COMMISSIONER OF INCOME TAXversusSHIVAKAMI CO. PVT. LTD.

                                                               881
                                                                      A
                      cat!ISSIONER OF INCOIE TAX
                                     v.
                       SHIVAKAMI CO. PVT. LTD.

                            MARCH 18, 1986
                                                                      B
               [R. S, PA~ AND SABYASACHI MUKHARJI, JJ. ]

           Indian Income Tax Act 1922/ Income Tax Act 1961, s.12
     B(2) first proviso/ s.52 - Capital asset - Acquisition of -
     Understatement of consideration in transfer of property -
     Understatement of value, a mis-statement of value - selling at
     under value to defeat revenue different from understating        c
     value in a document of sale.

           The respondent, a private COllpany under the Companies
     Act, 1956 in C.A. 1533 of 1974, had shares in two private
     companies. During the relevant period, it sold those shares
-f   and according to the respondent-assessee, the sales resulted     D
     in a loss. The shares were not quoted in stock market.
     However, the Income-tax Officer held that the break-up value
     on the date of sale of the shares in the two companies was
     Rs.1,72,800 and Rs.1,54,000 and after deducting the cost price
     of the aforesaid shares of Rs.81,201 and Rs.1,00,000
     respectively from the above said break-up value, he determined   E
     the capital gain at Rs.91,599 and Rs.54,000 respectively under
     the first proviso to section 12-8(2) of the 1922 Act. The
     Appellate Assistant Commissioner as also the Tribunal rejected
     the appeals of the respondent-assessee and upheld the order of
     the lnco11e-t:ax Officer.
                                                                      F
           Aggrieved by the order of the Tribunal, the respondent-
     assessee went to the High Court in a reference. The High Court
     allowed the reference holding that the first proviso to sub-
     section (2) of section 12-B of the Indian Income-tax Act, 1922
     was not applicable. It observed : (i) that the sale was true;
     (ii) that the consideration was not understated; and (iii)       G
     that the explanation given by the assessee for effecting the
     sale was not acceptable. The same question of law arose in the
     other civil appeals.

           Dismissing the appeals,
                                                                      H
    882                  SUPREME COURT REPORTS       [1986] 1 s.c.R.

A
          Bl!LD : 1.1 The proviso to section 12B(l) of the Act can
    be invoked only where the consideration for the transfer of
    capital asset has been understated by the assessee. The first
    proviso to section 12B(l) of the Act provides 'full value of
    the consideration for which the sale, exchange, relinquishment
    of transfer is made' , to be taken as the basis for the compu-
B   tation of , the capital gains. Therefore, unless there is
    evidence that 100re than what was stated was received, no           ~
    higher price can be taken to be the basis for computation of
    capital gains. The onus is on the Revenue - inferences might
    be drawn in certain cases but to come to a conclusion that a
    paricular higher 8""'Unt was in fact received 1111St be based on
c   such material from which such an irresistible conclusion
    follows. The proviso helps or enables the depart11ent by provi-
    ding a way to determine the market value. But the proviso is
    applicable only where the full value for the consideration has
    not been stated. (889 G-H]
D         1.2 When a conclusion of the fact finding body is based
    on an inference from primary facts, then the findings of facts
    are not amenable to challenge but the inference drawn from the
    primary facts are open to challenge as conclusions of law. It
    is also open to challenge the same on the ground that the
    conclusion of fact drawn by the Tribunal was not supported by
E   legal evidence or that the impugned conclusion drawn from the
    fact was not rationally possible. In such a case, it is neces-
    sary to examine the correctness of the conclusion. (886 H;
    887 A-B]

          ~sioner of ~ax v.              Rajastban Mines, 78 I.T.R.
F   45, relied upon.

          In the instant case, the facts found were that there was
    a sale. The High Court has stated that the Tribunal had found
    that the consideration was not understated. The High Court
    also notices that the explanation given by the assessee for
G   effecting the sale was not acceptable. The onus was on the
    Revenue to prove that there was understatement in the doCUlllellt
    not that the goods were sold at under value. There is no
    evidence that the full consideration received by the assessee
    in the transfer of the asset involved in these cases has been
    understated. The revenue has made no attempt to establish that
H   there was any under-statement though it might be that shar'"'1
    were sold at an under value. (888 B-01
          C.I.T. v. SHIVAKAMI CO. (sABYASACHI MUKHARJI, J.]    883


          LP. Verghese v. 1--Ul< Officer, Em•!nJlaw fi Am-.,          A
    131 I.T.R. 597, followed.

