Undisclosed consideration rule under income tax applies only when actual understatement is proved, not in bona fide transfers.

Section 52(2) of the Income-tax Act is described as a computation provision aimed at countering understatement of consideration, not at taxing every transfer where fair market value exceeds the declared price. The text states that the revenue must show both the statutory market-value difference and actual understatement of consideration; if a transfer is bona fide and the recorded consideration is the true amount received, section 52(2) does not apply. In that situation, the excess of market value over price may be treated as a gift in the ordinary sense, and exemption under section 47(iii) is attracted on that basis.

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Issues: Whether section 52(2) of the Income-tax Act, 1961 applies to a bona fide transfer where the declared consideration is the actual consideration received, but the fair market value exceeds the declared consideration by more than 15 per cent., and whether the shortfall can be treated as a gift excluded from capital gains under section 47(iii) of the Income-tax Act, 1961.

Analysis: Section 52 is a computation provision and its heading, legislative history, Finance Minister's speech, and CBDT circular indicate that sub-section (2) was intended to counter understatement of consideration. The words "full value of the consideration declared" and the structure of the provision show that the revenue must establish not only the prescribed difference between market value and declared consideration but also that the consideration was actually understated. Where the transaction is bona fide and the consideration recorded is the true consideration received, there is no understatement, and the excess of market value over price does not attract section 52(2). The shortfall may, in such a case, amount to a gift in the ordinary sense, and the exemption in section 47(iii) is attracted on that footing.

Conclusion: Section 52(2) does not apply to a bona fide transfer where the true consideration is fully disclosed and there is no understatement. The reference was answered in the affirmative and in favour of the assessee.

Ratio Decidendi: Section 52(2) can be invoked only when the revenue proves both that the fair market value exceeds the declared consideration by the statutory margin and that the declared consideration is understated.

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