Fair market value substitution under capital gains law requires both connected-party transfer and tax-avoidance intent.

The first proviso to section 12B(2) applied only where the transferee was directly or indirectly connected with the assessee and the transfer was made with the object of avoiding or reducing liability under the section; both conditions had to coexist before fair market value could replace the stated consideration. On the facts, the transaction produced a capital loss rather than a capital gains liability, so there was no liability capable of being reduced and the Tribunal's finding to that effect was reasonable, not perverse. The reference was answered for the assessee on both questions.

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Issues: (i) Whether the first proviso to section 12B(2) of the Indian Income-tax Act, 1922 applied only when both the purchaser was a connected person and the transaction was entered into with the object of avoidance or reduction of liability under the section; (ii) Whether the Tribunal's finding that there was no attempt at reduction of tax liability was perverse.

Issue (i): Whether the first proviso to section 12B(2) of the Indian Income-tax Act, 1922 applied only when both the purchaser was a connected person and the transaction was entered into with the object of avoidance or reduction of liability under the section.

Analysis: The proviso required satisfaction of two conditions: the transfer had to be to a person directly or indirectly connected with the assessee, and the transaction had to be effected with the object of avoiding or reducing liability under section 12B. The two requirements were cumulative and had to coexist before the fair market value could be substituted for the consideration received.

Conclusion: The proviso applied only if both conditions were satisfied, and the answer was in favour of the assessee.

Issue (ii): Whether the Tribunal's finding that there was no attempt at reduction of tax liability was perverse.

Analysis: On the computation accepted by the Tribunal, the transaction resulted in a capital loss and not in any liability to capital gains under section 12B. If no liability arose, there could be no attempt to reduce such liability by the transaction. The finding was therefore a reasonable one on the materials and could not be characterised as perverse.

Conclusion: The finding was not perverse, and the answer was in favour of the assessee.

Final Conclusion: The reference was answered on both questions in favour of the assessee, with the proviso held inapplicable on the facts and the Tribunal's finding upheld as reasonable.

Ratio Decidendi: A proviso that permits substitution of fair market value for consideration in a capital gains transaction operates only when all its stated conditions are cumulatively satisfied, and a finding that no tax liability existed cannot be treated as perverse merely because the transaction involved a transfer at a lower value.

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