The petitioner and his sons formed a Hindu undivided family. After a partition on 19 April 1952, the petitioner received a site of about 2,000 square yards. Between 1961 and 1963 he constructed godowns and shops on the site. The total cost of the site and the buildings was Rs. 64,042. For construction the petitioner borrowed Rs. 50,502.49 from his divided sons and other amounts from others. To discharge debts due to his sons, the petitioner sold the site and structures to his sons for Rs. 80,000 by a sale deed dated 15 April 1963.

For the assessment year 1964–65 the petitioner filed a revised return (10 February 1967) declaring capital gains of Rs. 10,958, computed by deducting cost Rs. 64,042 from sale consideration Rs. 80,000 and allowing permissible deductions. The Income-tax Officer (ITO) issued a pre-assessment notice (24 June 1968) estimating value at Rs. 1,30,586. The petitioner submitted that market value would be Rs. 86,380 and that the lump-sum sale price of Rs. 80,000 was reasonable.

The ITO finalised assessment on 28 September 1968, estimating fair market value (FMV) at Rs. 1,14,000 and fixing capital gains at Rs. 44,960 (after initial exemption of Rs. 5,000), levying tax and super-tax. The ITO recorded that purchasers were the assessee's sons and that he had reason to believe the transfer was effected with the object of avoiding tax, and accordingly applied section 45 read with section 52 of the Income-tax Act.

The ITO rectified a computation mistake (31 January 1969) fixing tax on capital gains at Rs. 5,244. Separately, by order dated 16 January 1969 the ITO levied gift-tax of Rs. 2,750 on the difference between FMV and sale proceeds (Rs. 1,14,000 − Rs. 80,000 = Rs. 34,000); that gift-tax was paid by the petitioner. In February 1970 the ITO initiated proceedings under section 155 and made a revised assessment for other income, retaining capital gains tax at Rs. 5,244.

The petitioner filed a writ petition (under article 226) seeking certiorari to quash the assessment order dated 28 September 1968 (as amended 24 February 1970) and a direction to refund the amount of capital gains tax collected for AY 1964–65.

Legal Issues Presented

Whether any capital gain arose from the transaction and whether tax under the head "capital gains" is leviable in the circumstances described.
Whether section 52(1) of the Income-tax Act applies to the transaction (i.e., whether the ITO could treat the consideration as the FMV because the transferees were "connected" and the transfer was with the object of avoidance or reduction of liability under section 45).
Whether the imposition of capital gains tax was permissible where gift-tax had been levied on the difference between FMV and consideration (i.e., whether the same amount can be treated both as a gift and as capital gain).
Whether the proceedings under section 52(1) complied with jurisdictional and natural justice requirements (in particular, whether the ITO recorded and based any finding that the transfer was made to avoid tax).
Whether the High Court should exercise writ jurisdiction (article 226) given the availability of statutory appeals and the delay in filing the writ petition.

Arguments of the Parties

Appellant's (Petitioner's) Arguments

The petitioner did not derive any capital gain from the transaction and therefore no tax under the head "capital gains" is leviable.
Section 52(1) of the Income-tax Act does not apply to these facts.
Even if section 52(1) were applicable, it could be invoked only when the ITO has reason to believe the transfer was effected to avoid or reduce liability under section 45; the ITO did not state such a belief in his show-cause notice and the finding in the assessment was not based upon evidence but amounted to his ipse dixit, making proceedings under section 52(1) illegal and without jurisdiction.
The proceedings violated principles of natural justice because the petitioner was denied an opportunity adequately to satisfy the authorities that the requirements of section 52(1) were not fulfilled.
An additional submission (not raised in the affidavit) was that because the transaction was assessed to gift-tax on the basis that it was not for adequate consideration (so that Rs. 34,000 was treated as gift), the same amount could not be taxed as capital gains; at most capital gains could be imposed only to the extent not treated as gift under the Gift-tax Act.

