TMI Blog1983 (1) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... net wealth was computed on the basis of the valuation of the said asset as per the balance-sheet. In the course of proceedings for his assessment to income-tax, the taxable income was determined by including therein the aforesaid rental income received from the said property. In the year 1967, B. T. Kharawala obtained the valuation report of an approved valuer in respect of the said property. The valuer, in the course of his report dated October 10, 1968, estimated the market value of the property at Rs. 1,21,000 as in November, 1967. The valuation was arrived at on the basis of the rental yield. In the course of proceedings for assessment to wealth-tax for the assessment years 1968-69, 1969-70 and 1970-71, the market value as determined by the valuer was accepted as the value of the said asset and the net wealth was computed on the said basis. In the year 1971, B. T. Kharawala on again got the said property valued by an approved valuer and in the valuation report dated November 15, 1971, the market value was estimated to be Rs. 1,25,000 as on October 30, 1970. The said valuation was also arrived at on the basis of the rental yield. In the course of proceedings for assessment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment year 1968-69) should not be taken to be Rs. 5,08,000 in place and stead of Rs. 1,21,000 as per the report of the approved valuer submitted to the WTO in the course of the proceedings for assessment to wealth-tax for the assessment year 1968-69. The petitioner, in the course of his reply dated September 6, 1976, set out his objections to the proposed valuation. The Valuation Officer, however, estimated the fair market value of the said property at Rs. 4,49,000 as on November 2, 1967, in his report dated October 6, 1976. The valuation was arrived at on the basis of the land and building method as against the rental yield method on the basis of which the valuation was earlier determined by the approved valuer. Be it stated at this stage that the proceedings for assessment to wealth-tax for the assessment years 1969-70, 1970-71, 1971-72 and 1972-73 were still pending when the Valuation Officer made his report dated October 6, 1976. Even then the net wealth for those assessment years was computed by the assessment orders made, on January 28, 1977, on the basis that the fair market value of the property on the relevant dates was as per the concerned valuation report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meaning of s. 147 of the Act. In response to the said notice, the petitioner submitted a return on Match 16, 1978, under protest and without prejudice to his right to challenge the validity of the reassessment proceedings. In the said return, the petitioner returned the same income as was assessed in the original assessment proceedings. On January 11, 1979, the petitioner instituted the present writ petition praying for an appropriate writ, direction and/or order quashing and setting aside the notice dated February 10, 1978 (Ex. C), and seeking permanent injunction so as to restrain the authorities from taking any further proceedings and from passing assessment orders and raising demands against the petitioner in pursuance of the impugned notice. The petitioner also sought interim relief in terms similar to those in which the substantive prohibitory relief was claimed. By a subsequent amendment introduced in the petition, the petitioner challenged the constitutional validity of s. 52, sub-ss. (1) and (2) of the Act. Rule nisi was issued on the petition on January 17, 1979, and interim relief restraining the respondent (ITO) from issuing demand notices was granted although the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mposed two conditions, subject to which alone the ITO can reopen an assessment which is already completed: firstly, the ITO must have reason to believe that income chargeable to tax has escaped assessment for any assessment year and, secondly, such belief must have been entertained by him in consequence of information in his possession. Those conditions must be first satisfied in order to confer jurisdiction upon the ITO to initiate proceedings for reassessment of income under s. 147(b). In other words, both these conditions are conditions precedent to be satisfied before the ITO could have jurisdiction to issue a notice for reassessment of income. In the present case, though the impugned notice, Ex. C, issued under s. 148 does not amplify the reasons entertained by the respondent for believing that income chargeable to tax for the assessment year 1973-74 had escaped assessment within the meaning of s. 147(b), it is clear, upon reading the show-cause notice, Ex. B collectively, which preceded the issue of the impugned notice, that the proceedings for reassessment were initiated on the strength of the report dated October 6, 1976, made by the Valuation Officer under s. 16A(5) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken to be its fair market value on the date of its transfer, subject to the previous approval of the IAC. These two sub-sections have received interpretation at the hands of the Supreme Court in K. P. Varghese v. ITO [1981] 131 ITR 597 and it would, therefore, be profitable to refer to the said decision at this stage. In K. P. Varghese's case, the assessee