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TMI Blog1973 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed 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. Sanghvi, Ratilal M. Gandhi and Nagardas Ranchhoddas Sanghvi and the relevant assessment year is 1960-61, the accounting year being S. Y. 2015. All the three assessees are the partners in the firm called R. Ratilal & Co. Each of them has a son or sons as partners in the said firm. Thus, Babubhai M. Sanghvi has a son, Dhirajlal, as partner, Ratilal M. Gandhi has a son, Kirit, as partner and Nagardas R. Sanghvi has two sons, Arun and Gaurang, as partners. The assessees as well as the three sons mentioned above also held certain number of shares in a public company called Bhavnagar Vegetable Products Ltd. Each of the three assessees and their sons held certain blocks of ordinary and preference shares in this company. Besides being partners in the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween 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 company as on October 31, 1959, which was published on May 24, 1960, afforded better evidence of the value of the shares in preference to the earlier balance-sheet as at October 31, 1958, which had been published on May 2, 1959. He did so for two reasons : first, the dates of sales being August 17, 1959, and September 4, 1959, were nearer in point of time to the balance-sheet as on October 31, 1959, and, secondly, he felt that the seller in each case was intimately connected with the management of the limited company and as such must have been aware of the financial condition and the improved potentialities of profit making of the company. For these reasons he took the view that the balance-sheet of the limited company as on October 31, 1959, afforded bett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et 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 account of provision for proposed dividend could not be made. In this view of the matter the Tribunal directed that the capital gain could be computed on the basis that the fair market value of the share was Rs. 264. At the instance of the assessees the Tribunal has submitted the statement of the case to this court and has raised four questions mentioned above for our determination. Mr. Kolah, learned counsel for the assessees, has strenuously contended before us that the taxing authorities as well as the Tribunal were in error in coming to the conclusion that the first proviso to section 12B(2) was attracted to the cases of each of the assessees. He contended that there were two conditions precedent which were required to be satisfied before this proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under section 12B of the Act. Mr. Kolah next referred to the order of the Appellate Assistant Commissioner and pointed out that there was no discussion whatsoever made by the Appellate Assistant Commissioner throughout his order on the question of applicability of the proviso to the facts of the case. It does appear from the order of the Appellate Assistant Commissioner that the entire discussion has proceeded on the assumption that the proviso to section 12B(2) was applicable to the facts of the case and it was on this assumption that the Appellate Assistant Commissioner went on to hold that the relevant balance-sheet to be considered was is on October 31, 1958, and that out of the two deductions claimed by the assessee only one was permissible. When the matter we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 than the full value is also open to doubt; for, according to him, the sale of the shares at price less than the full market value could have been effected by the assessees with a view to make a gift of shares to the transferees. In the alternative he pointed out that in a sense the transfers were in the nature of cross transactions and in view of the circuitous way that was adopted to effect those transactions the motive could possibly be to avoid the tax liability under section 16(3) of the Act and if either of these could be the motive for selling the shares at lesser price than the full market value of the shares, the Tribunal's view that there could be no other motive on the part of the assessee than to avoid his tax liability under section 12B of the Act coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely: (i) expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer ; (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12 : Provided that where a person who acquires a capital asset from the assessee, whether by sale, exchange, relinquishment or transfer is a person with whom the assessee is directly o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned 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 " for which the sale has been made. On a plain reading of that proviso it does not appear to us that it makes any provision for levying incidence of tax on fictional or deemed capital gains which ought to have been received by the assessee. The incidence being on the capital gains actually received by the assessee, it seems to us clear that the only possible manner in which the second condition mentioned in the proviso could be satisfied would be by showing that the actual consideration received by the transferor is higher than the one mentioned in the transfer deed itself. In other words, it must be a case of understating the consideration in the transfer deed and the transferor receiving higher consideration than mentioned in the transfer deed. Looked at from this angle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 legislature itself has made a distinction between the two expressions ' full value of the consideration ' and ' fair market value of the capital asset transferred ' and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are : (1) that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on the sale of capital asset and not on deemed capital gain which should be deemed to have been received by the assessee or the transferor and, secondly, in the situation contemplated by Mr. Joshi it is not understood as to how the second condition of the proviso could be said to have been fulfilled. Before the proviso could be invoked by the Income-tax Officer the second condition that he is required to be satisfied about is that he must have reason to believe that the sale or tranfer was effected with the object of avoidance or reduction of the liability of the assessee under this section : in other words, the sale must have been effected with the object of avoiding the liability to pay tax on the capital gains. It is quite possible that though the fair market value of a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 nor does it treat what is not an actual capital gain as a deemed capital gain but it must be limited to escaped capital gain, which is so in truth and in fact, and is not intended to bring about a fictional gain on an assumption and charge the same. This decision makes it very clear that the proviso must be limited to escaped capital gain and such escaped capital gain must be so in truth and in fact and the proviso is not intended to bring to tax any fictional or deemed capital gain. The provisions of section 12B(2) and the scope of the proviso thereto came up for consideration before the Madras High Court in Sivaka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Nixon and Co.'s case which observations we have quoted above. A similar view has been taken by the Kerala High Court in the case of K. P. Varghese v. Income-tax Officer. In that case the court was concerned with the provisions of section 52 of the Income-tax Act, 1961, which are in pari materia with and the same as the provisions of the first proviso to section 12B(2) of the Indian Income-tax Act, 1922. The matter arose in a writ petition, whereby the petitioner-assessee applied for quashing of the notice that had been issued by the Income-tax Officer. The petitioner purchased a property in 1958 for Rs 16,500 and sold it for the same consideration in December, 1965, to his 5 children and daughter-in-law. The difference between the fair market value and the actual consideration recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 assessee on capital gains. It must be observed that in the instant case it has not even been suggested that it is a case of under-statement of consideration in the transfer deed or that higher consideration than mentioned in the transfer deed was received by the transferors ; on the other hand, since the transfers were between close relations the object could be to make a gift of the shares to the transferees or having regard to the circuitous method adopted for effecting cross-transfers the object could be avoidance of liability under section 16(3) of the Act. In this view of the matter, the first question that has been referred to us will have to be answered in the negative, in favour of the assessee and we accordingly answer the same. In view of the negative answer which we have giv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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