Addl. Commissioner Of Income-Tax, A.P v. S.R.Y Ankeneedu Prasad

1. The assessee, S. R. Y. Ankineedu Prasad, is an individual. He purchased during the year of account ending with March 31, 1966, 48,123 equity shares of a public limited company called "Challapalli Sugars Ltd." from his brother for Rs. 6,58,804, i.e., at Rs. 13'69 per share. This purchase of equity shares in Challapalli Sugars Ltd. was made by him in order to obtain controlling interest in the said company in which he (the assessee) and his another brother had substantial shareholdings. The consideration paid by him for purchasing the shares in Challapalli Sugars Ltd. consisted partly of cash of Rs. 1,00,000 and partly by transfer of 12,724 equity shares in K. C. P. Ltd., Vuyyur, another public limited company. He transferred the equity shares in K. C. P. Ltd. at the face value of Rs. 10 per share and for the balance of consideration of Rs. 4,34,346, he executed a promissory note in favour of his brother. In the return filed for the assessment year 1966-67, the assessee declared a capital gain of Rs. 15,756 on the transfer of the shares of K. C. P. Ltd., which he himself had acquired earlier at Rs. 1,08,702. The Income-tax Officer, A-Waid, Vijayawada, having regard to the fact that the market value of a share of K. C. P. Ltd. was Rs. 22'30 issued a notice to the assessee to show cause why he should not be assessed to tax invoking Section 52(1) of the Income-tax Act. It was explained by the assessee on December 16, 1968, that the transaction was only for the purchase of shares of Challapalli Sugars in order to acquire controlling interest of that company and for that purpose, he had also exchanged K. C. P. Ltd. shares for a value which was less than the market rate. That explanation of his was not accepted by the Income-tax Officer on the ground that there was substantial difference between the market rate and the face value of the shares of the K. C. P. Ltd. Before initiating action, the Income-tax Officer had obtained the prior approval of the Inspecting Assistant Commissioner. The Income-tax Officer determined the lair market value of 12,724 equity shares of K. C. P. Ltd. transferred by the assessee at Rs. 2,83,745 and deducting the cost of those shares, i.e., Rs. 1,08,702, determined the capital gains for the transaction at Rs. 1,75,043. That assessment order was carried in appeal and the Appellate Assistant Commissioner held that the correct provision that should have been applied to the facts of the case is section 52(2) and not section 52(1). In that view, he confirmed the order of the Income-tax Officer and dismissed the appeal. The assessee further carried the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal, in the light of the construction put upon Sub-section (2) of Section 52 by it, held that the requirements of section 52(1) or section 52(2) were not satisfied. In so coming to the conclusion, the Tribunal recorded a finding of fact that "there was no question of the assessee transferring the shares of K. C. P. Ltd. with the object of avoiding or reducing the liability to capital gains". It also observed that "it is not the department's case that the assessee actually received consideration at more than Rs. 10 per share for the shares of K. C. P. Ltd. transferred to his brother". It is against the order of the Tribunal that the Additional Commissioner of Income-tax moved the Tribunal for reference under Section 256(1) of the Income-tax Act, the following question for our opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that neither the provisions of Section 52(1) nor the provisions of Section 52(2) are applicable and that the correct amount of capital gain to be assessed was not Rs. 1,75,043 as computed by the Income-tax Officer but Rs. 15,756 declared by the assessee ?"

2. Mr. Rama Rao, the learned counsel for the revenue, contended that the Tribunal was in error in holding that Section 52(2) is not attracted. According to the learned counsel for the revenue, if the Income-tax Officer comes to the conclusion that the fair market value of a capital asset transferred by an assessee on the date of the transfer exceeds the full value of consideration declared by him in respect of the transfer and that the difference in amount is not less than 15% of the value so declared, Section 52(2) is automatically attracted. It is also his stand that the question of a bona fide transfer of an asset is irrelevant in construing Section 52(2) of the Act. According to him, even on the assessee's own showing, he would not have transferred the shares to his brother at the face value of Rs. 10 per share, but for the advantage he would gain by purchasing the shares of Challa-palli Sugars Ltd., to get the controlling interest in Challapalli Sugars Ltd. In other words, it is his case that the controlling interest, which is expected to accrue to him, makes up the difference between the face value and the market value of the assets transferred.

