ORDER
G.E. Veerabhadrappa, A.M.
1. This appeal by the Revenue arises out of the order dt. 11th February, 1993 of the CIT(A) for the asst. yr. 1985-86. The only dispute relates to the levy of capital “gains on transfer of asset which was also the subject-matter of levy of gift-tax.
2. The assessee was found to have sold 9.5 cts. of diamond belonging to him for a sum of Rs. 20,000. It was found by the AO that the market value admitted in the wealth-tax assessment was to the extent of Rs. 52,550. Since the diamond is sold to a close relative for less than the market value, the full value of consideration was taken at the market value of Rs. 52,550 and the long-term capital gains was assessed to tax accordingly. It may be mentioned that in respect of the difference between the market price and declared sale value, the assessee has paid the gift-tax. The CIT(A) accepted the assessee’s contention in the following manner :
“As seen from the gift-tax assessment order issued under s. 15(3) dt. 28th December, 1989, it is seen that the difference between the market rate and the amount for which the diamond was transferred i.e. Rs. 27,250 was offered as a deemed gift for the asst. yr. 1985-86 by the assessee in the return of gift filed on 1st December, 1987. The gift-tax assessment was completed thereafter determining the taxable gift at Rs. 27,250 and gift-tax of Rs. 1,725 demanded thereon.
In view of the fact that the transfer of the capital asset has been held as a gift, the question of levying capital gains on the transfer does not arise. The addition made of Rs. 16,275 as capital gains for the asst. yr. 1985-86 is accordingly deleted.”
3. The Department is aggrieved. According to the learned Departmental Representative, the CIT(A) should have justified the assessment made by the AO in the light of the decision of the Madras High Court in the case of CIT vs. Tibruz Mustafa Bilgen (1986) 157 ITR 723 (Mad). According to him, the only way to get out of the capital gains tax is to take the case of the assessee under the provisions of s. 47(iii) of the IT Act. The Madras High Court has held that what is contemplated by the provisions of s. 47(iii) is only the gift and not the deemed gift under s. 4(1) of the GT Act. What has been assessed to tax under the GT Act is only deemed gift and therefore, the assessee is still liable for capital gains tax despite the fact that the assessee was already charged to gift-tax on the difference between the market price and the declared consideration. He further explained that the AO has made out the case under the provisions of s. 52(1) and not under s. 52(2) and therefore, any reference to the decision of the Supreme Court in the case of K. P. Varghese vs. ITO (1981) 131 ITR 597 (SC) is clearly out of the context.
4. The learned counsel for the assessee, on the other hand, vehemently supported the order of the CIT(A) in the light of the principle laid down by the Supreme Court in the case of K. P. Varghese vs. ITO (supra). According to him, there is no finding by the Department that the substituted consideration or the market price was actually received by the assessee in the absence of which the provisions of s. 52(2) are not applicable. He tried to distinguish the decision of the Madras High Court relied upon by the Departmental Representative by pleading that the decision in the case of CIT vs. Tibruz Mustafa Bilgen, cited supra, in fact supports the order of the CIT(A).
