JUDGMENT
Dalveer Bhandari, J.
1. The appellant, Commissioner of Income Tax, has
filed this appeal under Section 260A of the Income
Tax Act, 1961 (for short “the Act”) against the
order passed by the Income Tax Appellate Tribunal
(for short “the Tribunal”).
2. Brief facts which are relevant for the disposal of
the appeal are recapitulated as under.
3. The respondent assessed on 27.8.1987 filed his
income tax return declaring income of Rs.
3,60,448/- for the assessment year 1987-88. On
27.3.1990 this amount was revised to an income of
Rs. 4,18,400/-. The assessment was completed
under Section 143(3) of the Act on 29.3.1990 and
the total income was assessed at Rs. 16,31,125/-.
4. The Assessing Officer issued a notice under
Section 148 of the Act on 18.3.1991 and in
compliance of the said notice the assessed filed
return on 2.7.1991 declaring income of Rs.
4,18,400/- for the assessment year 1987-88.
5. On 7.6.1986 and 5.8.1986 the respondent assessed
had transferred 1250 fully paid up shares and 5000
partly paid up shares of M/s Tony Electronics to
his employees, declares and close relations at Rs.
100/- each per fully paid up share and Rs. 50/-
each per partly paid up share. The sale
consideration was also the cost price of each
share to the assessed.
6. The assessing Officer arrived at the conclusion
that in the case of transfer of shares at the cost
price the respondent assessed had deliberately
furnished inaccurate particulars and income was
under assessed. He accordingly completed the
assessment at a total income of Rs. 19,74,805/-.
7. The respondent assessed preferred an appeal before
the Commissioner of Income Tax (Appeals) (for
short “the CIT(A)”). After examining the facts,
grounds of appeal and after hearing the assessed
the CIT(A) deleted the addition on account of
deemed capital gains. According to the CIT(A) it
is not in dispute that the shares were transferred
at cost price. He further observed that there is
absolutely no material on
record to show that the sale consideration was
understand or that the appellant received
anything directly or indirectly over and above the
declared value of shares.
8. The CIT(A) observed that the legal position has
been settled by a celebrated judgment of the
Apex Court in the case of KP Varghese v. ITO
reported in 131 ITR 597. The CIT(A) mentioned
that the Section 52 was altogether omitted from
the statute w.e.f. 1.4.88 because of the K.P.
Verghese case (supra). He also observed that the
sale consideration is fully backed by one
recognised method of determining the fair market
value of shares i.e. the yield method. Under the
circumstances, the addition of Rs. 11,66,000/-
being the amount of deemed capital gains made by
the Assessing Officer cannot be upheld and the
same is deleted.
9. The appellant revenue had preferred an appeal
before the Tribunal against the said judgment of
the CIT(A). The Tribunal observed that the order
of the CIT(A) was reasonable and justified and
consequently the appeal filed by the Revenue was
dismissed.
10. The Revenue aggrieved by the order of the Tribunal
preferred appeal under Section 260A of the Act.
The Revenue submitted that the ITAT has wrongly
interpreted Section 52 of the Act. The Revenue
also submitted that the Assessing Officer rightly
invoked Section 52(1) of the Act and correctly
included Rs. 11,66,000/- as income from capital
gains on transfer of shares.
11. Section 52(1) of the Act was considered in great
detail by their Lordships in the case of K.P.
Verghese (supra). The judgment of K.P. Verghese
was followed in the subsequent judgment of the
Supreme Court in Commissioner of Income Tax v.
Godawari Corporation reported as 200 ITR 567.
12. Section 52 of the Act, which was omitted by the
Finance Act, 1987 with effect from 1.4.1988, on
which this case hinges heavily reads as under:-
“52.(1) Where the person who acquires a capital
asset from an assessed is directly or indirectly
connected with the assessed 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 assessed under
Section 45, the full value of the 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 assessed as on
the date of the transfer exceeds the full value
of the consideration declared by the assessed in
respect of the transfer 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;
Provided that this sub-section shall not apply in
any case –
(a) where the capital asset is transferred to the
Government, or
(b) where the full value of the consideration for
the transfer of the capital asset is determined
or approved by the Central Government or the
Reserve Bank of India.
