K.P. Varghese Vs. The Income Tax
Officer, Ernakulam, & ANR [1981] INSC 160 (4 September 1981)
BHAGWATI, P.N.
BHAGWATI, P.N.
VENKATARAMIAH, E.S. (J)
CITATION: 1981 AIR 1922 1982 SCR (1) 629 1981
SCC (4) 173 1981 SCALE (3)1315
CITATOR INFO :
R 1984 SC 420 (38) MV 1985 SC 150 (31) D 1985
SC1211 (18) R 1985 SC1698 (45) RF 1986 SC1499 (16) R 1986 SC1691 (14,16,18,19)
R 1986 SC1973 (17) R 1987 SC 558 (15) RF 1988 SC 191 (45) RF 1988 SC 603 (24) F
1988 SC 625 (5) RF 1988 SC 782 (41) RF 1989 SC 644 (16) E&F 1989 SC1167 (8)
D 1991 SC 772 (18) R 1991 SC1028 (15) RF 1992 SC 847 (37) RF 1992 SC1360 (9)
ACT:
Capital gains-Whether understatement of
consideration in a transfer of property is a necessary condition for attracting
the applicability of sub-section (2) of section 52 of the Income Tax Act
1961-Burden of proof of such understatement is on the Revenue-Interpretation of
statutes explained
HEADNOTE:
The appellant assessee sold his house in
Ernakulam on 25th of December, 1965 to his daughter-in-law and five of his
children for the same price of Rs. 16,500 at which he purchased in the year
1958. The assessment of the assessee for the assessment year 1966-67 for which
the relevant accounting year was the calendar year 1965 was thereafter
completed in the normal course and in this assessment, no amount was included
by way of capital gains in respect of the transfer of the house, since the
house was sold by the assessee at the same price at which it was purchased and
no capital gains accrued or arose to him as a result of the transfer. On 4th
April 1968, however, the Income Tax officer issued a notice under section 148
of the Act seeking to reopen the assessment of the assessee for the assessment
year 1966-67 and requiring the assessee to submit a return of income within
thirty days of the service of the notice, without stating what was the income
alleged to have escaped assessment. However, by his subsequent letter dated 4th
March, 1969, the Income Tax officer stated that he proposed to fix the fair
market value of the house sold by the assessee at Rs, 65,000 as against the
consideration of Rs. 16,500 for which the house was sold and assess the
difference of Rs. 48,500 as capital gains in the hands of the assessee. The
objections raised by the assessee were overruled and an order of reassessment
was passed by the Income Tax officer including the sum of Rs. 48,500 as capital
gains and bringing it to tax under sub-section (2) of section 52, taking the
view that this sub-section did not require as a condition precedent that there
should be under statement of consideration in respect of the transfer and it
was enough to attract the applicability of the sub-section if the fair market
value of the property as on the date of the transfer exceeded the full value of
the consideration declared by the assessee by an amount of not less than 15% of
the value so declared. The assessee thereupon filed a writ petition in Kerala
High Court challenging the validity of the order of re assessment insofar as it
brought a sum of Rs. 48,500 to tax relying on sub-section (2) of section 52 of
the the Income Tax Act, 1961. The writ petition was allowed, but in appeal the
Full Bench by a majority judgment agreed with the views of the Income Tax
officer and dismissed the writ petition. Hence the assessee's appeal by
certificate.
630 Allowing the appeal, the Court
HELD: 1: 1. Sub-section (2) of section 52 of
the Income Tax Act, 1961 can be invoked only where the consideration for the
transfer has been understated by the assessee or in other words, the
consideration actually received by the assessee is more than what is declared
or disclosed by him.
Sub-section (2) has no application in case of
an honest and bonafide transaction where the consideration received by the
assessee has been correctly declared or disclosed by him and there is no
concealment or suppression of the consideration.
[657 B, C-D] 1: 2. The burden of proving an
understatement or concealment is on the Revenue, which may be discharged by it
by establishing facts and circumstances from which a reasonable inference can
be drawn that the assessee has not correctly declared or disclosed the
consideration received by him and there is understatement or concealment of the
consideration in respect of the transfer.[657 B-C] 1: 3. Sub-section (4), in
the instant case, had no application and the Income Tax officer could have no
reason to believe that any part of the income of the assessee had escaped
assessment so as to justify the issue of a notice under section 148. It was a
common ground between the parties and that was a finding of fact reached by the
Revenue Authorities that the transfer of the property by the assessee was a
perfectly honest and bonafide transaction where the full value of the
consideration received by the assessee was correctly disclosed at the figure of
Rs.
16,500. The order of re-assessment made by
the Income Tax officer pursuant to the notice issued under section 148 was
accordingly without jurisdiction. [657 D-G] 2: 1. The task of interpretation of
the statutory enactment is not a mechanical task. It is more than mere reading
of mathematical formula because few words possess the precision of mathematical
symbols. It is an attempt to discover the intent of the legislature from the
language used by it and it must always be remembered that language is at best
an imperfect instrument for the expression of human thoughts and it would be
idle to expect every statutory provision to be "drafted with divine
prescience and perfect clarity". Courts, therefore, must eschew literalness
in the interpretation of a statutory provision and construe the language having
regard to the object and purpose which the legislature had in view in enacting
that provision and in the context and the setting in which it occurs. [640 C-D,
F.G, 642 B-C] 2: 2. Where the plain literal interpretation of a statutory
provision produces a manifestly absurd and unjust result which could never have
been intended by the legislature, the Court may modify the language used by the
legislature or even "do some violence" to it so as to achieve the
obvious intention of the legislature and produce a rational construction. The
Court may also in such a case read into the statutory provision a condition
which, though not expressed, is implicit as constituting the basic assumption
underlying the statutory provision. It is true that the consequences of a
suggested construction cannot alter the meaning of a statutory provision but
they can certainly help to fix its meaning.
Luke v. Revenue Commissioner, [1963] A.C.
557; Headan's case [1584] 3 Co. Rep. 7(a); In re May Fair Property Company, LR
[1898] 2 Ch. Dn; Eastman Photographic Material Company v. Comptroller-General
of Patents, Designs and Trade Marks, L.R. [1898] A.C. 571, quoted with
approval, 2:3. The speeches made by the Members of the Legislature on the floor
of the House when a Bill for enacting a statutory provision is being debated
are inadmissible for the purpose of interpreting the statutory provision but
the speech made by the Mover of the Bill explaining the reason for the
introduction of the Bill can certainly be referred to for The purpose of
ascertaining the mischief sought to be remedied by the legislation and the
object and purpose for which the legislation is enacted.
[654 E-G] Lok Shikshana Trust v. Commissioner
af Income-Tax, 101 I.T.R. 234; Indian Chamber of Commerce v. Commissioner of
Income-tax, 101 I.T.R. 796; Additional Commissioner of Income-tax v. Surat Art
Silk Cloth Manufacturers Association, 121 I.T.R. 1, referred to.
2:4. Again it is undoubtedly true that the
marginal note to a section cannot be referred to for the purpose of construing
the section but it can certainly be relied upon as indicating the drift of the
section or to show what the section dealing with. It cannot control the interpretation
of the words of a section particularly when the language of the section is
clear and unambiguous but, being part of the statute, it prima facie furnishes
some clue as to the meaning and purpose of the section. [647 A-B] Bushel v.
