Facts

Assessee who purchased a house situated in Ernakulam in 1958 for Rs. 16,500  sold the same on 25.12.1965, (falling assessment year 1966-1967), to his daughter in law and five of his children. On this assessment was first completed in normal course accepting the case of assesse that no capital gains accrue on subject property sale transaction since the house was sold by the assessee at the same  price at which it was purchased and no capital gains accrued or arose to him as      a result of the transfer. Later on, on 04.04.1968, Assessing Officer (‘AO’) issued notice under section 148 of the Act seeking to reopen the assessment of assessee  for subject assessment year.  Videletter dated 4th March 1969 the ‘AO’  intimated   to the assessee that he proposed to  fix  the  fair market  value of  the  house sold by the assessee on 25.12.1965 at Rs. 65,000 as against the consideration of Rs. 16,500 for which the house was sold and assess the difference of Rs. 48,500 as capital gains in the hands of the assessee. The assessee raised objections against  the reassessment proposed to be made by the Income-tax officer but the objections were over-ruled and an order of reassessment was passed by the Income-tax officer including the sum of Rs. 48,500 as capital gains and bringing it to tax. Though the sale of the house by the assessee was in favour of his daughter-in-     law and five of his children who were persons directly connected with him, the

 

 

‘AO’ could not invoke the aid of section 52 sub-section  (1) for bringing the sum of Rs. 48,500 to tax, because there was admittedly no under- statement of consideration in respect of the transfer of the  house  and it  was not  possible  to say that the transfer was effected by the assessee with the object of avoidance or reduction of his liability under section 45. The ‘AO’  therefore rested his decision   to assess the sum of Rs. 48,500 to tax on sub-section (2) of section 52 and taking   the view that this sub-section did not require as a condition precedent that there should be under-statement of consideration in respect of the transfer and it was enough to attract the applicability of the  sub-section if  the  fair  market  value of the property as on the date of the transfer exceeded the full value of the consideration declared by the assessee by an amount of not less than 15% of the value so declared, which was indisputably the position in the present case, the   ‘AO’ assessed the sum of Rs. 48,500 to tax  as  capital gains. Now  assessee filed writ petition before Kerala High court (single Judge court) where stand of assessee that under-statement of consideration in respect of the transfer was a necessary condition for attracting the applicability of section 52 sub-section (2) and since      in the present case there was admittedly no under-statement of consideration  and it was a perfectly bonafide transaction, section 52 sub-section (2) had no application and the sum of Rs. 48,500 could not be brought to tax as capital gains under that provision was given imprimatur by Single Judge of Kerala high court  and re-assessment was resultantly quashed. Now it was revenue turn to file intra court appeal against this order of Single Judge of Kerala high court in Division bench where on the issue was referred for consideration of full bench given the importance and complexity of the question involved. In full bench decision, the majority opinion of two judges favored the revenue side as it held that in order to bring a case within section 52 sub-section (2), it is not at all necessary that there should be under-statement of consideration in respect of the transfer and once it    is found that the fair market value of the property as on the date of the transfer exceeds the full value of the consideration declared by the assessee in  respect     of the transfer by an amount of not less than 15% of the value so declared,section 52 sub-section (2) is straightaway attracted and the fair market value of    the property as on the date of the transfer is liable to be taken  as the full  value  of the consideration for the transfer. The writ petition was accordingly dismissed and the order of re-assessment sustained by the majority decision (while one opinion  by Raghvan C.J. agreed substantially with the view taken by single judge).Hence  the present appeal by the assessee before the apex court.

 

Issue

The principal question that arises for determination in this appeal by certificate is whether understatement of consideration in a transfer of property is a necessary condition for attracting the applicability of section 52 sub-section (2) of the Income Tax Act 1961 (hereinafter referred as the Act) or it is enough for the Revenue to show that the fair market value of the property as on the date of the

 

 

transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared

 

Views

The Court significantly observed at the outset that “The task of interpretation of       a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and as pointed out by Lord Denning, it would be idle to expect every statutory provision to be “drafted with divine prescience and perfect clarity.” We can do no better than repeat the famous words of Judge Learned Hand when he said: “ it is true that the words used, even     in their literal sense, are the primary and ordinarily the most reliable, source of interpreting the meaning of any writing: be it a statute, a  contract or  anything else. But it is one of the surest indexes of a mature and developed jurisprudence     not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.” We must not adopt a strictly literal interpretation of section 52 sub-section (2) but we must construe its language having regard to the object and purpose which the legislature had in view in  enacting  that provision and in the context of the setting in which it occurs. We cannotignore the context and the collocation of the provisions in which section 52 sub- section (2)  appears, because, as  pointed out  by  Judge  Learned Hand  in  most I felicitous language the meaning of a sentence may be more than that of the separate words as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create”. Keeping these observations in mind we may now approach the construction of section 52 sub-section(2).”

