Understated consideration is essential before substituting fair market value in capital gains computation; undervalue alone is not enough.

The first proviso to section 12B(2) of the Indian Income-tax Act, 1922 applies to capital gains computation only where the Revenue proves that the consideration actually received on transfer was understated. A sale at an undervalue, even if structured to reduce tax, is insufficient by itself; there must be direct or inferential evidence that more than the declared amount passed to the assessee. The burden of proving understatement rests on the Revenue, and where that proof is absent, substitution of fair market value for the declared consideration cannot be sustained.

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Issues: Whether the first proviso to section 12B(2) of the Indian Income-tax Act, 1922 could be invoked for computing capital gains on sale of shares to connected persons without proof that the consideration stated in the transfer documents was understated.

Analysis: The governing principle applied was that the proviso, like section 52 of the Income-tax Act, 1961, operates only where the Revenue establishes that the assessee understated the consideration actually received. A sale at an undervalue, even with an intention to defeat tax, is not by itself enough; the material must show that more than the declared amount was in fact received. The burden to prove understatement lay on the Revenue, and no direct or inferential evidence established that the full consideration had not been disclosed.

Conclusion: The proviso was not attracted, and the capital gains computation based on substituted market value could not stand. The finding was in favour of the assessee.

Final Conclusion: The appeals failed and were dismissed, as the statutory condition for invoking the proviso was not proved.

Ratio Decidendi: The proviso for substituting fair market value in capital gains computation can be applied only when the Revenue proves that the consideration for transfer was actually understated by the assessee.

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