Hammond, [1904] 2 KB 563, quoted with approval.
Bengal Immunity Company Limited v. State of
Bihar, [1955] 2 SCR 603, referred to.
2:5. The rule of construction by reference to
contemporanea expositio is a well established rule for interpreting a statute
by reference to the exposition it has received from contemporary authority,
though it must give way where the language of the statute is plain and
unambiguous. [650 B-C] Baleshwar Bagarti v. Bhagirathi Dass, I.L.R. 35 Calcutta
701, approved.
Deshbandhu Gupta and Co. v. Delhi Stock
Exchange Association Ltd,. [1979] 4 S.C.C. 565, referred to.
2:6. Having regard to the well recognised
rule of interpretation, a fair and reasonable construction of section 52
sub-section (2) would be to read into it a condition that it would apply only
where the consideration for the transfer is understated or in other words, the
assessee has actually received a larger consideration for the transfer than
what is declared in the instrument of transfer and it would have no application
in case of a bonafide transaction where the full value of the consideration for
the transfer is correctly declared by the assessee. [642 E-F]
3. Several considerations which lead to this
conclusion are:
632 (a) The first consideration is the object
and purpose of the enactment of section 52(2). The speech made by the Finance
Minister while moving the amendment introducing sub- section (2) clearly states
what were the circumstances in which such sub-section (2) came to be passed,
what was the mischief for which section 52 as it stood then did not provide and
which was sought to be remedied by the enactment of sub section (2) and why the
enactment of that sub section was found necessary. The object and purpose of
sub-section (2), as explicated from the speech of the Finance Minister, was not
to strike at honest and bonafide transactions where the consideration for the
transfer was correctly disclosed by the assessee but to bring within the net of
taxation those transactions where the consideration in respect of the transfer
was shown at a lesser figure than that actually received by the assessee, so
that they do not escape The chargeable tax on capital gain by understatement of
the consideration. This was real object and purpose of the enactment of sub
section (2) and the interpretation of this sub-section must fall in line with
the advancement of that object and purpose.[642 F, 646 B. F] (b) Further the
marginal note to section 52 as it now stands, was originally a marginal note
only to what is presently sub-section (1) and significantly enough, this
marginal note remained unchanged even after the introduction of sub-section (2)
suggesting clearly that it was meant by Parliament to apply to both
sub-sections of section 52 and it must therefore be taken as indicating That,
like sub- section(l), sub-section (2) is also intended to deal with cases where
there is under-statement of The consideration in respect of the transfer. [647
C-D] (c) The placement of sub-section (2) in section 52 does indicate in some
small measure that Parliament intended that sub-section to apply only to cases
where the consideration in respect of the transfer is under stated by the
assessee.
If Parliament intended sub-section (2) to
cover all cases where the condition of 15% difference is satisfied, irrespective
of whether there is under-statement of consideration or not, it is reasonable
to assume that Parliament would have enacted that provision as a separate
section and rot pitch-forked it into section 52 with a total stranger under an
inappropriate marginal note. - Moreover there is inherent evidence in
sub-section (2) which suggests that the thrust of that sub section is directed
against cases of under-statement of consideration. The crucial and important
words in sub-section (2) are: "the full value of the consideration
declared by the assessee". The word 'declared' is very eloquent and
revealing. It clearly indicates that the focus of sub-section (2) is on the
consideration declared or disclosed by the assessee as distinguished from the
consideration actually received by him and it contemplates a case where the
consideration received by the assessee in respect of the transfer is not truly
declared or disclosed by him but is shown at a different figure. [647 D-G, 648
A-B] (d) The two circulars issued by the Central Board of Direct Taxes dated
7th July, 1964 and 14th January, 1974 are not only binding on the Tax
Department in administering or executing the provision enacted in sub-section
(2), but are in nature of contemporenea expositio, furnishing legitimate aid in
the construction of sub-section (2). It is clear from these two circulars that
the Central Board of Direct Taxes, which is the highest authority entrusted
with the execution of the provisions of the Act understood sub-section (2) as
limited to 633 cases where the consideration for the transfer has been
under-stated by the assessee. These two circulars are legally binding on the
Revenue and this legally binding character attaches to the two circulars even
if they be found not in accordance with the correct interpretation of
sub-section (2) and they depart or deviate from such construction. [650 A, F-G]
Navnitlal C. Jhaveri v. KK, Sen, 56 I.T.R. SC 198:
Ellerman Lines Ltd. v. Commissioner of
Income-tax, West Bengal, 82 I.T.R. 913 (SC), followed. 1 4: 1, It is a well
settled rule of law that the onus of establishing that the conditions of
taxability are fulfilled is always on the Revenue. To throw the burden of
showing that there is no understatement of the consideration, on the assessee
would be to cast an almost impossible burden upon him to establish the
negative, namely that he did not receive any consideration beyond that declared
by him. [653 F-H, 654 A] 4: 2. If the Revenue seeks to bring a case within sub-
section (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 under-stated 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- section (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 that each of
these two conditions is satisfied and the Revenue cannot claim to have
discharged this burden which lies upon it, by merely establishing that the fair
market value of the capital asset as on the date of the transfer exceeds by 15%
or more the full value of the consideration declared in respect of the transfer
and the first condition is therefore satisfied. The Revenue must go further and
prove that the second condition is also satisfied. Merely by showing that the
first condition is satisfied, the Revenue cannot ask the Court to presume that
the second condition too is fulfilled, because even in case where the first
condition of 15% difference is satisfied, the transaction may be a perfectly
honest and bonafide transaction and there may be no understatement of the
consideration. The fulfillment of the second condition has therefore to be
established independently of the first condition and merely because the first
condition is satisfied, no inference can necessarily follow that the second
condition is also fulfilled. Each condition has got to be viewed and
established independently before subsection (2) can be invoked and the burden
of doing so is clearly on the Revenue. [653 B-F] 4:3. The object of imposing
the condition of difference of 15% or more between the fair market value of the
capital asset and the consideration declared in respect of the transfer clearly
is to save the assessee from the rigour of subsection (2) in marginal cases
where difference in subjective valuation by different individuals may result in
an apparent disparity between the fair market value and the declared
consideration. This condition of 15% or more difference is merely intended to
be a safeguard against undue hardship which would be occasioned to the assessee
if the inflexible rule of the thumb enacted in sub-section (2) were applied in
marginal case and it has nothing to do with the question of burden of proof,
for the burden of establishing that there is understatement of the concide- 534
ration in respect of The transfer always rests on the Revenue. The postulate
underlying sub-section (2) is that the difference between one honest valuation
and another may range upto 15% and that constitutes the class of marginal cases
which are taken out of the purview of sub-section (2) in order to avoid
hardship to the assessee. [654 B-C, F-H] 4: 4. Once it is established by the
Revenue that the consideration for the transfer has been under-stated, sub-
section (2) is immediately attracted, subject of course to the fulfillment of
the condition of 15% or more difference, and the Revenue is then not required
to show what is the precise extent of the understatement or in other words,
what is the consideration actually received by the asseesee. That would in most
cases be difficult, if not impossible, to show and hence sub-section (2)
relieves the Revenue of all burden of proof regarding the extent of
under-statement 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 a statutory best judgment assessment of the
consideration actually received by the assessee and brings to tax capital gains
OD 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 construction of sub-section
(2) falls in line with the scheme of the provisions relating to tax on capital
gains. [665A-E] 4: 5. Section 52 is not a charging section but is a computation
section. It has to be read alongwith section 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 section 41.