          2. Understatement of value is a mis-statement of value.
    Selling goods at an undervalue to defeat Revenue is different
    from U!lderstating the value in the document of sale. (888 D]
                                                                      B
          J:n the instant case, there is no evidence direct or
    inferential that the consideration actually received by the
    assessee was more than what was disclosed or declared by him.
    [888 F]

          Capital gains was intended to tax the gains of an
    assessee, not what an assessee might have gained. What is not     c
    gained cannot be computed as gained. All laws fiscal or other-
    wise 1111e.t be both reasonably and justly interpreted whenever
    possible. Capital gains tax is not a tax on what might have
    been received or could have taxed. (889 E]
i                                                                     D
          CIVIL APPELIATE JURISDICTION : Civil Appeal Nos. 1532
    -35 (NT) of 1974.

          From the Judgment and Order dated 7th March, 1972 of the
    Madras High Court in Tax Cases Nos. 79, 83, 98 and 99 of 1966.

          s.c. Hanchanda, Ms. A. Subhashini and K.C. Dua for the      E
    Appellant.

          Nemo for the Respondent.

          The Judgment of the Court was delivered by
                                                                      F
          SABYASACHI HllKllARJI, J. These appeals are by 'certifi-
    cates granted by the High Court of Madras under article 133(1)
    of the Constitution.

          An identical question of law had been referred in
    respect of four separate tax cases to the High Court under        G
    section 66(1) of the Indian Income-tax Act, 1922 (hereinafter
    referred to as '1922 Act') at the instance of the assessee.
    The High Court disposed of these appeals by one co11D110n
    judgment.

          The High Court had to answer the following question :-      H
    884                   SUPREME COURT REPORTS       [1986] 1 S.C.R.

A
                11
                 Whether, on the facts and in the circumstati.ces of
                the case, the conclusion of the Tribunal, that for
               the purpose of the computation of capital gain on
               the sale of the shares in East India Corporation
               Ltd., Madura Insurance Company Ltd. and Pudukottah
               Company Private Ltd. the first proviso to sub-
B              section (2) of section 12B of the Indian Income-tax
               Act, 1922 was applicable, is correct in law?"

         The High Court answered the question in the negative and
    in favour of the assessee.

C         According to the High Court in the      instant case,   the
    shares held by the assessee company were sold to two persons
    who were directly or indirectly connected with them at prices
    considerably less than their break-up value.

         As mentioned hereinbefore, the four cases were dealt by
0   the High Court together. It may be appropriate to ref er to Tax
    Case No. 83/66 first. The assessee in that case was Rukmani
    Co. Private Ltd. lt was a private limited company incorporated
    in the former Pudukottai State and at the time the High Court
    dealt with the matter, was a company under the Companies Act,
    1956. The paid up capital of the assessee-company consisted of
E   50 shares of the face value of Rs.1,000 each, fully paid up
    and the shareholders during the material time were Padmanabha
    Private Ltd. holding 25 shares and Pudukottah Corporation
    Private Ltd. holding the remaining 25 shares. On 14th March,
    1957, the assessee sold 800 shares held by it in East India
    Corporation Ltd. and 1,000 shares held by it in Madura
F   Insurance Company Ltd. to Pachnayaki Private Ltd., Coimbatore,
    for a sum of Rs.60,000 and Rs.7.5,000 respectively. The cost
    price of the 800 East India Corporation Ltd. shares was
    Rs.81,201 and that of 1,000 Madura Insurance Company Ltd. was
    Rs .1, 00, 000. On the same day the assessee had sold its 499
    shares in Pudukottah Company Private Ltd. to Padmanabha
G   Company Private Ltd. for the cost price of Rs. 4,990. The
    shares in East India Corporation Ltd., Madura Insurance
    Company Ltd. and Pudukottah Company Private Ltd. were not
    quoted in stock-mark.et. It was ascertained from the order of
    the Tribunal that the break-up value on the date of sale of
    the 800 shares in East India Corporation Ltd. was Rs.1,72,800
H
          C. I. T, v. SHIVAKAMI CO. (SABYASACHI MUKHARJI, J,]   885

                                                                      A
 and the 1000 shares in the Madura Insurance Company Ltd. was
 Rs.1,511,000, Deducting the cost price of Rs. 81,201 and Rs.
 1,00,000 respectively from the above said break-up value, a
 sum of Rs.91,599 and Rs.54,000 respectively had been determin-
 ed as the capital gain under the first proviso to section
 12B(2) of the 1922 Act in respect of the sale of shares in           B
 East India Corporation Ltd. and Madura Insurance Company Ltd.
 The Tribunal gave a finding that there was no capital gain in
 respect of the sale of the shares in Pudukottah Company
 Private Ltd.                                              ·

      Discussing the facts of Tax Case No. 79/66 in case of
 Sivakami Company Pri><ate Ltd., the Tribunal held that the           c
 assessee was liable to pay capital gains tax under the first
 proviso to section 12B(2) of the 1922 Act and it also held
 that the assessee had sold 499 shares in Pudukottah Company
 Private Ltd. to Padmanabha Private Ltd. for Rs.4,990 in
 respect of which the Tribunal held that there was no capital
 gain.                                                                D


      In Tax Case No. 98/66, the assessee was Pudukottah
 Company Private Ltd. which was a private limited company with
 a paid up capital of 3,000 shares of the face value of Rs.JOO
 each with Rs.10 per share paid up and the shareholders were
 certain above-mentloned companies. In respect of sales of            E
 these shares, the Tribunal held that the assessee was liable
 to pay tax on the capital gain under the first proviso to the
 said section.

