K P VARGHESE Vs. INCOME TAX OFFICER ERNAKULAM

JUDGEMENT

(1.) The principal question that arises for determination 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 Inconme-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 form the backdrop against which the question arises for consideration, we may briefly state them.

(2.) 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 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. The notice did not state what was the income alleged to have escaped assessment but by his subsequent letter dated 4th Mar. '69 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 Dec. 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 overruled and an order of reassessment was passed by the Income-tax officer including the sum of Rupees 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 Rs. 48,500/- to tax, because there was admittedly no understatement of consideration in respect of the transfer of the house and it was not possible to say that the transfer was affected 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 understatement 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.

(3.) 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 understatement 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 understatement of consideration and it was a perfectly bona fide transaction, Section 52 sub-sec. (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 understatement 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 an amount of not less than 15% of the value so declared, Section 52 sub-section (2) is straightway 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 reassessment sustained by the majority decision reached by the Full Bench. Hence the present appeal by the assessee with certificate obtained from the High Court.