TMI Blog1977 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 of 1972, which gave rise to the above questions, are as follows: The assessee, a Hindu undivided family, held 20 equity shares in M/s. Premier Transports (Private) Ltd. These shares had been acquired at a cost of Rs. 2,000 and were sold in the financial year 1967-68 for Rs. 15,000. The assessee returned the capital gains of Rs. 13,000 with reference to the sale of these shares. Taking into account the balance-sheet of the company at or about the time of the transaction, the Income-tax Officer found that the break-up value of the said shares would be Rs. 2,079 per share. He, therefore, considered that since the sale price declared by the assessee was less than the market price ascertained by the break-up value method, the provisions of section 52(2) of the Income-tax Act, 1961, were applicable and after obtaining the approval of the Inspecting Assistant Commissioner as required by the said provisions, he computed the capital gains to be Rs. 39,580 as against Rs. 13,000 returned by the assessee. The appeal filed by the assessee before the Appellate Assistant Commissioner was unsuccessful and when the matter came before the Tribunal at the instance of the assessee, the assessee cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the appellant in the instant case should be a matter of enquiry and investigation by the Income-tax Officer. Such an enquiry and investigation cannot be short-circuited by the Income-tax Officer by taking the fair market value and equalling (sic) it as the full value of the consideration received by the assessee. That would be reversing the process and since section 52(2) specifically provides that the full value of the consideration for the capital asset should be taken to be its fair market value, it is obligatory on the part of the Income-tax Officer to investigate and find out the full consideration received by the assessee for the transfer of the capital asset. If the consideration declared by the appellant was the full value of the consideration for transfer of such capital assets and if there was no understatement of consideration received with a view to dishonestly evade tax liability, section 52(2) cannot be invoked. As the necessary ground for invoking section 52(2) has not been established and since the correct computation of capital gains has not been done by the Income-tax Officer, the assessment made cannot be legally sustained. In the result, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer? ........" As pointed out already, in the absence of any suggestion by the department that the assessee had received any extra amount in addition to what has been declared in the assessment proceedings as the sale price of the shares, we have to proceed on the basis that the transfer of the shares was effected actually for the consideration set out in the respective transfer deeds. The question is whether section 52(2) is attracted on the above facts. We have, in this context, to examine some earlier cases under the Act of 1922. In the Indian Income-tax Act of 1922, the corresponding provision was in the form of a proviso to sub-section (2) of section 12B. That provision ran as follows : " 12B. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs. 93,660. On. 19th December, 1958, it sold these shares to certain persons related to its directors for a sum of Rs. 66,900. The Income-tax Officer applying the proviso to section 12B(2) of the Act of 1922 considered the market value of the shares to be Rs. 1,56,064 and he treated the difference between the said market price and the cost of the shares as the capital gains on the sale of the shares made during the accounting year, relevant for the assessment year 1959-60. It is this assessment which ultimately reached this court on reference. After setting out the provisions, commenting on the language used, this court observed as follows at page 246 : " In fact, if literal effect is given to the words actually used, it must be said that the purpose of the proviso will be otiose. The proviso refers to the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall ...... be taken to be the fair market value and that would mean that the value mentioned in the particular transaction as the consideration shall be taken to be the fair market value. If we give effect to these words, as we should, nothing more need be said against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assumption, hauled up, if we may use the expression, 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. That simply, as we read the proviso, is not its purpose. It does not treat what is not an actual capital gain as a deemed capital gain. In fact, occurring as it does as the first proviso to sub-section (2) dealing with the procedural aspect of computation, it should, we think, be interpreted as limited to escaped capital gain, which is so in truth and in fact, and not intended to bring about fictional gain on an assumption and charge the same." In Sivakami Company Private Ltd. v. Commissioner of Income-tax [1973] 88 ITR 311 (Mad), this decision was followed. That was also a case of a company selling certain shares held by it to persons who were directly or indirectly connected with it at prices considerably less than their break-up value. In that case also the proviso to section 12B(2) had been invoked. This court held after referring to the decision in Sundaram Industries Private Ltd. v. Commissioner of Income-tax [1969] 74 ITR 243 (Mad) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant years. For our purpose it is enough to refer to section 45 and section 48. Section 45 provides that any Profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head " capital gains ", and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 provides: " The income chargeable under the head " capital gains " shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capita; asset the following amounts, namely :-- (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." The point sought to be taken was that unless section 52 provided that the difference between the fair market value and the consideration shown in the transaction was deemed to be the consideration received or accruing as a result of the transfer of the capital asset, there would be no effective charge with reference to the said difference. In dealing with this contention this court observed at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and not to cases where there is no understatement by the assessee, but where the tax authorities are of the view that the property would have fetched a higher price. This view that the provision is intended to apply only to cases of understatement is also supported by the observations of the Supreme Court in Killick Nixon and Co. v. Commissioner of Income-tax [1967] 66 ITR 714, 719, running as follows : " 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 understated 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. " (Underlining ours). Though the above observations were made in the context of the proviso to section 12B(2), as pointed out already, section 51(1) is identically worded and, therefore, the same construction should apply to that provision. The question that now arises is whether the above interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r market value of the capital asset on the date of the transfer. When identical words are used in both the provisions, the same interpretation should govern both of them. Therefore, the decision of this court in Commissioner of Income-tax v. Rikadas Dhuraji [1976] 103 ITR 111 (Mad) has to be applied. In the absence of the difference between the fair market value and the full value of the consideration being deemed to be the capital gain received by or accruing to the assessee, it will not be possible to tax the assessee to capital gains under section 52(2). It is true that though the same words occur in both the provisions, they need not be given the same interpretation if the context suggests the contrary. We were not referred to any special feature in sub-section (2) so as to justify a departure from the construction placed on sub-section (1). In fact, in the only other case where sub-section (2) came in for consideration, the Karnataka High Court has held that it would not apply to cases of bona fide transfer not involving any understatement of consideration for the transfer in Additional Commissioner of Income-tax v. M. Ranga Pai [1975] 100 ITR 413 (Kar). That case has consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and invoked the provisions of section 52(1). The transaction had already been subjected to gift-tax. The majority of the Full Bench held, disagreeing with the single judge, Isaac J., whose decision is reported as K.P. Varghese v. In tax Officer [1970] 77 ITR 719 (Ker), that section 52(1) could be applied, Raghavan C.J. has taken a different view, which is in conformity with the earlier decisions of this court in Sundaram Industries Private Ltd. v. Commissioner of Income-tax [1969] 74 ITR 243 (Mad). This Full Bench decision has also been considered in Commissioner of Income-tax v. Rikadas Dhuraji [1976] 103 ITR 111 (Mad) and the view of the majority of the Full Bench has been dissented from. We do not think that it is a to go further into the majority judgment in that case, as it has already been dissented from. Another decision to which our attention was drawn is that in Commissioner of Income-tax v. N. S. and North Malabar Public Conveyance (P.) Ltd. [1976] 102 ITR 36 (Ker). That was a case, where the assessee, a company, sold two non-residential buildings to one of its shareholders for a sum of Rs. 80,000, while according to the Income-tax Officer the market value was Rs. 1,20, ..... 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