         More or less similar is the position in Tax Case No.99/66
 where the assessee was Pudukottah Corporation Private Ltd.           F

         In all these cases,     in the original proceedings for
 assessment for the year 1958-59, it was held by the Appellate
 Assistant Coflllllissioner, accepting the contention of the
  respective assessees, that the profit or loss on the sale of
  the aforesaid shares should not be considered as trading            G
  profit or loss on the ground that the shares were held as an
1 investment and not as stock-in-trade of a business and the
  assessments were modified by excluding therefrom the profits
  on the sale of those shares included in the assessment. The
  Income-tax Officer thereafter reopened the assessment under
 section 34(l)(b) with a view to assess the capital gain              H
    886                  SUPREME COURT REPORTS      [19861 1 s.c.R.
A
    arising on the sale of the shares. As there was some argument
    as to what the Tribunal actually found, it is better to ref er
    to the order of the Tribunal. The Tribunal, inter alia,
    observed as follows :

               "Assuming that the sale on 14th March, 1957 was
B              actuated by the sole motive of sequestering the
               shares from the Department it is not necessary that
               some of the shares which are very valuable should
               have been transferred at a loss. It falls flat and
               unconvincing to be told that the sole object was to
               sequester the shares from the clutches of the
c              Government and at the same time proclaim that the
               motive was not avoidance of capital gains tax.

                The assessee's learned counsel was not able to tell
                us how exactly the sale value of the East India
                Corporation Ltd. came to be fixed at Rs.60,000, We
D
               ·find that in another case the shares in this
                company had also been valued at the same price. The
                cost of acquisition was also the same."

         Dealing with the finding, the High Court observed at page
    316 of 88 I.T.R. where the judgment under appeal is reported,
E   that the facts found were (1) that the sale was true; (2) that
    the consideration was not understated; and (3) that the expla-
    nation given by the assessees for effecting the sale was not
    acceptable. The High Court went on to observe that on these
    facts, could it be said that the sales were effected with the
    object of avoidance or reduction of liability of the assessee
F   for capital gain. The High Court was of the view that the
    Tribunal·though specifically did not find that the sales were
    effected with the object of avoidance or reduction of the
    liability for capital gain, had concluded that the department
    was justified in applying the first proviso of section 12B(2)
    of the Act.
G
          The High Court discussed on this aspect the question as
    to whether the finding of the Tribunal could be interfered
    with in a matter like this. It is well-settled that when a
    conclusion of a fact finding body is based on an inference
    from primary facts then the findings of fact are not amenable
H   to challenge but the inferences drawn from the primary facts
             C.I.T. v._SHIVAKAMI CO.(SABYASACHI MIJKHARJI, J,]    887
....
                                                                         A
       are open to challenge as conclusion of law," It is also open
       to challenge the same on the ground that the conclusion of
       fact drawn by the Tribunal was not supported by legal evidence
       or that the impugned conclusion drawn fr0111 the fact was not
       rationally possible. In such a case it is necessary to examine
       the correctness of the conclusion. Reliance may be placed on
                                                                         8
       the decision of this Court in Coml.ssioner of Income-tax v.
       Rajastban Mines, 78 I.T.R. 45. This position is well settled
       by many decisions of this Court.

            It may be mentioned that section 52 of Income-tax Act,
       1961 (hereinafter referred to as . '1961 Act') corresponds to
       the first proviso of section· 128(2) of 1922 Ac~. The first
       proviso to section 128(2) read as follows:
                                                                         c

                  "Provided that where a person who acquires a
                  capital asset from the assessee, whether by sale,
                  exchange, relinquishment or transfer, is a person
                  with whom the assessee is directly or indirectly       D
                  connected, and the Income-tax Officer has reason to
                  believe that the sale, exchange, relinquishment 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 the sale, exchange, relinqubhment or         E
                  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, relinquishment or transfer took place."
                                                                         F
       Section 52 of 1961 Act came up for consider~tion by this Court
       in LP. Varghese v. ~ .Officer, EmUnlu, 11114
       Another, 131 I. T.R. 597. This Court held that so far as
       material for the present purpose sub-section (2) of section 52
       could be invoked only where the consideration for the transfer
       of a capital asset had been understated by the assessee, or.,     G
       in other words, the full value of the consideration in respect
       of the transfer was shown at a lesser figure than that
.~
       actually received by the assessee, and the burden of prOYing
       such understatement or concealment was on the revenue. 'nlis
       Court observed that the sub-section had no application in the
       case of an honest and bona fide transaction where the             H
    888                  SUPREME COURT REPORTS     [19861 1 s.c.R.