Respondent's (Income-tax Department's) Arguments

The High Court should not exercise jurisdiction under article 226 because statutory remedies by appeal (to the Appellate Assistant Commissioner and to the Tribunal) were available and the petitioner had not availed himself of those remedies.
There was a delay of more than two years in filing the writ petition (the assessment was in September 1968), and that delay weighed against entertaining the writ petition.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
K.P. Varghese v. Income-tax Officer [1970] 77 I.T.R. 719 (Ker.)	Held that legislature did not intend to charge income-tax on an amount liable to gift-tax; section 52 is meant to operate in cases of understating consideration and where ITO has reason to believe transfer is to avoid tax.	The court noted this decision as supporting the conclusion that an amount treated as gift and taxed under the Gift-tax Act cannot simultaneously be charged as capital gains; the present court accepted the reasoning as supportive but rested its decision on the specific ground that the amount treated as gift (and taxed as such) cannot be treated as capital gain under the Income-tax Act.

Court's Reasoning and Analysis

The court first set out and analysed the relevant statutory provisions of the Income-tax Act (including sections 2(24), 14, 45(1), 47(iii), 48 and 52(1)) and the definition and deeming provisions in the Gift-tax Act (in particular section 4(a) under which a transfer otherwise than for adequate consideration gives rise to a deemed gift equal to the excess of market value over consideration).

Key legal points and the court's application to the facts:

Section 45 read with section 47(iii) of the Income-tax Act provides that transfers by way of gift are not subject to capital gains tax. The Income-tax Act itself does not define "gift", so the court examined the Gift-tax Act's definition and deeming provisions to determine whether, for Income-tax Act purposes, the transaction amounted to a gift (or included a deemed gift).
Under the Gift-tax Act, where property is transferred otherwise than for adequate consideration, the amount by which market value exceeds consideration is deemed to be a gift (section 4(a)). In this case the FMV was found to be Rs. 1,14,000 and consideration Rs. 80,000, so Rs. 34,000 was deemed a gift and gift-tax was levied on that amount (and paid).
The court held that the same sum cannot be treated simultaneously as a "gift" (taxed under the Gift-tax Act) and as a "capital gain" (taxed under the Income-tax Act). Reading the two Acts together, and having regard to the integrated taxation system administered by the income-tax authorities, it would be contrary to legislative intent to subject the very amount taxed as gift also to income-tax under capital gains.
Consequently, the court concluded that capital gains tax could only be levied by treating the transaction as a sale for Rs. 80,000 (the consideration stated in the deed) and computing capital gains on the difference between Rs. 80,000 and the admitted cost Rs. 64,042 (after making permissible deductions). The portion of value treated as a deemed gift (Rs. 34,000) and taxed under the Gift-tax Act could not also be taxed as capital gains.
The court acknowledged arguments about section 52(1) (which permits the ITO, where transferees are connected persons and the ITO has reason to believe the transfer was effected to avoid tax, to treat consideration as FMV with prior approval of Inspecting Assistant Commissioner). The petitioner had also argued that the ITO did not properly record a reason to believe in the show-cause notice and that the finding was not evidence-based. While the court recorded these contentions, it did not rest its decision exclusively on defects in invocation of section 52(1); instead it rested the decision on the incompatibility of treating the same amount as both gift and capital gain.
The court referred to the Kerala High Court decision in K.P. Varghese v. Income-tax Officer as supporting the general principle that amounts liable to gift-tax should not also be charged to income-tax as capital gains. Although the court considered prior reasoning about section 52, it preferred to base the present ruling on the principle that the amount treated as gift (and taxed under the Gift-tax Act) cannot be treated as capital gain.
As to exercise of writ jurisdiction and delay, the court observed that the relevant Kerala decision (K.P. Varghese) was rendered on 3 April 1970 and published in a part of the Income-tax Reports in August 1970; the petitioner filed the writ petition on 16 November 1970. The court accepted the explanation of delay and entertained the writ petition, stating it was a proper case to do so for the reasons given.

Holding and Implications

Holding:

The writ petition is allowed to the extent that capital gains tax must be computed treating the transfer as a sale for Rs. 80,000 (the consideration stated in the deed) with the admitted cost of the asset being Rs. 64,042. The difference between the tax computed on this footing and the tax actually levied by the assessment order dated 28 September 1968 (as amended) shall be refundable to the assessee.

Direct consequences and other orders made by the court:

The capital gains tax will be recomputed on the basis that the sale consideration is Rs. 80,000 and the cost of the asset is Rs. 64,042 (with permissible deductions taken into account).
The amount of tax which was collected in excess (i.e., the difference between the tax computed on the above basis and the tax levied by the assessment) will be refunded to the petitioner.
The court did not consider the remaining contentions in view of the above conclusion that the petitioner admits tax is leviable on the footing of Rs. 80,000 consideration and had himself returned income on that basis.
There will be no order as to costs.
Advocate's fee assessed: Rs. 100.