 

Held

Allowing the appeal of assessee and quashing reassessment order, the court held that, Firstly it was held that “We must therefore eschew literalness in the interpretation of section 52 sub-section (2) and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from  the tyranny of the literal interpretation. It is now a well settled rule of construction that where the plain literal interpretation of astatutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even ‘do some violence’ to it, so as to achieve the obvious intention of the legislature and produce a rational construction”. Secondly, that, having regard to this well recognised rule of interpretation, a fair andreasonable construction of section 52

 

 

sub-section (2) would be to read into it a condition that it would apply only where the consideration for the transfer is under-stated or in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in case      of a bonafide transaction where the full value of the consideration for the transfer  is correctly declared by the assessee. Thirdly, it held that there may be cases where the consideration for the transfer is shown at a lesser figure than that actually received by the assessee but the transferee is not a person directly or indirectly connected with the assessee or the object of under-statement of the consideration is unconnected with tax on capital gains, Such cases would not be withinthe reach of sub section (1) and the assessee, though dishonest, would escape the rigour of the provision enacted in that sub-section. Parliament therefore enacted sub-section (2) with a view to extending the coverage of the provision in sub-section (I) to other cases of under statement of consideration. This becomes clear if one gives regard to the object and purpose of the introduction of sub- section (2) as appearing from travaux preparatoire relating to the enactment of that provision. It is a sound rule of construction of a statute firmly established in England as far back as 1584 when Heydon’s case was decided that”… for the sure and true interpretation of all statutes in general-four things are to be discerned and considered: (1) What was the common law before the making of the Act, (2) What  was the mischief and defect for which the common law did not provide, (3) What remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth, and (4) The true reason of the remedy, and then the office of all    the Judges is always to make such construction as shall suppress the mischief, and advance the remedy”. Fourthly, it held that,the speech made by the Mover of the  Bill explaining the reason for the introduction of the Bill can certainly be referred  to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This     is in accord with the recent trend in juristic thought not only in Western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. Fifthly, it held that, The object and purpose of sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest   and bonafide transactions where the consideration for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure  than that actually received by the assessee, so that they do not escape the charge   of tax on capital gains by under-statement of the consideration. This was real object and purpose of the enactment of sub-section (2) and the interpretation of  this sub-section must fall in line with the advancement of that object andpurpose. So it was held that it accepts as the underlying assumption of sub- section (2) that there is under-statement of consideration in respect of the transfer and sub-section (2) applies only where the actual consideration received by the assessee is not disclosed andthe consideration declared in respect of the transfer

 

 

is shown at a lesser figure than that actually received. Sixthly, it held that, its interpretation of sub-section (2) of section 52 is strongly supported by the marginal note to section 52 which reads ‘Consideration for transfer in cases of under-statement’ to which the court noted that “It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section      or, to use the words of Collins MR in Bushel v. Hammond to show what the section is dealing with.” Seventhly, the court held that the placement of subsection (2) in section 52 does indicate in some small measure that Parliament intended that sub-section to apply only to cases where the consideration in respect of the transfer is under-stated by the assessee. As held by the court, it is   not altogether without significance that the provision in sub- section (2) was enacted by Parliament  not as a separate section, but as part of section 52 which,    as it originally stood, dealt only with cases of under-statement of consideration.      It was further explained that, If Parliament intended sub-section (2) to cover all cases where the condition of 15% difference is satisfied, irrespective of whether there is understatement of consideration or not, it is reasonable to assume that Parliament would have enacted that provision as a separate section and not pitch- forked it into section 52 with a total stranger under an inappropriate marginal note. Moreover there is inherent evidence in sub-section (2), which suggests that the thrust of that sub-section is directed against cases of under-statement of consideration. Eighthly, the court after noting that, soon after the introduction of sub-section (2), the Central Board of Direct Taxes, in exercise of the power conferred under section 119 of the Act, issued a circular dated 7th July, 1964 explaining the scope and object of sub-section (2) and another circular on 14th January,  194 whereby the Central Board, after reiterating the assurance given by  the Finance Minister in the course of his speech pointed out and instructed the Income-tax officers that “while completing the assessments they should keep in mind the assurance given by the Minister of Finance and the provisions of section 52(2) of the Income-tax Act may not be invoked in cases of bonafide transactions”, held that these two CBDT circulars are i) binding on the Tax Department in administering or executing the provision enacted in sub-section (2), butquite apart from their binding character, ii) they are clearly in the nature of contemporanea expositio furnishing legitimate aid in the construction of sub-section (2). Ninthly the court held that, the two circulars of the Central Board of Direct Taxes to which they have referred are legally binding on the Revenue and this binding character attaches to the two circulars even if they be found not in accordance   with the correct interpretation of subsection (2) and they depart or deviate from such construction. Tenthly, the court held that, there are two distinct conditions which have to be satisfied before sub-section (2) of section 52 can be invoked by  the Revenue and the burden of showing that these two conditions are satisfied  rests on the Revenue. It is for the Revenue to show that each of these two conditions is satisfied and the Revenue cannot claim to have discharged this burden which lies upon it, by merely establishingthat the fair market value of

 

