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PETITIONER: COMMISSIONER OF INCOME TAX

       Vs.

RESPONDENT: SHIVAKAMI CO. PVT. LTD.

DATE OF JUDGMENT18/03/1986

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) PATHAK, R.S.

CITATION:  1986 AIR 1691            1986 SCR  (1) 881  1986 SCC  (2) 418        1986 SCALE  (1)451

ACT:      Indian Income  Tax Act  1922/ Income Tax Act 1961, 8.12 B(2) first  proviso/ 8.52  - Capital  asset - Acquisition of Understatement of  consideration  in  transfer  of  property Understatement of  value, a mis-statement of value - selling at under value to defeat revenue different from understating value in a document of sale.

HEADNOTE:      The respondent,  a private  company under the Companies Act, 1956  in C.A.  1533 of  1974, had shares in two private companies. during  the relevant period, it sold those shares and according to the respondent-assessee, the sales resulted in a  loss. The  shares were  not quoted  in  stock  market. However, the Income tax Officer held that the break-up value on the  date of files of the shares in the two companies was Rs.1,72,800 and  Rs.1,54,000 and  after deducting  the  cost price of  the aforesaid  shares of Rs.81,201 and Rs.1,00,000 respectively  from   the  above   said  break-up  value,  he determined the  capital  gain  at  Rs.91,599  and  Rs.54,000 respectively under  the first  proviso to section 12-B(2) of the 1922  Act. The  Appellate Assistant Commissioner as also the Tribunal rejected the appeals of the respondent-assessee and upheld the order of the Income tax Officer.      Aggrieved by  the order of the Tribunal, the respondent assessee went  to the  High Court  in a  reference. The High Court allowed  the reference  holding that the first proviso to subsection  (2) of  section 12-B of the Indian Income-tax Act, 1922  was not  applicable. It  observed :  (i) that the sale  was   true;  (ii)   that  the  consideration  was  not understated; and  (iii) that  the explanation  given by  the assessee for effecting the sale was not acceptable. The same question of law arose in the other civil appeals.      Dismissing the appeals, 882 ^      HELD : 1.1 The proviso to section 12B(l) of the Act can be invoked  only where the consideration for the transfer of capital asset  has been  understated by  the  assessee.  The first proviso  to section  12B(1) of  the Act provides ’full value of  the confederation  for which  the sale,  exchange, relinquishment of  transfer is  made’, to  be taken  as  the

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basis for  the computation  of the 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 computation of  capital gains.  The onus is on the Revenue - 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.  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. [889 G-H]      1.2 When a conclusion of the fact finding body is based on an  inference from  primary facts,  then the  findings of facts are  not amenable to challenge but the inference drawn from the  primary facts are open to challenge as conclusions 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. [886 H; 887 A-B]      Commissioner  of  Income-tax  v.  Rajasthan  Mines.  78 I.T.R. 45, relied upon.      In the  instant case,  the facts  found were that there was d  sale. The High Court has stated that the Tribunal had found that  the consideration  was not understated. The High Court  also  notices  that  the  explanation  given  by  the assessee for effecting the sale was not acceptable. The onus was on the Revenue to prove that there was understatement in the document  not that  the goods  were sold at under value. There is no evidence that the full consideration received by the assessee  in the transfer of the asset involved in these cases has  been understated. The revenue has made no attempt to establish  that there  was any  under-statement though it might be that sharee were sold at an under value. [888 B-D] 883      K.P. Verghese  v. Income-tax Officer, Ernakulam & Anr., 131 I.T.R. 597, followed.      2. Understatement of value is a mis-statement of value. Selling  goods   at  an  undervalue  to  defeat  Revenue  is different from  understanding the  value in  the document of sale. [888 D]      In the  instant case,  there is  no evidence  direct or inferential that  the consideration actually received by the aesessee was more than what was disclosed or declared by him [888 F]      Capital gd  ns was  intended to  tax the  gains  of  an assescee, not  what an  assessee might  have gained. What is not gained  cannot be commuted as gained. All laws 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 taxed. [889 L]

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1532 - 35 (NT) of 1974.      From the  Judgment and  Order dated  7th March, 1972 of the Madras High Court in Tax Cases Nos. 79, 83, 98 and 99 of 1966.      S.C. Manchanda,  Ms. A. Subhashini and K.C. Dua for the Appellant.      Nemo for the Respondent.

