judgement:
Civil Appeal No. 412(NT) of 1973 From the judgment and order dated the 5th July, 1972 of the Kerala High Court at Ernakulam in Writ Appeal No. 127 of 1970.
M. M. Abdul Khadher, S.K. Mehta, E.M.S. Anam, P.N.Puri and M.K Dua for the appellant.
S.T. Desai and Miss A. Subhashini for the respondent Anil B. Diwan, Dinesh Vyas, P.H. Parekh and R.N. Karanjawala for the intervener.
section Swaminathan, N. Srinivasan and Gopal Subramaniam for the intervener.
Debi Pal, Praveen Kumar and A.R. Sharma for the intervener.
K.R. Kazi and S.C. Patel for the intervener.
N.A. Palkhiwala, P.H. Parekh, J.B. Dadachanji, H. Salve and Ravinder Narain for interveners.
S.C. Patel for the intervener.
J.B. Dadachanji for the intervener.
B.K Mohanty and C.S. Rao for the intervener.
P.A. Francis and M.N. Shroff for the intervener.
The Judgment of the Court was delivered by BHAGWATI, J.
The principal question that arises for deter 636 mination 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.
The facts giving rise to the appeal are not very material but since they from the backdrop against which the question arises for consideration, we may briefly state them.
The assessee was the owner of a house situated in Ernakulam, which he had purchased in 1958 for the price of Rs. 16,500.
On 25th December 1965 the assessee sold the house for the same price of Rs. 16,500 to his daughter in law and five of his children.
The assessment of the assessee for the assessment year 1966 67 for which the relevant accounting year was the calendar year 1965 was thereafter completed m the normal course and in this assessment, no amount was included by way of capital gains in respect of the transfer of the house 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.
On 4th April 1968 however the Income tax officer issued a notice under section 148 of the 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 dated 4th March 1969 the Income tax officer intimated to the assessee that he proposed to fix the fair market value of the house sold by the assessee on 25th December 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 Income tax officer could not invoke the aid of section 52 sub section (1) for bringing the sum of 637 Rs. 48,500 to tax, because there was admittedly no under statement A 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 Income tax officer 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 Income tax officer assessed the sum of Rs. 48,500 to tax as capital gains.
The assessee thereupon 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.
D The writ petition came up for hearing before Isaacs J. sitting as a single Judge of the High Court and after hearing both parties, the learned Judge came to the conclusion 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.
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 but there was a division of opinion, two Judges taking one view and the third Judge taking another.
While Raghvan C.J. agreed substantially with the view taken by Isaacs J., Gopalan Nambiar J. and Vishwanath Iyer J. took a different view and 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 638 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 reached by the Full Bench.
Hence the present appeal by the assessee with certificate obtained from the High Court.
It will be noticed from the above statement of facts that the principal question arising for determination in this appeal turns on the true interpretation of section 52 sub section (2).
But in order to arrive at its proper interpretation, it is necessary to refer to some other provisions of the Act as well.
Section 2 clause (24) defines the word 'income '.
The definition is inclusive and covers 'capital gains ' chargeable under section 45.
Section 4 is the charging section and it provides that income tax shall be charged in respect of the total income of the previous year of every person.
Section 5 defines the scope of 'total income ' by providing that the total income of the previous year of a person who is resident shall include all income from whatever source derived which is received or is deemed to be received in India in such year by him or on his behalf or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year.
Section 14 enumerates the heads of income under which income shall, for the purposes of charge of income tax and computation of total income, be classified and they includes capital gains".
Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head "capital gains" and shall be deemed to be the income of the previous year in which the transfer took place.
The mode of computation of capital gains is laid down in section 48 which provides that the income chargeable under the head "capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the & transfer of the capital asset, two amounts, namely, (i) expenditure incurred wholly and exclusively in connection with such transfer and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.
Then follows section 52 which is the material section requiring to be construed in the present appeal.
That section consists of two sub sections and runs as follows: 639 (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 assets by an amount of not less than fifteen 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 its transfer.
There is a marginal note to section 52 which reads: Consideration for transfer in cases of under statement".
It may be pointed out that originally when the Act came to be enacted, section 52 consisted of only one provision which is now numbered as sub section (I) and it was by section 13 of the Finance Act 1964 that sub section (2) was added in that section with effect from 1st April 1964.
Now on these provisions the question arises what is the true interpretation of section 52, sub section (2).
The argument of the Revenue was and this argument found favour with the majority Judges of the Full Bench that on a plain natural construction of the language of section 52, sub section (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.
Once the Income tax officer is satisfied that this condition exists, he can proceed to 640 invoke the provision in section 52 sub section (2) and take the fair market value of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and compute the capital gains on that basis.
No more is necessary to be proved, contended the Revenue.
To introduce any further condition such as understatement of consideration in respect of the transfer would be to read into the statutory provision something which is not there: indeed it would amount to rewriting the section.
This argument was based on a strictly literal reading of section 52 sub section (2 but we do not think such a construction can be accepted.
It ignores several vital considerations which must always be borne in mind when we are interpreting a statutory provision.
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 cannot ignore 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).
641 The primary objection against the literal constriction of section 52 sub section (2) is that it leads to manifestly unreasonable and absurd consequences.
It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but they can certainly help to fix its meaning.
It is a well recognised rule of construction that a statutory provision must be so construed, if possible that absurdity and mischief may be avoided.
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.
Take, for example, a case where A agrees to sell his property to for a certain price and before the sale is completed pursuant to the agreement and it is quite well known that sometimes the competition of the sale may take place even a couple of years after the date of the agreement the market price shoots up with the result that the market price prevailing on the date of the sale exceeds the agreed price at which the property is sold by more than 15% of such agreed price.
This is not at all an uncommon case in an economy of rising prices and in fact we would find in a large number 1 of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement.
Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no under statement of consideration in respect of the transfer and the transaction is perfectly honest and bonafide and, in fact, in fulfilment of a contractual obligation, the assessee who has sold the property should be liable to pay tax on capital gains which have not accrued or arisen to him.
It would indeed be most harsh and inequitable to tax the assessee on income which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation under taken by him.
It is difficult to conceive of any rational reason why the legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carries out such contractual obligation.
It would indeed be strange if obedience to the law should attract the levy of tax on income which has neither arisen to the assessee nor has been received by him.
If we may take another illustration, let us consider a case where A sells his property to with a stipulation that after some time which may be a couple of years or more, he shall resell the property to A for the same price.
642 could it be contended in such a case that when transfers the property to A for the same price at which he originally purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of resale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15% Many other similar situations can be contemplated where it would be absurd and unreasonable to apply section 52 sub section (2) according to its strict literal construction.
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 a statutory 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, Vide: Luke Inland Revenue Commissioner(1) The Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision.
We think that, having regard to this well recognised rule of interpretation, a fair and reasonable 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 bonafinde transaction where the full value of the consideration for the transfer is correctly declared by the assessee.
There are several important considerations which incline us to accept this construction of section 52 sub section (2).
The first consideration to which we must refer is the object and purpose of the enactment of section 52 sub section (2).
Prior to the introduction of sub section (2), section 52 consisted only of what is now sub section (1).
This sub section provides that where an assessee transfers a capital asset and in respect of the transfer two conditions are satisfied ' namely, (1) the transferee is a person directly or indirectly connected with the assessee and (ii) the 643 Income tax officer has reason to believe that the transfer was effected A with the object of avoidance or reduction of the liability of the assessee to tax on capital gains, the fair market value of the capital asset on the date of the transfer shall be taken to be the full value of consideration for the transfer and the assessee shall be taxed on capital gains on that basis.
The second condition obviously involves under statement of the consideration in respect of the transfer because it is only by showing the consideration for the transfer at a lesser figure than that actually received that the assessee can achieve the object of avoiding or reducing his liability to tax on capital gains.
And that is why the marginal note to section 52 reads: "Consideration for the transfer in cases of under statement ' '.
But, it must be noticed that for the purpose of bringing a case within sub section (1), it is not enough merely to show understatement of consideration but it must be further shown that the object of the under statement was to avoid or reduce the liability of the assessee to tax on capital gains.
Now it is necessary to bear in mind that when capital gains are computed by invoking sub section (I) it is not any fictional accrual or receipt of income which is brought to tax.
Sub section (I) does not deem income to accrue or to be received which in fact never accrued or was never received.
It seeks to bring within the net of taxation only that income which has accrued or is received by the assessee as a result of the capital asset.
But since the actual consideration received by the assessee is not declared or disclosed and in most of the cases, if not all, it would not be possible for the Income tax officer to determine precisely what is actual consideration received by the assessee or in other words how much m ore consideration is received by the assessee than that declared by him, sub section (1) provides that the fair market value of the property as on the date of the transfer shall be taken to be the full value of the consideration for the transfer which has accrued to or is received by the assessee.
Once it is found that the consideration in respect of the transfer is understated and the conditions specified in sub section (1) are fulfilled, the Income tax Officer will not be called upon to prove the precise extent of the undervaluation or in other words, the actual extent of the concealment and the full value of the consideration received for the transfer shall be computed in the manner provided in subsection (1).
The net effect of this provision is as if a statutory best judgment assessment of the actual consideration received by the assessee is made, in the absence of reliable materials.
644 But the scope of sub section (1) of section 52 is extremely restricted because it applies only where the transferee is a person directly or indirectly connected with the assessee and the object of the under statement is to avoid or reduce the income tax liability of the assessee to tax on capital gains.
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 within the 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 we have 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(1) 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".
In in re Mayfair Property Company(2) Lindley.
M.R. in 1898 found the rule "as necessary now as it was when Lord Coke reported Heydon 's case".
The rule was reaffirmed by Earl of Halsbury in Eastman Photographic Material Company vs Comptroller General of Patents, Designs and Trade Marks(3) in the following words.
"My Lords, it appears to me that to construe the Statute in question, it is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which the former Act had given rise, and to 645 the later Act which provided the remedy.
These three being A compared I cannot doubt the conclusion.
" This Rule being a Rule of construction has been repeatedly applied in India in interpreting statutory provisions.
It would therefore be legitimate in interpreting sub section (2) to consider that was the mischief and defect for which section 52 as it then stood did not provide and which was sought to be remedied by the enactment of sub section (2) or in other words, what was the object and purpose of enacting that sub section.
Now in this connection the speech made by the Finance Minister while moving the amendment introducing sub section (2) is extremely relevant, as it throws considerable light on the object and purpose of the enactment or sub section (2).
The Finance Minister explained the reason for introducing sub section (2) in the following words: "Today, particularly every transaction of the sale of property is for a much lower figure than what is actually received.
The deed of registration mentions a particular amount; the actual money that passes is considerably more.
It is to deal with these classes of sales that this amendment has been drafted It does not aim at perfectly bona fide transactions. but essentially relates to the day to day occurrences that are happening before our eyes in regard to the transfer of property.
I think, this is one of the key sections that should help us to defeat the free play of unaccounted money and cheating of the Government.
" Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred t o 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.
In fact there are at least 646 three decisions of this Court, one in Loka Shikshana Trust vs Commissioner of Income Tax(1) the other in Indian Chamber of Commerce vs Commissioner of Income tax(2) and the third in Additional Commissioner of Income tax vs Surat Art Silk Cloth Manufacturers Association(3) where the speech made by the Finance Minister while introducing the exclusionary clause in section 2 clause (15) of the Act was relied upon by the Court for the purpose of ascertaining what was the reason for introducing that clause.
