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M/S PREM NARAIN & CO. , LUDHIANA versus THE COMMISSIONER OF INCOME

High Court of Punjab and Haryana, Chandigarh

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M/S PREM NARAIN & CO. , LUDHIANA v. THE COMMISSIONER OF INCOME-TAX, (CENTRAL - ITR-37-1990 [2006] RD-P&H 3352 (22 May 2006)

I.T.R. NO. 37 OF 1990 [1]

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

I.T.R. NO. 37 OF 1990

DATE OF DECISION: 19.04.2006

M/S PREM NARAIN & CO. , LUDHIANA

....PETITIONER

VERSUS

THE COMMISSIONER OF INCOME-TAX, (CENTRAL), LUDHIANA ....RESPONDENT

CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL
HON'BLE MR. JUSTICE RAJESH BINDAL

PRESENT: MR. AKSHAY BHAN, ADVOCATE

FOR THE PETITIONER

MR. D.S. PATWALIA, ADVOCATE

FOR THE RESPONDENT

JUDGEMENT:

In compliance to the order of this Court in ITC No. 69 of 1981 dated 23.8.1988, the following question of law was referred to this Court for it's opinion by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, arising out of it's order dated 26.9.1980 in ITA No.278 of 1979, for the assessment year 1975-76:

"Whether in the absence of any evidence on record to prove that the consideration of the impugned plot had been understated by the assessee with the object of avoidable or reduction of his tax liability, the Tribunal erred in law in holding that he provisions of section 52(2) were applicable to the case of the assessee ?" The assessee firm purchased a plot measuring 1239 Sq. yards in Sarabha Nagar, Ludhiana on 8.10.1969 for Rs. 44,337/-. This plot was sold to Sh. Devinder Singh son Sh. Sadhu Singh for a sum of Rs. 55,755/- I.T.R. NO. 37 OF 1990 [2]

on June 10, 1974 at a sale price of Rs. 45 per sq. yard. Resultantly, the assessee had declared a profit of Rs.11,418/- out of this transaction.

Enquiries made on the basis of sale deeds registered in the area for plots of different sizes, the Income-tax Officer found that the fair market value of the plot in question, on the day of transaction, exceeded by more than 15 % of the value of consideration as shown by the assessee in respect of the transfer of the plot. Invoking Section 52 (2) of the Income Tax Act,1961 (for short " the Act") the assessing Officer valued the plot at Rs. 55 per sq.

yard against Rs. 45 per sq. yard shown by the assessee. With the result a difference of Rs. 12,390/- was found as under-valuation in the transaction of sale, which was added to the income of the assessee.

The assessee failed in his appeal before the Commissioner of Income Tax (Appeals) and also before the Tribunal. The Commissioner of Income Tax (Appeals ) upheld the findings of the Assessing Officer only on the ground that since the fair market value of the plot, as determined by the Assessing Officer, exceeded by more than 15 per cent of the value as declared by the assessee, in terms of Section 52 (2) of the Act, he was right in taking the fair market value as the consideration for determining the capital gain earned by the assessee on the sale of the plot.

Even the Tribunal rejected the appeal of the assessee by concurring with the findings recorded by CIT (A) in the following terms: "9. In so far as the appeal of the assessee is concerned, we find that the Income-tax Officer had quoted the instances of sale of plot near about the time when the plot of the assessee was sold and on that basis adopted the rate of Rs. 55/- per sq. yard for sale of the plot. When worked on this basis the sale consideration which has to be considered as fair market I.T.R. NO. 37 OF 1990 [3]

value is the context of the facts set out above gives difference of Rs. 12,390/- between the sale consideration and the fair market value as worked out by the Commissioner in para 5 of his impugned order abstracted by us supra. The provisions of section 52(2) were, therefore, attracted.

