ADDITIONAL COMMISSIONER OF INCOME TAX Vs. ANKINEEDU PRASAD S R Y

JUDGEMENT

(1.) THE assessee, S. R. Y. Ankineedu Prasad, is an individual. He purchased during the year of account ending with March 31, 1966, 48,123 equity shares of a public limited company called "Challapalli Sugars Ltd." from his brother for Rs. 6,58,804, i.e., at Rs. 13'69 per share. This purchase of equity shares in Challapalli Sugars Ltd. was made by him in order to obtain controlling interest in the said company in which he (the assessee) and his another brother had substantial shareholdings. THE consideration paid by him for purchasing the shares in Challapalli Sugars Ltd. consisted partly of cash of Rs. 1,00,000 and partly by transfer of 12,724 equity shares in K. C. P. Ltd., Vuyyur, another public limited company. He transferred the equity shares in K. C. P. Ltd. at the face value of Rs. 10 per share and for the balance of consideration of Rs. 4,34,346, he executed a promissory note in favour of his brother. In the return filed for the assessment year 1966-67, the assessee declared a capital gain of Rs. 15,756 on the transfer of the shares of K. C. P. Ltd., which he himself had acquired earlier at Rs. 1,08,702. THE Income-tax Officer, A-Waid, Vijayawada, having regard to the fact that the market value of a share of K. C. P. Ltd. was Rs. 22'30 issued a notice to the assessee to show cause why he should not be assessed to tax invoking Section 52(1) of the Income-tax Act. It was explained by the assessee on December 16, 1968, that the transaction was only for the purchase of shares of Challapalli Sugars in order to acquire controlling interest of that company and for that purpose, he had also exchanged K. C. P. Ltd. shares for a value which was less than the market rate. That explanation of his was not accepted by the Income-tax Officer on the ground that there was substantial difference between the market rate and the face value of the shares of the K. C. P. Ltd. Before initiating action, the Income-tax Officer had obtained the prior approval of the Inspecting Assistant Commissioner. THE Income-tax Officer determined the lair market value of 12,724 equity shares of K. C. P. Ltd. transferred by the assessee at Rs. 2,83,745 and deducting the cost of those shares, i.e., Rs. 1,08,702, determined the capital gains for the transaction at Rs. 1,75,043. That assessment order was carried in appeal and the Appellate Assistant Commissioner held that the correct provision that should have been applied to the facts of the case is Section 52(2) and not Section 52(1). In that view, he confirmed the order of the Income-tax Officer and dismissed the appeal. THE assessee further carried the matter in appeal to the Income-tax Appellate Tribunal. THE Tribunal, in the light of the construction put upon Sub-section (2) of Section 52 by it, held that the requirements of section 52(1) or Section 52(2) were not satisfied. In so coming to the conclusion, the Tribunal recorded a finding of fact that "there was no question of the assessee transferring the shares of K. C. P. Ltd. with the object of avoiding or reducing the liability to capital gains". It also observed that "it is not the department's case that the assessee actually received consideration at more than Rs. 10 per share for the shares of K. C. P. Ltd. transferred to his brother". It is against the order of the Tribunal that the Additional Commissioner of Income-tax moved the Tribunal for reference under Section 256(1) of the Income-tax Act, the following question for our opinion:

(2.) MR.Rama Rao, the learned counsel for the revenue, contended that the Tribunal was in error in holding that Section 52(2) is not attracted. According to the learned counsel for the revenue, if the Income-tax Officer comes to the conclusion that the fair market value of a capital asset transferred by an assessee on the date of the transfer exceeds the full value of consideration declared by him in respect of the transfer and that the difference in amount is not less than 15% of the value so declared, Section 52(2) is automatically attracted. It is also his stand that the question of a bona fide transfer of an asset is irrelevant in construing Section 52(2) of the Act. According to him, even on the assessee's own showing, he would not have transferred the shares to his brother at the face value of Rs. 10 per share, but for the advantage he would gain by purchasing the shares of Challa-palli Sugars Ltd., to get the controlling interest in Challapalli Sugars Ltd. In other words, it is his case that the controlling interest, which is expected to accrue to him, makes up the difference between the face value and the market value of the assets transferred.

(3.) SECTION 2(14) defines "capital asset" as to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include items (i) to (iv) referred to therein. SECTION 2(22A) defines "fair market value" and it means, in relation to a capital asset, (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and (ii) where the price referred to in sub- Clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under the Act. SECTION 2(24) defines "income "to include profits and gains and any capital gains chargeable under SECTION 45. SECTION 45 is the charging section for capital gains and, to the extent relevant, it reads :