MADANMOHAN KISHANLAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS court is called upon to express an opinion on two questions which are referred to us by the Income -tax Appellate Tribunal and they are as under :

(2.) IT is required to be stated that the assessment year is 1965 -66 and the assessee is a partnership firm consisting of five partners, viz., Goverdhandas, Ghanshyamdas, Damodardas, Brijbhushandas and Satyanarayandas. The partnership firm had purchased land bearing survey Nos. 11 and 15 admeasuring about 27,000 square yards situated at Pahadi, near Goregaon in Greater Bombay, for a sum of Rs. 1,21,000 somewhere in the middle of 1953. Thereafter, it appears that the land was plotted out and there were sales in favour of two societies and also in favour of Gayatridevi, Govindlal, Keshardevi, Ghanshyamdas, Sushiladevi Natwerlal and Govindlal Hemantkumar. It appears that these individuals were in one way or the other related or connected with one or the other of the partners of the firm. It was also on record that so far as the plots ultimately sold to the co -operative societies were concerned, they were sold at a price of Rs. 20 per square yard, while to these relatives or connected persons, the plots were sold at the rate of Rs. 7 per square yard. It may be stated here that in the year 1962, there were some agreements of sales with which we are not concerned at present, because the transactions were not in the relevant assessment year. The ITO thought that because the market rate of the land in question at the relevant time was Rs. 20 per square yard, sales to the above persons was with the object of avoidance or reduction of the liability of the assessee. Under these circumstances, the ITO came to the conclusion that s. 52(1) of the I.T. Act, 1961, would be attracted and the assessee was required to be assessed accordingly for the purpose of capital gains. That led to the filing of an appeal which was heard by the AAC who confirmed the view taken by the ITO. The same view was confirmed by the Tribunal also. Therefore, on an application, two questions came to be referred to this court by the Income -tax Appellate Tribunal. To answer question No. 2, one has only to look at s. 52(1) of the I.T. Act, which reads as under :

(3.) THE learned counsel for the Revenue, Mr. B. R. Shah, tried to mix up the transaction with the co -operative societies and suggested that because the fair market value in sales to them was Rs. 20 per square yard, it was required to be assumed here also and an inference is required to be drawn. This cannot be done without facts on record. The Supreme Court in the case of Varghese v. ITO : [1981]131ITR597(SC) decided that on such facts s. 52 of the I.T. Act, 1961, shall not be attracted. The facts in that case were that the assessee had purchased in 1958 a house for Rs. 16,500 and on December 25, 1965, he sold the house for the same price to his daughter -in -law and five of this children. The ITO by action taken under s. 148 of the I.T. Act estimated the fair market value of the house sold by the assessee at Rs. 65,000 and proceeded to assessee the difference of Rs. 48,500 as capital gains in the hands of the assessee by invoking sub -s. (2) of s. 52. The assessee filed a writ petition challenging the validity of the order of reassessment in so far as it brought the sum of Rs. 48,500 to tax relying on sub -s. (2) of s. 52 of the I.T. Act, 1961. The petition was allowed, the learned judge holding that there was no allegation of understatement of consideration and the transaction was a clear one. Section 52(2) had no application. There was an appeal by the Department. The Full Bench of the Kerala High Court construed the sub -section literally. The Supreme Court restored the decision of the single judge and the court laid down the propositions by which not only s. 52(2) but the whole scheme of that section was considered and s. 52(1) was also considered and the view expressed was that the second condition obviously involved an understatement of the consideration in respect of the transfer and this is also indicated by the marginal note to s. 52. It was observed (p. 606) :