Therefore sub-section (2) cannot be construed as bringing within the
computation of capital gains an amount which, by no stretch of imagination, can
be said to have accrued to the assessee or been received by him. [655 E-F] 4:
6. This construction of sub-section (2) also marches in step with the Gift Tax
Act, 1958. If a capital asset is transferred for a consideration below its
market value, the difference between the market value and the full value of the
P consideration received in respect of the transfer would amount to a gift
liable to tax under the Gift Tax Act, 1958. Since the Income Tax Act, 1961 and
the Gift Tax Act, 1958 are parts of an integrated scheme of taxation the same
amount which is chargeable as gift could not be intended to be charged also as
capital gains. [656 A-C] 4: 7. Besides, under Entry 82 in List I of the Seventh
Schedule to the Constitution which deals with "Taxes on income" and
under which the Income Tax Act, 1961 has been enacted, Parliament cannot
"choose to tax as income an item which in no rational sense can be regarded
as a citizen's income or even receipt. Sub-section (2) would, therefore, on the
construction of the Revenue, go outside the legislative power of Parliament,
and it would Dot be possible to justify it even as an incidental or ancillary
provision or a provision intended to prevent evasion of tax. [656 E-F] 635 4:
8. Sub-section (2) would also be violative of the fundamental right of the
assessee under Article 9(1) (f)- which fundamental right was in existence at
the time when sub-section (2) came to be enacted-since on the construction
canvassed on behalf of the Revenue, the effect of sub- section (2) would be to
penalize the assessee for transferring his capital asset for a consideration
lesser by 15% or more than the fair market value and that would constitute
unreasonable restriction on the fundamental right of the assessee to dispose of
his capital asset at the price of his choice. The Court must obviously prefer a
construction which renders the statutory provision constitutionally valid
rather than that which makes it void.
[656 F-H, 657 A]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 412(NT) of 1973 From the judgment and order dated the 5th July, 1972 of the
Kerala High Court at Ernakulam in Writ Appeal No. 127 of 1970.
M. M. Abdul Khadher, S.K. Mehta, E.M.S. Anam,
P.N.Puri and M.K Dua for the appellant.
S.T. Desai and Miss A. Subhashini for the
respondent Anil B. Diwan, Dinesh Vyas, P.H. Parekh and R.N. Karanjawala for the
intervener.
S. Swaminathan, N. Srinivasan and Gopal
Subramaniam for the intervener.
Debi Pal, Praveen Kumar and A.R. Sharma for
the intervener.
K.R. Kazi and S.C. Patel for the intervener.
N.A. Palkhiwala, P.H. Parekh, J.B.
Dadachanji, H. Salve and Ravinder Narain for interveners.
S.C. Patel for the intervener.
J.B. Dadachanji for the intervener.
B.K Mohanty and C.S. Rao for the intervener.
P.A. Francis and M.N. Shroff for the
intervener.
The Judgment of the Court was delivered by
BHAGWATI, J. The principal question that arises for deter- 636 mination in this
appeal by certificate is whether understatement of consideration in a transfer
of property is a necessary condition for attracting the applicability of
section 52 sub-section (2) of the Income Tax Act 1961 (hereinafter referred as
the Act) or it is enough for the Revenue to show that the fair market value of
the property as on the date of the transfer exceeds the full value of the
consideration declared by the assessee in respect of the transfer by an amount
of not less than 15% of the value so declared. The facts giving rise to the
appeal are not very material but since they from the backdrop against which the
question arises for consideration, we may briefly state them.
The assessee was the owner of a house
situated in Ernakulam, which he had purchased in 1958 for the price of Rs.
16,500. On 25th December 1965 the assessee sold the house for the same price of
Rs. 16,500 to his daughter-in- law and five of his children. The assessment of
the assessee for the assessment year 1966-67 for which the relevant accounting
year was the calendar year 1965 was thereafter completed m the normal course
and in this assessment, no amount was included by way of capital gains in
respect of the transfer of the house since the house was sold by the assessee
at the same price at which it was purchased and no capital gains accrued or
arose to him as a result of the transfer. On 4th April 1968 however the Income
tax officer issued a notice under section 148 of the Act seeking to reopen the
assessment of the assessee for the assessment year 1966-67 and requiring the
assessee to submit a return of income within thirty days of the service of the
notice.
The notice did not state what was the income
alleged to have escaped assessment but by his subsequent letter dated 4th March
1969 the Income-tax officer intimated to the assessee that he proposed to fix
the fair market value of the house sold by the assessee on 25th December 1965
at Rs. 65,000 as against the consideration of Rs. 16,500 for which the house
was sold and assess the difference of Rs. 48,500 as capital gains in the hands
of the assessee. The assessee raised objections against the reassessment
proposed to be made by the Income-tax officer but the objections were
over-ruled and an order of reassessment was passed by the Income-tax officer
including the sum of Rs. 48,500 as capital gains and bringing it to tax. Though
the sale of the house by the assessee was in favour of his daughter-in-law and
five of his children who were persons directly connected with him, the
Income-tax officer could not invoke the aid of section 52 sub-section (1) for
bringing the sum of 637 Rs. 48,500 to tax, because there was admittedly no
under- statement A of consideration in respect of the transfer of the house and
it was not possible to say that the transfer was effected by the assessee with
the object of avoidance or reduction of his liability under section 45. The
Income-tax officer therefore rested his decision to assess the sum of Rs.
48,500 to tax on sub-section (2) of section 52 and taking the view that this
sub-section did not require as a condition precedent that there should be
under-statement of consideration in respect of the transfer and it was enough
to attract the applicability of the sub-section if the fair market value of the
property as on the date of the transfer exceeded the full value of the
consideration declared by the assessee by an amount of not less than 15% of the
value so declared, which was indisputably the position in the present case, the
Income-tax officer assessed the sum of Rs. 48,500 to tax as capital gains. The
assessee thereupon preferred a writ petition in Kerala High Court challenging
the validity of the order of reassessment in so far as it brought the sum of
Rs. 48,500 to tax relying on section 52 sub-section (2) of the Act. D The writ
petition came up for hearing before Isaacs J.
sitting as a single Judge of the High Court
and after hearing both parties, the learned Judge came to the conclusion that
under-statement of consideration in respect of the transfer was a necessary
condition for attracting the applicability of section 52 sub-section (2) and
since in the present case there was admittedly no under-statement of
consideration and it was a perfectly bonafide transaction, section 52
sub-section (2) had no application and the sum of Rs. 48,500 could not be
brought to tax as capital gains under that provision. The Revenue appealed
against this decision to a Division Bench of the High Court and having regard
to the importance and complexity of the question involved, the Division Bench
referred the appeal to a Full Bench of three Judges. The Full Bench heard the
appeal but there was a division of opinion, two Judges taking one view and the
third Judge taking another. While Raghvan C.J.
agreed substantially with the view taken by
Isaacs J., Gopalan Nambiar J. and Vishwanath Iyer J. took a different view and
held that in order to bring a case within section 52 sub-section (2), it is not
at all necessary that there should be under-statement of consideration in
respect of the transfer and once it is found that the fair market value of the
property as on the date of the transfer exceeds the full value of the
consideration declared by the assessee in respect of the transfer by 638 an
amount of not less than 15% of the value so declared, section 52 sub-section
(2) is straightaway attracted and the fair market value of the property as on
the date of the transfer is liable to be taken as the full value of the
consideration for the transfer. The writ petition was accordingly dismissed and
the order of re-assessment sustained by the majority decision reached by the
Full Bench. Hence the present appeal by the assessee with certificate obtained
from the High Court.