10. It is to be noted that the sale price per sq. yard of the comparable plots taken by the authorities below ranged between Rs. 62/- to 67/- and it is only after taking into consideration the adverse factors relating to the plot sold by the assessee that the sale price at Rs. 55/- per sq. yard was taken by the Income-tax Officer and confirmed by the Commissioner of Income-tax. We are, therefore, of the opinion that there is no case for an interference in the order of the Commissioner of Income- tax at the instance of the assessee in so far as the question of capital gains in concerned. We, therefore, dismiss the appeal of the assessee."

We have heard Sh. Akshay Bhan, Advocate for the petitioner- assessee and Sh. D.S. Patwalia, Advocate for the respondent-Revenue.

Relevant provisions of Section 52 of the Act are reproduced hereunder:

"(1) Where the person who acquires a capital asset from an assessee is directed or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 45, the full value of the I.T.R. NO. 37 OF 1990 [4]

consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer.

(2) Without prejudice to the provisions of sub-section (1), if in the opinion of the Income-tax Officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent of the value so declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer." At the very outset, the learned counsel for the appellant submitted that the principles applied by the authorities below to invoke the provisions of Section 52 (2) of the Act, run totally contrary to the law laid down by Hon'ble the Supreme Court of India in the case of K.P.Varghese versus Income-tax Officer, Ernakulam, and another, (1981) 131 ITR

597. While discussing the law on the subject, the Hon'ble Supreme Court of India held as under:-

" xx xx xx xx xx

xx xx xx xx

Thus, it is not enough to attract the applicability of sub- s. (2), that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the full value of the consideration I.T.R. NO. 37 OF 1990 [5]

declared in respect of the transfer by not less than 15 % of the value so declared, but it is furthermore necessary that the full value of the consideration in respect of the transfer is understated or, in other words, shown at a lesser figure than that actually received by the assessee.

Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15 % difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied. If, therefore, the revenue seeks to bring a case within sub-s. (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15 % of the value so declared, but also that the consideration has been understated and the assessee has actually received more than what is declared by him.

There are two distinct conditions which have to be satisfied before sub-s. (2) can be invoked by the revenue and the burden of showing that these two conditions are satisfied rests on the revenue. It is for the revenue to show that each of these two conditions is satisfied and the revenue cannot claim to have discharged this burden which lies upon it, by merely establishing that the fair market value of the capital I.T.R. NO. 37 OF 1990 [6]

asset as on the date of the transfer exceeds by 15 % or more the full value of the consideration declared in respect of the transfer and the first condition is, therefore, satisfied. The revenue must go further and prove that the second condition is also satisfied. Merely by showing that the first condition is satisfied, the revenue cannot ask the court to presume that the second condition too is fulfilled, because even in a case where the first condition of 15 % difference is satisfied, the transaction may be a perfectly honest and bona fide transaction and there may be no understatement of the consideration. The fulfilment of the second condition has, therefore, to be established independently of the first condition and merely because the first condition is satisfied, no inference can necessarily follow that the second condition is also fulfilled. Each condition has got to be viewed and established independently before sub- s. (2) can be invoked and the burden of doing so is clearly on the revenue. (emphasis supplied) It is a well- settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the revenue and the second condition being as much a condition of taxability as the first, the burden lies on the revenue to show that there is an understatement of the consideration and the second condition is fulfilled.

Moreover, to throw the burden of showing that there is no understatement of the consideration, on the assessee would be to cast an almost impossible burden I.T.R. NO. 37 OF 1990 [7]

upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him.