The speech made by the Finance Minister while moving the amendment introducing sub section (2) clearly states what were the circumstances in which sub section (2) came to be passed, what was the mischief for which section 52 as it then stood did not provide and which was sought to be remedied by the enactment of sub section (2) and why the enactment of sub section (2) was found necessary.
It is apparent from the speech of the Finance Minister that sub section(2) was enacted for the purpose of reaching those cases where there was under statement of consideration in respect of the transfer or to put it differently, the actual consideration received for the transfer was 'considerably more ' than that declared or shown by the assessee, but which were not covered by sub section (1) because the transferee was not directly or indirectly connected with the assessee.
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 13: 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 and purpose.
We must therefore accept 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 and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received.
647 This interpretation of sub section (2) i strongly supported by A the marginal note to section 52 which reads 'Consideration for transfer in cases of under statement '.
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 vs Hammond(l) to show what the section is dealing with.
It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section.
Vide Bengal Immunty Company Limited vs State of Bihar(2) The marginal note to section 52.
as it now stands, was originally a marginal note only to what is presently sub section (I) and significantly enough, this marginal note remained unchanged even after the introduction of sub section (2) suggesting clearly that it was meant by Parliament to apply to both sub sections of section 52 and it must therefore be taken as indicating that, like sub section (1), sub section (2) is also intended to deal with cases where there is under statement of the consideration in respect of the transfer.
But apart from these considerations, 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.
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.
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.
The crucial and important words in sub section (2) are: "the full value of the consideration declared by the assessee", The word 'declared ' 648 is very eloquent and revealing.
It clearly indicates that the focus of sub section (2) is on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplates a case where the consideration received by the assessee in respect of the transfer is not truly declared or disclosed by him but is shown at a different figure.
This or course is a very small factor and by itself of little consequence but alongwith the other factors which we have discussed above, it assumes same significance as throwing light on the true intent of sub section (2).
There is also one other circumstance which strongly reinforces the view we are taking in regard to the construction of sub section (2).
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) in the following words: "Section 13 of the Finance Act has introduced a new sub section (2) in section 52 of the Income tax Act with a view to countering evasion of tax on capital gains through the device of an under statement of the full value of the consideration received or receivable on the transfer of a capital asset.
The provision existing in section 52 of the Income tax Act before the amendment (which has now been remembered as sub section (2) enables the computation of capital gains arising on transfer of a capital asset with .
reference to its fair market value as on the date of its : transfer, ignoring the amount of the consideration shown by the assessee, only if the following two conditions are satisfied: (a) the transferee is a person who is directly.
or indirectly connected with assessee, and (b) the Income tax officer has reason to believe that the transfer was effected with object of avoidance or reduction of the liability of assessee to tax of capital gains.
In view of these conditions, this provision has a limited operation and does not apply to other cases where the 649 tax liability on capital gains arising on transfer of capital A assets between parties not connected with each other, is sought to be avoided or reduced by an under statement of the consideration paid for the transfer of the asset " The circular also drew the attention of Income tax Authorities to the assurance given by the Finance Minister in his speech that sub B section (2) was not aimed at perfectly honest and bonafide transactions where the consideration in respect of the transfer was correctly disclosed or declared by the assessee, but was intended to deal only with cases where the consideration for the transfer was under stated by the assessee and was shown at a lesser figure than that actually received by him.
It appears that despite this circular, the Income tax Authorities in several cases levied tax by invoking the provision in sub section (2) even in cases where the transaction was perfectly, honest and bonafide and there was no under statement of the consideration.
This was quite contrary to the instructions issued in the circular which was binding on the Tax Department and the Central Board of Direct Taxes was, therefore, constrained to issue 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: "It has come to the notice of the Board that in some cases the Income tax officers have invoked the provisions of section 52(2) even when the transactions were bonafide.
In this context reference is invited to the decision of the Supreme Court in Navnitlal C. Jhaveri vs R K Sen(1) and Ellerman Lines Ltd. vs Commissioner of Income tax, West Bengal(2) wherein it was held that the circular issued by the Board would be binding on all officers and persons employed in the execution of the Income tax Act.
Thus, the Income tax officers are bound to follow the instructions issued by the Board." 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 trans 650 actions".
These two circulars of the Central Board of Direct Taxes are, as we shall presently point out, binding on the Tax Department in administering or executing the provision enacted in sub section (2), but quite apart from their binding character, they are clearly in the nature of contemporanea expositio furnishing legitimate aid in the construction of sub section (2).
The rule of construction by reference to contemporanea expositio is a well established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous.
This rule has been succinctly and felicitously expressed in Crawford on Statutory Construction (1940 ed) where it is stated in paragraph 219 that "administrative construction (i. e. contemporaneous construction placed by administrative or executive officers charged with executing a statute) generally should be clearly wrong before it is overturned; such a construction, commonly referred to as practical construction, although non controlling, is nevertheless entitled to considerable weight; it is highly persuasive.
" The validity of this rule was also recognised in Baleshwar Bagarti vs Bhagirathi Dass(1) where Mookerjee, J. stated the rule in these terms: "It is a well settled principle of interpretation that courts in construing a statute will give much weight to the interpretation put upon it, at the time of its enactment and since, by those whose duty it has been to construe, execute and apply it." and this statement of the rule was quoted with approval by this Court in Deshbandhu Guptu & Co. vs Delhi Stock Exchange Association Ltd.(2) It is clear from these two circulars that the Central Board of Direct Taxes, which is the highest authority entrusted with the execution of the provisions of the Act, understood sub section (2) as limited to cases where the consideration for the transfer has been under stated by the assessee and this must be regarded as a strong circumstance supporting the construction which we are placing on that sub section.
But the construction which is commending itself to us does not rest merely on the principle of contemporanea expositio.
The 651 two circulars of the Central Board of Direct Taxes to which we have just 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.
It is now well settled as a result of two decisions of this Court, one in Navnitlal C. Jhaveri vs RR.