It will be noticed from the above statement
of facts that the principal question arising for determination in this appeal
turns on the true interpretation of section 52 sub-section (2). But in order to
arrive at its proper interpretation, it is necessary to refer to some other
provisions of the Act as well. Section 2 clause (24) defines the word 'income'.
The definition is inclusive and covers 'capital gains' chargeable under section
45. Section 4 is the charging section and it provides that income tax shall be
charged in respect of the total income of the previous year of every person.
Section 5 defines the scope of 'total income' by providing that the total
income of the previous year of a person who is resident shall include all
income from whatever source derived which is received or is deemed to be
received in India in such year by him or on his behalf or accrues or arises or
is deemed to accrue or arise to him in India during such year or accrues or
arises to him outside India during such year. Section 14 enumerates the heads
of income under which income shall, for the purposes of charge of income tax
and computation of total income, be classified and they includes capital
gains". 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. The mode of
computation of capital gains is laid down in section 48 which provides that 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, two amounts, namely, (i)
expenditure incurred wholly and exclusively in connection with such transfer
and (ii) the cost of acquisition of the capital asset and the cost of any
improvement thereto. Then follows section 52 which is the material section
requiring to be construed in the present appeal. That section consists of two
sub-sections and runs as follows:
639 (1) Where the person who acquires a
capital asset from an assessee is directly or indirectly connected with the
assessee and the Income-tax officer has reason to believe that the transfer was
effected with the object of avoidance or reduction of the liability of the
assessee under section 45, the full value of the consideration for the transfer
shall, with the previous approval of the Inspecting Assistant Commissioner, be
taken to be the fair market value of the capital asset on the date of the
transfer.
(2) Without prejudice to the provisions of
sub-section (1), if in the opinion of the Income-tax officer the fair market
value of a capital asset transferred by an assessee as on the date of the
transfer exceeds the full value of the consideration declared by the assessee
in respect of the transfer of such capital assets by an amount of not less than
fifteen per cent of the value declared, the full value of the consideration for
such capital asset shall, with the previous approval of the Inspecting
Assistant Commissioner, be taken to be its fair market value on the date of its
transfer.
There is a marginal note to section 52 which
reads:
Consideration for transfer in cases of
under-statement". It may be pointed out that originally when the Act came
to be enacted, section 52 consisted of only one provision which is now numbered
as sub-section (I) and it was by section 13 of the Finance Act 1964 that
sub-section (2) was added in that section with effect from 1st April 1964.
Now on these provisions the question arises
what is the true interpretation of section 52, sub-section (2). The argument of
the Revenue was and this argument found favour with the majority Judges of the
Full Bench that on a plain natural construction of the language of section 52,
sub- section (2), the only condition for attracting the applicability of that
provision is that the fair market value of the capital asset transferred by the
assessee as on the date of the transfer exceeds the full value of the
consideration declared by the assessee in respect of the transfer by an amount
of not less than 15% of the value so declared. Once the Income-tax officer is
satisfied that this condition exists, he can proceed to 640 invoke the
provision in section 52 sub-section (2) and take the fair market value of the
capital asset transferred by the assessee as on the date of the transfer as
representing the full value of the consideration for the transfer of the
capital asset and compute the capital gains on that basis.
No more is necessary to be proved, contended
the Revenue. To introduce any further condition such as understatement of
consideration in respect of the transfer would be to read into the statutory
provision something which is not there:
indeed it would amount to rewriting the
section. This argument was based on a strictly literal reading of section 52
sub-section (2 but we do not think such a construction can be accepted. It
ignores several vital considerations which must always be borne in mind when we
are interpreting a statutory provision. The task of interpretation of a
statutory enactment is not a mechanical task. It is more than a mere reading of
mathematical formulae because few words possess the precision of mathematical
symbols. It is an attempt to discover the intent of the legislature from the
language used by it and it must always be remembered that language is at best
an imperfect instrument for the expression of human thought and as pointed out
by Lord Denning, it would be idle to expect every statutory provision to be
"drafted with divine prescience and perfect clarity." We can do no
better than repeat the famous words of Judge Learned Hand when he said: "
it is true that the words used, even in their literal sense, are the primary
and ordinarily the most reliable, source of interpreting the meaning of any
writing: be it a statute, a contract or anything else. But it is one of the
surest indexes of a mature and developed jurisprudence not to make a fortress
out of the dictionary; but to remember that statutes always have some purpose
or object to accomplish, whose sympathetic and imaginative discovery is the
surest guide to their meaning." We must not adopt a strictly literal
interpretation of section 52 sub-section (2) but we must construe its language
having regard to the object and purpose which the legislature had in view in
enacting that provision and in the context of the setting in which it occurs.
We cannot ignore the context and the collocation of the provisions in which
section 52 sub-section (2) appears, because, as pointed out by Judge Learned
Hand in most I felicitous language the meaning of a sentence may be more than
that of the separate words as a melody is more than the notes, and no degree of
particularity can ever obviate recourse to the setting in which all appear, and
which all collectively create". Keeping these observations in mind we may
now approach the construction of section 52 sub-section (2).
641 The primary objection against the literal
constriction of section 52 sub-section (2) is that it leads to manifestly
unreasonable and absurd consequences. It is true that the consequences of a
suggested construction cannot alter the meaning of a statutory provision but
they can certainly help to fix its meaning. It is a well recognised rule of
construction that a statutory provision must be so construed, if possible that
absurdity and mischief may be avoided. There are many situations where the
construction suggested on behalf of the Revenue would lead to a wholly
unreasonable result which could never have been intended by the legislature.
Take, for example, a case where A agrees to sell his property to for a certain
price and before the sale is completed pursuant to the agreement and it is
quite well- known that sometimes the competition of the sale may take place
even a couple of years after the date of the agreement-the market price shoots
up with the result that the market price prevailing on the date of the sale
exceeds the agreed price at which the property is sold by more than 15% of such
agreed price. This is not at all an uncommon case in an economy of rising
prices and in fact we would find in a large number 1 of cases where the sale is
completed more than a year or two after the date of the agreement that the
market price prevailing on the date of the sale is very much more than the
price at which the property is sold under the agreement. Can it be contended
with any degree of fairness and justice that in such cases, where there is
clearly no under-statement of consideration in respect of the transfer and the
transaction is perfectly honest and bonafide and, in fact, in fulfilment of a
contractual obligation, the assessee who has sold the property should be liable
to pay tax on capital gains which have not accrued or arisen to him. It would
indeed be most harsh and inequitable to tax the assessee on income which has
neither arisen to him nor is received by him, merely because he has carried out
the contractual obligation under- taken by him. It is difficult to conceive of
any rational reason why the legislature should have thought it fit to impose
liability to tax on an assessee who is bound by law to carry out his
contractual obligation to sell the property at the agreed price and honestly
carries out such contractual obligation. It would indeed be strange if
obedience to the law should attract the levy of tax on income which has neither
arisen to the assessee nor has been received by him. If we may take another
illustration, let us consider a case where A sells his property to with a
stipulation that after some-time which may be a couple of years or more, he
shall resell the property to A for the same price.