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    The Judgment of the Court was delivered by      NUKHARJI, 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  ’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 - 884           "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 Company Ltd. and Pudukottah           Company Private  Ltd, the  first proviso  to  sub-           section (2)  of section  12B 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  them  at prices considerably less than their break-up value.      As mentioned hereinbefore, the four cases were dealt by the High  Court together.  It may be appropriate to refer to Tax Case  No. 83/66  first. The  assessee in  that case  was Rukmani Co.  Private Ltd.  It was  a private limited company incorporated in  the former Pudukottai 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 Private Ltd. holding 25 shares and  Pudukottah   Corporation  Private   Ltd.  holding   the remaining 25  shares. On 14th March, 1957, the assessee sold 800 shares  held by  it in  East India  Corporation Ltd. and 1,000 shares  held by it in Madura Insurance Company Ltd. to Pachnayaki Private  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 Company Ltd. was Rs.1,00,000. On the same day  the assessee had sold its 499 shares in Pudukottah Company Private  Ltd. to Padmanabha Company Private Ltd. for the cost  price of  Rs. 4,990.  The  shares  in  east  India Corporation  Ltd.,   Madura  Insurance   Company  Ltd.   and Pudukottah Company  Private Ltd.  were not  quoted in 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.1,72,800 885 and the 1000 shares in the Madura Insurance Company 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 12B(2)  of the  1922 Act  in respect  of the sale of shares in  East India  Corporation Ltd. and Madura Insurance Company Ltd.  The Tribunal  gave a finding that there was no capital gain  in respect  of  the  sale  of  the  shares  in Pudukottah Company Private Ltd.      Discussing the  facts of  Tax Case  No.79/66 in case of Sivakami Company  Private Ltd.,  the Tribunal  held that the

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assessee was liable to pay capital gains tax under the first proviso to  section 12B(2)  of the 1922 Act and it also held that the  assessee had sold 499 shares in Pudukottah Company Private Ltd.  to Padmanabha  Private Ltd.  for  Rs.4,990  in respect of which the Tribunal held that there was no capital gain.      In Tax  Case No.  98/66, the  assessee  was  Pudukottah Company Private  Ltd. which  was a  private limited  company with a  paid up capital of 3,000 shares of the face value of Rs.100  each   with  Rs.10   per  share   paid  up  and  the shareholders  were  certain  above-mentioned  companies.  In respect of sales 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.99/66  where  the  assessee  was  Pudukottah  Corporation Private Ltd.      In all  these cases,  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 those 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 886 arising on  the sale  of  the  shares.  As  there  was  some argument as  to what  the Tribunal  actually  found,  it  is better to  refer to the order of the Tribunal. The Tribunal, inter alia, observed as follows :           "Assuming that  the sale  on 14th  March, 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  at           Rs.60,000. We find that in another case the shares           in this  company had  also been valued at the same           price. The cost of acquisition was also the same."      Dealing with  the finding,  the High  Court observed at page 316  of 88  I.T.R. 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 the liability for capital  gain,   had  concluded   that  the  department  was justified in applying the first proviso of section 12B(2) of the Act.

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    The High Court discussed on this aspect 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 887 are open  to challenge as 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 Commissioner of Income-tax v.  Rajasthan Mines,  78 I.T.R. 45. This position is well settled by many decisions of this Court.      It may  be mentioned that section 52 of Income-tax Act, 1961 (hereinafter  referred to as ’1961 Act’) corresponds to the first  proviso of  section 12B(2) of 1922 Act. The first proviso to section 12B(2) read 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 1961  Act came  up for  consideration by this Court in K.P. Varghese v. Income-tax Officer, Ernakulam, and Another, 131  I.T.R. 597.  This Court  held that  so far  as material for  the present purpose sub-section (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 sub-section had no  application in  the case  of an honest and bona fide transaction where the 888 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.

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    As it  appears from  the decision of this Court in K.P. Varghese’s case  (supra), 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 value is a  mis-statement of value. Selling goods at an undervalue to defeat  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 this  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 what was disclosed or declared by him. The relationship between the  parties has  been established.  The  desire  to defeat the  claims of  the revenue has also been established but that  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. 889      The  first  proviso  to  section  12B(2)  of  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 of the 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  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’s  case that the  second ingredient  that is  to say  that the  word ’declared’ in  sub-section (2)  of section  52 of the Act is very eloquent  and revealing.  It clearly indicated that the focus of  sub-section (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 assessee  in respect  of  the  transaction  was  not  truly  declared  or disclosed by  him but  was  shown  at  a  different  figure. Capital gains  was intended to tax the gains of an assessee, not what  an assessee might have gained. All laws, 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 taxed. In this case, the revenue  has made no attempt to establish that there was any understatement  though it might be that shares were sold at an undervalue.      In view  of the  ratio of  K.P. Varghese’s case (supra) the proviso to section 12B(1) of the Act can be invoked only where the  consideration for  the transfer  of capital asset has been  understated 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 understated. The proviso helps or enables the

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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. 890      In that view of the matter, in our opinion, the appeals must fail,  though on  different grounds  than taken  by the High Court. The appeals are accordingly dismissed. M.L.A.                                    Appeals dismissed. 891