was the owner of a house which he had purchased in 1958 for a consideration of Rs. 16,500. On December 25, 1965, the assessee sold the house for the same price (Rs. 16,500) to his daughter-in-law and five of his children. The assessment of the assessee for the assessment year 1966-67 was duly completed in the normal course and in the said assessment, no amount was included by way of capital gains since the house was sold at the same price at which it was purchased. Subsequently, however, a notice under s. 148 was issued seeking to reopen the assessment for the assessment year 1966-67. The notice itself did not state what was the income alleged to have escaped assessment but a subsequent communication intimated to the assessee that it was proposed to fix the fair market value of the house at Rs. 65,000 against the considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve at the proper interpretation of sub-s. (2), which was introduced in s. 52 by s. 13 of the Finance Act, 1964, with effect from April 1, 1964, the Supreme Court ascertained the object and purpose of the enactment and the context and collocation and the state of existing law at the time of the introduction of the said sub-section. In the process, the Supreme Court interpreted the provisions of sub-s. (1) which, prior to the introduction of sub-s. (2), was the only provision contained in s. 52. The relevant observations of the Supreme Court bearing on the interpretation of sub-s. (1) are to be found at p. 606 and they are as follows "This sub-section provides that where an assessee transfers a capital asset and in respect of the transfer two conditions are satisfied, namely, (i) the transferee is a person directly or indirectly connected with the assessee ; and (ii) the ITO has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to tax on capital gains, the fair market value of the capital asset on the date of the transfer shall be taken to be the full value of the consideration for the transfer and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en proceeded to observe that the scope of sub-s. (1) was extremely restricted because it is applied only where the transferee is a person directly or indirectly connected with the assessee and the object of the understatement is to avoid or reduce the income-tax liability of the assessee to tax on capital gains. There may be cases, however, where the consideration for the transfer is shown at a lesser figure than that actually received by the assessee but the transferee is not a person directly or indirectly connected with the assessee or the object of understatement of the consideration is unconnected with tax on capital gains. Such cases would not be within the reach of sub-s. (1) and the assessee, though dishonest, would escape the rigour of the provision enacted in that sub-section. The Supreme Court pointed out that sub-s. (2) was, therefore, enacted with a view to extending the coverage of the provision of sub-s. (1) to other cases of understatement of consideration. Having thus considered the object and purpose of the enactment of sub-s. (2) against the background of the law then existing and having made reference to the speech of the Finance Minister while moving the amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he full value of the consideration in respect of the transfer is understated or, in other words, shown at a lesser figure than that actually received by the assessee. Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15% difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied if, therefore, the Revenue seeks to bring a case within sub-s. (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15% of the value so declared, but also that the consideration has been understated and the assessee has actually received more than what is declared by him. There are two distinct conditions which have to be satisfied before sub-s. (2) can be invoked by the Revenue and the burden of showing that these two conditions are satisfied rests on the Revenue. It is for the Revenue to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 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 of the provisions relating to tax on capital gains. It may be noted that s. 52 is not a charging section but is a computation section. It has to be read along with s. 48 which provides the mode of computation and under which the starting point of computation is " the full value of the consideration received or accruing ". What in fact never accrued or was never received cannot be computed as capital gains under s. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s beyond doubt that before a case could be brought within sub-s. (1), two conditions must be shown to exist: (a) that the transferee is a person directly or indirectly connected with the assessee; and (b) that the ITO has reason to believe that the transfer was effected with the object of avoidance or reduction of liability regarding capital gains tax. The second condition postulates that there was an understatement 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 could have achieved the object of avoiding or reducing his liability to tax on capital gains. Once it is established that the consideration in respect of the transfer is understated and the conditions specified in sub-s. (1) are fulfilled, the Revenue will not be called upon to prove the precise extent of the undervaluation. In other words, the actual extent of the concealment and the full value of the consideration received for the transfer are, in such a case, required to be computed in the manner provided in sub-s. (1). Sub-s. (2), like sub-s. (1), is also intended to deal with cases where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as " information " within the meaning of s. 147(b), the respondent had reached the tentative conclusion that the provisions of sub-ss. (1) and (2) of s. 52 were applicable because the report showed that the fair market value of the property in question on the date of its transfer was considerably higher and that, therefore, there was escapement of income. It is apparent, therefore, that the respondent initiated proceedings for reassessment under s. 147(b) on the assumption that once it was found that the fair market value of the property as on the date of the transfer was more than the value of the consideration for the transfer as declared by the assessee, sub-s. (1) and/or sub-s. (2) of s. 52 was straightaway attracted and the fair market value of the property as on the date of the transfer was liable to be taken as the full value of the consideration for the transfer, irrespective of whether the actual consideration received by the assessee in respect of the transfer was shown at a lesser figure than that actually received. In proceeding on this basis, the respondent has apparently misconstrued the provisions of sub-ss. (1) and (2) of s. 52 and has taken the first step i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at a lesser figure than that actually received. Paragraph 8 of the affidavit-in-reply filed by the respondent deals with the averments made in para. 13. All that is stated in para. 8 is as follows: "I deny the contention of the petitioner as is contained in paragraph 13 of the petition, that the provisions of section 52 of the Act can never be attracted. I deny that the Income-tax Officer while reopening the assessment had no material to form any belief that any income had escaped assessment as alleged or otherwise. The valuation report as stated hereinabove constituted a valid information on facts on the basis of which the reopening of assessment was done. " It would thus appear that even in the affidavit-in-reply, it is not the case of the respondent that he had reason to believe that there was an understatement of the consideration in respect of the transfer and that by showing the consideration for the transfer at a lesser figure than that actually received, the assessee had achieved his object of avoiding or reducing his liability to tax on capital gains. When questioned, counsel for the Revenue fairly conceded that even on record there was no material which indicated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration. However, in order to arrive at a proper interpretation of sub-s. (2) in the light of the existing law at the time of the enactment of the said sub-section, the Supreme Court expressed its view on the true scope and effect of sub-s. (1) after careful and analytical consideration. The opinion expressed by the Supreme Court was deliberately and advisedly given in order to comprehend the true effect of s. 52 in all its material parts. The observations of the Supreme Court on the true interpretation of sub-s. (1) cannot, therefore, be regarded as mere passing observations. At the highest, they may be treated as an obiter dictum, that is to say, the expression of opinion on point which it was not necessary for the decision of the case. Even if they are conceivably regarded as obiter dictum, it is settled that if an opinion is expressed by the Supreme Court on the interpretation of a section after careful consideration and such opinion is deliberately and advisedly given, the opinion would be binding on the High Court (see Mohandas Issardas v. A. N. Sattanathan [1955] 56 BLR 1156; AIR 1955 Bom 113. Under these circumstances, we are unable to accede to this submission made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiating reassessment proceedings. In the present case, as earlier pointed out, the affidavit-in-reply falls short of establishing the satisfaction of the said pre-condition. In fact, it was fairly conceded that the mind of the ITO was not at all applied to the relevant aspect before the notice was issued. It is apparent on an overall view of all the facts and circumstances of the case, that the respondent assumed jurisdiction for reassessment on a total misconstruction or misapprehension of the true scope and effect of sub-ss. (1) and (2) of s. 52. For these reasons, it is not possible to accede to the submission made by the Revenue. It was lastly submitted on behalf of the Revenue that this is not the stage at which this court should interpose itself in exercise of its writ jurisdiction and that it should be left open to the Revenue to establish in the course of reassessment proceedings that there was, in fact, an understatement of the consideration in respect of the transfer and that the actual consideration received by B. T. Kharawala was not disclosed and that it was shown at a lesser figure than that actually received. In support of this submission, reliance was placed o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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