642 could it be contended in such a case that
when transfers the property to A for the same price at which he originally
purchased it, he should be liable to pay tax on the basis as if he has received
the market value of the property as on the date of resale, if, in the
meanwhile, the market price has shot up and exceeds the agreed price by more
than 15% Many other similar situations can be contemplated where it would be
absurd and unreasonable to apply section 52 sub- section (2) according to its
strict literal construction. We must therefore eschew literalness in the
interpretation of section 52 sub-section (2) and try to arrive at an interpretation
which avoids this absurdity and mischief and makes the provision rational and
sensible, unless of course, our hands are tied and we cannot find any escape
from the tyranny of the literal interpretation. It is now a well settled rule
of construction that where the plain literal interpretation of a statutory
provision produces a manifestly absurd and unjust result which could never have
been intended by the legislature, the court may modify the language used by the
legislature or even 'do some violence' to it, so as to achieve the obvious
intention of the legislature and produce a rational construction, Vide: Luke
Inland Revenue Commissioner(1) The Court may also in such a case read into the
statutory provision a condition which, though not expressed, is implicit as
constituting the basic assumption underlying the statutory provision. We think
that, having regard to this well recognised rule of interpretation, a fair and
reasonable construction of section 52 sub-section (2) would be to read into it
a condition that it would apply only where the consideration for the transfer
is under-stated or in other words, the assessee has actually received a larger
consideration for the transfer than what is declared in the instrument of
transfer and it would have no application in case of a bonafinde transaction
where the full value of the consideration for the transfer is correctly
declared by the assessee. There are several important considerations which
incline us to accept this construction of section 52 sub- section (2).
The first consideration to which we must
refer is the object and purpose of the enactment of section 52 sub- section
(2). Prior to the introduction of sub-section (2), section 52 consisted only of
what is now sub-section (1).
This sub-section provides that where an
assessee transfers a capital asset and in respect of the transfer two
conditions are satisfied' namely, (1) the transferee is a person directly or
indirectly connected with the assessee and (ii) the 643 Income-tax officer has
reason to believe that the transfer was effected A 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 consideration for the transfer and the assessee shall be
taxed on capital gains on that basis. The second condition obviously involves
under-statement 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 can achieve the object of avoiding or
reducing his liability to tax on capital gains. And that is why the marginal
note to section 52 reads: "Consideration for the transfer in cases of under-
statement''. But, it must be noticed that for the purpose of bringing a case
within sub-section (1), it is not enough merely to show understatement of
consideration but it must be further shown that the object of the
under-statement was to avoid or reduce the liability of the assessee to tax on
capital gains. Now it is necessary to bear in mind that when capital gains are
computed by invoking sub-section (I) it is not any fictional accrual or receipt
of income which is brought to tax. Sub-section (I) does not deem income to
accrue or to be received which in fact never accrued or was never received. It
seeks to bring within the net of taxation only that income which has accrued or
is received by the assessee as a result of the capital asset. But since the
actual consideration received by the assessee is not declared or disclosed and
in most of the cases, if not all, it would not be possible for the Income-tax
officer to determine precisely what is actual consideration received by the
assessee or in other words how much m ore consideration is received by the
assessee than that declared by him, sub- section (1) provides that the fair
market value of the property as on the date of the transfer shall be taken to
be the full value of the consideration for the transfer which has accrued to or
is received by the assessee. Once it is found that the consideration in respect
of the transfer is understated and the conditions specified in sub-section (1)
are fulfilled, the Income-tax Officer will not be called upon to prove the
precise extent of the undervaluation or in other words, the actual extent of
the concealment and the full value of the consideration received for the
transfer shall be computed in the manner provided in subsection (1).
The net effect of this provision is as if a
statutory best judgment assessment of the actual consideration received by the
assessee is made, in the absence of reliable materials.
644 But the scope of sub-section (1) of
section 52 is extremely restricted because it applies only where the transferee
is a person directly or indirectly connected with the assessee and the object
of the under-statement is to avoid or reduce the income-tax liability of the
assessee to tax on capital gains. There may be cases 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 under-statement of the consideration is
unconnected with tax on capital gains. Such cases would not be within the reach
of sub section (1) and the assessee, though dishonest, would escape the rigour
of the provision enacted in that sub-section. Parliament therefore enacted
sub-section (2) with a view to extending the coverage of the provision in
sub-section (I) to other cases of understatement of consideration. This becomes
clear if we have regard to the object and purpose of the introduction of
sub-section (2) as appearing from travaux preparatoire relating to the enactment
of that provision. It is a sound rule of construction of a statute firmly
established in England as far back as 1584 when Heydon's case(1) was decided
that"... for the sure and true interpretation of all statutes in
general-four things are to be discerned and considered: (1) What was the common
law before the making of the Act, (2) What was the mischief and defect for
which the common law did not provide, (3) What remedy the Parliament hath
resolved and appointed to cure the disease of the Commonwealth, and (4) The
true reason of the remedy, and then the office of all the Judges is always to
make such construction as shall suppress the mischief, and advance the
remedy". In in re Mayfair Property Company(2) Lindley. M.R. in 1898 found
the rule "as necessary now as it was when Lord Coke reported Heydon's
case". The rule was reaffirmed by Earl of Halsbury in Eastman Photographic
Material Company v. Comptroller General of Patents, Designs and Trade Marks(3)
in the following words.
"My Lords, it appears to me that to
construe the Statute in question, it is not only legitimate but highly
convenient to refer both to the former Act and to the ascertained evils to
which the former Act had given rise, and to 645 the later Act which provided
the remedy. These three being A compared I cannot doubt the conclusion."
This Rule being a Rule of construction has been repeatedly applied in India in
interpreting statutory provisions. It would therefore be legitimate in
interpreting sub-section (2) to consider that was the mischief and defect for
which section 52 as it then stood did not provide and which was sought to be
remedied by the enactment of sub-section (2) or in other words, what was the
object and purpose of enacting that sub-section. Now in this connection the
speech made by the Finance Minister while moving the amendment introducing
sub-section (2) is extremely relevant, as it throws considerable light on the
object and purpose of the enactment or sub-section (2). The Finance Minister
explained the reason for introducing sub-section (2) in the following words:
"Today, particularly 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." Now it is true that the
speeches made by the Members of the Legislature on the floor of the House when
a Bill for enacting a statutory provision is being debated are inadmissible for
the purpose of interpreting the statutory provision but the speech made by the
Mover of the Bill explaining the reason for the introduction of the Bill can
certainly be referred t o for the purpose of ascertaining the mischief sought
to be remedied by the legislation and the object and purpose for which the
legislation is enacted.