Sen(1) and the other in Ellerman Lines Ltd. vs Commissioner of Income tax, West Bengal(2) that circulars issued by the Central Board of Direct Taxes under section 119 of the Act are binding ( n all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act.
The question which arose in Navnitlal C. Jhaveri 's case (supra) was in regard to the constitutional validity of sections 2(6A) (e) and 12(1B) which were introduced in the Indian Income Tax Act 1922 by the Finance Act 1955 with effect from 1st April, 1955.
These two sections provided that any payment made by a closely held company to its shareholder by a way of advance or loan to the extent to which the company possesses accumulated profits shall be treated as dividend taxable under the Act and this would include any loan or advance made in any previous year relevant to any assessment year prior to the assessment year 1955 56, if such loan or advance remained outstanding on the first day of the previous year relevant to the assessment year 1955 56.
The constitutional validity of these two sections was assailed on the ground that they imposed unreasonable restrictions on the fundamental right of the assessee under Article 19(1) (f) and (g) of the Constitution by taxing outstanding loans or advances of past years as dividend.
The Revenue however relied on a circular issued by the Central Board of Revenue under section 5(8) of the Indian lncome tax Act 1922 which corresponded to section 119 of the Present Act and this circular provided that if any such outstanding loans or advances of past years were repaid on or before 30th June 1922, they would not be taken into account in determining the tax liability of the shareholders to whom such loans or advances were given.
This circular was clearly contrary to the plain language of section 2(6A)(e) and section 121(B), but even so this Court held that it was binding on the Revenue and since "past transactions which would normally have attracted the stringent provisions of section 12(1B) as it was introduced in 1955, were substantially granted exemption from the 652 operation of the said provisions by making it clear to all the companies and their shareholders that if the past loans were genuinely refunded to the companies they would not be taken into account under section 12(1B)" sections 2(6A) (e) and 12(1B) did not suffer from the vice of unconstitutionality.
This decision was followed in Ellerman Lines case (supra) where referring to another circular issued by the Central Board of Revenue under section 5(8) of the Indian Income Tax Act 1922 on which reliance was placed on behalf of the assessee, this Court observed: "Now, coming to the question as to the effect of instructions issued under section 5(8) of the Act, this J Court observed in Navnit Lal C. Jhaveri vs R. K. Shah Appellate Assistant Commissioner, Bombay.
"It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act.
This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine trans actions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision.
The directions given in that circular clearly deviated from the provisions of the Act, yet this Court held that circular was binding on the Income tax officers.
" The two circulars of the Central Board of Direct Taxes referred to above must therefore be held to be binding on the Revenue in the administration or implementation of sub section (2) and this sub section must be read as applicable only to cases where there is under statement of the consideration in respect of the transfer.
Thus it is not enough to attract the applicability of sub section (2) 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 in respect of the transfer by not less than 15% of the value so declared, but it is furthermore necessary that the full value of the consideration in respect of the transfer is under stated or in other words, shown at a lesser figure than that actually received by the assessee.
Sub section (2) has no application 653 in case of an honest and bonafide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15% difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied.
If therefore the Revenue seeks to bring a case within sub section (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15% of the value so declared, but also that the consideration has been under stated and the assessee has actually received more than what is declared by him.
There are two distinct conditions which have to be satisfied before sub section (2) 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 establishing that 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 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.
The fulfilment 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 () can be invoked and the burden of doing so is clearly on the Revenue.
It is a well settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the Revenue and the second condition being as much a condition of taxability as the first, the burden lies on the Revenue to show that there is understatement of the consideration and the second condition is fulfilled.
Moreover, to throw the burden of showing that there is no understatement of the consideration, on the assessee would be to cast an almost impossible burden upon him to establish the negative, 654 namely, that he did not receive any consideration beyond that declared by him.
But the question then arises why has Parliament introduced the first condition as a pre requisite for the applicability of subsection (2) ? Why has Parliament provided that in order to attract the applicability of sub section (2) the fair market value of the capital asset as on the date of the transfer should exceed by 15% or more the full value of the consideration for the transfer declared by the assessee ? The answer is obvious.
The object of imposing the condition of difference of 15% or more between the market value of the capital asset and the consideration declared in respect of the transfer clearly is to save the assessee from the rigour of sub section (2) in marginal cases where difference in subjective valuation by different individuals may result in an apparent disparity between the fair market value and the declared consideration.
It is a well known fact borne out by practical experience that the determination of fair market value of a capital asset is generally a matter of estimate based to some extent on guess work and despite the utmost bonafides, the estimate of the fair market value is bound to vary from individual to individual.
It is obvious that if the restrictive condition of difference of 15% or more between the fair market value of the capital asset as on the date of the transfer and the consideration declared in respect of the transfer were not provided in sub section (2), many marginal cases would, having regard to the possibility of difference of opinion in subjective assessment of the fair market value, fall within the mischief of that sub section and the statutory measure enacted in that sub section for determining the consideration actually received by the assessee would be applicable in all its rigour in such cases.
This condition of 15% or more difference is merely intended to be a safeguard against under hardship which would be occasioned to the assessee if the inflexible rule of the thumb enacted in sub section (2) were applied in marginal cases and it has nothing to do with the question of burden of proof, for the burden of establishing that there is under statement of the consideration in respect of the transfer always rests on the Revenue.
The postulate underlying sub section (2) is that the difference between one honest valuation and another may range upto 15% and that constitutes the class of marginal cases which are taken out of the purview of sub section (2) in order to avoid hardship to the assessee.
655 It is therefore clear that sub section (2) cannot be invoked by A the Revenue unless there is under statement of the consideration in respect of the transfer and the burden of showing that there is such under statement is on the Revenue.
