1986 (3) TMI 2 - SC - Income Tax

Revenue failed to prove understatement of sale consideration; first proviso to s.12B(2) requires direct or inferential evidence

Commissioner of Income-Tax, Madras Versus Shivakami Co. Pvt. Limited

SC held that the Revenue failed to discharge the burden of proving understatement of the sale consideration; selling at undervalue is distinct from ... Liability to pay tax on the capital gain - Shares sold at an undervalue - Burden of proof - Whether, the conclusion of the Tribunal, that for the purpose of the computation of capital gain on the sale of the shares in East India Corporation Ltd., Madura Insurance Co. Ltd. and Pudukkottah Co. P. Ltd., the first proviso to sub-section (2) of section 12B of the Indian Income-tax Act, 1922, was applicable, is correct in law? - HELD THAT:- As it appears from the decision of this court in K. P. Varghese's case [1981 (9) TMI 1 - SUPREME COURT], the onus was on the Revenue to prove that there was understatement in the document, not that the goods were sold at undervalue. Understatement of a value is a misstatement of value. Selling goods at an undervalue to defeat the Revenue is different from understating the value in the document of sale. Counsel for the Revenue contended that in the background of the facts of this case, the evil design of the assessee was clear and he said that it was difficult to know the mind of man. Therefore, an inference could be drawn in the facts of this case as noted by the Tribunal that there was understatement of value in the document. Though the legislation in question is to remedy the social evil and should be read broadly and should be so read that the object is fulfilled, yet the onus of establishing a condition of taxability must be fulfilled by the Revenue. There is no evidence direct or inferential that the consideration actually received by the assessee was more than what was disclosed or declared by him. The relationship between the parties has been established. The desire to defeat the claims of the Revenue has also been established but the fact that, for this, the assessee had stated a false fact in the document is not established. What appears from the Tribunal's order was that the real and main object was to safeguard these shares from being taken over by the Government in settlement of tax dues, and also that the buyer and seller were indirectly connected with each other. The first proviso to section 12B(2) of the 1922 Act provides ' full value of the consideration for which the sale, exchange, relinquishment or transfer is made' to be taken as the basis for the computation of capital gains. Therefore, unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for the computation of capital gains. The onus is on the Revenue- the inferences might be drawn in certain cases but to come to a conclusion that a particular higher amount was, in fact, received must be based on such material from which such an irresistible conclusion follows. In the instant case, no such attempt was made. There is no evidence as discussed above that the full consideration received by the assessee in the transfer of the assets involved in these cases has been understated. The proviso helps or enables the Department by providing a way to determine the market value. But the proviso is applicable only where the full value for the consideration has not been stated. There is no evidence, direct or inferential, in these cases that the full consideration had not been stated in the document. In that view of the matter, in our opinion, the appeals must fail, though on grounds different from those taken by the High Court. The appeals are accordingly dismissed. Issues:1. Interpretation of the first proviso to section 12B(2) of the Indian Income-tax Act, 1922.2. Application of the first proviso to section 12B(2) in cases involving sale of shares.3. Assessment of capital gains tax on transactions involving connected parties.4. Burden of proof on the Revenue regarding understatement of consideration in transactions.5. Analysis of legal precedents related to the interpretation of tax laws.Detailed Analysis:1. The judgment addresses the interpretation of the first proviso to section 12B(2) of the Indian Income-tax Act, 1922, which deals with the computation of capital gains. The High Court had to determine whether the proviso applied to the sale of shares in specific companies. The proviso is invoked when the consideration for a transfer is understated by the assessee, impacting the calculation of capital gains.2. The cases involved transactions where shares were sold to connected parties at prices below their break-up value. The Tribunal assessed capital gains tax under the proviso for some sales but not for others. The High Court concluded that the proviso did not apply in these cases, ruling in favor of the assessee. The judgment delves into the specifics of each transaction and the application of the proviso based on the facts presented.3. The judgment discusses the assessment of capital gains tax on transactions between connected parties. It highlights the importance of establishing whether the sales were conducted to avoid or reduce tax liability. The Tribunal's findings on the motive behind the sales and the relationship between the parties play a crucial role in determining the applicability of the proviso to the transactions.4. The burden of proof regarding understatement of consideration in transactions lies with the Revenue. The judgment emphasizes the distinction between understatement of value in documents and selling goods at undervalue. It explores the necessity for the Revenue to prove that the consideration received was understated, not just that the goods were sold at a lower value, to invoke the proviso for computing capital gains tax.5. Legal precedents, including the interpretation of section 52 of the Income-tax Act, 1961, are cited to support the analysis of the tax laws in question. The judgment references the decision in K. P. Varghese v. ITO to establish the principles guiding the application of provisions related to capital gains tax. The discussion underscores the need for a factual basis to determine whether the proviso should be invoked in specific cases.In conclusion, the judgment dismisses the appeals, highlighting that the proviso to section 12B(2) can only be applied when there is evidence of understatement of consideration in transactions. The analysis underscores the importance of factual evidence and legal interpretation in determining the tax implications of transactions involving connected parties.