TMI Blog1975 (1) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... nkatesha Pai died in the year 1951, and Manel Raghunatha Naik died some time thereafter. In the year 1963, the assessee reconveyed the said property to Manel Mukunda Naik, son of Manel Raghunatha Naik, for the same consideration amount of Rs. 25,000. According to the assessee, the reconveyance was done in accordance with the oral understanding between the parties to the sale transaction which had been entered into to help Manel Raghunatha Naik, then in financial difficulties. In the proceedings for assessment to gift-tax for the assessment year 1964-65, the Gift-tax Officer being of the opinion that the market value of the property in the year 1963 was Rs. 55,000 whereas it had been acquired for Rs. 25,000, the difference, viz., Rs. 30,000, should be brought to tax as " deemed gift " and, therefore, included the said sum in the gift-tax assessment of the assessee by an order dated October 22, 1965. In the assessment for the year 1964-65 to income-tax, the Income-tax Officer did not levy income-tax on capital gains on the transaction in question. The Commissioner of Income-tax, acting under section 263 of the Act, set aside the assessment order being of the opinion that sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Tribunal was whether section 52(2) is attracted to a case when there is no understatement of the price by the assessee with the object of avoiding tax. The Tribunal came to the conclusion that it found no material to hold that the assessee had declared a lower price as the consideration for the transfer of the property. It relied on the decision of Isaac J. in K. P. Varghese v. Income-tax Officer wherein the learned judge had taken the view that section 52(2) is intended to operate only in cases of understatement of consideration done with a view to dishonestly escape tax liability, and also on the circular of the Board of Direct Taxes explaining the scope and, object of the said provision. The Tribunal, taking the view that section 52(2) operates only in cases of understatement of consideration, affirmed the order of the Appellate Assistant Commissioner and dismissed the department's appeal. Sri Rajasekhara Murthy, learned counsel for the department, submitted that the decision of Isaac J. in K. P. Varghese v. Income-tax Officer has been reversed on appeal by a Full Bench of the Kerala High Court in Income-tax Officer v. K. P. Varghese by a majority of two against one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that there were no capital gains arising to the assessee on the resale of the property on August 28, 1963 ? Section 2(24) of the Act defines the term " income " ; it includes any capital gains chargeable under section 45. Sections 45 to 55 deal with capital gains. Section 45 states that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54C and 54D, 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 47(iii) states that section 45 shall not apply to any transfer of a capital asset under a gift. Section 48 provides for the mode of computation of capital gains. According to the said section, 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 capital asset, the expenditure incurred wholly and exclusively in connection with such transfer together with the cost of acquisition of the capital asset and the cost of any improvement thereto. Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision to bring within its scope every transaction of under-statement of consideration for transfer of capital assets. That is clear from the fact that the amendment was introduced not as an independent section but as a sub-section of section 52. Sri Rajasekara Murthy wants us to ignore the heading given to the section and hold that sub-section (2) is attracted even to perfectly bona fide transactions where there is no under-statement of consideration for transfer as in the instant case. If sub-section (2) is to be construed independently without reference to the section heading and the object of section 52, it undoubtedly is capable of the interpretation pressed for by the learned counsel for the department, viz., that even in the case of perfectly bona fide transactions or where there is no material to hold that the assessee has declared a lower price than what he has actually received, the transfer attracts capital gains tax if its fair market value as on the, date of transfer exceeds the full value of consideration declared by the assessee. Let us take a case where an assessee transfers a property and contemporaneously enters into an agreement for reconveyance for the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of a capital asset. Income-tax is levied by Parliament in the exercise of its taxing power conferred by entry 82 of List I of Schedule VII read with article 246 of the Constitution. While the said entry confers a very wide power on Parliament and it is an elementary rule of construction that the widest possible construction must be put on the words in the legislative entries, it does not, however, mean that Parliament can choose to tax as income something which in no rational sense can be regarded as a citizen's income. Gajendragadkar C.J. in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax , while dealing with the, constitutional validity of section 12(1B) of the Indian Income-tax Act, 1922, as introduced by the Finance Act 15 of 1955, has stated thus : " In dealing with this point, it is necessary to consider what exactly is the denotation of the word 'income' used in the relevant entry. It is hardly necessary to emphasise that the entries in the Lists cannot be read in a narrow or restricted sense, and as observed by Gwyer C.J. in United Provinces v. Atiqa Begum, 'each general word should be held to extend to all ancillary or subsidiary ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se being one of escapement or suppression of capital gains, the difference between the fair market value and the cost of the asset can be treated as capital gains accruing to the assessee. In our judgment, sub-section (2) of section 52 does not apply to a bona fide transfer not involving any under-statement of consideration for the transfer. The Central Board of Direct Taxes, in exercise of the powers vested under section 119 of the Act, has issued circulars explaining the scope and object of sub-section (2) of section 52. The said circular is found in the Income-tax Circulars Letters, etc. (Part II, pages 142 143). The same is reproduced below : " 62. Section 13 of the Finance Act has introduced a new sub-section (2) in section 52 of the Income-tax Act with a view to countering evasion of tax on capital gains through the device of an under-statement of the full value of the consideration received or receivable on the transfer of a capital asset. The provision existing in section 52 of the Income-tax Act before the amendment (which has now been renumbered as sub-section (1)) enables the computation of capital gains arising on transfer of a capital asset with reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Finance made the following observations in regard to the provisions of section 55(2) of the Income-tax Act during his reply to the debate in the Lok Sabha at the time of clause by clause consideration of the Finance Bill, 1964 : ' To-day, practically every transaction of the sale of property is for a much lower figure than what is actually received. The, deed of registration mentions a particular amount ; the actual; money that passes is considerably more. It is to deal with these classes of sales that this amendment has been drafted ...... It does not aim at perfectly bona fide transactions... but essentially relates to the day-to-day occurrences that are happening before our eyes in regard to the transfer of property. I think, this is one of the key sections that should help us to defeat the free play of unaccounted money and cheating of the Government '." The circular of the Board is not binding on the court or the assessee, but is binding on the department. The statement of the Minister of Finance made in Parliament, no doubt, cannot be looked into by the court for the purpose of interpreting a statute but when that statement is incorporated as part of the Board's ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other Act. According to Webster's International Dictionary, the word " gift " means a " voluntary transfer of real or personal property without any consideration or more strictly without a valuable consideration ".When the capital asset is transferred without any valuable consideration, there is no question of any capital gains accruing or arising by the transfer, because capital gains have to be computed under section 48 by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the said asset. To a case of transfer made without valuable consideration, there is no question of capital gains tax being attracted at all and, as such, there was no purpose served in providing for the exclusion of such transfer from the operation of section 45. If the contention of the learned counsel for the department and the reasoning of the majority judgment in Varghese's case are accepted as sound, the provision of section 47(iii) excluding gifts from the purview of section 45 becomes otiose. What then are the transfers intended to be excluded by section 47(iii) ? The class of transfers involving under- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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