This is in accord with the recent trend in
juristic thought not only in Western countries but also in India that
interpretation of a statute being an exercise in the ascertainment of meaning,
everything which is logically relevant should be admissible. In fact there are
at least 646 three decisions of this Court, one in Loka Shikshana Trust v. Commissioner
of Income-Tax(1) the other in Indian Chamber of Commerce v. Commissioner of
Income-tax(2) and the third in Additional Commissioner of Income-tax v. Surat
Art Silk Cloth Manufacturers Association(3) where the speech made by the
Finance Minister while introducing the exclusionary clause in section 2 clause
(15) of the Act was relied upon by the Court for the purpose of ascertaining
what was the reason for introducing that clause. The speech made by the Finance
Minister while moving the amendment introducing sub- section (2) clearly states
what were the circumstances in which sub-section (2) came to be passed, what
was the mischief for which section 52 as it then stood did not provide and
which was sought to be remedied by the enactment of sub-section (2) and why the
enactment of sub-section (2) was found necessary. It is apparent from the
speech of the Finance Minister that sub-section(2) was enacted for the purpose
of reaching those cases where there was under- statement of consideration in
respect of the transfer or to put it differently, the actual consideration
received for the transfer was 'considerably more' than that declared or shown
by the assessee, but which were not covered by sub- section (1) because the
transferee was not directly or indirectly connected with the assessee. The
object and purpose of sub-section (2), as explicated from the speech of the
Finance Minister, was not to strike at honest and bonafide transactions where
the consideration for the transfer was correctly 13: disclosed by the assessee
but to bring within the net of taxation those transactions where the
consideration in respect of the transfer was shown at a lesser figure than that
actually received by the assessee, so that they do not escape the charge of tax
on capital gains by under-statement of the consideration. This was real object
and purpose of the enactment of sub-section (2) and the interpretation of this
sub-section must fall in line with the advancement of that object and purpose.
We must therefore accept as the underlying assumption of sub-section (2) that
there is under-statement of consideration in respect of the transfer and
sub-section (2) applies only where the actual consideration received by the
assessee is not disclosed and the consideration declared in respect of the
transfer is shown at a lesser figure than that actually received.
647 This interpretation of sub-section (2) i
strongly supported by A the marginal note to section 52 which reads
'Consideration for transfer in cases of under-statement'. It is undoubtedly
true that the marginal note to a section cannot be referred to for the purpose
of construing the section but it can certainly be relied upon as indicating the
drift of the section or, to use the words of Collins MR in Bushel v. Hammond(l)
to show what the section is dealing with. It cannot control the interpretation
of the words of a section particularly when the language of the section is
clear and unambiguous but, being part of the statute, it prima facie furnishes
some clue as to the meaning and purpose of the section. Vide Bengal Immunty
Company Limited v. State of Bihar(2) The marginal note to section 52. as it now
stands, was originally a marginal note only to what is presently sub-section
(I) and significantly enough, this marginal note remained unchanged even after
the introduction of sub-section (2) suggesting clearly that it was meant by
Parliament to apply to both sub-sections of section 52 and it must therefore be
taken as indicating that, like sub- section (1), sub-section (2) is also
intended to deal with cases where there is under-statement of the consideration
in respect of the transfer.
But apart from these considerations, the
placement of subsection (2) in section 52 does indicate in some small measure
that Parliament intended that sub-section to apply only to cases where the
consideration in respect of the transfer is under-stated by the assessee. It is
not altogether without significance that the provision in sub- section (2) was
enacted by Parliament not as a separate section, but as part of section 52
which, as it originally stood, dealt only with cases of under-statement of
consideration. If Parliament intended sub-section (2) to cover all cases where
the condition of 15% difference is satisfied, irrespective of whether there is
understatement of consideration or not, it is reasonable to assume that
Parliament would have enacted that provision as a separate section and not
pitch-forked it into section 52 with a total stranger under an inappropriate
marginal note. Moreover there is inherent evidence in sub-section (2), which
suggests that the thrust of that sub-section is directed against cases of
under-statement of consideration. The crucial and important words in
sub-section (2) are: "the full value of the consideration declared by the
assessee", The word 'declared' 648 is very eloquent and revealing. It
clearly indicates that the focus of sub-section (2) is on the consideration
declared or disclosed by the assessee as distinguished from the consideration
actually received by him and it contemplates a case where the consideration
received by the assessee in respect of the transfer is not truly declared or
disclosed by him but is shown at a different figure. This or course is a very
small factor and by itself of little consequence but alongwith the other
factors which we have discussed above, it assumes same significance as throwing
light on the true intent of sub-section (2).
There is also one other circumstance which
strongly reinforces the view we are taking in regard to the construction of
sub-section (2). Soon after the introduction of sub-section (2), the Central
Board of Direct Taxes, in exercise of the power conferred under section 119 of
the Act, issued a circular dated 7th July, 1964 explaining the scope and object
of sub-section (2) in the following words:
"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 remembered as
sub-section (2) enables the computation of capital gains arising on transfer of
a capital asset with . reference to its fair market value as on the date of its
: transfer, ignoring the amount of the consideration shown by the assessee,
only if the following two conditions are satisfied:
(a) the transferee is a person who is
directly.
or indirectly connected with assessee, and
(b) the Income-tax officer has reason to believe that the transfer was effected
with object of avoidance or reduction of the liability of assessee to tax of
capital gains.
In view of these conditions, this provision
has a limited operation and does not apply to other cases where the 649 tax
liability on capital gains arising on transfer of capital A assets between
parties not connected with each other, is sought to be avoided or reduced by an
under-statement of the consideration paid for the transfer of the asset "
The circular also drew the attention of Income-tax Authorities to the assurance
given by the Finance Minister in his speech that sub- B section (2) was not
aimed at perfectly honest and bonafide transactions where the consideration in
respect of the transfer was correctly disclosed or declared by the assessee,
but was intended to deal only with cases where the consideration for the
transfer was under-stated by the assessee and was shown at a lesser figure than
that actually received by him. It appears that despite this circular, the
Income-tax Authorities in several cases levied tax by invoking the provision in
sub- section (2) even in cases where the transaction was perfectly, honest and
bonafide and there was no under- statement of the consideration. This was quite
contrary to the instructions issued in the circular which was binding on the
Tax Department and the Central Board of Direct Taxes was, therefore,
constrained to issue another circular on 14th January, 194 whereby the Central
Board, after reiterating the assurance given by the Finance Minister in the
course of his speech pointed out:
"It has come to the notice of the Board
that in some cases the Income-tax officers have invoked the provisions of
section 52(2) even when the transactions were bonafide. In this context
reference is invited to the decision of the Supreme Court in Navnitlal C. Jhaveri
v. R K Sen(1) and Ellerman Lines Ltd. v. Commissioner of Income-tax, West
Bengal(2) wherein it was held that the circular issued by the Board would be
binding on all officers and persons employed in the execution of the Income-tax
Act. Thus, the Income-tax officers are bound to follow the instructions issued
by the Board." and instructed the Income-tax officers that "while
completing the assessments they should keep in mind the assurance given by the
Minister of Finance and the provisions of section 52(2) of the Income-tax Act
may not be invoked in cases of bonafide trans- 650 actions". These two
circulars of the Central Board of Direct Taxes are, as we shall presently point
out, binding on the Tax Department in administering or executing the provision
enacted in sub-section (2), but quite apart from their binding character, they
are clearly in the nature of contemporanea expositio furnishing legitimate aid
in the construction of sub-section (2). The rule of construction by reference
to contemporanea expositio is a well established rule for interpreting a
statute by reference to the exposition it has received from contemporary
authority, though it must give way where the language of the statute is plain
and unambiguous. This rule has been succinctly and felicitously expressed in
Crawford on Statutory Construction (1940 ed) where it is stated in paragraph
219 that "administrative construction (i. e. contemporaneous construction
placed by administrative or executive officers charged with executing a
statute) generally should be clearly wrong before it is overturned; such a
construction, commonly referred to as practical construction, although
non-controlling, is nevertheless entitled to considerable weight; it is highly
persuasive." The validity of this rule was also recognised in Baleshwar
Bagarti v. Bhagirathi Dass(1) where Mookerjee, J. stated the rule in these
terms:
"It is a well-settled principle of
interpretation that courts in construing a statute will give much weight to the
interpretation put upon it, at the time of its enactment and since, by those
whose duty it has been to construe, execute and apply it." and this
statement of the rule was quoted with approval by this Court in Deshbandhu
Guptu & Co. v. Delhi Stock Exchange Association Ltd.(2) It is clear from
these two circulars that the Central Board of Direct Taxes, which is the
highest authority entrusted with the execution of the provisions of the Act,
understood sub section (2) as limited to cases where the consideration for the
transfer has been under- stated by the assessee and this must be regarded as a
strong circumstance supporting the construction which we are placing on that
sub-section.
