K.P. Varghese v. The Income Tax Officer, Ernakulam & Anr.

Though Section 52 of the Income Tax Act was deleted in the year 1987, the Apex Court had to interpret the Section as the facts of the case were set in a time before the deletion. Read this analysis to learn how the Court interpreted the Section.
CITATION1981 AIR 1922
COURTSupreme Court of India
JUDGES/CORAMJustice P.N. Bhagwati
DATE OF JUDGEMENT04.09.1981

Introduction

The present case revolved around Section 52 of the Income Tax Act, 1961. While this section was deleted in 1987, the interpretation of the section laid down, in this case, is extremely important for cases prior to 1987. Further, the Apex Court also reiterated the rule of construction while interpreting the section.

Facts

The facts of the case are as follows: The assessee was the owner of a house he had purchased in 1958 for Rs. 16,500. He sold this house in 1965 for the same price to his daughter in law and five of his children. In the assessment year 1966-67, he included no amount in capital gains as he had sold the house at the same price at which it was purchased. However, the Income Tax Officer issued a notice to him under Section 148 of the Income Tax Act seeking to reopen the assessment of the assessee for the assessment year 1966-67 and requiring the assessee to submit a return of income within thirty days of the service of the notice. The notice did not state what was the income alleged to have escaped assessment but by his subsequent letter, the Income-tax officer intimated to the assessee that he proposed to fix the fair market value of the house sold by the assessee 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 but they were over-ruled.

Issues

The main issue in the case was: Whether understatement of consideration in a transfer of property was a necessary condition for attracting the applicability of section 52 sub-section (2) of the Income Tax Act 1961 or it was 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.

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Contentions of the parties

The argument of the Revenue was that on a plain natural construction of the language of section 52, subsection (2), the only condition for attracting the applicability of that provision is that the fair market value of the capital asset transferred by the assessee 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. The assessee objected against the literal constriction of section 52 sub-section (2) as it leads to manifestly unreasonable and absurd consequences.

Summary of court decision and judgment

The assessee initially preferred a writ petition in Kerala High Court challenging the validity of the order of reassessment in so far as it brought the sum of Rs. 48,500 to tax relying on section 52 sub-section (2) of the Act. The Judge concluded that in the case, it was a perfectly bona fide transaction, and thus, the section could not be invoked.

The Revenue appealed against this decision to a Division Bench of the High Court and having regard to the importance and complexity of the question involved, the Division Bench referred the appeal to a Full Bench of three Judges. The Full Bench heard the appeal and upheld the decision of the Income Tax Officer. The assessee then moved to the Supreme Court.

The Supreme Court observed that a strict literal interpretation of Section 52(2) cannot be adopted, and it must be construed in the light of the object and purpose of its enactment. As per the well-recognized rule of construction, a statutory provision must be construed in a way that absurdity and mischief is avoided. The Court remarked that there are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature.

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The Court interpreted the section and observed it would apply only where the consideration for the transfer is under-stated i.e. 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 bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. The Court relied upon the marginal note to Section 52. The Court held that the section cannot be invoked unless there is an understatement of the consideration in respect of the transfer and the burden of showing that there is such under-statement is on the Revenue. The appeal was allowed by the Court and the order of the Full Bench was set aside.

Analysis

Section 52 was omitted by Finance Act, 1987 with effect from 1st April 1988. The Section before its omission was as under:

“52. (1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income Tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer.

(2) Without prejudice to the provisions of sub-section (1), if in the opinion of the Income Tax Officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than 15 per cent of the value declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of the transfer.”

It was held in Commissioner of Income Tax, Madras v. Shivakami Company Private Limited[1], that the provision would apply only when there was consideration and which consideration actually received was more than the consideration disclosed or declared.

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The applicability of the section still remains on cases pending from before its omission or pertaining to the years before its omission. Recently, the Delhi High Court in Arun Malhotra v. CIT[2], while citing the present case, held that difference between the consideration actually received and market value of consideration by itself would not justify invoking the said Section. Thus, the rule laid down in the present case is the correct view and is still adopted by the Courts.

Conclusion

While the section pertaining to this case has been deleted, it is still important with respect to cases before its deletion. Additionally, the Court in this case, laid down some extremely rules regarding interpretation of statutes.


[1] [1986] 159 ITR 71 (SC).

[2] Appeal Nos. 405/2005 & 406/2005.