 

the capital asset as on the date of the transfer exceeds by 15% or more the full value of the consideration declared in respect of the transfer and the first condition is therefore satisfied. The court held that, The Revenue must go further and prove that the second condition is also satisfied. Merely by showing that the first condition is satisfied, the Revenue cannot ask the Court to presume that the second condition too is fulfilled, because even in a case where the first condition  of 15% difference is satisfied, the transaction may be a perfectly honest and bonafide transaction and there may be no under-statement of the consideration. It was clearly held that, the fulfillment of the second condition has therefore to be established independently of the first condition and merely because the first condition is satisfied, no inference can necessarily follow that the second condition is also fulfilled. Each condition has got to be viewed and established independently before sub- section (2) can be invoked and the burden of doing so    is clearly on the Revenue. Eleventhly, it was held that, to throw the burden of showing that there is no understatement of the consideration, on the assessee wouldbe to cast an almost impossible burden upon him to establish the negative, namely, that he did not receive any consideration beyond that declared by him. Twelwethly, it held that,it may be noted that section 52 is not a charging section  but is a computation section. It has to be read alongwith section 48 which provides the mode of computation and under which the starting point of computation is “the full value of the consideration received or accruing”. What in fact never accrued or was never received cannot be computed as capital gains under section 48. Therefore sub- section (2) cannot be construed as bringing within the computation of capital gains an amount which, by no stretch of imagination, can be said to have accrued to the assessee or been received by him and it must be confined to cases where the actual consideration received for the transfer is under-stated and since in such cases it is very difficult, if not impossible, to determine and prove the exact quantum of the suppressed consideration, sub-section (2) provides the statutory measure for determining the consideration actually received by the assessee and permits the Revenue to take  the fair market value of the capital asset as the full value of the consideration received in respect of the transfer. Thirteenthly, it held that, if sub-section (2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in     an amount being taxed which has neither accrued to the assessee nor been received by him and which from no view point can be rationally considered as capital gains or any other type of income. It is a well settled rule of interpretation that the Court should as for as possible avoid that construction which attributes irrationality to the legislature. Besides, under Entry 82 in List I of the Seventh Schedule to the Constitution which deals with “Taxes on income” and under which the Income Tax Act, 1961 has been enacted, Parliament cannot “choose to  tax as income as item which in no rational sense can be regarded as a citizens income or even receipt. Sub-section (2)would, therefore, on the construction of

 

 

the Revenue, go outside the legislative power of Parliament. Fourteenthly, it held that, sub-section (2) of sec. 52 can be invoked only where the consideration for    the transfer has been understated by the assessee or in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such under-statement or concealment  is on the Revenue. This burden may be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not a correctly declared or disclosed the consideration received by  him and there is understatement of concealment of the consideration in respect     of the transfer. Sub-section (2) has no application in case of an honest and bonafide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration. Finally accepting appeal of assessee it was concluded that, subsection (2) had no application to the present case and the Income-tax officer could have no reason to believe that any part of the income of the assessee had escaped assessment so as to justify the issue of a notice under section 148. The order of re-assessment made by the Income-tax officer pursuant   to the notice issued under section 148 was accordingly without jurisdiction and  the majority judges of the Full Bench were in error in refusing to quash it. (AY. 1966-67) (CA No. 412 of 1973 dt. 4-9-1981)

 

Editorial: Section is omitted by the Finance Act, 1987, w.e.f  1-4-1988. Followed   in CIT v. Shivakami Co Pvt Ltd (1986) 159 ITR 71 (SC).

No doubt K. P. Varghese  has  been  a  milestone verdict and  a  locuss classicus in  income tax jurisprudence and it  is  still a  good law even today in  matters  of interpretation of statutory taxation provisions like section 52(2) of the Act. Three recent Apex court decisions where K. P. Varghese in context of taxation statute is not only referred but heavily relied to flash the primary burden on revenue in context of anti abuse provisions inserted in the Act to address some    tax avoidance etc are Sati Oil Udyog, (2015) 7 SCC 304/372 ITR 746 (SC), Rajasthan State Electricity Board v. Dy. CIT (2020) 424 ITR 704 (SC) and Southern Motors case of 18/01/2017 in CA Nos. 10955-10971 of 2016, all these three decisions are towing the same line of thought as charted in K. P. Varghese case. Another landmark decision of Apex court which states in same  tone  is  Ms Era v. Govt of NCT of Delhi (2017) 15 SCC 133. One may be definitely benefited by reading all these references in full detail. In present context ofprovisions of section 50C, 43CA and section 56 where in relation to immovable property (land/building) sale/purchase stamp value is prescribed as standard benchmark for purposes of taxation, subject to reference to Department Valuation Officer (DVO), K. P. Varghese case (supra) remain relevant specially where distress sales etc are made and revenue is not able to prove any “on money” case, there actual price might not be allowed to be interfered. Similar views can be found in

 

 

Mumbai bench ITAT recent decision in case of Mohd Yusuf Trust in ITA 2243/ Mum/2015 order dated 08.03.2019 (paragraph 12/15 discusses K. P. Varghese case). Likewise Mumbai bench of ITAT in recent case of Subodh Menon in ITA 676/ Mum/2015 order dated 07.12.2018 in paragraph 18 has relied on K. P. Varghese case in context of section 56(2)(vii) of the ‘Act’ where issue of shares was  in issue and it was held that said provision does not apply to bonafide business transaction.)

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