K.P. VARGHESE Vs. ITO

JUDGEMENT

(1.) THE question arising for decision in this case is whether S.52 of the Income Tax Act 1961 has any application in computing capital gains arising from the transfer of a capital asset for a consideration lesser than its fair market value;in other words,whether the capital gains is to be computed on the basis of the actual consideration arising to the assessee or on the basis of the fair market value of the asset transferred.The facts,in so far as they are necessary for the decision of the above question,are not in dispute.The petitioner is an assessee to income tax.For the year 1966 -67,his total income during the year ending on 31 -12 -1965 was fixed at Rs.97,890/ -;and he was assessed accordingly.He had purchased an item of house property situate within the Municipal town of Ernakulam in 1958 for a consideration of Rs.16,500/ -.On 25 -12 -1965,he sold it for the same consideration in favour of a daughter inlaw and five of his children.On 4 -4 -1968,the Income Tax Officer issued a notice,Ex.P 1,to the petitioner under S.148 of the Act,stating that he had reason to believe that the petitioner 's income chargeable to tax for the year 1966 -67 had escaped assessment,and he proposed to reassess the said income,and requiring the petitioner to submit a return in the prescribed form within 30 days of the service of the notice.Ex.P1 did not disclose any particulars of the income alleged to have escaped assessment.The petitioner,however,filed a return.Subsequently the Income Tax Officer,by his letter,Ex.P3 dated 4 -3 -1969,disclosed to the petitioner what was the escaped income,which he proposed to assess.Ex.P3 stated that the Income Tax Officer proposed to fix the fair markets value of the property sold by him on 25 -12 -1965 at Rs.65,000/ - as against the consideration of Rs.16,500/ - for which it was transferred,and to assess the difference of Rs.48,500/ - as capital gains.The petitioner was also required to file his objections,if any,to the said proposal with necessary evidence on or before 12 -3 -1969.The petitioner submitted his objections,Ex.P4,on the same day.By his order,Ex.P5 dated 31 -3 -1969,the Income Tax Officer overruled all the objections raised by the petitioner,and reassessed him by including the said sum of Rs.48,500/ - as part of his total income for the year 1966 -67.This writ Petition has been filed to quash Ex.P5.

(2.) THE main objection raised by the petitioner before the Income Tax Officer was that there was no question of any capital gains,when a capital asset is transferred for the same consideration as for which it was originally acquired.There is no dispute that petitioner actually received only Rs.16,500/ - by the sale of the property.The difference between the fair market value and the actual consideration received by petitioner was treated as gift under S.4 of the Gift Tax Act,1958,and assessed under that Act.The Income Tax Officer,however,held that S.52 of the Act applied to the case,and that capital gains has accordingly to be computed on the basis of the fair market value of the asset.The only question pressed before me by the learned counsel for the petitioner is whether S.52 has any application to the case.The point does not appear to be covered by any judicial pronouncement.The learned counsel for the petitioner and for the Department have argued the case with ability and thoroughness.

(3.) GIFTS to include certain transfers:For the purposes of this Act, - - (a)where 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 transfer; (b)* * * * * (c)* * * * * (d)* * * * * (Clauses(b ),( c ),and(d)are omitted,being unnecessary for the present discussion ). To some extent both the definitions are substantially the same;but the inclusion in the definition of gift in the Gift Tax Act of the transfer of any property deemed to be a gift under S.4 makes a vital difference.For example,if a property having a market value of Rs.1,00,000/ - is transferred for a consideration of Rs.10,000/ - it is not a gift as defined in the Transfer of Property Act;it is a sale.But under the Gift Tax Act,it is a gift in respect of Rs.90,000/ -,which represents the difference between the market value of the property and the actual consideration for which it is transferred.It is on this basis that the petitioner was assessed under the Gift Tax Act on a sum of Rs.48,500/ -.This is the identical amount which has been now included in the total income,of the assessee and assessed as escaped income as per the impugned order Ext.P 5. 4.Now I shall state the respective contentions of the learned counsel.Shri C.T.Peter,the learned counsel for the petitioner contended that we are in this case concerned only with item(vi)included in the definition of income in S.2(24)of the Income Tax Act,1961,any capital gains chargeable under S.45 ;,and that under S.45,what is chargeable to income tax under the head capital gains is only any profits or gains arising from the transfer of a capital asset ;.He further submitted that no profits or gains rose to the petitioner in this case from the transfer of the capital asset,as admittedly he transferred it for the same amount for which he acquired it,and no manner of benefit arose to him out of the said transaction.Shri P.K.Krishnakutty Menon,the learned counsel for the Revenue met this argument by stating that what is chargeable to income tax under S.4 of the Act is the total income of the previous year,and the total income of a person as stated in S.5 of the Act includes not only all income which is received by or accrues or arises to him,but also all income which is deemed to be received by,or to accrue or arise to him.He,therefore,submitted that what is chargeable under the head capital gains is not only any profit or gains arising from the transfer of a capital asset as provided in S.45,but also any profits or gains deemed to arise from the transfer of a capital asset under any provision of the Act.Then he relied on S.48,which lays down the method of computation of capital gains ;,and S.52 which deals with consideration for transfer in cases of understatement.S.48 provides that capital gains shall be computed by deducting from the full value of the consideration received or accrued as a result of the transfer of the capital asset,the cost of its acquisition and improvements thereto and the expenditure incurred in connection with the said transfer.Now I came to the controversial S.52,which I have already quoted.According to the learned counsel for the Revenue,the case falls under Sub -s.( 1)and at any rate,it falls under Sub -s.( 2 );and in either case,the full value of the transfer shall be taken to be the fair market value of the capital asset on the date of its transfer.The term fair market value,is defined in S.2(22A)of the Act;and it is as follows: (22A)fair market value ;,in relation to a capital asset,means (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 this Act; There is no dispute that the transfer in this case was for a consideration much less than the fair market value.So,if S.52 applies to the case,the learned counsel for the Revenue is right in his submission that what is chargeable under the head capital gains is not only profits or gains arising from the transfer of a capital asset,but also profits or gains deemed to arise from the said transfer under S.52;and the controversy is whether this section applies.