SEENAPPA N Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under s. 256(2) of the IT Act, 1961. The following questions have been referred :

(2.) THE facts are these : THE assessee was a contractor. In 1967, he was allotted site No. 328, Palace Upper Orchards, Bangalore, by the City Improvement Trust Board, Bangalore, for Rs. 19,274. In 1968, he started construction of a building and when it was nearing completion, he sold it to Mr. and Mrs. Mehta, for Rs. 2,51,101. THE purchasers then spent about Rs. 52,720, on improvement and finishing touch up. THE assessee did not offer any capital gains for tax. Before the Assessing Officer, there were at least two valuation reports, one at the instance of the assessee and another at the instance of the Department . After examining the matter, the Assessing Officer took the valuation of the land at Rs. 60 per sq. yd. and determined the fair market value of the building at Rs. 3,56,000 for purposes of capital gains under s. 52(2) of the IT Act. He obtained the prior approval of the IAC for that purpose and assessed Rs. 89,722 as short- term capital gains. THE assessee preferred an appeal before the AAC, who gave no relief in respect of the questions with which we are considered. THEreupon the assessee appealed to the Tribunal . THE Tribunal slightly reduced the fair market value of the land. It held that the value of land should be determined at Rs. 50 per sq. yd. and the fair market value of the property at Rs. 3,27,330. Since this market value admittedly exceeded the declared consideration by more than 15 per cent the Tribunal held that s. 52(2) of the IT Act is attracted. In the course of the order, the Tribunal has observed that there was no direct evidence of any understatement of consideration in this case but that cannot be expected because things like these are carried out in secrecy and not with witnesses who may depose against the parties. It proceeded on the probabilities of the case and also took into account the common course of human conduct in business affairs. It noticed that the property was not advertised for sale and if it had been advertised, there would not have been dearth of purchasers since the property is situated in a good locality in Bangalore. It appears that it was argued for the assessee that the sale was a distress sale, because a firm of which the assessee was a partner owed money to Syndicate Bank. But the Tribunal found that there was no such acceptable evidence in proof of the distress sale. THE Tribunal also observed that in the normal course, the contractor could not have forgone the benefit of the increase in the price of land and increase in the cost of construction and personal supervision effected by him, for no reason whatsoever. On these circumstances, the Tribunal came to the conclusion that there was understatement of consideration and a part of the consideration must have been paid under the table.

(3.) THESE findings have been recorded obviously without proper understanding of the true scope of s. 52(2) of the IT Act. We can understand the difficulty of these authorities. The Tribunal rendered the decision on 31st December, 1976. Till then, there was no authoritative pronouncement on the scope of s. 52(2) of the IT Act either of this Court or of the Supreme Court. The Supreme Court delivered the judgment in K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) : TC22R.105 on 4th September, 1981 and this Court in Sanjiv V. Kudva vs. CIT (1981) 20 CTR (Kar) 1 : (1981) 127 ITR 354 (Kar) : TC21R.207, delivered judgment on 7th August, 1980. In Varghese's case (supra), the Supreme Court has observed :