But the construction which is commending
itself to us does not rest merely on the principle of contemporanea expositio.
The 651 two circulars of the Central Board of Direct Taxes to which we have
just referred are legally binding on the Revenue and this binding character
attaches to the two circulars even if they be found not in accordance with the
correct interpretation of subsection (2) and they depart or deviate from such construction.
It is now well-settled as a result of two decisions of this Court, one in
Navnitlal C. Jhaveri v. RR. Sen(1) and the other in Ellerman Lines Ltd. v.
Commissioner of Income-tax, West Bengal(2)
that circulars issued by the Central Board of Direct Taxes under section 119 of
the Act are binding ( n all officers and persons employed in the execution of
the Act even if they deviate from the provisions of the Act. The question which
arose in Navnitlal C. Jhaveri's case (supra) was in regard to the constitutional
validity of sections 2(6A) (e) and 12(1B) which were introduced in the Indian
Income Tax Act 1922 by the Finance Act 1955 with effect from 1st April, 1955.
These two sections provided that any payment made by a closely held company to
its shareholder by a way of advance or loan to the extent to which the company
possesses accumulated profits shall be treated as dividend taxable under the
Act and this would include any loan or advance made in any previous year
relevant to any assessment year prior to the assessment year 1955-56, if such
loan or advance remained outstanding on the first day of the previous year
relevant to the assessment year 1955-56. The constitutional validity of these
two sections was assailed on the ground that they imposed unreasonable
restrictions on the fundamental right of the assessee under Article 19(1) (f)
and (g) of the Constitution by taxing outstanding loans or advances of past
years as dividend. The Revenue however relied on a circular issued by the
Central Board of Revenue under section 5(8) of the Indian lncome-tax Act 1922
which corresponded to section 119 of the Present Act and this circular provided
that if any such outstanding loans or advances of past years were repaid on or
before 30th June 1922, they would not be taken into account in determining the
tax liability of the shareholders to whom such loans or advances were given.
This circular was clearly contrary to the plain language of section 2(6A)(e)
and section 121(B), but even so this Court held that it was binding on the
Revenue and since "past transactions which would normally have attracted
the stringent provisions of section 12(1B) as it was introduced in 1955, were
substantially granted exemption from the 652 operation of the said provisions
by making it clear to all the companies and their shareholders that if the past
loans were genuinely refunded to the companies they would not be taken into
account under section 12(1B)" sections 2(6A) (e) and 12(1B) did not suffer
from the vice of unconstitutionality. This decision was followed in Ellerman
Lines case (supra) where referring to another circular issued by the Central
Board of Revenue under section 5(8) of the Indian Income Tax Act 1922 on which
reliance was placed on behalf of the assessee, this Court observed:
"Now, coming to the question as to the
effect of instructions issued under section 5(8) of the Act, this J Court
observed in Navnit Lal C. Jhaveri v. R. K. Shah Appellate Assistant
Commissioner, Bombay.
"It is clear that a circular of the kind
which was issued by the Board would be binding on all officers and persons
employed in the execution of the Act under section 5(8) of the Act. This
circular pointed out to all the officers that it was likely that some of the
companies might have advanced loans to their shareholders as a result of
genuine trans actions of loans, and the idea was not to affect such
transactions and not to bring them within the mischief of the new provision.
The directions given in that circular clearly
deviated from the provisions of the Act, yet this Court held that circular was
binding on the Income-tax officers." The two circulars of the Central
Board of Direct Taxes referred to above must therefore be held to be binding on
the Revenue in the administration or implementation of sub- section (2) and
this sub section must be read as applicable only to cases where there is
under-statement of the consideration in respect of the transfer.
Thus it is not enough to attract the
applicability of sub-section (2) that the fair market value of the capital
asset transferred by the assessee as on the date of the transfer exceeds the
full value of the consideration declared in respect of the transfer by not less
than 15% of the value so declared, but it is furthermore necessary that the full
value of the consideration in respect of the transfer is under-stated or in
other words, shown at a lesser figure than that actually received by the
assessee.
Sub-section (2) has no application 653 in
case of an honest and bonafide 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-section (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 under- stated 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-section (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 that each of
these two conditions is satisfied and the Revenue cannot claim to have
discharged this burden which lies upon it, by merely establishing that the fair
market value of the capital asset as on the date of the transfer exceeds by 15%
or more the full value of the consideration declared in respect of the transfer
and the first condition is therefore satisfied. The Revenue must go further and
prove that the second condition is also satisfied. Merely by showing that the
first condition is satisfied, the Revenue cannot ask the Court to presume that
the second condition too is fulfilled, because even in a case where the first
condition of 15% difference is satisfied, the transaction may be a perfectly
honest and bonafide transaction and there may be no under-statement of the
consideration. The fulfilment of the second condition has therefore to be
established independently of the first condition and merely because the first
condition is satisfied, no inference can necessarily follow that the second
condition is also fulfilled. Each condition has got to be viewed and established
independently before sub- section () can be invoked and the burden of doing so
is clearly on the Revenue. It is a well settled rule of law that the onus of
establishing that the conditions of taxability are fulfilled is always on the
Revenue and the second condition being as much a condition of taxability as the
first, the burden lies on the Revenue to show that there is understatement of
the consideration and the second condition is fulfilled. Moreover, to throw the
burden of showing that there is no understatement of the consideration, on the
assessee would be to cast an almost impossible burden upon him to establish the
negative, 654 namely, that he did not receive any consideration beyond that
declared by him.