Once it is established by the Revenue that the consideration for the transfer has been understated or, to put it differently, the consideration actually received by the assessee is more than what is declared or disclosed by him, sub section (2) is immediately attracted.
subject of course to the fulfilment of the condition of 15% or more difference, and the Revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the assessee.
That would in most cases be difficult. .if not impossible, to show and hence sub section (2) relieves the Revenue of all burden of proof regarding the extent of understatement or concealment and provides a statutory measure of the consideration received in respect of the transfer.
It does not create any fictional receipt.
It does not deem as receipt something which is not in fact received.
It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains on the footing that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him.
This approach in construction of sub section (2) falls in line with the scheme of the provisions relating to tax on capital gains.
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.
656 This construction which we are placing on sub section (2) also marches in step with the Gift Tax Act, 1958.
If a capital asset is transferred for a consideration below its market value, the difference between the market value and the full value of the consideration received in respect of the transfer would amount to a gift liable to tax under the Gift Tax Act, 1958, but if the construction of sub section (2) contended for on behalf of the Revenue were accepted, such difference would also be liable to be added as part of capital gains taxable under the provisions of the Income Tax Act, 1961.
This would be an anomalous result which could never have been contemplated by the legislature, since the Income Tax Act, 1961 and the Gift Tax Act, 1958 are parts of an integrated scheme of taxation and the same amount which is chargeable as gift could not be intended to be charged also as capital gains.
Moreover, 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, and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax.
Sub section (2) would also be violative of the fundamental right of the assessee under Article 19 (1) (f) which fundamental right was in existence at the time when sub section (2) came to be enacted since on the construction canvassed on behalf of the Revenue, the effect of sub section (2) would be to penalise the assessee for transferring his capital asset for a consideration lesser by 15% or more than the fair market value and that would constitute unreasonable restriction on the fundamental right of the assessee to dispose of his capital 657 asset at the price of his choice.
The Court must obviously prefer a A construction which renders the statutory provision constitutionally valid rather than that which makes it void.
We must therefore hold 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.
We find that in the present case, it was not the contention of the Revenue that the property was sold by the assesssee to his daughter in law and five of his children for a consideration which was more than the sum of Rs. 16,500 shown to be the consideration for the property in the Instrument of Transfer and there was understatement or concealment of the consideration in respect of the transfer.
It was common ground between the parties and that was a finding of fact reached by the Income tax Authorities, that the transfer of the property by the assessee was a perfectly, honest and bonafide transaction where the full value of the consideration received by the assessee was correctly disclosed at the figure of Rs. 16,500.
Therefore, on the construction placed by us, 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.
We accordingly allow the appeal, set aside the order passed by the Full Bench and restore the order of Issac, J. allowing the writ 658 petition and quashing the order of re assessment made by the Income tax officer.
The Revenue will pay the costs of the assessee throughout.
S.R. Appeal allowed.

dataset_name: IN-Abs

summary:
The appellant assessee sold his house in Ernakulam on 25th of December, 1965 to his daughter in law and five of his children for the same price of Rs. 16,500 at which he purchased in the year 1958.
The assessment of the assessee for the assessment year 1966 67 for which the relevant accounting year was the calendar year 1965 was thereafter completed in the normal course and in this assessment, no amount was included by way of capital gains in respect of the transfer of the house, 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.
On 4th April 1968, however, the Income Tax officer issued a notice under section 148 of the 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, without stating what was the income alleged to have escaped assessment.
However, by his subsequent letter dated 4th March, 1969, the Income Tax officer stated 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 objections raised by the assessee were overruled 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 under sub section (2) of section 52, 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.
The assessee thereupon filed a writ petition in Kerala High Court challenging the validity of the order of re assessment insofar as it brought a sum of Rs. 48,500 to tax relying on sub section (2) of section 52 of the the Income Tax Act, 1961.
The writ petition was allowed, but in appeal the Full Bench by a majority judgment agreed with the views of the Income Tax officer and dismissed the writ petition.
Hence the assessee 's appeal by certificate.
630 Allowing the appeal, the Court ^ HELD: 1: 1.
Sub section (2) of section 52 of the Income Tax Act, 1961 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.
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.
[657 B, C D] 1: 2.
The burden of proving an understatement or concealment is on the Revenue, which may be discharged by it by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration received by him and there is understatement or concealment of the consideration in respect of the transfer.[657 B C] 1: 3.
Sub section (4), in the instant case, had no application 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.
It was a common ground between the parties and that was a finding of fact reached by the Revenue Authorities that the transfer of the property by the assessee was a perfectly honest and bonafide transaction where the full value of the consideration received by the assessee was correctly disclosed at the figure of Rs. 16,500.
The order of re assessment made by the Income Tax officer pursuant to the notice issued under section 148 was accordingly without jurisdiction.
[657 D G] 2: 1.
The task of interpretation of the statutory enactment is not a mechanical task.
It is more than mere reading of mathematical formula 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 thoughts and it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity".
Courts, therefore, must eschew literalness in the interpretation of a statutory provision and construe the language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context and the setting in which it occurs.
[640 C D, F.G, 642 B C] 2: 2.
Where the plain literal interpretation of a statutory 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.
The Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision.
It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but they can certainly help to fix its meaning.
631 Luke vs Revenue Commissioner, ; Headan 's case ; ; In re May Fair Property Company, LR [1898] 2 Ch.
Dn; Eastman Photographic Material Company vs Comptroller General of Patents, Designs and Trade Marks, , quoted with approval, 2:3.
The speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but 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.
[654 E G] Lok Shikshana Trust vs Commissioner af Income Tax, ; Indian Chamber of Commerce vs Commissioner of Income tax, ; Additional Commissioner of Income tax vs Surat Art Silk Cloth Manufacturers Association, , referred to.
Again 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 show what the section dealing with.
It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section.
[647 A B] Bushel vs Hammond, , quoted with approval.
Bengal Immunity Company Limited vs State of Bihar, , referred to.
