1972 (9) TMI 13 - SC - Income Tax

Transfer of investments to company held a genuine sale; capital gains measured by agreed consideration u/s12B

Dominant issue: whether the transfer of investments to a company constituted capital gains within section 12B and, if so, whether assessment should use ... Scope of the proceedings u/s 34(1)(a) - computation of capital gains - Whether any capital gains within the meaning of section 12B could be said to arise by the transaction involving transfer of the investments held by the assessee to the company to the public ? - HELD THAT:- It is not without significance that the assessee did not challenge the validity of the proceedings under section 34(1)(a) before the income-tax Officer. Even before the Appellate Assistant Commissioner, the only point that appears to have been urged was that since the firm was reconstituted and the reconstituted firm was granted registration under section 26A in the assessment year 1947-48, it should be presumed that the Income-tax Officer while making the original assessment was aware of all the material facts. We agree with the Tribunal and the High Court that there is hardly any doubt that the assessee had failed to disclose fully and truly all material facts for the purpose of ascertaining whether it had made any capital gains or not. The sale with which we are concerned in this case took place on February 28, 1947. Section 12B was incorporated into the Act with effect from April 1, 1947. That being so at the time the sale transaction took place section 12B was not a part of the Act. Hence, there is no basis for saying that the ' transfer was effected with the object of avoidance or reduction of the liability of the assessee ', see Commissioner of Income-tax v. George Henderson and Co. Ltd. [1967 (4) TMI 18 - SUPREME COURT], Hence, the question for decision is whether the facts of this case fall within the scope of section 12B(1) read with sub-section (2) of that section. In the instant case, the Tribunal has held that the 'agreement for sale' entered into between the assessee-firm and the ' company ' is a genuine transaction and the same evidences a sale. This is essentially a finding of fact. The High Court has affirmed that finding. In that view, we are unable to accept the contention of the revenue that the transaction in question was an exchange and not a sale. We are equally unable to accept the contention of the assessee that it was merely a readjustment. Is it the consideration agreed to be paid or is it the market value of the consideration ? In the case of sale for a price, there is no question of any market value unlike in the case of an exchange. Therefore, in cases of sales to which the first proviso to sub-section (2) of section 12B is not attracted, all that we have to see is what is the consideration bargained for. As mentioned earlier, to the facts of the present case, the first proviso is not attracted. As seen earlier, the price bargained for the sale of the shares and securities was only rupees seventy-five lakhs. Applying the priciples enunciated in that decision we think that the full value of the sale price received by the assessee was only rupees seventy five lakhs. That being so, the capital gains made by the company were Rs. 27,04,772 as held by the High Court. In the result both these appeals fail and they are dismissed with costs. Issues Involved:1. Validity of proceedings initiated under Section 34(1)(a) of the Indian Income-tax Act, 1922.2. Applicability of Section 12B regarding capital gains.3. Correct computation of capital gains under Section 12B.Detailed Analysis:1. Validity of Proceedings Initiated Under Section 34(1)(a):The first issue examined was whether the Income-tax Officer validly initiated proceedings under Section 34(1)(a). This section allows reopening of assessments if the officer has reason to believe that income has escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The court referred to the precedent set in *Calcutta Discount Co. Ltd. v. Income-tax Officer*, which established that the Income-tax Officer must have reasonable grounds for such belief, and the assessee must have failed to disclose primary facts necessary for the assessment.In this case, the court found that the assessee did not disclose the sale deed executed on February 28, 1947, the value of shares and securities on January 1, 1939, nor the sale price of Rs. 75 lakhs. The court concluded that the assessee had indeed failed to disclose all material facts, validating the proceedings under Section 34(1)(a).2. Applicability of Section 12B Regarding Capital Gains:The second issue was whether Section 12B, which taxes capital gains, was applicable. The court noted that Section 12B was incorporated into the Act effective April 1, 1947, and the sale transaction occurred on February 28, 1947. Therefore, the transaction predated the applicability of Section 12B, and the first proviso to Section 12B(2), which allows the Income-tax Officer to consider the fair market value in certain conditions, was not applicable.The court examined whether the transaction was a sale or an exchange. It concluded that the transaction was a sale, rejecting the revenue's contention that it was an exchange and the assessee's claim that it was merely a readjustment. The court emphasized that the legal nature of the transaction, as a sale, must be considered, not its substance.3. Correct Computation of Capital Gains Under Section 12B:The third issue was the proper computation of capital gains. The court referred to the provision of Section 12B(2), which mandates deductions from the full value of the consideration for the sale. The court clarified that in the case of a sale, the 'full value of the consideration' is the actual sale price paid, not the market value, unless the first proviso to Section 12B(2) is applicable, which it was not in this case.The court upheld the High Court's computation of capital gains at Rs. 27,04,772, rejecting the Income-tax Officer's higher valuation and the assessee's claims of no capital gain or capital loss.Conclusion:The Supreme Court dismissed both appeals, affirming the High Court's decisions on all three issues:1. The proceedings under Section 34(1)(a) were validly initiated.2. Section 12B was applicable to the facts of the case.3. The correct computation of capital gains was Rs. 27,04,772.Appeals Dismissed.