13. This section came up for consideration before
their Lordships of the Supreme Court in the case
of K.P. Varghese (Supra). While interpreting
Section 52(1) their Lordships in this case
observed that “Section 52(1) does not deem income
to accrue or to be received which in fact never
accrued or was never received. It seeks to bring
within the net of taxation only that income which
has accrued or is received by the assessed as a
result of the transfer of the capital asset. But
since it would not be possible for the ITO to
determine precisely how much more consideration is
received by the assessed than that declared by
him, Sub-section (1) provides that the fair market
value of the property as on the date of the
transfer shall be taken to be the full value of
the consideration for the transfer which has
accrued to or is received by the assessed.” The
court also observed that “the net effect of this
provision is as if a statutory best judgment
assessment of the actual consideration received by
the assessed is made, in the absence of reliable
materials. The onus of establishing that the
conditions of taxability are fulfillled is always
on the Revenue. A statutory provision must be so
construed, if possible, that absurdity and
mischief may be avoided. Where the plain literal
interpretation of a statutory provision produces a
manifestly absurd and unjust result which could
never have been intended by the legislature, the
court may modify the language used by the
legislature or even do some violence to it, so as
to achieve the obvious intention of the
legislature and produce a rational construction.”
14. In the said case of K.P. Varghese (supra) their
Lordships of the Supreme Court observed that “on a
plain and natural construction of the language of
Section 52, Sub-section (2), the only condition
for attracting the applicability of that provision
was that the fair market value of the capital
asset transferred by the assessed as on the date
of the transfer exceeded the full value of the
consideration declared by the assessed in respect
of the transfer by an amount of not less than 15%
of the value so declared. Once the Income Tax
Officer or the Assessing Officer is satisfied that
this condition exists, he can proceed to invoke
the provision in Section 52, Sub-section (2), and
take the fair market value of the capital asset
transferred by the assessed as on the date of the
transfer as representing the full value of the
consideration for the transfer of the capital
asset and compute the capital gains on that
basis.” The Court further observed that “To
introduce any further condition such as
understatement of consideration in respect of the
transfer would be to read into the statutory
provision something which is not there; indeed,
it would amount to re-writing the section.
15. Their Lordships observed in the said case that the
argument was based on a strictly literal reading
of Section 52, Sub-section (2), but the Court
observed that “…we do not think such a
construction can be accepted. It ignores several
vital considerations which must always be borne in
mind when we are interpreting a statutory
provision.” The Court observed that the task of
interpretation of a statutory enactment is not a
mechanical task. It is more than a mere reading
of mathematical formulae because few words possess
the precision of the mathematical symbols. It is
an attempt to discover the intent of the
Legislature from the language used by it and it
must always be remembered that the language is at
best an imperfect instrument of the expression of
human thought and, as pointed out by Lord Denning,
it would be idle to expect every statutory
provision to be “drafted with divine prescience
and perfect clarity”. In the said judgment their
Lordships also quoted the distinguished American
Judge, Justice Hand which reads as under:-
“…it is true that the word used, even in their
literal sense, are the primary and ordinarily the
most reliable source of interpreting the meaning
of any writing; be it a statute, a contract or
anything else. But it is one of the surest
indexes of a mature and developed jurisprudence
not to make a fortress out of the dictionary;
but to remember that statutes always have some
purpose or object to accomplish, whose
sympathetic and imaginative discovery is the
surest guide to their meaning.”
16. Their Lordships of the Supreme Court further
observed as under:-
“We must not adopt a strictly literal
interpretation of Section 52, Sub-section (2), but we must
construe its language having regard to the object
and purpose which Legislature had in view in
enacting that provision and in the context of the
setting in which it occurs. We cannot ignore the
context and the collection of the provisions in
which Section 52, Sub-section (2), appears, because, as
pointed out by judge Learned Hand in the most
felicitous language:
“…..the meaning of a sentence may be
more than that of the separate words, as
melody is more than the notes, and no
degree of particularity can ever obviate
recourse to the setting in which all
appear, and which all collectively
create.”
17. The Court observed that the primary objection
against the literal construction of Section 52,
Sub-section (2) is that it leads to manifestly
unreasonable and absurd consequences. It is true
that the consequences of a suggested construction
cannot alter the meaning of a statutory provision
but it an certainly help to fix its meaning. It
is a well-recognised rule of construction that a
statutory provision must be so construed, if
possible, that absurdity and mischief may be
avoided. There are many situations where the
construction suggested on behalf of the revenue
would lead to a wholly unreasonable result which
could never have been intended by the Legislature.
Their Lordships gave an illustration which is
quite apt and we think it proper to reproduce it.
It reads as under:-
“A agrees to sell his property to B for a
certain price and before the sale is completed
pursuant to the agreement – and it is quite
well known that sometimes the completion of the
sale may take place even a couple of years
after the date of the agreement – the market
price shoots up with the result that the market
price prevailing on the date of the sale
exceeds the agreed price, at which the property
is sold, by more than 15% of such agreed price.