5. I have carefully considered the rival contentions and perused the material on record. The provisions of s. 47(iii) has application where the transfer of the capital asset is under a gift, or will or an irrevocable trust, that is, when the capital asset becomes the property of the transferee by a gift, will or irrevocable trust. The clause states in effect that in certain circumstances mentioned therein a transfer of a capital asset shall not be treated a transfer for the purposes of s. 45. The expression “gift” here should be understood as it implies under the general law, i.e. s. 122 of the Transfer of Property Act, 1882. The extended definition of ‘gift’ in s. 2(xii) of the GT Act, 1958 cannot be imported into s. 47(iii) of the IT Act, because a legal fiction cannot be extended beyond its legitimate field. These are the decisions of the Madras High Court in CIT vs. Bharani Pictures (1981) 129 TR 244 (Mad) of the Calcutta High Court in the case of CIT vs. Shyam Narain Mehrotra (1980) 122 ITR 313 (Cal) and the Andhra Pradesh High Court in the case of ITO vs. Buragadda Satyanarayana (1975) 106 ITR 333 (AP). However, the Delhi High Court in the case of Shiv Shankar Lal vs. CIT (1997) 94 ITR 433 (Del) and the Karnataka High Court in the case of Sanjiv V. Kudva vs. CIT (1981) 127 ITR 354 (Kar) have taken a contrary view to the effect that the definition of “gift” in the GT Act, 1958, rather than that in the Transfer of Property Act is applicable to the term “gift” as used in s. 47(iii) and the difference between the market value and the sale price of a property sold by the assessee which was assessed as gift under the GT Act is exempt under s. 47(iii) from capital gains tax. However, in the facts before me it is not the case of the assessee that since the gift is assessed such transactions should not be treated as capital gains by virtue of s. 47(iii). But it is something different. The AO in his order nowhere deals with the provisions of s. 47(iii). He only proceeds to invoke the provisions of s. 52(1) on the reasoning that the sale of diamond was to a close relative for less than the market price and was only made to reduce the wealth-tax liability of the assessee. The AO is clear in his mind about the provisions of s. 52(1) of the Act. Even the CIT(A) has dealt with the provisions of s. 52(1) and not in the light of the provisions of s. 47(iii) of the Act. Therefore, in my view, I have to examine whether the application of s. 52(1) in the facts and circumstances of the case is justified. In the light of these discussions, any reference to the decisions of the Madras High Court, cited supra, are only out of context. In fact, it may be mentioned that the Madras High Court in the case of Tibruz Mustafa Bilgen, cited supra, happened to deal with s. 47(iii) of the Act and also ss. 45 and 52 of the Act. In that case the difference between the consideration of Rs. 5 lakhs shown in the document of sale and the market value of Rs. 8,39,000 as a gift within the meaning of s. 4(a) of the GT Act was brought to tax. The AAC upheld the claim of the assessee that the ITO was not justified in invoking the provisions of s. 52(2) as there was no proof of under-valuation and the Revenue had not established that the sale price stated in the document of sale was different from the actual sale consideration that passed between the parties. In the gift-tax appeal, the AAC held that the case fell under s. 4(a) and, hence, the assessee was not entitled to any relief. The Tribunal upheld the assessment under the GT Act but in regard to the income-tax assessment found that s. 52(2) could not be invoked as on understatement of the consideration had been established. The Tribunal also held that in view of the gift-tax assessment on the difference between the fair market value of the property and the declared value treating it as a gift, s. 47(iii) of the IT Act stood attracted and hence ss. 45 and 52 could not be invoked. On a reference, the Hon’ble Madras High Court held that the Tribunal was not correct in holding that s. 47(iii) of the IT Act stood attracted and hence ss. 45 and 52 could not be invoked inasmuch as the said s. 47(iii) dealt only with actual gift and not with deemed gift. Further, the High Court held that in view of the specific finding of the Tribunal that no extra consideration other than what was stated in the document passed between the parties, the provisions of s. 52(2) could not be invoked and hence the Tribunal was correct in holding that the ITO was not justified in invoking the provisions of s. 52(2) to arrive at the capital gains. The principle laid down by the Hon’ble Madras High Court in this case will have to be applied with reference to the invocation of s. 52(1) of the IT Act by the AO. The provisions of s. 52(1) read as under :
“52. Consideration for transfer in cases of under statement. – (1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the ITO has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under s. 45, the full value of the consideration for the transfer shall, with the previous approval of the IAC, be taken to be the fair market value of the capital asset on the date of the transfer.”