3. Mr. Parvatha Rao, appearing for the assessee, contended that, in view of the findings of fact recorded by the Tribunal, the case does not fall either under Section 52(1) or under Section 52(2) and that there is no warrant for interfering with the construction placed upon Sub-section (2) of Section 52 by the Tribunal.

4. So, what has to be considered by us iu this reference is whether the transfer of equity shares of K. C. P. Ltd. by the assessee to his brother was effected with a view to avoid the tax liability or to have the tax liability reduced. We have also to see whether the fair market value of the shares transferred by the assessee exceeds the full value of consideration by an amount of not less than 15% of the value so declared. In other words, we have to examine whether the case falls under section 52(1) or section 52(2).

5. Section 2(14) defines "capital asset" as to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include items (i) to (iv) referred to therein. Section 2(22A) defines "fair market value" and it means, in relation to a capital asset, (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and (ii) where the price referred to in sub- Clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under the Act. Section 2(24) defines "income "to include profits and gains and any capital gains chargeable under Section 45. Section 45 is the charging section for capital gains and, to the extent relevant, it reads :

"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, 54, 54B and 54D be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous-year in which the transfer took place."

6. Another section, which we may notice before we reproduce Section 52, is Section 48. It deals with the mode of computation and deductions and it reads:

"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."

7. Section 52 is in these terms:

"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.

(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 asset by an amount of not less than fifteen per cent. of the value so 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....." (Proviso not necessary).

8. As already stated by us, the first question to be considered is whether the transactions in question were entered into for bona fide reasons on account of the relationship between the assessee and his brother and whether the assessee effected the transfer with the object of avoidance of tax or reduction of tax liability.

9. For avoidance of payment of tax, it should be shown that the assessee has tried to avoid payment of tax or to have the tax liability reduced by some device or design. The Supreme Court, while approving the decision of the Gujarat High Court in Commissioner of Income-tax v. Sakarlal Bala-bhai [1968] 69 ITR 186 (Guj), observed in Commissioner Of Income Tax, Gujarat v. Vadilal Lallubhai, Etc. Etc. , that legal fictions are only for a definite purpose ; they are limited to the purpose for which they are created and should not be extended beyond their legitimate field. The subject is not to be taxed unless the charging section clearly imposes the obligation. It is well settled lhat it is not permissible to construe any provision of a statute, much less a taxing provision, by reading into it more words than it contains. But, if a section of a statute is considered as ambiguous, it will not be inappropriate to find out the reasons which persuaded the legislature to recommend the inclusion of that section. Section 52(1) postulates two main conditions before it could be invoked: (1) the transferee should be a person directly or indirectly connected with the assessee ; and (2) the Income-tax Officer should have reason to believe that the transfer effected by the assessee was with the object of avoidance of tax or reduction of his tax liability under Section 45 on capital gains. So far as the first requirement is concerned, there is no controversy in view of the direct relationship as brothers between the transferor and the transferee. As regards the second requirement, the Tribunal has given a finding of fact that the transfer of shares was not effected by the assessee with the object of reducing the tax liability under Section 45. We are afraid we cannot interfere with this finding of fact, though Mr. Rama Rao tried to persuade us that the object of avoiding capital gains is apparent on the face of the transaction, viz., that the assessee sought to gain advantage by getting controlling interest in Challapalli Sugars Ltd., which also formed part of the consideration for the transfer. The finding of fact recorded by the Tribunal is final. That finding of fact is open to attack only when it is erroneous in law or when there is no evidence to support it or if it is perverse. The fact that the finding of fact is an inference from other basic facts will not alter its character as one of fact (see Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax [1957] 31 ITR 28 (SC) and I.C.I. (India) Private Ltd. v. Commissioner of Income-tax . In LC.L (India) Private Ltd. v. Commissioner of Income-tax [1972] 83 ITR 710, the Supreme Court, construing Section 52 of the Act, opined that the question whether the object of the assessee in transferring assets was to avoid or reduce his liability to tax on capital gains by making the transfer, does not involve the application of any legal principles to the facts established by the evidence and that the intention with which the particular transfer is made and the object which is to be achieved by such transfer is essentially a question of fact, the conclusion relating to which is to be arrived at on a consideration of the relevant material.

