Section 52 cannot deem income without understatement of consideration; Revenue must prove taxability before disallowing capital loss.

Section 52(2) applies only where understatement of consideration for transfer of a capital asset is proved, and section 52(1) does not create a deeming fiction of income where no income has in fact accrued or been received. The burden of establishing taxability remains on the Revenue. On those principles, the invocation of section 52 was found unjustified on the facts discussed, and the claimed short-term capital loss was not liable to disallowance.

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Issues: (i) Whether the provisions of section 52(1) or section 52(2) of the Income-tax Act, 1961, were validly invoked on the facts and in the circumstances of the case; (ii) whether the short-term capital loss claimed by the assessee could be disallowed.

Issue (i): Whether the provisions of section 52(1) or section 52(2) of the Income-tax Act, 1961, were validly invoked on the facts and in the circumstances of the case.

Analysis: Section 52(2) applies only where the consideration for transfer of a capital asset has been understated. Section 52(1) does not create a deeming fiction of income where no income had in fact accrued or been received. The burden to establish taxability remains on the Revenue.

Conclusion: The invocation of section 52(1) or section 52(2) was not justified and the answer was against the Revenue and in favour of the assessee.

Issue (ii): Whether the short-term capital loss claimed by the assessee could not be disallowed.

Analysis: In light of the finding that section 52 could not be validly applied on the facts, the claimed short-term capital loss was not liable to be disallowed on the Revenue's reference.

Conclusion: The short-term capital loss claimed by the assessee could not be disallowed and the answer was against the Revenue and in favour of the assessee.

Final Conclusion: The reference was answered entirely in favour of the assessee and the Revenue failed on both referred questions.

Ratio Decidendi: Section 52(2) can be invoked only on proof of understatement of consideration, section 52(1) cannot deem income to arise where none was received, and the burden of proving taxability lies on the Revenue.

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