The rule of construction by reference to contemporanea expositio is a well established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous.
[650 B C] Baleshwar Bagarti vs Bhagirathi Dass, I.L.R. 35 Calcutta 701, approved.
Deshbandhu Gupta and Co. vs Delhi Stock Exchange Association Ltd,. ; , referred to.
Having regard to the well recognised rule of interpretation, a fair and reasonable 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 understated 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.
[642 E F] 3.
Several considerations which lead to this conclusion are: 632 (a) The first consideration is the object and purpose of the enactment of section 52(2).
The speech made by the Finance Minister while moving the amendment introducing sub section (2) clearly states what were the circumstances in which such sub section (2) came to be passed, what was the mischief for which section 52 as it stood then did not provide and which was sought to be remedied by the enactment of sub section (2) and why the enactment of that sub section was found necessary.
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 chargeable tax on capital gain by understatement 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 and purpose.[642 F, 646 B. F] (b) Further the marginal note to section 52 as it now stands, was originally a marginal note only to what is presently sub section (1) and significantly enough, this marginal note remained unchanged even after the introduction of sub section (2) suggesting clearly that it was meant by Parliament to apply to both sub sections of section 52 and it must therefore be taken as indicating That, like sub section(l), sub section (2) is also intended to deal with cases where there is under statement of The consideration in respect of the transfer.
[647 C D] (c) The placement of sub section (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.
If Parliament intended sub section (2) to cover all cases where the condition of 15% difference is satisfied, irrespective of whether there is under statement of consideration or not, it is reasonable to assume that Parliament would have enacted that provision as a separate section and rot 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.
The crucial and important words in sub section (2) are: "the full value of the consideration declared by the assessee".
The word 'declared ' is very eloquent and revealing.
It clearly indicates that the focus of sub section (2) is on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplates a case where the consideration received by the assessee in respect of the transfer is not truly declared or disclosed by him but is shown at a different figure.
[647 D G, 648 A B] (d) The two circulars issued by the Central Board of Direct Taxes dated 7th July, 1964 and 14th January, 1974 are not only binding on the Tax Department in administering or executing the provision enacted in sub section (2), but are in nature of contemporenea expositio, furnishing legitimate aid in the construction of sub section (2).
It is clear from these two circulars that the Central Board of Direct Taxes, which is the highest authority entrusted with the execution of the provisions of the Act understood sub section (2) as limited to 633 cases where the consideration for the transfer has been under stated by the assessee.
These two circulars are legally binding on the Revenue and this legally binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of sub section (2) and they depart or deviate from such construction.
[650 A, F G] Navnitlal C. Jhaveri vs KK, Sen, 56 I.T.R. SC 198: Ellerman Lines Ltd. vs Commissioner of Income tax, West Bengal, , followed.
1 4: 1, It is a well settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the Revenue.
To throw the burden of showing that there is no understatement of the consideration, on the assessee would be 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.
[653 F H, 654 A] 4: 2.
If the Revenue seeks to bring a case within sub section (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15% of the value so declared, but also that the consideration has been under stated and the assessee has actually received more than what is declared by him.
There are two distinct conditions which have to be satisfied before sub section (2) 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 establishing that 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 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 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 understatement of the consideration.
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 subsection (2) can be invoked and the burden of doing so is clearly on the Revenue.
[653 B F] 4:3.
The object of imposing the condition of difference of 15% or more between the fair market value of the capital asset and the consideration declared in respect of the transfer clearly is to save the assessee from the rigour of subsection (2) in marginal cases where difference in subjective valuation by different individuals may result in an apparent disparity between the fair market value and the declared consideration.
This condition of 15% or more difference is merely intended to be a safeguard against undue hardship which would be occasioned to the assessee if the inflexible rule of the thumb enacted in sub section (2) were applied in marginal case and it has nothing to do with the question of burden of proof, for the burden of establishing that there is understatement of the concide 534 ration in respect of The transfer always rests on the Revenue.
The postulate underlying sub section (2) is that the difference between one honest valuation and another may range upto 15% and that constitutes the class of marginal cases which are taken out of the purview of sub section (2) in order to avoid hardship to the assessee.
[654 B C, F H] 4: 4.
Once it is established by the Revenue that the consideration for the transfer has been under stated, sub section (2) is immediately attracted, subject of course to the fulfillment of the condition of 15% or more difference, and the Revenue is then not required to show what is the precise extent of the understatement or in other words, what is the consideration actually received by the asseesee.
That would in most cases be difficult, if not impossible, to show and hence sub section (2) relieves the Revenue of all burden of proof regarding the extent of under statement or concealment and provides a statutory measure of the consideration received in respect of the transfer.
It does not create any fictional receipt.
It does not deem as receipt something which is not in fact received.
It merely provides a statutory best judgment assessment of the consideration actually received by the assessee and brings to tax capital gains OD the footing that the fair market value of the capital asset represents the actual consideration received by the assessee as against the consideration untruly declared or disclosed by him.
This approach in construction of sub section (2) falls in line with the scheme of the provisions relating to tax on capital gains.
[665A E] 4: 5.
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 41.
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.
[655 E F] 4: 6.
This construction of sub section (2) also marches in step with the Gift Tax Act, 1958.
If a capital asset is transferred for a consideration below its market value, the difference between the market value and the full value of the P consideration received in respect of the transfer would amount to a gift liable to tax under the Gift Tax Act, 1958.
Since the Income Tax Act, 1961 and the Gift Tax Act, 1958 are parts of an integrated scheme of taxation the same amount which is chargeable as gift could not be intended to be charged also as capital gains.
[656 A C] 4: 7.
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 an item which in no rational sense can be regarded as a citizen 's income or even receipt.
Sub section (2) would, therefore, on the construction of the Revenue, go outside the legislative power of Parliament, and it would Dot be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax.
[656 E F] 635 4: 8.