10. As has been pointed out by the House of Lords in Inland Revenue Commissioners v. Brebner [1970] 76 ITR 436, where there are two ways of carrying out a genuine commercial transaction, one by paying the maximum amount of tax, and the other by paying less, it would be wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects was, for the purposes of the section, avoidance of tax. It is, therefore, obvious from the findings recorded by the Tribunal that the case of the assessee does not fall under Section 52(1). Now, it has to be considered whether the case falls under Sub-section (2) of Section 52. It is argued by Mr. Kama Rao that Section 52(2) operates independently of Sub-section (1) and in an area not covered by Sub-section (1) and that the findings of fact recorded by the Tribunal have no place when construing Sub-section (2). All that is necessary in order to attract Sub-section (2), according to the learned counsel, is, it is enough if the Income-tax Officer forms opinion on the facts that the fair market value of the assets transferred by the assessee on the date of the transfer exceeds the full value of the consideration declared by him in respect of the transfer by an amount of not less than 15%. In support of his contention, he relied upon the statement of the assessee that he transferred the shares in question not only for the consideration of Rs. 10 per share, but also for the advantage he was to gain by getting control over the management of Challapalli Sugars Ltd. The advantage, which the assessee may get or was likely to get, depends upon several imponderable circumstances. Unless the advantage can be brought within the sweep of the definition of "capital asset" (Section 2(14)), which means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include the items (i) to (iv) referred to in Section 2(14), it cannot be said to come within the meaning of "fair market value" (section 2(22A)). What Sub-section (2) of Section 52 speaks of is the fair market value of a capital asset transferred by the assessee. The advantage of the controlling interest, which the assessee hoped to have, cannot be said to constitute the difference between the value of the shares declared by him on the date of the transfer and the fair market value. Therefore, for forming an opinion in accordance with the requirements of Section 52(2), the possible controlling interest in Challapalli Sugars Ltd., which the assessee hoped to secure at a future date, cannot be taken into account. It is thus manifest that the "controlling interest" cannot be construed as income chargeable under the head "Capital gains".

12. The words "full value of the consideration", which also occurred in section 12b(2) of the 1922 act, came to be construed by the Supreme Court in Commissioner of Income-tax v. George Henderson and Co. Ltd. [1967] 66 ITR 622. The Supreme Court said that the expression "full consideration" in the main part of Section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him and that the main part of Section 12B(2) provides that the amount of capital gain shall be computed after making certain deductions from the "full value of the consideration for which the sale, exchange or transfer of the capital asset is made". Therefore, the full value of the consideration of the capital asset, in this case, "shares", is the consideration received by the assessee for their transfer to his brother. It is not the case of the department that the assessee had received more than what was declared by him as the full value of the consideration received by him. The object of introducing Sub-section (2) in the Finance Act of 1964 was to deal with cases of transfers for less than the market value with the object of avoidance of tax or reduction of tax liability. In our view, it does not cover cases where the consideration recorded and declared for transfer of the capital asset is the same as the consideration actually received. As already adverted to by us, it is not the case of the department that anything more than what was actually declared was received by the transferor-assessee. We are unable to agree with Mr. Rama Rao that because of the opening words in Sub-section (2) of Section 52, namely, "without prejudice to the provisions of Sub-section (I)", the object of the transfer effected is irrelevant when construing Sub-section (2) of Section 52. There is no separate marginal note for subsection (2). Both the Sub-sections, in our opinion, form one code when construed in the light of the object of inserting Sub-section (2). Sub-section (2), therefore, cannot be divorced from Sub-section (1) and construed literally. As already pointed out, Sub-section (1) deals with a case of transfer for consideration less than the market value for the avoidance of tax or reduction of the tax liability. It is with the same object in view that Sub-section (2) has also been enacted. If we are to construe Sub-section (2) literally, as contended by Mr. P. Rama Rao for the revenue, it would apply to cases where the full consideration received by the assessee is bona fide disclosed resulting in taxing on a consideration which he had not in fact and actually received. The meaning of the word "income" as stated by S. R. Das J. (as he then was) in Navinchandra Mafatlal v. Commissioner of Income-tax indicates that "its natural meaning embraces any profit or gain which is actually received". The Supreme Court while so expressing its view endorsed the observations of Lord Wright in Kamakshya Narain Singh v. Commissioner of Income-tax [1943] 11 ITR 513 (PC). This view of the Supreme Court in Navinchandra Mafatlal's case [1954] 26 ITR 758 was again affirmed by the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax [1965] 56 ITR 198, that the word "income" used in Entry 54 of List I of the Seventh Schedule must be given its ordinary, natural and grammatical meaning and, that is, income is a thing that comes in The revenue cannot choose to tax as income ah item which in no rational sense can be regarded as a citizen's income.