A
    consideration received by the assessee had been correctly
    declared or disclosed by him.

         In the instant case, on behalf of the revenue, it ~as
    contended that it was accepted both by the Tribunal and the
    High Court that the transactions in question were done in
B   order to defeat the claim of the revenue. The facts found were
    that there was a sale. The High Court has stated that the
    Tribunal had found that the consideration was not understated
    (emphasis supplied), Co.unset for the revenue contended that
    this was not correct. On the other hand, an inference could be
    drawn that the consideration was understated. The High Court
c   also noted that the explanation given by the assessee for
    effecting the sale was not acceptable.

          As it appears from the decision of this Court in LP.
    Varghese's case (supra), the onus was on the revenue to prove
    that there was understatement in the document not that the
D   goods were sold at under-value. Understatement of value is a
    mis-statement of value. Selling goods at an undervalue to
    defeat revenue is different from understating the value in the
    document of sale. Counsel for the revenue contended that in
    the background of the facts of this case, the evil design of
    the assessee was clear and he said that it was difficult to
E   know the mind of man. Therefore, an inference could be drawn
    in the facts of this case as noted by the Tribunal that there
    was understatement of value in the document. Though the
    legislation in question is to remedy the social evil and
    should be read broadly and should be so read that the object
    is fulfilled, yet the onus of establishing a condition of
F   taxability must be fulfilled by the revenue. There is no
    evidence direct or inferential that the consideration actually
    received by the assessee was m0re than what was disclosed or
    declared bY himo The relationship between the parties has been
    established, The desire to defeat the claims of the revenue
    has also been established but that fact that for this the
G   assessee had stated a false fact in the document is not
    established. What appears from the Tribunal's order was .that
    the real and main object was to safeguard these sha.res from
    being taken over by the Government in settlement of tax dues,
    and also that the buyer and seller were indirectly connected
    with each other.
H
             C.I.T. v. SHIVAKAMI co. !l;ABYASACHI MUKHARJI, J.]   889

                                                                        A
         The first proviso to section 12B(2) of 1922 Act provides
    'full value of the consideration for which the sale, exchange,
    relinquishment or transfer is made' to be taken as the basis
    for the computation of the capital gains. Therefore, unless
    there ls evidence that more than what was stated was received,
    no higher price can be taken to be the basis for computation
                                                                        B
    of capital gains. The onus is on the revenue - the inferenc~s
    might be drawn in certain cases but to come to a conclusion
    that a particular higher amount was in fact recel ved rust be
    based on such material from which such an irresistible
    conclusion follows. In the instant case, no such attempt was
    made.

         As this Court has explained in K.P. Varghese's case that
                                                                        c
    the second ingredient that is to say that the word 'declared'
    in sub-section (2) of section 52 of the Act is very eloquent
    and revealing. It clearly indicated that the focus of
    sub-section (2) was on the consideration declared or disclosed
i   by the assessee as distinguished from the consideration
                                                                        D
    actually received by him and it contemplated a case where the
    consid·eration rece:ived by the assessee      in respect of the
    transaction was not truly declared or disclosed by him but was
    shown at a different figure. Capital gains was intended to tax
    the gains of an assessee, not what an _assessee might have
    gained. All laws, fiscal or otherwise, rust be both reasonably      E
    and justly interpreted whenever possible. Capital gains tax is
    not a tax on what might have been received or could have
    taxed.   In this caSe,    the revenue has made no attempt to
    establish that there was any understatement though it might be
    that shares were sold at an undervalue.
                                                                        F
         In view of the ratio of K.P. Vargbese's case (supra) the
    proviso to section 12B(l) of the Act can be invoked only where
    the consideration for the transfer of capital asset has been
    understated by the assessee.· There is no evidence as discussed
    above that the full consideration received by the assessee in
    the transfer of the assets involved in these cases has been         G
    understated. The proviso helps or enables the department by
    providing a way to determine the market value. But the proviso
    is applicable only where the full value for the consideration
    has not been stated. 'lbere is no evidence, direct or
    inferential, in these cases that the full consideration had
    not been stated in the document.                                    H
    890                  SUPREME COURT REPORTS     [1986] 1 S.C.R.
                                                                      ~-
A
           In. that view of the matter, in our opinion, the appeals
    1111st fail, though on different grounds than taken by the High
    Court. The appeals are accordingly dismissed.


    M.L.A.                                Appeals dismissed.