1988 PLP 920 (PTD)

SABYASACHI MUKHARJI, J.--These appeals are by certificates granted by the High Court of Madras under Article 133 (1) of the Constitution. An identical question of law had been referred in respect of four separate tax cases to the High Court under section 66(1)of the Indian Income-tax Act, 1922 (hereinafter referred to as the "1922 Act"), at the instance of the assessee. The High Court disposed of these appeals by one common Judgment. The High Court had to answer the following question:- "Whether on the facts and in the circumstances of the case, the conclusion of the Tribunal, that for the purpose of the computation of capital gain on the sale of the shares in East India Corporation Ltd., Madura Insurance Co., Ltd. and Pudukkottah Co. P. Ltd., the first proviso to subsection (2) of section 12-B of the Indian Income-tax Act, 1922, was applicable, is correct in law?" The High Court answered the question in the negative and in favour of the assessee. According to the High Court, in the instant case, the shares held by the assessee-company were sold to two persons who were directly or indirectly connected with it at prices considerably less than their break up value. As mentioned hereinbefore, the four cases were dealt with by the High Court together. It may be appropriate to refer to Tax Case No.83 of 1966 first. The assessee, in that case, was Rukmani Co. P. Ltd. It was a private limited company incorporated in the former Pudukkottah State and at the time the High Court dealt with the matter, was a company under the Companies Act, 1956. The paid-up capital of the assessee-company consisted of 50 shares of the face value of Rs.1,000 each fully paid-up and the shareholders during the material time were Padmanabha P. Ltd. holding 25 shares and Pudukkottah Corporation P. Ltd. holding the remaining 25 shares. On March 14, 1957, the assessee sold 806 shares held by it in East India Corporation Ltd. and 1,000 shares held by it in Madura Insurance Co. Ltd. to Pachnayaki P. Ltd. Coimbatore for a sum of Rs.60,000 and Rs.75,000, respectively. The cost price of the 800 East India Corporation Ltd. shares was Rs.81,201 and that of 1,000 Madura Insurance Co. Ltd. was Rs.1,00,00U. On the same day; the assessee had sold its 499 shares in Pudukkottah Co. Ltd. To Padmanabha Co. P Ltd. at the cost price of Rs.4,990. . The shares in East India Corporation Ltd., Madura Insurance Co. Ltd. and Pudukkottah Co. P. Ltd. were not -quoted on stock market. It was ascertained from the order of the Tribunal that the break-up value on the date of sale of the 800 shares in East India Corporation Ltd. was Rs.1,72,800 and the 1,000 shares in the Madura Insurance Co. Ltd. was Rs.1,54,

000. Deducting the cost price of Rs.81,201 and Rs.1,00,000 respectively, from the above said break-up value, a sum of Rs.91,599 and Rs.54,000, respectively, had been determined as the capital gain under the first proviso to section 12-B(2) of the 1922 Act in respect of the sale of shares in East India Corporation Ltd. and Madura Insurance Co. Ltd. The Tribunal gave a finding that there was no capital gain in respect of the shares in Pudukkottah Co. P. Ltd. Discussing the facts of Tax Case No.79 of 1966 in case of Shivakami Co. P. Ltd., the Tribunal held that the assessee was liable to pay capital gains tax under the first proviso to section 12-B(2) of the 1922 Act and it also held that the assessee had sold 499 shares in Pudukkottah Co. P. Ltd. to Padmanabha P. Ltd. for Rs.4,990 in respect of which the Tribunal held that there was no capital gain. In Tax Case No.98 of 1966, the assessee was Pudukkottah Co. P. Ltd., which was a private limited company with a paid-up capital of 3,000 shares of the lace value of Rs.10 per share paid-up and the shareholders were the above-mentioned companies. In respect of sale of these shares. The Tribunal held that the assessee was liable to pay tax on the capital gain under the first proviso to the said section. More or less similar is the position in Tax Case No.99 of 1966, where the assessee was Pudukkottah Corporation P. Ltd. In all these, in the original proceedings for assessment for the year 1958-59, it was held by the Appellate Assistant Commissioner, accepting the contention of the respective assessees, that the profit or loss on the sale of the aforesaid shares should not be considered as trading profit or loss on the ground that the shares were held as an investment and not as stock-in-trade of a business and the assessments were modified by excluding therefrom the profits on the sale of these shares included in the assessment. The Income Tax Officer thereafter reopened the assessment under section 34(1)(b) with a view to assess the capital gain arising on the sale of the shares. As there was some argument as to what the Tribunal actually found, it was better to refer to the order of the Tribunal. The Tribunal, inter alia, observed as follows: "Assuming that- the sale on March 14, 1957, was actuated by the sole motive of sequestering the shares from the Department, it is not necessary that some of the shares which are very valuable should have been transferred at a loss. It falls flat and unconvincing to be told that the sole object was to sequester the shares from the clutches of the Government and at the same time proclaim that the motive was not avoidance of capital gains tax. The assessee's learned counsel was not able to tell us how exactly the sale value of the East India Corporation Ltd. came to be fixed as Rs.60,

