirmative- (2) Whether, on the facts and in the circumstances of the case, the ' fair market value ' of the shares was properly fixed taking into consideration the balance-sheet of the company as at October 31, 1959, or it was to be fixed on the basis of the balance-sheet of the company as at October 31, 1958 ? (3) In any event, in fixing the ' fair market value ' of the shares on the basis of either balance-sheet of the company, the proposed dividend was liable to be deducted? (4) In any event, whether on the facts and in the circumstances of the case, capital gains on the sale of shares could properly be computed taking the full value of the consideration' to be higher than Rs. 125 per share within the meaning of the substantive provisions of section 12B(2) of the Act ? The facts giving rise to this reference may be stated. Three assessees in the case are Babubhai M. Sang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the uniform price of Rs. 125 per share. In the assessment for the year 1960-61 in the case of each of the assessees above a question arose about the taxability of the capital gains, if any, made on the sales of shares as detailed above. Since the transfer of shares was to persons who were directly or indirectly connected with the assessees, the Income-tax Officer took the view that the provisions of the first proviso to section 12B(2) of the Income-tax Act were attracted to the facts of the case. Disregarding the contention urged by the assessees that the value of Rs. 125 placed on the sale price of transfer of each of such shares to the various persons was proper, in view of the fact that in the companies' register of transfer maintained for the period between April, 1959, and December, 1959, share transfer had been effected at the same rate, the Income-tax Officer proceeded to take the intrinsic value of the share as the fair market value of the said shares and by adopting what is known as " break-up value " method he computed the capital gain on that basis. For the purpose of arriving at the fair market value of the shares he took the view that the balance-sheet of the limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first proviso to section 12B(2) of the Act was attracted and the method followed by the Income-tax Officer was a correct one. Being aggrieved by the orders passed by the Appellate Assistant Commissioner, each of the assessees went up in second appeal to the Tribunal. The Income-tax Officer too went up in appeal to the Tribunal asking for restoration of his order. The appeals were consolidated and were disposed of by the Tribunal by a common order. On the question of applicability of the proviso to section 12B(2) the Tribunal took the view that the two conditions required to be fulfilled before the Income-tax Officer could have resorted to the proviso had been satisfied in the case. It further confirmed the view of the Income-tax Officer that the balance-sheet of the company as on October 31, 1959, which was nearer the dates of sales in question had to be taken into consideration and afforded better evidence to arrive at the fair market value of the shares in question. On the question of deductions it upheld the Appellate Assistant Commissioner's order that the deductions on account of provision for taxation made by the company was required to be made but the deductions claimed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Officer had reason to believe that the sales of the shares were effected with the object of avoidance or reduction of the liability of the assessees under section 12B of the Act. In this behalf he invited our attention to the manner in which the Income-tax Officer proceeded to apply the proviso to section 12B(2). This is what the Income-tax Officer has observed: " The assessee's son and Shri Nagardas Ranchhoddas were directors of the limited company during the year of account. It is, therefore, clear that the transfer of the shares is to persons who are directly or indirectly connected with the assessee. Under the circumstances, the provisions of the first proviso to section 12B(2) of the Act are attracted in this case." From the above observations it does appear clear that the Income-tax officer has undoubtedly stated that the first condition required by the proviso was satisfied but there is no mention whatsoever about the second condition having been satisfied in the case, for throughout the order the Income-tax Officer has nowhere stated tha the was satisfied that the transfer of shares was effected with the object of avoiding or reducing the liability of the assessee und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be no other motive for making the sale at less than the full value. In our opinion, in this case, the fair market value of the shares sold being much more than the sale price shown, as held by us above, the sale could not be taken to have been made by the assessees at the full value. Therefore, we think the Income-tax Officer was fully justified in resorting to the proviso to section 12B(2) of the Income-tax Act. " Mr. Kolah has taken serious exception to the manner in which the Tribunal has disposed of the question of applicability of the proviso to the facts of the case. He contended that the reasoning adopted by the Tribunal for coming to the conclusion that the second condition was fulfilled was that it had been shown in the earlier part of its judgment that the sale was not made for the full market value of the shares and if that was so it followed as a matter of course that the sale at lesser value must have been made with the object of avoidance or reduction of the liability of the assessee. This approach was attacked by Mr. Kolah as unwarranted and incorrect. He also contended that the view of the Tribunal that there could be no other motive for making the sale at less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the consideration " occurring in the main provision of section 12B(2) has been explained as meaning the price bargained for and the bargained price actually received by the transferor. Having regard to the rival contentions which we have summarised above, it seems to us clear that the answer to the first question that has been referred to us by the Tribunal would depend upon the question as to what is the true scope and nature of the provisions of section 12B(2) and the proviso thereto and before we go to the decided cases on this question, it would be desirable to set out the relevant provision of section 12B, which ran as follows, as it stood at the relevant time : " 12B. Capital gains.