Understatement of consideration is essential before fair market value can replace sale price for capital gains taxation.

Section 52 of the Income-tax Act, 1961 could not be invoked because the Revenue failed to prove actual understatement of sale consideration. In the absence of material showing understatement, fair market value could not be substituted for the stated price to compute capital gains. On that factual basis, no taxable capital gain arose on the Revenue's adopted method, and the assessee's position was upheld.

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Issues: (i) whether section 52 of the Income-tax Act, 1961 applied to the transfer of the properties in question; (ii) whether any capital gain was taxable on the basis adopted by the Revenue.

Issue (i): whether section 52 of the Income-tax Act, 1961 applied to the transfer of the properties in question.

Analysis: The Revenue sought to invoke section 52 on the footing that the sale consideration was understated and the fair market value could be substituted. The factual finding recorded was that no material existed to establish actual understatement of consideration. In the absence of proof of understatement, the statutory conditions for applying section 52 were not satisfied.

Conclusion: Section 52 of the Income-tax Act, 1961 was not applicable, and the answer was in favour of the assessee.

Issue (ii): whether any capital gain was taxable on the basis adopted by the Revenue.

Analysis: Since the Revenue failed to establish actual understatement of consideration, capital gains could not be computed merely by substituting fair market value for the stated sale price. The decision applied the principle that assessment of capital gains cannot rest only on fair market value in the absence of material proving understatement.

Conclusion: No taxable capital gain arose on the basis adopted by the Revenue, and the answer was in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue and the Tribunal's view was upheld because the Revenue did not prove understatement of consideration necessary to attract section 52.

Ratio Decidendi: Section 52 of the Income-tax Act, 1961 can be applied only where the Revenue establishes actual understatement of consideration, and capital gains cannot be assessed solely by reference to fair market value in the absence of such proof.

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