Ajit K. Sengupta, J. - (1.) These are two references for the assessment year 1970-71--one under Section 256(1) and the other under Section 256(2) of the Income-tax Act, 1961. Both the references arise out of the same order and the questions are interlinked. For the sake of convenience, both the references are heard together and disposed of by one judgment.
(2.) The assessee is a private limited company. On Sri Hari Charan and the members of his family are the shareholders of the assessee company. The assessee company sold 1,500 equity shares of Eastern India Cotton Manufacturing Company (P.) Limited to three persons who are the close relatives of the directors and the shareholders of the assessee company. The said shares were sold during the previous year relevant to the assessment year 1970-71 at Rs. 120 per share.
(3.) The Income-tax Officer was of the view that the fair market value of the said shares was Rs. 167 per share and because the assessee had sold the said shares at a rate much lower than the fair market value, the provisions of Section 52(2) of the Income-tax Act, 1961, were applicable. The Income-tax Officer accordingly determined the fair market value at Rs. 167 per share and thus computed the capital gains on the sale of the said 1,500 shares at Rs. 1,00,500. When the matter came in appeal before the Appellate Assistant Commissioner, he held that the provisions of Section 52(2) were applicable to the instant case. However, relying on the valuation report of an approved valuer filed before him by the assessee, the Appellate Assistant Commissioner held that the fair market value of each share of M/s. East India Cotton Mfg, Co. Private Ltd. should be taken at Rs. 145. On that basis, the Appellate Assistant Commissioner computed the capital gains on the sale of 1,500 shares at Rs. 67,500. The assessee being aggrieved filed an appeal before the Tribunal. It was urged on behalf of the assessee that the provisions of Section 52(2) were not applicable to the instant case and, in the alternative, it was urged that the fair market value as determined by the Appellate Assistant Commissioner was highly excessive. The Department also had come up in appeal before the Tribunal against the relief allowed by the Appellate Assistant Commissioner. It was urged on behalf of the Department that the provisions of Section 52(2) were rightly invoked by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner. However, according to the Departmental Representative, the relief allowed by the Appellate Assistant Commissioner was not justified. The Tribunal considered the provisions of Section 52, Sub-section (1) and Sub-section (2), in detail. The Tribunal observed that there was no finding given by the Revenue authorities that there was understatement of consideration in the sale of 1,500 shares of East India Cotton Mfg. Co. Private Ltd. and, therefore, the Income-tax Officer was not justified in substituting the fair market value. In the opinion of the Tribunal, the transaction of sale was bona fide and the full value of consideration received by the assessee had been correctly declared. The Tribunal accordingly directed the Income-tax Officer to accept the sale consideration received and shown by the assessee for the sale of the said shares and to compute the capital gains accordingly. Thus, the Departmental appeal was dismissed by the Tribunal, whereas the assessee's appeal was allowed. At the instance of the Commissioner, the following two questions of law were referred by the Tribunal in Income-tax Reference No. 124 of 1977 under Section 256(1) of the Income-tax Act, 19611 "1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 52(2) of the Income-tax Act, 1961, the Tribunal was correct in holding that the provisions of Section 52(2) of the Income-tax Act, 1961, were not applicable to the instant case because the Income-tax Officer had not established that there had been an understatement in the consideration for the sale declared by the assessee in respect of sale of 1,500 equity shares of Messrs. East India Cotton Mfg. Co. Private Ltd. ?" 2. Without prejudice to question No. (1) whether, on the facts and in the circumstances of the case, the Tribunal had any evidence to come to the conclusion that the transaction of sale entered into by the assessee was a bona fide transaction and that the full value of consideration received by it had been correctly declared ?";