Sub section (2) would also be violative of the fundamental right of the assessee under Article 9(1) (f) which fundamental right was in existence at the time when sub section (2) came to be enacted since on the construction canvassed on behalf of the Revenue, the effect of sub section (2) would be to penalize the assessee for transferring his capital asset for a consideration lesser by 15% or more than the fair market value and that would constitute unreasonable restriction on the fundamental right of the assessee to dispose of his capital asset at the price of his choice.
The Court must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void.
[656 F H, 657 A]


judgement:
Special Leave Petition (Civil) No. 5631 of 1981.
AND S.L.P. (Civil) No.5632 of 1981 With S.L.P. (Civil) Nos.
5698 5701 of 1981.
From the judgment and order dated the 15th July, 1981 of the Bombay High Court in Writ Petition Nos.
1814, 1965, 1966, 1913 and 1815 of 1981 respectively.
Soli J. Sorabjee, P.H. Parekh and Hemant Sharma for the petitioners in SLP No. 5631 of 1931.
D. V. Patel, P.H. Parekh and Hemant Sharma for the petitioners in SLP No. 5632 of 1981.
Anil B. Dewan, S.V. Bhat, R. Satish and E.C. Agarwala for the respondents.
The Judgment of the Court was delivered by PATHAK, J.
This and the connected petitions pray for special leave to appeal to this Court against the refusal of the Bombay High Court to grant relief under Article 227 of the Constitution in the 714 matter of the dismissal of six declaratory suits filed by the petitioners.
The first respondent, Ahmed R.V. Peer Mohamed, is the owner of a property, "Peerbhai Mansion", situate on Vithalbhai Patel Road, Bombay.
He let out the entire first floor to the second respondent, Smt.
Saraswatibai Dahyabhai Bhatt.
The first floor consisted of a hall and three rooms and an adjoining terrace.
It seems that Saraswatibai sub divided the hall into a number of cabins, and transferred them to the occupation of the petitioners in this and the connected special leave petitions.
The landlord served a notice dated July 28, 1962 on her terminating her tenancy and thereafter filed an ejectment suit No. 576/5157 of 1962.
A decree for ejectment was passed in 1966.
An appeal by Saraswatibai was dismissed in 1972.
The landlord took out execution of the decree.
Obstructionist notice was served on all the petitioners and was made absolutely in favour of the landlord on February 27, 1974.
The petitioners appealed, and on November 30, 1976 these appeals were dismissed.
The six petitioners then filed separate suits Nos. 5734 to 5739 of 1976 against the landlord for a declaration that they were lawful sub tenants or licensees entitled to the protection of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 and for a permanent injunction restraining the landlord from executing the decree for ejectment obtained against Saraswatibai.
During the trial of the suits the sole issue pressed before the trial Judge was whether the petitioners were entitled to the benefit of the Act as lawful sub tenants or as deemed tenants or as protected licensees.
The Trial Judge ruled that they were not so protected and he dismissed the suits on March 29, 1978.
The petitioners appealed.
The only point raised in appeal was whether the petitioners could be described as lawful sub tenants or protected licensees.
Affirming the findings of the trial Judge the appellate Court held that the petitioners were inducted into the premises after 1960 and, therefore, were not entitled to be regarded as lawful sub tenants.
It found that Saraswatibai had become a statutory tenant on the termination of her tenancy by the notice dated July 28, 1962, and the petitioners were her licensees and after the decree for ejectment against Saraswatibai on September 30, 1966 her rights and interest in the premises came to an end and from that date the licensees were not entitled to any statutory protection.
Accordingly, the appellate Court maintained the dismissal of the suits filed by the petitioners.
715 The petitioners filed writ petitions under Article 227 of the Constitution before the High Court, and the High Court after hearing the parties rejected the petitions by its order dated July 15, 1981.
These petitions for special leave to appeal are directed against that order.
Mr. Soli Sorabjee, appearing for the petitioner in S.L.P. No. 5631 of 1981, contends that the petitioner must be regarded as a licensee entitled to the benefit of sub section
(2) of section 14 read with sub section
(1) of section 15 A of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947.
He urges that in virtue of the definition of "licensee" set forth in sub section
(4A) of section 5 of the Act, that is to say, a person who is in occupation of the premises under a subsisting agreement for licence, the petitioner, must be regarded as a licensee in occupation on February 1, 1973, and therefore a tenant falling within the terms of sub section
(1) of section 15 A.
On that, learned counsel says, the petitioner must be deemed, pursuant to sub section
(2) of section 14, to be a tenant of the landlord, the first respondent, on the terms and conditions of the agreement.
Now, there can be no doubt that if the petitioner can be said to be a licensee in occupation on February 1, 1973 he is entitled to assert that he has become a tenant of the landlord.
But a licensee is one who is in occupation under a subsisting agreement for licence.
The agreement for licence must be subsisting on the date on which he claims to be a licensee.
In the instant case, in order to establish his claim the petitioner must be in occupation on February 1, 1973 under an agreement for licence subsisting on that date.
In our opinion, the petitioner is not entitled to the benefit claimed by him.
An agreement for licence can subsist and continue to take effect only so long as the licensor continues to enjoy a right, title or interest in the premises.
On the termination of his right, title or interest in the premises, the agreement for licence comes to an end.
If the licensor is a tenant, the agreement for licence terminates with the tenancy.
No tenant is ordinarily competent to grant a licence enduring beyond his tenancy.
On the termination of the licensor 's tenancy the licensee ceases to be a licensee.
This loss of status is the point from which sub section
(2) of section 14 begins to operate and in consequence of its operation, the erstwhile licensee becomes a tenant of the landlord on the terms and conditions of the agreement.
What have we here ? Saraswatibai ceased to be tenant of any description long before February 1, 1973.