Broader implications:

This decision applies the principle, as reflected in prior authority cited by the court, that an amount treated and taxed as a gift under the Gift-tax Act should not be simultaneously treated as capital gain under the Income-tax Act. The court relied on the integrated operation of taxation statutes administered by the income-tax authorities in reaching this conclusion. The direct effect in the instant case is the recomputation of capital gains on the basis described and refund of any excess tax collected; the opinion did not purport to create a distinct new rule of law beyond the application of that principle to these facts.

Show all summary ...

Kuppuswami, J.:— The petitioner and his sons constituted a Hindu undivided family. There was a partition between the members of the family on April 19, 1952. In that partition, a site measuring about 2,000 square yards together with sheds thereon fell to the share of the petitioner. Subsequently, he constructed certain godowns and shops during the years 1961 to 1963. The total cost of the site together with structures and buildings came to Rs. 64,042; for the construction of the building the petitioner borrowed Rs. 50,502.49 from his divided sons and other amounts from others. For the discharge of the debts due to the sons, the petitioner sold the site and structures for a total consideration of Rs. 80,000 in favour of his sons under a sale deed dated April 15, 1963. For the assessment year 1964–65, the petitioner filed a revised return of income on February 10, 1967, including therein the amount of Rs. 10,958 as capital gains in respect of this transaction. This amount was arrived at by deducting the cost of the capital asset, namely, Rs. 64,042 from the sale consideration of Rs. 80,000 and making other permissible deductions. The Income-tax Officer, B-Ward, Tenali, issued a pre-assessment notice dated June 24, 1968, estimating the value of the building and site sold at Rs. 1,30,586, and called upon the petitioner to file his objections, if any, against the proposed valuation. The petitioner submitted that the value of the building and the site would come to Rs. 86,380 and as he had sold it for a lump sum of Rs. 80,000 the variation is very small and as he was disposing of the property as a whole, the value for which the property was sold was reasonable and fair priced. He stated that the proposed estimate of the building at Rs. 1,30,586 was uncalled for and unwarranted. The Income-tax Officer finalised the assessment of the petitioner for the year 1964–65 on the 28th September, 1968. While making the assessment he estimated the fair market value of the properties at Rs. 1,14,000 and fixed the capital gains at Rs. 44,960 after allowing initial exemption of Rs. 5,000 and levied a tax of Rs. 6,905 and super-tax on capital gains. In the assessment order he observed that as the purchasers are the assessee's sons he had reason to believe that the transfer of the property was effected with the object of avoidance of tax liability and, therefore, under section 45 read with section 52 of the Income-tax Act, the capital gains was fixed as the difference between Rs. 1,14,000 which was the fair market value and Rs. 64,042 which is the cost of the asset.

2. Subsequently, as there was mistake in the method of computation of other income, the Income-tax Officer by his order dated January 31, 1969, rectified the mistake and the tax on capital gains was fixed at Rs. 5,244.

3. The Income-tax Officer also levied a gift-tax of Rs. 2,750 on the difference between the fair market value and the sale proceeds, i.e, Rs. 1,14,000 minus Rs. 80,000 by his order dated January 16, 1969. The sum of Rs. 2,750, being the gift-tax, was paid by the petitioner. In February, 1970, the Income-tax Officer initiated proceedings under section 155 of the Income-tax Act, and made a revised assessment by bringing to tax the petitioner's share income from another firm. In this order, the tax on capital gains was retained at Rs. 5,244.

4. The petitioner has filed this writ petition for the issue of a writ of certiorari quashing the order of assessment dated September 28, 1968, as amended on February 24, 1970, and for a direction to refund the amount of the capital gains tax collected from the petitioner for the assessment year 1964–65.

