Gift-tax fiction cannot enlarge Income-tax exemption; undervalued transfers to relatives may trigger capital gains and fair market value rules.

A deemed gift under the Gift-tax Act cannot be imported into section 47(iii) of the Income-tax Act to exclude a sale from capital gains tax, because the two statutes operate in different fields and the Gift-tax fiction cannot enlarge the exemption under the Income-tax Act. A transfer for consideration remains a sale unless the Income-tax Act itself treats it as a gift. Section 52 may apply where the transferee is closely connected with the assessee and the transfer is made to avoid or reduce tax liability; gross undervaluation and transfer to sons supported that inference, permitting adoption of fair market value.

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Issues: (i) Whether the definition of "gift" and the deeming provision under the Gift-tax Act could be imported into section 47(iii) of the Income-tax Act so as to exclude the transfer from capital gains tax; (ii) Whether section 52 of the Income-tax Act was validly invoked on the facts of the sale to the assessee's sons.

Issue (i): Whether the definition of "gift" and the deeming provision under the Gift-tax Act could be imported into section 47(iii) of the Income-tax Act so as to exclude the transfer from capital gains tax.

Analysis: Section 45 charges tax on profits or gains arising from transfer of a capital asset, while section 47(iii) excludes only transfers under a gift. The transfer in question was a sale for consideration, not a gift in the ordinary sense. The definition of "gift" in the Gift-tax Act and the fiction created for the limited purpose of that Act could not be bodily imported into the Income-tax Act. The two enactments operate in different fields, and the fiction created under the Gift-tax Act cannot enlarge the exemption under section 47(iii). A transfer treated as a deemed gift under the Gift-tax Act remains a sale for the Income-tax Act unless the latter statute itself so provides.

Conclusion: The transfer was not exempt under section 47(iii) of the Income-tax Act, and capital gains tax was attracted.

Issue (ii): Whether section 52 of the Income-tax Act was validly invoked on the facts of the sale to the assessee's sons.

Analysis: Section 52 applies where the transferee is directly or indirectly connected with the assessee and the transfer is effected with the object of avoiding or reducing the liability under section 45. Those conditions were satisfied because the transferees were the assessee's sons and the property was grossly undervalued. The circumstances justified the inference that the transfer was made to reduce the tax liability under section 45. The assessee also failed to challenge the assessment in time and allowed it to attain finality, which weighed against interference in writ jurisdiction.

Conclusion: Section 52 was properly applied, and the assessment based on fair market value was sustainable.

Final Conclusion: The writ petition was unsustainable, the assessee could not rely on the Gift-tax Act to defeat capital gains taxation, and the reassessment based on section 52 was upheld.

Ratio Decidendi: A statutory fiction created under the Gift-tax Act for the purpose of that Act cannot be imported into the Income-tax Act to enlarge the exemption for transfers under a gift; a sale to relatives at an undervalue may attract capital gains tax and, where the statutory conditions are met, section 52 can justify adoption of fair market value.

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