K.P. Varghese Vs. Income Tax Officer, Ernakulam and Ors.

This case summary is written by Mr. Mohit Bhardwaj, a 6th Semester student at Unitedworld School of Law, Karnavati University

Case Comment K.P. Varghese Vs. Income Tax Officer, Ernakulam and Ors.

CITATION 1981 AIR 1922
COURT Supreme Court of India
JUDGES/CORAM Justice P.N. Bhagwati & Venkataramiah, E.S.
DATE OF JUDGEMENT 04.09.1981

 

Case Note:

Direct Taxation – capital gain – Section 52 (2) of Income Tax Act, 1961 – appellant sold his house at the same price at which he bought to his relatives – taxing officer claim that there was an understatement of consideration to avoid tax – whether understatement of consideration in the transfer of property is a necessary condition for the applicability of Section 52 (2) – Section 52 (2) could be invoked only when there is an understatement by the assessee – burden to prove understatement on revenue – Section 52 (2) has no application in case of honest and bona fide transaction where there is no concealment – no concealment by appellant – appeal allowed.

Relevant Facts

The appellant assessee sold his house in Ernakulam on the 25th of December, 1965 to his daughter-in-law and five of his children for the same price of Rs. 16,500 which he purchased in the year 1958. 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 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, without stating what was the income alleged to have escaped assessment. However, by his subsequent letter dated 4th March 1969, the Income Tax officer stated that he proposed to fix the fair market value of the house sold by the assessee 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 objections raised by the assessee were overruled and order of reassessment was passed by the Income Tax officer including the sum of Rs. 48,500 as capital gains and bringing it to tax under sub-section (2) of section 52, taking the view that this sub-section did not require as a condition precedent that there should be an 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.

The assessee thereupon filed a writ petition in Kerala High Court challenging the validity of the order of re-assessment insofar as it brought a sum of Rs. 48,500 to tax relying on sub-section (2) of section 52 of the Income Tax Act, 1961. The writ petition was allowed, but in appeal, the Full Bench by a majority judgment agreed with the views of the Income Tax officer and dismissed the writ petition. Hence the assessee’s appeal by certificate.

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Issues

Whether understatement of consideration in a transfer of property was a necessary condition for attracting the applicability of section 52[1] sub-section (2) of the Income Tax Act 1961 or it was 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.

Contentions

The Revenue argued that on a plain natural construction of the language of section 52, subsection (2), the only condition for attracting the applicability of that provision is that the fair market value of the capital asset transferred by the assessee 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 assessee objected against the literal constriction of section 52 sub-section (2) as it leads to manifestly unreasonable and absurd consequences.

Judgment with reasoning

The assessee initially 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. The Judge concluded that in the case, it was a perfectly bona fide transaction, and thus, the section could not be invoked.

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 and upheld the decision of the Income Tax Officer. The assessee then moved to the Supreme Court.

The Supreme Court observed that a strictly literal interpretation of Section 52(2) cannot be adopted, and it must be construed in the light of the object and purpose of its enactment. As per the well-recognized rule of construction, a statutory provision must be construed in a way that absurdity and mischief are avoided. The Court remarked that there are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result that could never have been intended by the legislature.

The Court interpreted the section and observed it would apply only where the consideration for the transfer is under-stated i.e. the assessee has received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in case of a bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. The Court relied upon the marginal note to Section 52. The Court held that the section cannot be invoked unless there is an understatement of the consideration in respect of the transfer and the burden of showing that there is such under-statement is on the Revenue. The appeal was allowed by the Court and the order of the Full Bench was set aside.

 

 

Analysis/Conclusion

Section 52 was omitted by Finance Act, 1987 with effect from 1st April 1988. The Section before its omission was as under:

“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 15 percent of the value 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 the transfer.”

It was held in Commissioner of Income Tax, Madras v. Shivakami Company Private Limited[2], that the provision would apply only when there was consideration and which consideration received was more than the consideration disclosed or declared.

The applicability of the section remains on cases pending from before its omission or on the years before its omission. Recently, the Delhi High Court in Arun Malhotra v. CIT[3], while citing the present case, held that the difference between the consideration received and market value of consideration by itself would not justify invoking the said Section. Thus, the rule laid down in the present case is the correct view and is still adopted by the Courts.

While the section pertaining to this case has been deleted, it is still important concerning cases before its deletion. Additionally, the Court, in this case, laid down some extreme rules regarding the interpretation of statutes.

 

References:

[1] The Income Tax Act, 1961, s. 52

[2] Commissioner of Income Tax, Madras v. Shivakami Company Private Limited [1986] 159 ITR 71 (SC)

[3] Arun Malhotra v. CIT 2017-LL-0517-115

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