6. The provision of s. 52 either (1) or (2) applies only in the case where there is understatement of consideration for transfer. Sec. 52(1) comes into operation only if and where (i) the person who acquired the capital asset was directly or indirectly connected with the assessee; and (ii) the ITO has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee in respect of capital gains arising from the transfer. If and where these two initial conditions are fulfilled, s. 52(1) empowered the ITO to reject the figure of the consideration as purported to have been agreed by and between the parties, and to take it at a figure which is the fair market value of the asset on the date of the transfer. The condition (ii) abovestated obviously involved an understatement of the consideration in respect of the transfer because it is only by showing the consideration for the transfer at a lesser figure than that actually received that the assessee can achieve the object of avoiding or reducing his liability to tax on capital gains. And that is why the marginal note to s. 52 reads : “Consideration for the transfer in cases of understatement”. But it must be noticed that for the purpose of bringing a case within s. 52(1), it is not enough merely to show understatement of consideration but it must be further shown that the object of the understatement was to avoid or reduce the liability of the assessee to tax on capital gains. K. P. Varghese vs. ITO (supra).
7. Dealing with the corresponding provisions of the 1922 Act, it was held that these provisions do not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being hauled up for attempting to avoid or reduce the tax liability nor do they treat what is not an actual capital gain as a deemed capital gain, but the provisions must be limited to escaped capital gain, which is so in truth and in fact. The provisions are not intended to bring about a fictional gain on an assumption. Reference may be made to the decision of the Madras High Court in the case of Sundaram Industries (P) Ltd. vs. CIT (1969) 74 ITR 243 (Mad).
8. It is quite possible that though the fair market value of a particular capital asset is high, the assessee may transfer it to a person directly or indirectly connected with him for a nominal sum for more than one reason and such reasons cannot partake of the object of avoiding or reducing the liability of the assessee. In order that a transfer may be hit by the second condition of the proviso to s. 12B [new s. 52(1)], it must be a case where the consideration mentioned in the deed has been understated and actually the assessee has received more than what is stated in the document. The following observations of the Supreme Court in the case of CIT vs. Shivakami Co. (P) Ltd. (1986) 159 ITR 71 (SC) are relevant and in fact they have dealt with the decision of the Madras Court in Shivakami Co. (P) Ltd. & Ors. vs. CIT (1973) 88 ITR 311 (Mad) :
“Capital gains tax was intended to tax the gains of an assessee, not what an assessee might have gained. What is not gained cannot be computed as gained. All laws, fiscal or otherwise, must be both reasonably and justly interpreted whenever possible. Capital gains tax is not a tax on what might have been received or could have been taxed.”
9. For attracting s. 52(1), understatement was to be proved. Reference may be made to K. P. Varghese vs. ITO (supra), CIT vs. Rikadas Dhuraji (1976) 103 ITR 111 (Mad), Addl. CIT vs. P. S. Kuppuswamy & Ors. (1978) 112 ITR 1012 (Mad), CIT vs. Southern Transports (1981) 128 ITR 576 (Mad) and CIT vs. A. Venkataraman (1982) 137 ITR 846 (Mad).
10. In such a situation the burden of proof is clearly on the Department. The Supreme Court in CIT vs. Shivakami Co. (P) Ltd., cited supra, while affirming the decision of the Madras High Court in (1973) 88 ITR 311 (Mad) (supra) on different grounds, observed that unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for the computation of capital gains. The onus is on the Revenue-the inferences might be drawn in certain cases but to come to a conclusion that a particular higher amount was, in fact, received must be based on such material from which such an irresistible conclusion follows.
11. In the body of the assessment order nowhere the AO has come to the finding that the assessee has received more than what has been stated as consideration. It is not the case of the Department that the assessee has in fact received the consideration sought to be substituted by the Department. The AO has also not come to the clear conclusion that the object of the transaction was to avoid or reduce the liability of the assessee under s. 45. But he observes that it was done with an intention to reduce the wealth-tax liability of the assessee. In my view in the absence of a clear finding that there is an understatement of the consideration, the invocation of the provisions of s. 52(1) in the facts and circumstances and in the light of the Supreme Court decisions and the decision of the Madras High Court, discussed above, is not justified and proper. I, therefore, do not find any error in the conclusion reached by the CIT(A). The addition made in respect of capital gains by invoking the provisions of s. 52(1) is correctly deleted. I decline to interfere.
12. In the result, the appeal is dismissed.