5. Sri Venkatarama Reddi, learned counsel for the petitioner, contended, firstly, that the petitioner did not derive any capital gain from the transaction in question and hence no tax under the head “capital gains” is leviable. Secondly, he contended that section 52(1) of the Act under which the Income-tax Officer purported to act has no application to the facts of the case. Thirdly, he argued that even assuming that section 52(1) of the Act was applicable it could be invoked only when 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. In this case the Income-tax Officer did not state in his show-cause notice that he has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee and that in the order the finding to the above effect was not based upon any evidence, but on the mere ipse dixit of the officer and hence the proceedings under section 52(1) were illegal and without jurisdiction. He also contended that the said proceedings were contrary to the principles of natural justice, as the petitioner was denied the opportunity to satisfy the authorities that the requirements of section 52(1) were not fulfilled. He made a further submission which was not raised in that form in the affidavit in support of the writ petition. He submitted that the petitioner was assessed to gift-tax in respect of the transaction on the footing that the property was not transferred for adequate consideration and hence the amount by which the market value of the property exceeded the value of the consideration, namely, Rs. 1,14,000 minus Rs. 80,000 = Rs. 34,000, was deemed to be a gift. Hence it was not permissible to levy tax on capital gains on the same transaction. At any rate the capital gain will have to be confined only to the extent to which the transaction was not treated as a gift under the Gift-tax Act.

6. The learned counsel for the income-tax department besides replying to the contentions of the petitioner argued that this is not a fit case for exercising the jurisdiction under article 226 of the Constitution. He pointed out that there was a remedy by way of appeal against the order of assessment to the Appellate Assistant Commissioner and a further appeal to the Tribunal and the petitioner had not availed himself of that remedy. Further, the order was passed on September 28, 1968, and there was a delay of more than two years in filing this writ petition.

7. In order to appreciate the contentions of the petitioner it would be convenient to set out the relevant provisions of the Income-tax Act,

“Sec. 2(24). ‘income’ includes:— …

(vi) any capital gains chargeable under section 45………”

“Sec. 14. Save as otherwise provided by this Act, all income shall, for the purpose of charge of income-tax and computation of total income, be classified under the following heads of income:— ….

E. Capital gains….”

8. Section 45(1):

“Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, 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.”

9. Section 47; “Nothing contained in section 45 shall apply to the following transfers:— ….

(iii) any transfer of a capital asset under a gift or will or an irrevocable trust.”

10. Section 48:

“The income chargeable under the head ‘Capital gains’ shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.”

11. Section 52(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.”

12. It is clear from section 45 read with section 47(3) that no tax under the head of “Capital gains” can be levied in respect of a transfer under a gift. The expression “gift” is not defined in the Income-tax Act, but I am of the view that the expression has to be understood in the context of the Gift-tax Act. The Gift-tax Act defines “gift” as a transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth, and includes the transfer of any property deemed to be a gift under section 4. Section 4 deals with transfers which are deemed to be gifts for the purpose of the Act. Section 4(a) states that where the property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor.

13. In this case the property which is of the market value of Rs. 1,14,000 was purported to be transferred to the sons for a sum of Rs. 80,000. In view of the above provisions of the Gift-tax Act the difference between the market value and the value of the consideration, namely, Rs. 34,000, would be deemed to be a gift in favour of the transferee. It was for this reason that gift-tax was levied on Rs. 34,000. Having treated the difference as a gift and levied gift-tax, I am of the view that it was not permissible for the authorities to levy income-tax under the head “Capital gains” in respect of the said amount. The same amount cannot at the same time be treated as a gift and as a transfer resulting in a “Capital gain”. Reading the two Acts together the true position would be that the tax on capital gains would be leviable treating the transaction as a transfer for a sum of Rs. 80,000 on the difference between Rs. 80,000 and the cost of the capital asset after making permissible deductions and gift-tax would be leviable on the difference between Rs. 1,14,000 and Rs. 80,000.