This is not at all an uncommon case in an
economy of rising prices and in fact we would
find in a large number of cases where the sale
is completed more than a year or two after the
date of the agreement that the market price
prevailing on the date of the sale is very much
more than the price at which the property is
sold under the agreement. Can it be contended
with any degree of fairness and justice that in
such cases, where there is clearly no
under-statement of consideration in respect of
the transfer and the transaction is perfectly
honest and bona fide and, in fact, in
fulfilment of a contractual obligation, the
assessed, who has sold the property, should be
liable to pay tax on the capital gains which
have not accrued or arisen to him? It would
indeed be most harsh and inequitable to tax the
assessed on income which has neither arisen to
him nor is received by him, merely because he
has carried out the contractual obligation
undertaken by him. It is difficult to conceive
of any rational reason why the Legislature
should have thought it fit to impose liability
to tax on an assessed who is bound by law to
carry out his contractual obligation to sell
the property at the agreed price and honestly
carries out such a contractual obligation. It
would indeed be strange if obedience to the law
should attract the levy of tax on him.”
18. The Court observed that it is now a well-settled
rule of construction that where the plain literal
interpretation of a statutory provision produces a
manifestly absurd and unjust result which could
never have been intended by the legislature, the
court may modify the language used by the
legislature or even “do some violence” to it, so
as to achieve the obvious intention of the
legislature and produce a rational construction.
19. Their Lordships of the Supreme Court observed that
the Court must obviously prefer a construction
which renders the statutory provision
constitutionally valid rather than that which
makes it void. The Court held that the
Sub-section (2) of Section 52 can be invoked only
where the consideration for the transfer has been
understated by the assessed or, in other words,
the consideration actually received by the
assessed is more than what is declared or
disclosed by him and the burden of proving such an
understatement or concealment is on the revenue.
This burden may be discharged by the revenue by
establishing facts and circumstances from which a
reasonable inference can be drawn that the
assessed has not correctly declared or disclosed
the consideration received by him and there is an
understatement or concealment of the consideration
in respect of the transfer. Sub-section (2) has
no application in the case of an honest and bona
fide transaction where the consideration received
by the assessed has been correctly declared or
disclosed by him, and there is no concealment or
suppression of the consideration.
20. Reverting to the facts of this case the respondent
assessed had transferred the share at the cost
price to the employees and near relations. The
learned Tribunal held that the provision of
Section 52 of the Act comes into operation only
when actual consideration received by the assessed
is not disclosed and the consideration declared in
respect of the transfer is shown at a lesser
figure than that actually received. The onus to
prove that the assessed has not declared the
actual consideration and that the consideration
declared in respect of the transfer is shown at a
lesser figure rests upon the revenue. It may be
pertinent to mention that it is extremely
difficult, if not impossible, for the revenue to
discharge the onus placed by the Legislature.
Perhaps for this reason and for the other reasons
incorporated in K.P. Varghese’s case (supra) led
to deletion of Section 52 from the Act with effect
from 1.4.1988. The Tribunal observed that in the
present case the revenue has not made out a case
that any consideration was concealed or not
declared by the assessed. The learned CIT(A) has
given finding in his order dated 10.1.1996 that
“There is no material on record to show that the
sale consideration was understated or that the
appellant received anything directly or indirectly
over and above the declared value of shares. In
fact, this is not the case of the Assessing
Officer.” The findings of the CIT (A) have been
upheld by the learned Tribunal.
21. We have carefully considered the relevant
provision and the decision of K.P. Varghese
(supra) in extenso. The orders of the CIT(A) and
the Tribunal have correctly reached to the
conclusion that there is no material on record to
show that the sale consideration was understated
or the respondent assessed had received anything
directly or indirectly over and above the declared
value of the shares. In view of these findings,
the provisions of Section 52 of the Act are not
attracted. In view of the judgment of their
Lordships of the Supreme Court in K.P. Varghese’s
(supra) the revenue is under an obligation to
discharge that there is material to show that the
sale consideration was understated or the assessed
had received anything directly or indirectly over
and above the declared value. It is always a
difficult task for the revenue to establish this
and perhaps for this reason the legislature in its
wisdom had rightly decided to delete Section 52 of
the Income Tax Act, 1961 from the statute book with
effect from 1.4.1988.
22. In our considered opinion, no interference is
called for. The appeal filed by the Commissioner
of Income Tax is devoid of any merit and is
accordingly dismissed. In the facts and
circumstances of the case, we direct the parties
to bear their own costs.