Understated consideration rule limits capital gains tax to real gains, not notional gains, absent proven tax avoidance.

The first proviso to section 12B(2) of the Income-tax Act, 1922 was construed as a machinery provision that applies only where consideration for a transfer is understated with the object of avoiding or reducing tax on actual capital gain. Where the sales were real and genuine, the recorded consideration was actually received, and there was no understatement of price, the proviso could not be invoked merely because the transferees were connected persons or the explanation for the sales was not accepted. The burden lay on the department to prove tax-avoidance intent and understatement; suspicion alone was insufficient, and notional or fictional gain could not be taxed.

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Issues: Whether the first proviso to section 12B(2) of the Income-tax Act, 1922 applied to the sale of shares so as to compute capital gains on the basis of fair market value on the footing that the transactions were effected with the object of avoiding or reducing capital gains liability.

Analysis: The sales were found to be real and genuine and the consideration recorded was actually received, with no under-statement of price. The only adverse circumstance was that the explanation for the sales was not accepted and the transferees were connected persons. The proviso was construed as a machinery provision aimed at cases where the consideration is understated with a view to escaping tax on the gain actually received. The Court held that the burden lay on the department to establish such avoidance or reduction and that suspicion alone could not justify application of the proviso. It further held that the proviso does not authorise taxation of a fictional or deemed gain and that its scope is confined to real capital gain where understatement of consideration is shown.

Conclusion: The first proviso to section 12B(2) did not apply on the facts found, and the Tribunal's contrary conclusion was incorrect.

Final Conclusion: The references were answered against the revenue and the assessees succeeded on the construction of the capital gains computation provision.

Ratio Decidendi: The first proviso to section 12B(2) applies only where there is under-statement of the consideration for a transfer with the object of avoiding or reducing tax on the actual capital gain received, and it cannot be used to assess a notional or fictional gain in the absence of such understatement.

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