000. We find that in another case, the shares in this company has also been valued at the same price. The cost of acquisition was also the same." Dealing with this finding, the High Court observed in Sivakami Company (Private) Ltd. v. CIT (1973] 88 ITR 311, at page 316, where the judgment under appeal is reported, that the facts found were (1) that the sale was true; (2) that the consideration was not understated; and (3) that the explanation given by the assessees for effecting the sale was not acceptable. The High Court went on to observe that on these facts, could it be said that the sales were effected with the object of avoidance or reduction of liability of the assessee for capital gain. The High `Court was of the view that the Tribunal though specifically did not find that the sales were effected with the object of avoidance or reduction of liability for capital gain, had concluded that the Department was justified in applying the first proviso of section 12-B(2) of the Act. The High Court discussed on this aspect of the question as to whether the finding of the Tribunal could be interfered with in a matter like this. It is well-settled that when a conclusion of a fact finding body is based on an inference from primary facts, then the findings of fact are not amenable to challenge but the inferences drawn from the primary facts are open to challenge as a conclusion of law. It is also open to challenge the same on the ground that the conclusion of fact drawn by the Tribunal was not supported by legal evidence or that the impugned conclusion drawn from the fact was not rationally possible. In such a case, it is necessary to examine the correctness of the conclusion. Reliance may be placed on the decision of this Court in CIT v. Rajasthan Mines [1970] 78 ITR

45. This position is well-settled by many decisions of this Court. It may be mentioned that section 52 of the Income-tax Act, 1961 (hereinafter referred to as "the 1961 Act"), corresponds to the first proviso of section 12-B(2) of the 1922 Act. The first proviso to section 12-B(2) reads as follows: "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 or indirectly connected, and the Income Tax Officer has reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall, with the prior approval of the inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange, relinquishment or transfer took place." Section 52 of the 1961 Act came up for consideration by this Court in K. P. Varghese v. ITO [1981] 131 ITR

597. This Court held that, so far as is material for the present purpose, subsection (2) of section 52 could be invoked only where the consideration for the transfer of a capital asset had been understated by the assessee, or, in other words, the full value of the consideration in respect of the transfer was shown at a lesser figure than that actually received by the assessee, and the burden of proving such understatement or concealment was on the Revenue. This Court observed that the subsection had no application in the case of an honest and bona fide transaction where the consideration received by the assessee had been correctly declared or disclosed by him. In the instant case, on behalf of the Revenue, it was contended that it was accepted both by the Tribunal and the High Court that the transactions in question were done in order to defeat the claim of the Revenue. The facts found were that there was a sale. The High Court has stated that the Tribunal had found that the consideration was not understated (emphasis supplied.) Counsel for the Revenue contended that this was not correct. On the other hand, an inference could be drawn that the consideration was understated. The High Court also noted that the explanation given by the assessee for effecting the sale was not acceptable. As it appears from the decision of this Court in K. P. Vaghese's case [1981] 131 ITR 597, the onus was on the Revenue to prove that there was understatement in the document, not that the goods were sold at under-value. Understatement of a value is a misstatement of value. Selling goods at an under-value to defeat the Revenue is different from understating the value in the document of sale. Counsel for the Revenue contended that in the background of the facts of this case, the evil design of the assessee was clear and he said that it was difficult to know the mind of man. Therefore, an inference could be drawn in the facts of his case as noted by the Tribunal that there was understatement of value in the document. Though the legislation in question is to remedy the social evil and should be read broadly and should be so read that the object is fulfilled, yet the onus of establishing a condition of taxability must be fulfilled by the Revenue. There is no evidence direct or inferential that the consideration actually received by the assessee was more than was disclosed or declared by him. The relationship between the parties has been established. The desire to defeat the claim of the Revenue has also been established but the fact that, for this, the assessee had stated a false fact, in the document is not established. What appears from the Tribunal's order was that the real and main object was to safeguard these shares from being taken over by the Government in settlement of tax dues, and also that the buyer and seller were indirectly connected with each other. The first proviso of section 12-B (2) of the 1922 Act provides "full value of the consideration for which the sale, exchange, relinquishment or transfer is made" to be taken as the basis for the computation or capital gains. Therefore, unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for the computation of capital gains. The onus is on the Revenue the inferences might be drawn in certain cases but to come to a conclusion that a particular higher amount was, in fact, received must be based on such material from which such an irresistible conclusion follows. In the instant case, no such attempt was made. As this Court has explained in K. P.' Varghese' case [1981] 131 ITR 597, the second ingredient, that is to say, the word "declared" in subsection (2) of section 52 of the Act is very eloquent and revealing. It clearly indicated that the focus of subsection (2) was on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplated a case where the consideration received by the assessor: in respect of the transaction was not truly declared or disclosed by him but was shown at a different figure. Capital gains tax intended to tax the gains of an assessee, not what an assessee might have gained. what is not gained cannot be computed as gained. All law fiscal or otherwise, must be both reasonably and justly interpreted whenever possible. Capital gains tax is not a tax on what might have been received or could have been taxed. In this case, the Revenue has made no attempt to establish that there was any under-statement though it might be that shares were sold at an under-value. In view of the ratio of K. P. Varghese's case [1981) 131 ITR 597, the proviso to section 12-B(2) of the Act can be invoked only where the consideration for the transfer of capital asset has been under-stated by the assessee. There is no evidence as discussed above that the full consideration received by the assessee in the transfer of the assets involved in these cases has been under-stated. The proviso helps or enables the Department by providing a way to determine the market value. But the proviso is applicable only where the full value for the consideration has not been stated. There is no evidence, direct or inferential, in these cases that the full consideration had not been stated in the document. In that view of the matter, in our opinion, the appeals must fail, though on grounds different from those taken by the High Court. The appeals are accordingly dismissed. M.B.A./406/T Appeals dismissed.