Strict construction of deemed consideration under capital gains law bars substitution of market value for actual transfer price.

A deed described as a release deed was treated as an effective transfer by the partnership firm of its house property to one partner because the recitals, surrounding circumstances, account entries and the assessee's own return showed that the firm conveyed the asset and ceased to own it after the transaction. In computing capital gains, section 52(1) of the Income-tax Act was held to be a strict deeming provision that cannot be used to substitute fair market value for the actual consideration received or accruing on a bona fide transfer unless the statutory conditions are satisfied. The ratio emphasises strict construction of deeming provisions in tax law.

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Issues: (i) Whether the deed styled as a release deed executed in favour of one partner amounted to a transfer by the partnership firm of the house property to that partner. (ii) Whether, in computing capital gains, the fair market value could be substituted for the actual consideration under section 52(1) of the Income-tax Act, 1961.

Issue (i): Whether the deed styled as a release deed executed in favour of one partner amounted to a transfer by the partnership firm of the house property to that partner.

Analysis: The document, its recitals, the surrounding circumstances, the book entries in the firm's accounts, and the assessee's own return showed that the property, though described as released, was being conveyed by the firm in its capacity as owner of the partnership asset. The partners executing the deed were treated as acting for and on behalf of the firm, and the property ceased to be the firm's asset after the transaction.

Conclusion: The deed constituted an effective transfer by the firm to the partner, and the answer was against the assessee.

Issue (ii): Whether, in computing capital gains, the fair market value could be substituted for the actual consideration under section 52(1) of the Income-tax Act, 1961.

Analysis: Sections 45 and 48 tax profits or gains arising from transfer and compute them with reference to the full value of consideration actually received or accruing. Section 52(1), being a deeming provision, had to be construed strictly. It was held that the provision applies only where the statutory conditions are satisfied and cannot be used to treat a bona fide transfer for the stated consideration as if the difference between market value and actual consideration were itself consideration received or accruing. The difference between fair market value and the actual price could not be brought to tax merely because the market value was higher.

Conclusion: Section 52(1) could not be invoked to substitute fair market value for actual consideration in this case, and the answer was against the revenue.

Final Conclusion: The transaction was a valid transfer by the firm, but capital gains could not be computed by replacing the actual consideration with market value under the deeming provision; the reference concerning the firm was answered partly for the revenue and partly for the assessee, and the partner's reference was answered in favour of the assessee.

Ratio Decidendi: A deeming provision in a taxing statute must be strictly construed, and unless the statute expressly authorises it, fair market value cannot be substituted for the actual consideration received or accruing on a bona fide transfer.

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