14. It was contended that in the absence of definition of the “gift” in the Income-tax Act, it is not proper to rely upon the provisions of the Gift-tax Act and consider a deemed gift under the provisions of the Act as a gift for the purposes of section 47(3) of the Income-tax Act. It was argued that under section 122 of the Transfer of Property Act, a gift is a transfer of property without consideration and the transaction in question would not amount to a gift under that Act. Hence, section 47(3) of the Income-tax Act would not have any application and the transaction would be liable to tax under the head “Capital gains” under section 45 of the Act. I am not inclined to accept this contention. According to this content???on it would mean that the same transaction would result in capital gains tax being levied on the ground that profits or gains have arisen from the transfer and would also result in gift-tax being levied in view of section 4(a) of the Gift-tax Act. A construction which would lead to such a result has to be avoided. It was also pointed out by Sri Rama Rao that even before the coming into force of the Gift-tax Act, the provision then existing, namely, section 12B of the Indian Income-tax Act, 1922, also provided for the exemption of transfer of a capital asset under a gift from capital gains tax. On that date, at any rate the expression “gift” occurring in section 12B could have been interpreted only as meaning a gift under the ordinary law or under the Transfer of Property Act. This may be so, but after the Gift-tax Act was enacted which provided that certain transactions shall be deemed to be gifts for the purpose of the Act, there is no reason why the two Acts should not be read together. It is well-known that the Income-tax Act, the Wealth-tax Act, the Gift-tax Act and the Expenditure-tax Act form different heads of an integrated system of taxation and they are all administered by the officers of the income-tax department. The imposition of tax under one head has relevancy to the liability under other heads of tax. It is, therefore, reasonable to infer that the legislature did not intend to charge income-tax on an amount which is liable to gift-tax.

15. The above view was taken in a decision of the Kerala High Court in K.P Varghese v. Income-tax Officer [1970] 77 I.T.R 719, 732 Ker... In that case the petitioner purchased a property in 1958 for Rs. 16,500 and sold it for the same consideration in 1965 to his 5 children and daughter-in-law. The difference between the fair market value and the actual consideration received by the petitioner was treated as gift under section 4 of the Gift-tax Act and assessed under that Act. The Income-tax Officer, however, held that section 52 of the Income-tax Act also applied to the case and that capital gains had accordingly to be computed on the basis of the fair market value of the asset. He fixed the fair market value of the property at Rs. 65,000 and assessed the difference of Rs. 48,500 as capital gains. It was held that the legislature did not intend to charge income-tax on an amount which is liable to gift-tax. In that case it was also held that section 52 was intended to operate only in cases of under-statement of consideration, section 52(1) deals with a case where the transfer is between persons directly connected and the Income-tax Officer has no reason to believe that it was effected with the object of avoiding or reducing the liability of the transfer under section 45. Avoidance or reduction of such liability is possible only by understating the consideration. I do not wish, however, to rest my conclusion on the above reasoning. I prefer to rest my decision on the ground that in so far as the difference between Rs. 1,14,000 and Rs. 80,000 in this case is concerned, as it was treated as gift and was subjected to gift-tax, it cannot be treated as capital gain under the Income-tax Act and income-tax cannot be levied under that head in respect of that amount. The result would be that the transaction would be liable to capital gain treating it as a transfer other than a gift for a sum of Rs. 80,000. In regard to the difference between the market value and Rs. 80,000, that is, Rs. 34,000, which has been treated as a gift and gift-tax has been levied, no tax under the head “Capital gains” can be levied on that amount. It was argued that the proper remedy was to prefer an appeal against the order levying tax under the head “Capital gains” under the provisions of the Income-tax Act and this court ought not to exercise its jurisdiction to quash the order under article 226 of the Constitution. As in my view the imposition of capital gains tax to the extent indicated above is contrary to the provisions of the Act, I feel this is a proper case to entertain a writ petition under article 226 of the Constitution. It was also argued that there has been considerable delay in filing the writ petition. This has been explained by the petitioner by stating that the decision of the Kerala High Court which throws considerable light on the legal position was rendered on 3rd April, 1970, and was published only in Part 9, dated August 31, 1970, of the Income-tax Reports. The writ petition was filed on the 16th November, 1970. As stated in that judgment itself, the point was not covered by any judicial pronouncements. In the circumstances I cannot say that the delay is of such a nature as to deny relief to the petitioner.

16. In the result the tax on capital gain will have to be computed on the footing that the transfer is for Rs. 80,000 as stated in the deed and the cost of the asset as admitted by the authorities is Rs. 64,042. The difference between the tax so computed and the tax levied as per the order dated September 28, 1968, will be refundable to the assessee.

17. In this view it is unnecessary to consider the other contentions raised by the assessee as it is admitted by him that tax under the head “Capital gains” is leviable on the footing that the transfer is for Rs. 80,000 and the assessee himself has submitted a return to that effect. The writ petition is allowed to the above extent. There will be no order as to costs.

18. Advocate's fee Rs. 100.