Sabyasachi Mukharji, J. - (1.) We are concerned in this reference with the assessment year 1960-61, the relevant previous year being the financial year ending on the 31st March, 1960. The assessee had shown a profit of Rs. 15,571 on sale of investment and this found place in its profit and loss account. When the Income-tax Officer went into the question of levying capital gains on these transactions, the assessee requested substitution of the fair market value of the shares as on the 1st day of January, 1954, under the second proviso to Sub-section (2) of Section 12B of the Indian Income-tax Act, 1922, in place of cost price. The Income-tax Officer worked out the fair market value of the shares on the basis of the break-up value as on the 1st January, 1954, at Rs. 14.62 per share. With regard to the sale price the Income-tax Officer found that the sales were effected by the assessee at Rs. 2.25 per share. On the facts of the case, the Income-tax Officer held that the sales were to persons with whom the assessee was directly or indirectly connected as the assessee was a Birla group of concerns and the sales were to the members of the Birla family. In those circumstances, the Income-tax Officer came to the conclusion that, even though the shares were of very high value, the sales were effected with the object of reducing the assessee's liability under Section 12B of the Act. He, therefore, applied the first proviso to Section 12B(2) and determined the fair market value of the shares on the break-up method at Rs. 14.45 per share. The result was a loss of Rs. 10,625, which was held to be capital loss.
(2.) There was an appeal before the Appellate Assistant Commissioner and it is stated that the main grievance before the Appellate Assistant Commissioner was that from the amounts of the break-up value of the shares the brokerage amount of 4 annas per share should also have been allowed as a deduction from such sale price. According to the Appellate Assistant Commissioner, unless there was proof that the amount claimed as brokerage had actually been spent in connection with the sale of the share, it was hardly possible to hold that the amount so claimed was an allowable deduction. The Appellate Assistant Commissioner, therefore, agreed with the Income-tax Officer that capital loss at Rs. 10,625 was properly worked out.
(3.) There was a further appeal to the Tribunal and it was urged before the Tribunal that the first proviso to Section 12B(2) had no application and, alternatively, in arriving at the sale price, deduction should be given for the brokerage on the sale of the shares. The Tribunal was of the opinion that proviso to Section 12B(2) of the Indian Income-tax Act, 1922, was applicable only if: (i) the person acquiring the share, that is, the purchaser, is one with whom the assessee is directly or indirectly connected ; and (ii) the Income-tax Officer has reason to believe that the sale, that is, the only type of transaction relevant here, was effected with the object of avoidance or reduction of liability under this section. It was urged before the Tribunal on behalf of the assessee that there could not be and was no direct or indirect connection between the assesses, a limited company, and the purchasers, the individuals. The Tribunal, for the purpose of considering the argument of the revenue, assumed in favour of the revenue that the shares were sold to persons with whom the assessee was directly or indirectly connected. The Tribunal, however, was of the view that the two conditions were cumulative and had to be simultaneously satisfied and the Tribunal observed that there must first be a liability to capital gains and there must be an attempt at avoidance or reduction thereof. Finding that there was no liability to capital gains according to the Income-tax Officer's own computation, he having arrived at a capital loss, the Tribunal held that there was no proved attempt at avoidance or reduction of liability to tax. It was held that the second condition was not satisfied and the proviso did not, therefore, apply. The Income-tax Officer was directed to modify the assessment in the light of the finding of the Tribunal. On these, at the instance of the revenue, under Section 66(2) of the Indian Income-tax Act, 1922, the following questions have been referred to this court: "(1) Whether, on the facts and in the circumstances of the case, and on a proper construction of the first proviso to Section 12B(2) of the Indian Income-tax Act, 1922, the Tribunal was correct in holding that there was no liability of the assessee under Section 12B of the Indian Income-tax Act ? (2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that there was no attempt at reduction of liability to tax was perverse in the sense that no reasonable person would come to it on the materials on record. ? ";