13. We have also in this case a circular issued by the Central Board of Revenue. In this circular, the attention of the income-tax authorities was invited to the speech of the Finance Minister in the Lok Sabha at the time of insertion of the provisions of Section 52(2). In this circular, the Central Board of Revenue has clearly told the officers that Sub-section (2) of Section 52 is not to levy tax on perfectly bona fide transactions where the full value of consideration received has been correctly declared by the assessee. A circular like this issued by the Board is binding on the department. The speech of the Finance Minister which is extracted in the circular for the benefit of the taxing authorities reads :

15. The view expressed by Beg J. was again endorsed by the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-tax [1975] 101 ITR 796. Therefore, on a true construction of the language of the provisions of Section 52( 1) and (2) in the light of the Board's circular and the speech of the Finance Minister, we are of the opinion that these provisions are attracted only where the transfer of a capital asset is effected with the object of avoidance or reduction of the tax liability under Section 45 and not where the full value of the consideration received is declared.

16. The learned counsel for the revenue, however, sought to rely upon the view expressed by Gopalan Nambiyar J. (as he then was), in Income-tax Officer v. K. P. Varghese [FB] on behalf of himself and Viswanatha Iyer J. He was of the opinion that the consideration indicated by Sections 48 and 52 is one and the same, viz., the consideration for the transfer of capital assets. He so concluded on the reasoning that the heading and marginal note of a section cannot control the language in the main body of the section, and that it is not open to the court to look into the speeches of a Minister in Parliament or the instructions issued by the Board for understanding the object and purpose in enacting a particular provision of law. According to him, the instructions of the Central Board of Revenue and the speech of the Minister should not have the effect of controlling the meaning of the plain words in the section. We are unable to say that the words are so plain in Section 52(2) as to straightaway hold that the legislative intent is amply borne out by the language employed therein. Section 52 is intended only to cover cases where the assessee does not declare the full value of the consideration received or accruing to him with the object of avoidance of tax or reduction of tax liability. There is nothing in the language of section 52(1) or 52(2) to suggest that Parliament intended to tax as income something which in no rational sense can be regarded as income by the assessee. The likely advantage which the asses-see was to gain by the transfer of the shares cannot be construed as coming within the ambit of profits and gains of business or profession. The intention of Parliament could not have been to levy tax where no right to profits or gains accrues or arises on the transfer of capital assets. Section 52, therefore, applies to cases of understatement of consideration, that is to say, where consideration received is more than what was declared and not to cases of bona fide transfers of capital assets where nothing more than what was declared was received. The view expressed by us is in conformity with the view taken by the High Court of Madras in Sundaram Industries Private Ltd. v. Commissioner of Income-tax [1969] 74 ITR 243, Sivakami Company Private Ltd. v. Commissioner of Income-lax [1973] 88 ITR 311 and Commissioner of Income-tax v. Rikadas Dhuraji [1976] 103 ITR 111 and the Karnataka High Court in Additional Commissioner of Income tax v. M. Ranga Pai [1975] 100 ITR 413. For the reasons recorded, the reference is answered in the affirmative and in favour of the assessee. The revenue shall pay costs to the assessee. Advocate's fee Rs. 250.