Ramaswami, J. - (1.) This appeal is brought on a certificate by the Commissioner of Income-tax, West Bengal, from the judgment of the Calcutta High Court dated July 15, 1963, in Income-tax Reference No. 108 of 1952.
(2.) Prior to January 1, 1939, the respondent-company (hereinafter referred to as the "respondent") purchased 1,500 shares of Bally Jute Company Limited. During the accounting year ending on March 31, 1947, the respondent was the managing agent of Bally Jute Company Limited. On April 1, 1946, the respondent transferred these shares to one Giridhari Lal Mehta at the rate of Rs. 136 per share. The market value of the shares on that date was Rs. 620 per share. Giridhari Lal Mehta has been described as the beneficial owner of the respondent as he purchased all but five shares of the respondent. On the same date, i.e., April 1, 1946, Giridhari Lal Mehta sold the shares to Jardine Skinner & Co. at the rate of Rs. 100 per share. Giridhari Lal Mehta retained the share scrips with blank transfer forms until May, 1946, when the shares were registered in the name of Jardine Skinner & Co. In November, 1946, Jardine Henderson & Co. Ltd. was incorporated and these 1,500 shares were transferred in March, 1947, by Jardine Skinner & Co. to Jardine Henderson & Co. Ltd. at Rs. 493-10-0 per share. In assessing the respondent to income-tax for the assessment year 1947-48 the Income-tax Officer held that the respondent had sold the shares at the book value of Rs. 136 per share to Jardine Skinner & Co. on April 1, 1946, whereas the market value of the shares on that date was Rs. 620 per share and the difference of Rs. 484 per share on 1,500 shares was capital gain arising from the sale of the shares under section 12B of the Income Tax Act. The Income-tax Officer made the order under the first proviso to section 12B(2) with the previous approval of the Inspecting Assistant Commissioner as required by the proviso apparently on the footing that all conditions of the aforesaid proviso has been satisfied. By his order dated April 25, 1950, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer but varied the quantum of capital gain at Rs. 6,93,000. The Appellate Assistant Commissioner held that the market value of the shares on January 1, 1939, was Rs. 153 per share and that figure should be taken as the actual cost in view of the third proviso to section 12B(2). The Appellate Assistant Commissioner also considered that the respondent and the transferee were directly connected and the sale was effected with the object of avoidance of tax and the conditions of the first proviso to section 12B(2) were satisfied and the market value of the shares on the date of transfer should be taken as the full value of the consideration for the sale. The respondent appealed to the Income-tax appellate Tribunal which dismissed the appeal by its order dated August 23, 1951. The Appellate Tribunal held that the sale was not effected with object of avoidance or reduction of liability of the assessee under section 12B and, therefore the first proviso to section 12B(2) did not apply to the case. The Appellate Tribunal, however, felt that the order of the Appellate Assistant Commissioner should be affirmed. The ground upon which the Appellate Tribunal proceeded in the subject-matter of controversy in this appeal and we shall discuss it in detail later on. The order of dismissal of the appeal dated August 23, 1951, was passed by the Appellate Tribunal consisting of Shri S. M. Gupta and Shri B. M. Chatrath. On the application of the respondent the Appellate Tribunal consisting of Shri A. B. Aggarwal and Shri B. M. Chatrath drew up a statement of the case dated July 20, 1952, and referred the following question of law for the determination of the High Court under section 66(1) of the Income Tax Act : "Whether, on the facts an in the circumstances of the case, the sum of Rs. 6,93,000 has been rightly held to be capital gains of the assessee assessable under section 12B of the Income Tax Act -
(3.) The reference was heard by a Bench constituted by Sinha and Datta JJ. who did not agree as to how question of law should be answered. By his judgment dated November 30, 1962, Sinha J. answered the question in the affirmative, but Datta J. answered the question in the negative. In view of this difference of opinion the matter was referred to R. S. Bachawat J. who, by his judgment dated March 21, 1963, answered the question in the negative and agreed with the opinion of S. K. Datta J. In view of the opinion of the majority of the Judges the Division Bench passed an order on July 15, 1963, answering the question in the negative in favour of the respondent. Section 12B of the Income Tax Act as it was in force on April 1, 1947, provided as follows : 12B. Capital gains. - (1) The tax shall be payable by an assessee under the head capital gains in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946, and before the 1st day of April, 1948, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place : ....... (2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made, namely :- (i) expenditure incurred solely in connection with such sale, exchange or transfer; (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12 : Provided that where a person who acquires a capital asset from the assessee, whether by sale, exchange or transfer, is a person with whom the assessee is directly or indirectly connected, and the Income-tax Officer has reason to believe that the sale, exchange or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which sale, exchange or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange or transfer took place : ..... Provided further that where the capital asset became the property of the assessee, or of the previous owner where the cost of the capital asset to the previous owner is to be taken in accordance with sub- section (3) before the 1st day of January, 1939, he may, on proof of the fair market value thereof on the said date to the satisfaction of the Income-tax Officer, substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset, and which shall be reduced by the amount of depreciation, if any, allowed to the assessee after the said date and increased or diminished, as the case may be, by any adjustment made under clause (vii) of sub-section (2) of section 10 :........" ;