1967 (4) TMI 18 - SC - Income Tax

Supreme Court clarifies 'full value of consideration' in share transfer under Income-tax Act

The Supreme Court held that the transfer of shares did not fall within the first proviso to section 12B(2) of the Income-tax Act as the transfer occurred ... Capital gains - full value of the consideration - fair market value of the capital asset - first proviso to section 12B(2) - deeming of market value as consideration - transfer between connected persons with object of avoidance - interpretation of statutory phrase 'full value of the consideration'Full value of the consideration - fair market value of the capital asset - interpretation of statutory phrase 'full value of the consideration' - The expression 'full value of the consideration' in section 12B(2) denotes the actual price received by the transferor (the price bargained for), and does not, as a matter of construction, mean the market value of the asset transferred. - HELD THAT: - The Court held that the consideration for a transfer is the thing received by the transferor (money or money's worth) and not the asset parted with; therefore the main part of section 12B(2) requires taking the full sale price actually paid. The legislative contrast between 'full value of the consideration' and 'fair market value of the capital asset' in the first proviso confirms that market value is a distinct concept usable only where the proviso's conditions are satisfied. The first proviso creates a statutory fiction enabling the Income-tax Officer, with prior approval, to treat market value as the full consideration only when (1) the parties are directly or indirectly connected and (2) the transfer was effected with the object of avoidance or reduction of liability under section 12B. Absent those conditions, the Income-tax Officer must take the actual price agreed by the parties as the full value of the consideration.The Court construed 'full value of the consideration' to mean the whole price actually received, not the market value of the asset.Remand for rehearing - finding as to actual consideration - Whether the Appellate Tribunal had recorded a clear finding that the respondent actually received the market price on the transfer to Giridhari Lal Mehta and, in consequence, whether the reference could be answered on the record as it stood. - HELD THAT: - The Court examined the Appellate Tribunal's order and concluded that its language as to the actual contract price paid was obscure and incapable of being clearly interpreted as a definitive finding that the market price was paid. Because the determinative factual finding was unclear, the Court directed that the Appellate Tribunal should rehear the appeal, record a clear finding after hearing the parties, and afford the respondent an opportunity to explain the unusual features of the transactions and to produce supporting evidence; the Tribunal may call for elucidation and the appellants may give rebuttal evidence. The Court accordingly set aside the High Court's judgment and remitted the matter for fresh adjudication on the factual question of what price was actually received.Order set aside and the matter remanded to the Appellate Tribunal for rehearing and for recording a clear finding as to the actual price received by the respondent on the sale to Giridhari Lal Mehta.Final Conclusion: The Court construed 'full value of the consideration' in section 12B(2) to mean the actual price received (not market value) and, finding the Tribunal's factual finding on the price obscure, set aside the High Court's order and remitted the case to the Appellate Tribunal for rehearing and a clear factual finding; parties to bear their own costs up to this stage. Issues Involved:1. Applicability of the first proviso to section 12B(2) of the Income-tax Act.2. Determination of the 'full value of the consideration' for the sale of shares.3. Validity of the findings of the Income-tax Appellate Tribunal and the High Court.Issue-wise Detailed Analysis:1. Applicability of the First Proviso to Section 12B(2):The core issue was whether the transfer of shares fell within the ambit of the first proviso to section 12B(2) of the Income-tax Act. The proviso applies if the transferor is directly or indirectly connected with the transferee and if the transfer was effected with the object of avoiding or reducing the liability under section 12B.The Income-tax Officer and the Appellate Assistant Commissioner initially held that the conditions of the first proviso were satisfied, asserting that the respondent and the transferee were directly connected and the sale was intended to avoid tax. However, the Appellate Tribunal rejected this view, stating that the sale was not effected with the object of tax avoidance or reduction. The Supreme Court concurred with the Tribunal, noting that the transfer occurred before the enactment of section 12B and hence could not have been made with the object of avoiding liability under this section.2. Determination of the 'Full Value of the Consideration':The appellants contended that the 'full value of the consideration' should be interpreted as the market value of the shares, which was Rs. 620 per share, rather than the book value of Rs. 136 per share at which the shares were transferred. The Supreme Court rejected this contention, clarifying that the 'full value of the consideration' refers to the actual price received by the transferor and not the market value. The Court emphasized that the consideration is what the transferor receives in exchange for the asset, and the term 'full value' means the whole price without any deductions.The Court noted that the legislature made a clear distinction between 'full value of the consideration' and 'fair market value' in the first proviso to section 12B(2). Therefore, in the absence of the conditions specified in the proviso, the main part of section 12B(2) applies, and the actual price received by the respondent must be considered.3. Validity of the Findings of the Income-tax Appellate Tribunal and the High Court:The Supreme Court scrutinized the findings of the Appellate Tribunal and the High Court. The Tribunal had affirmed the order of the Appellate Assistant Commissioner but rejected the applicability of the first proviso. The Tribunal's order contained ambiguous language regarding the actual price received for the shares, leading to uncertainty about its findings.The Supreme Court observed that the Tribunal's statement of the case did not accurately reflect its order, leading to confusion. The Court concluded that the Tribunal's language was obscure and its import could not be determined. Consequently, the Supreme Court remanded the case to the Appellate Tribunal for a rehearing. The Tribunal was directed to record a clear finding on the actual price received by the respondent for the shares after giving both parties an opportunity to present evidence and explanations.Conclusion:The Supreme Court set aside the judgment of the Calcutta High Court dated July 15, 1963, and remanded the case to the Appellate Tribunal for rehearing. The parties were instructed to bear their own costs up to that stage. The Tribunal was tasked with recording a clear finding on the actual price received for the shares and disposing of the appeal accordingly.