But the question then arises why has Parliament
introduced the first condition as a pre-requisite for the applicability of
subsection (2) ? Why has Parliament provided that in order to attract the
applicability of sub- section (2) the fair market value of the capital asset as
on the date of the transfer should exceed by 15% or more the full value of the
consideration for the transfer declared by the assessee ? The answer is
obvious. The object of imposing the condition of difference of 15% or more
between the market value of the capital asset and the consideration declared in
respect of the transfer clearly is to save the assessee from the rigour of
sub-section (2) in marginal cases where difference in subjective valuation by
different individuals may result in an apparent disparity between the fair
market value and the declared consideration. It is a well known fact borne out
by practical experience that the determination of fair market value of a
capital asset is generally a matter of estimate based to some extent on guess
work and despite the utmost bonafides, the estimate of the fair market value is
bound to vary from individual to individual. It is obvious that if the
restrictive condition of difference of 15% or more between the fair market
value of the capital asset as on the date of the transfer and the consideration
declared in respect of the transfer were not provided in sub-section (2), many
marginal cases would, having regard to the possibility of difference of opinion
in subjective assessment of the fair market value, fall within the mischief of
that sub-section and the statutory measure enacted in that sub-section for
determining the consideration actually received by the assessee would be
applicable in all its rigour in such cases. This condition of 15% or more
difference is merely intended to be a safeguard against under hardship which
would be occasioned to the assessee if the inflexible rule of the thumb enacted
in sub section (2) were applied in marginal cases and it has nothing to do with
the question of burden of proof, for the burden of establishing that there is
under-statement of the consideration in respect of the transfer always rests on
the Revenue. The postulate underlying sub-section (2) is that the difference
between one honest valuation and another may range upto 15% and that
constitutes the class of marginal cases which are taken out of the purview of
sub-section (2) in order to avoid hardship to the assessee.
655 It is therefore clear that sub-section
(2) cannot be invoked by A the Revenue unless there is under-statement of the
consideration in respect of the transfer and the burden of showing that there
is such under-statement is on the Revenue. Once it is established by the
Revenue that the consideration for the transfer has been understated or, to put
it differently, the consideration actually received by the assessee is more
than what is declared or disclosed by him, sub- section (2) is immediately
attracted. subject of course to the fulfilment of the condition of 15% or more
difference, and the Revenue is then not required to show what is the precise
extent of the understatement or in other words, what is the consideration
actually received by the assessee. That would in most cases be difficult.....if
not impossible, to show and hence sub-section (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 a 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
construction of sub-section (2) falls in line with the scheme of the provisions
relating to tax on capital gains. It may be noted that section 52 is not a
charging section but is a computation section. It has to be read alongwith
section 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 section 48. Therefore sub- section (2) cannot be construed as
bringing within the computation of capital gains an amount which, by no stretch
of imagination, can be said to have accrued to the assessee or been received by
him and it must be confined to cases where the actual consideration received
for the transfer is under-stated and since in such cases it is very difficult,
if not impossible, to determine and prove the exact quantum of the suppressed
consideration, sub-section (2) provides the statutory measure for determining
the consideration actually received by the assessee and permits the Revenue to
take the fair market value of the capital asset as the full value of the
consideration received in respect of the transfer.
656 This construction which we are placing on
sub-section (2) also marches in step with the Gift Tax Act, 1958. If a capital
asset is transferred for a consideration below its market value, the difference
between the market value and the full value of the consideration received in
respect of the transfer would amount to a gift liable to tax under the Gift Tax
Act, 1958, but if the construction of sub-section (2) contended for on behalf
of the Revenue were accepted, such difference would also be liable to be added
as part of capital gains taxable under the provisions of the Income Tax Act,
1961. This would be an anomalous result which could never have been
contemplated by the legislature, since the Income Tax Act, 1961 and the Gift
Tax Act, 1958 are parts of an integrated scheme of taxation and the same amount
which is chargeable as gift could not be intended to be charged also as capital
gains.
Moreover, if sub-section (2) is literally
construed as applying even to cases where the full value of the consideration
in respect of the transfer is correctly declared or disclosed by the assessee
and there is no understatement of the consideration, it would result in an
amount being taxed which has neither accrued to the assessee nor been received
by him and which from no view point can be rationally considered as capital
gains or any other type of income. It is a well settled rule of interpretation
that the Court should, as for as possible avoid that construction which
attributes irrationality to the legislature. Besides, under Entry 82 in List I
of the Seventh Schedule to the Constitution which deals with "Taxes on
income" and under which the Income Tax Act, 1961 has been enacted,
Parliament cannot "choose to tax as income as item which in no rational
sense can be regarded as a citizens income or even receipt.
Sub-section (2) would, therefore, on the
construction of the Revenue, go outside the legislative power of Parliament,
and it would not be possible to justify it even as an incidental or ancillary
provision or a provision intended to prevent evasion of tax. Sub-section (2)
would also be violative of the fundamental right of the assessee under Article
19 (1) (f)-which fundamental right was in existence at the time when
sub-section (2) came to be enacted-since on the construction canvassed on
behalf of the Revenue, the effect of sub section (2) would be to penalise the
assessee for transferring his capital asset for a consideration lesser by 15%
or more than the fair market value and that would constitute unreasonable
restriction on the fundamental right of the assessee to dispose of his capital
657 asset at the price of his choice. The Court must obviously prefer a A
construction which renders the statutory provision constitutionally valid
rather than that which makes it void.
We must therefore hold that sub-section (2)
of sec. 52 can be invoked only where the consideration for the transfer has
been understated by the assessee or in other words, the consideration actually
received by the assessee is more than what is declared or disclosed by him and
the burden of proving such under-statement or concealment is on the Revenue.
This burden may be discharged by the Revenue by establishing facts and circumstances
from which a reasonable inference can be drawn that the assessee has not a
correctly declared or disclosed the consideration received by him and there is
understatement of concealment of the consideration in respect of the transfer.
Sub-section (2) has no application in case of an honest and bonafide
transaction where the consideration received by the assessee has been correctly
declared or disclosed by him, and there is no concealment or suppression of the
consideration. We find that in the present case, it was not the contention of
the Revenue that the property was sold by the assesssee to his daughter-in-law
and five of his children for a consideration which was more than the sum of Rs.
16,500 shown to be the consideration for the property in the Instrument of
Transfer and there was understatement or concealment of the consideration in
respect of the transfer. It was common ground between the parties and that was
a finding of fact reached by the Income-tax Authorities, that the transfer of
the property by the assessee was a perfectly, honest and bonafide transaction
where the full value of the consideration received by the assessee was
correctly disclosed at the figure of Rs. 16,500. Therefore, on the construction
placed by us, subsection (2) had no application to the present case and the
Income-tax officer could have no reason to believe that any part of the income
of the assessee had escaped assessment so as to justify the issue of a notice
under section 148. The order of re-assessment made by the Income-tax officer
pursuant to the notice issued under section 148 was accordingly without
jurisdiction and the majority judges of the Full Bench were in error in
refusing to quash it.
We accordingly allow the appeal, set aside
the order passed by the Full Bench and restore the order of Issac, J.
allowing the writ 658 petition and quashing
the order of re-assessment made by the Income-tax officer. The Revenue will pay
the costs of the assessee throughout.
S.R. Appeal allowed.
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