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Issues: Whether the first proviso to section 12B(2) of the Indian Income-tax Act, 1922 applied to the share transfers so as to substitute fair market value for the stated consideration and bring the difference to tax as capital gains.
Analysis: The charging provision in section 12B(1) applies to profits or gains actually arising on transfer of a capital asset, while section 12B(2) and its proviso are machinery provisions governing computation. The proviso can be invoked only where the transferee is directly or indirectly connected with the transferor and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of liability under section 12B. The material did not show understatement of the actual consideration or concealment of higher consideration; the mere fact that the consideration was below fair market value was insufficient. The record also did not establish that the dominant object of the transfers was avoidance of capital gains tax.
Conclusion: The first proviso to section 12B(2) was not attracted, and the capital gains had to be computed on the actual consideration received. The issue was answered in favour of the assessees.
Ratio Decidendi: The first proviso to section 12B(2) of the Indian Income-tax Act, 1922 applies only to transfers involving understatement of consideration made with the object of avoiding or reducing capital gains liability, and it cannot be used to tax a notional difference between sale price and fair market value where no such understatement is shown.
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