The contractual tenancy 716 came to an end when the notice to quit dated July 28, 1962 took effect and the statutory tenancy terminated when the decree for ejectment was passed thereafter.
Before February 1, 1973 she had ceased to be a tenant.
With that, the agreement for licence stood automatically terminated.
In consequence, the petitioner cannot legitimately claim to be a licensee on February 1, 1973.
Mr. Sorabjee relies on Madhusudan A. Mahale vs P.M. Gidh and others, but we are unable to see any support for the petitioner in the judgment in that case.
In our judgment, Special Leave Petition No. 5631 of 1981 must fail.
Mr. D.V. Patel, appearing for the petitioner in Special Leave Petition No. 5632 of 1981, points out that the petitioner had been in occupation of the entire flat as a sub tenant since 1943 and that in 1960 he had merely restricted his occupation to the portion presently occupied by him.
It must be taken, he contends, that he was a lawful sub tenant since 1943, and therefore, by virtue of sub section
(1) of section 14 of the Act he must be regarded as a tenant of the landlord on the determination of Saraswatibai 's tenancy.
The contention has no force.
The courts below have found that the occupation of the petitioner in the premises presently in his possession must be treated as dating back to 1962 and not earlier.
That being so, the benefit of sub section (1) of section 14 cannot be available to the petitioner.
The benefit can be claimed by a sub tenant to whom the premises have been lawfully sub let before the commencement of the Bombay Rents, Hotel and Lodging House Rates Control (Amendment) ordinance, 1959.
In as much as the sub tenancy of the petitioner in the premises has been found to commence from 1962, we must hold that this petitioner also has no right to continue in possession.
This Special Leave Petition must also be rejected.
As regards the remaining special leave petitions, it is admitted that they must be disposed of on the same footing as Special Leave .
Petition (Civil) No. 5631 of 1981.
In the result these special leave petitions are dismissed.
Learned counsel for the petitioners pray that the petitioners may be allowed to continue in possession for a period of eighteen 717 months in view of the great difficulty in securing alternative accommodation in Bombay.
They point out that the landlord, the first respondent, had agreed in the High Court to grant that period to the petitioners but subject to the condition that the petitioners did not move this Court in appeal.
Having regard to the circumstances of the case, it appears to us appropriate to direct that the petitioners shall not be dispossessed from the accommodation in their possession upto September 30, 1982, provided they furnish an undertaking with the Registrar of this Court within one month from today: (a) that they will hand over peaceful and vacant possession of the said premises to the landlord, the first respondent, on or before September 30, 1982.
(b) that they shall continue to pay to the first respondent by the 7th day of each month an amount on account of the use and occupation of the premises equal to the monthly amount paid by them to the licensor Saraswatibai under the agreement for licence, (c) that they will deposit within three months from today in the court executing the decree in Ejectment Suit No. 576/5157 of 1962 all arrears calculated in accordance with the condition (b) mentioned above for the period commencing with the date of the decree in that suit, and (d) that they shall not induct in the said premises any other person as sub lessee, licensee or otherwise.

summary:
Respondent No. 1 who was the landlord and had let out the petition premises to respondent No. 2, served a notice (dated July 28, 1962) terminating her tenancy and filed an ejectment suit.
A decree for ejectment was passed (in 1966) and the appeal of respondent No. 2 was dismissed (in 1972).
The landlord took out execution of the decree.
Obstructionist notice served on the petitioners who were sub tenants of respondent No. 2 was made absolute in favour of the landlord.
The pensioners ' appeal was dismissed.
Dismissing the petitioners ' suits against the landlord for a declaration that they were lawful sub tenants /licensee entitled to the protection of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 and for an injunction restraining the landlord from executing the decree for ejectment the trial Court held that they were not entitled to the benefit of the Act as lawful sub tenants or as deemed tenants or as protected licensees.
The petitioners appeals were dismissed on the ground that having been inducted into the premises after 1960 they were not entitled to be regarded as lawful sub tenants.
In the Special Leave Petitions to this Court it was contended that the petitioners: (1) must be regarded as licensees entitled to the benefit of section 14(2) read with section 15 A(1) of the Act: and (2) having been in occupation since 1943 and having in 1960 merely restricted their occupation to the portions occupied by them, they were lawful sub tenants since 1943, and, therefore, by virtue of section 14(1) they must be regarded as tenants on the determination of respondent No. 2 's tenancy.
Dismissing the Special Leave Petitions: ^ HELD: 1.
An agreement for licence can subsist and continue only so long as the licensor continues to enjoy a right, title or interest in the premises.
On the termination of his right, title or interest in the premises, the agreement for licence comes to an end.
If the licensor is a tenant, the agreement for licence terminates with the tenancy.
No tenant is ordinarily competent to grant a licence beyond his tenancy.
On the termination of the licensor 's tenancy the licensee cases to be a licensee.
This loss of status is the point 713 from which sub section (2) of section 14 of the Act begins to operate and in consequence of its operation, the erstwhile licensee becomes a tenant of the landlord on the terms and conditions of the agreement.
[715 F H] In the instant case respondent No. 2 ceased to be a tenant of any description long before February 1, 1973.
The contractual tenancy came to an end when the notice to quit took effect and the statutory tenancy terminated when the decree for ejectment was passed thereafter.
When she had ceased to be tenant, the agreement for licence stood automatically terminated by reason of which the petitioners cannot claim to be licensees on February 1, 1973.
[715 H 716 B] 2.
The benefit of section 14(1) can be claimed by a sub tenant to whom the premises had been lawfully sub let before the commencement of the Bombay Rents, Hotel and Lodging House Rates Control (Amendment) Ordinance, 1959.
[716 E] In the instant case the sub tenancy has been found to commence from 1962 and not earlier.
The benefit of sub section (1) of section 14 cannot be available, and there can be no right to continue in possession.
[716 F] Madhusudan A Mahale vs P.M. Gidh and others, held inapplicable.