- (1) The tax shall be payable by an assessee under the head ' Capital gains ' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place." [We are not concerned with the two provisos to sub-section (1)]. (2) The amount of a capital gain shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d solely in connection with such sale, etc, and the actual cost to the assessee of the capital asset including expenditure of a capital nature incurred for making any additions or alterations thereto. In other words, it is the difference between " the full value of the consideration for which the capital asset has been sold and the actual cost of the capital asset to the assessee that will be taken to be the amount of the capital gain actually earned by the assessee by effecting sale of his capital asset and on such capital gain actually arising to him that the incidence of tax falls on the assessee. All that the first proviso to section 12B of the Act does is to provide for fictional full value of the consideration, for according to that proviso if the two conditions mentioned therein are satisfied, the full value of the consideration for which sale has been effected shall be taken to be the fair market value of the capital asset on the date on which the sale has taken place. In other words, under this proviso, if the conditions mentioned therein are satisfied, the fair market value of the capital asset on the date of transfer is deemed to be " the full value of the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed after making certain deductions from the ' full value of the consideration for which the sale, exchange or transfer of the capital asset is made '. In case of a sale, the full value of the consideration is the sale price actually paid. The legislature had to use the words ' full value of the consideration, because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is, therefore, held in the present case that the actual price received by the respondent was at the rate of Rs. 136 per share the full value of the consideration must be taken at the rate of Rs. 136 per share. The view that we have expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression ' full value of the consideration ' is used in contradistinction with ' fair market value of the capital asset ' and there is an express power granted to the Income-tax Officer to ' take the fair market value of the capital asset transferred ' as the full value of the consideration ' in specified circumstances. It is evident that the legislatur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the said rate of Rs. 125 and even so, if the fair market value of the shares in question was higher than Rs. 125 per share--Rs. 375 as found by the Income-tax Officer, Rs. 171.50 as found by the Appellate Assistant Commissioner and Rs. 264 as found by the Tribunal--the liability to pay tax on the capital gains would arise for, according to him, having regard to such higher fair market value of the shares found by the taxing authorities, the sale price mentioned in the transfer deed will have to be regarded as having been under-stated. In other words, according to Mr. Joshi, the assessee must be deemed to have made capital gains on the basis of difference between the actual price received by him and the fair market value as found by the taxing authorities. In our view, it is not possible to accept this contention of Mr. Joshi for the simple reason that in the first place the provision of sub-section (2) and the proviso thereto of section 12B are machinery sections and do not deal with the actual incidence of the charge. The incidence of charge is provided by sub-section (1) of section 12B and that incidence, as we have indicated earlier, is on profits or gains actually arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is open to the Income-tax Officer, if it appears to him, that with the object of avoiding or reducing the liability of the assessee to pay tax, the full value of the consideration for which the sale, exchange or transfer is made is under-stated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected, to determine the fair market value of the capital asset on the date on which the sale, exchange or transfer took place." In other words, the Supreme Court clearly implied that the first proviso to section 12B(2) could be attracted in a case where the full value of the consideration, meaning thereby the value actually received by the transferor, has been under-stated. In other words, it must be a case where the transferor has actually received something much more than what is stated in the transfer deed. In Sundaram Industries Private Ltd. v. Commissioner of Income-tax, on the true scope of the proviso to section 12B(2), the Madras High Court has held that the proviso does not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being hauled up for having attempte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment or collection of the tax and not to increase or vary it ; (ii) what was intended to be taxed by the entire provisions in section 12B was the real gain and not a fictional gain and the first proviso to section 12B(2) dealt with cases of avoidance of the tax liability on the gain actually received by understatement of the consideration payable or paid ; and (iii) on the facts found by the Tribunal that the saleswere true and that the consideration was not under-stated, except for the fact that the explanation offered by the assessee was not acceptable and a strong suspicion existed as to the real motive which prompted the assessee to sell the shares, there was nothing positive to suggest that the sales were effected with the object of avoidance or reduction of liability to tax. Therefore, the conclusion of the Tribunal that the first proviso to section 12B(2) was applicable was not correct. It may be stated that in this case the court accepted with approval the view expressed by a Division Bench of that court in Sundaram Industries Private Ltd.'s case on the scope of the first proviso to section 12B(2). It also relied upon the observations of the Supreme Court in Killick Nix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the Madras High Court, as indicated earlier by us, has taken the view that the proviso was not intended to discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being hauled up for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value. The Madras High Court also took the view that the proviso does not treat what is not an actual capital gain as a deemed capital gain. Having regard to the above discussion and the several decisions to which we have referred, we are clearly of the view, that in the instant case the second condition which was required to be fulfilled before the first proviso to section 12B(2) could be invoked was not satisfied. Merely because the consideration mentioned in the transfer deed was less than the fair market value of the shares in question and merely because such less consideration was actually received by the transferor, it does not necessarily follow that the only motive for effecting such transfer would be to avoid or reduce the tax liability on the part of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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