1981 (10) TMI 30 - HC - Income Tax

Court rules Section 52(2) inapplicable for gift-tax treatment in genuine transactions.

Additional Commissioner Of Income-Tax, Delhi-I Versus Mrs. Avtar Mohan Singh

The court held in favor of the assessee, ruling that Section 52(2) of the Income Tax Act was not applicable as the difference between market value and ... Capital Gains, Understatement Issues Involved:1. Applicability of Section 52(2) of the Income Tax Act, 1961.2. Treatment of the difference between market value and actual consideration as capital gains or gift.3. Interpretation of 'gift' under Section 47(iii) of the Income Tax Act in conjunction with the Gift Tax Act.Issue-wise Detailed Analysis:1. Applicability of Section 52(2) of the Income Tax Act, 1961:The primary issue was whether the provisions of Section 52(2) of the Income Tax Act, 1961, were applicable to a transaction where the market value of the property transferred exceeded the declared consideration by more than 15%. The Income Tax Officer (ITO) had invoked Section 52(2) to tax the difference as capital gains, arguing that the market value of the property was higher than the sale price declared by the assessee.2. Treatment of the Difference between Market Value and Actual Consideration:The difference between the sale price (Rs. 3,60,000) and the market value (Rs. 4,28,571) was treated as a gift by the Gift Tax Officer (GTO) and taxed accordingly. The ITO, however, sought to tax this difference as capital gains under Section 52(2). The Tribunal upheld the AAC's decision that the transaction was partly a sale and partly a gift, and hence, Section 52(2) was not applicable. The Tribunal relied on the Kerala High Court's decision in K.P. Varghese v. ITO, which held that Section 52(2) would not apply to bona fide transactions where the consideration was not understated.3. Interpretation of 'Gift' under Section 47(iii) of the Income Tax Act:The Tribunal also held that the definition of 'gift' in the Gift Tax Act should be applied to Section 47(iii) of the Income Tax Act, which excludes gifts from the ambit of capital gains tax. The Tribunal reasoned that since the transaction resulted in a charge of gift-tax, it could not also result in a charge of capital gains tax. This interpretation was challenged by the revenue, which argued that deemed gifts should not be excluded from capital gains tax under Section 47(iii).Court's Analysis and Judgment:The court examined the relevant provisions of the Income Tax Act and the Gift Tax Act. It noted that Section 52(2) was introduced to counter tax evasion through understatement of consideration in property transfers. The court emphasized that Section 52(2) would apply only in cases where there was an actual understatement of consideration, not in bona fide transactions where the declared consideration matched the actual consideration received.The court relied on the Finance Minister's speech and the Central Board of Direct Taxes (CBDT) circular, which clarified that Section 52(2) was not aimed at bona fide transactions. The court also referred to the Supreme Court's decision in K.P. Varghese v. ITO, which held that the revenue must prove both conditions: the market value exceeded the declared consideration by 15% and there was an understatement of consideration.The court concluded that in bona fide transactions, the difference between the declared consideration and the market value should be treated as a gift and not as capital gains. This interpretation aligns with the legislative intent to exclude transfers involving an element of bounty from capital gains tax under Section 47(iii).Final Decision:The court answered the reference in the affirmative, in favor of the assessee, holding that the provisions of Section 52(2) were not applicable in the instant case as the difference between the market value and the real consideration was charged to gift-tax. The court made no order as to costs.The judgment was pronounced in consonance with the Supreme Court's decision in K.P. Varghese v. ITO, which reinforced the requirement for the revenue to prove both the conditions for invoking Section 52(2).