But the question then arises, why has

Parliament introduced the first condition as a pre- requisite for the applicability of sub-s. (2) ? Why has Parliament provided that in order to attract the applicability of sub-s. (2), the fair market value of the capital asset as on the date of the transfer should exceed by 15 % or more the full value of the consideration for the transfer declared by the assessee ? The answer is obvious. The object of imposing the condition of difference of 15 % or more between the fair market value of the capital asset and the consideration declared in respect of the transfer clearly is to save the assessee from the rigour of sub-s (2) in marginal cases where difference in subjective valuation by different individuals may result in an apparent disparity between the fair market value and the declared consideration. It is a well-known fact borne out by practical experience that the determination of fair market value of a capital asset is generally a matter of estimate based to some extent on guess work and despite the utmost bona fides, the estimate of the fair market value is bound to vary from individual to individual. It is obvious that if the restrictive condition of a difference of 15 % or more between the fair market value of the capital asset as on the date of the transfer and the consideration declared in respect of the transfer I.T.R. NO. 37 OF 1990 [8]

were not provided in sub-s. (2), many marginal cases would, having regard to the possibility of difference of opinion in subjective assessment of the fair market value, fall within the mischief of that sub-section and the statutory measure enacted in that sub-section for determining the consideration actually received by the assessee would be applicable in all its rigour in such cases. This condition of 15 % or more difference is merely intended to be a safeguard against the undue hardship which would be occasioned to the assessee if the inflexible rule of thumb enacted in sub-s. (2) were applied in marginal cases and it has nothing to do with the question of burden of proof, for, the burden or establishing that there is an understatement of the consideration in respect of the transfer always rests on the revenue. The postulate underlying sub-s. (2) is that the difference between one honest valuation and another may range up to 15 % and that constitutes the class of marginal cases which are taken out of the purview of sub-s. (2) in order to avoid hardship to the assessee.

It is, therefore, clear that sub-s. (2) cannot be invoked by the revenue unless there is understatement of the consideration in respect of the transfer and the burden of showing that there is such understatement is on the revenue. One it is established by the revenue that the consideration for the transfer has been understated or, to put it differently, the I.T.R. NO. 37 OF 1990 [9]

consideration actually received by the assessee is more than what is declared or disclosed by him, sub-s. (2) is immediately attracted, subject to course to the fulfilment of the condition of 15 % or more difference, and the revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee.............."

This judgment of Hon'ble the Supreme Court of India was followed in C.I.T. v. Sundaram Industries Ltd. (Mad.) (1987) 166 ITR 35.

Examining the case in hand, it is found that the Assessing Officer adopted the fair market value of the plot in question for the purpose of computation of the capital gains by invoking the provisions of Section 52 (2) of the Act solely for the reason that there was a difference of more than 15 per cent in the value of transaction as recorded by the assessee and the fair market value as was determined by the Assessing Officer.

While doing so the authorities had totally ignored the principles of law laid down by Hon'ble the Supreme Court of India in K.P. Varghese's case (supra), wherein it was held that in case the Revenue seeks to invoke provisions of Section 52 (2) of the Act it must show not only that the fair market value of the capital asset as on the date of transaction exceeded full value of the consideration declared by the assessee by not less than 15 per cent of the value so declared but also that the assessee had in fact received more than the consideration declared in the transaction.

From a perusal of the order of all the authorities, it is revealed that the provisions of Section 52 (2) of the Act have been invoked merely by recording that there is a difference of more than 15 per cent in the value I.T.R. NO. 37 OF 1990 [10]

of the transaction declared by the assessee as against the fair market value assessed by the Assessing Officer. There is no finding on the second condition which was also required to be proved by the Revenue before invocation of Section 52 (2) of the Act. In the absence thereof, we find that the provisions of Section 52 (2) of the Act have wrongly been invoked by the authorities in the present case. The counsel for the Revenue in spite of his efforts could not possibly distinguish the law laid by Hon'ble the Supreme Court in K.P. Varghese's case (supra).

In view of our findings recorded above, the question of law referred to this Court, is answered in favour of the assessee and against the Revenue.

(RAJESH BINDAL)

JUDGE

April 19, 2006 (ADARSH KUMAR GOEL)

gsv JUDGE


Copyright

Reproduced in accordance with s52(q) of the Copyright Act 1957 (India) from judis.nic.in, indiacode.nic.in and other Indian High Court Websites

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