# K.P. VARGHESE v. THE INCOME-TAX OFFICER, ERNAKULAM, AND ANOTHER

- **Citation:** [1982] 1 S.C.R. 629
- **Court:** Supreme Court of India
- **Decided:** 1981-09-04
- **Case number:** Writ Appeal No. 127 of 1970
- **Bench:** P.N. Bhagwati, E.S. Venkataramiah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/k-p-varghese-v-the-income-tax-officer-ernakulam-and-another-8306
- **Pages:** 30

## Headnote

Capital gains-Whether understatement of consideration in a transfer of pro·
perty Is a necessary condition for attracting the applicability of sub-.section (2) of
section 52 of the Income Tax Act, 1961-Burden of proof of such understatement
is on the Revenue-Interpretation of statutes, explained,
The appellant assessee sold his house in Ernakularn 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, oo 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 Jetter 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 re-assessment was passed by the Income Tax Officer including the sum of
Rs. 4&,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 tho
th~ 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 certifi ..
cate.
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SUPREME COURT REPORTS
(1982] I s.c.a.
Allowing the appeal, the Court
HELD : l : l. Sub-section (2) of section 52 of the Income Tax Act, 1961
can be invoked only where the consideration for the transfer has been under·
stated 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 dec1ared 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 (~), in the instant case, had no application and the
Income Tax Officer could have no reason to believe that any part of the incom.e
of the assessee had escaped assessment so as to j

## Text

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629
A
K.P. VARGHESE
v.
THE INCOME-TAX OFFICER,
ERNAKULAM, AND ANOTHER
September 4, 1981
[P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ.]
Capital gains-Whether understatement of consideration in a transfer of pro·
perty Is a necessary condition for attracting the applicability of sub-.section (2) of
section 52 of the Income Tax Act, 1961-Burden of proof of such understatement
is on the Revenue-Interpretation of statutes, explained,
The appellant assessee sold his house in Ernakularn 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, oo 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 Jetter 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 re-assessment was passed by the Income Tax Officer including the sum of
Rs. 4&,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 tho
th~ 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 certifi ..
cate.
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SUPREME COURT REPORTS
(1982] I s.c.a.
Allowing the appeal, the Court
HELD : l : l. Sub-section (2) of section 52 of the Income Tax Act, 1961
can be invoked only where the consideration for the transfer has been under·
stated 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 dec1ared 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 (~), in the instant case, had no application and the
Income Tax Officer could have no reason to believe that any part of the incom.e
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 bona:ide transaction where the
full value of the cons;deration 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 or the statutory enactment 1s 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 in1perfect instru·
meat 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 produ·
ces a manifestly absurd and unjust result which could never have been int~nded
by the Iegislatu1e, 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 statut..:>ry 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.
[64l·A 642 C-E]
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K.P. VARGHESE V. 1.T.0.
631
Luke v. Revenue Commissioner, [1963] A.C. 557; Headan's case [1584] 3
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Co. Rep. 7(a); In re May Fair Property Company, LR [1898] 2 Ch. Dn; Eastman
Photographii: Material Company v. Comptroller.General of Patents, Designs and
Trade Marks, L. R. [1898] A.C. 571, 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 v. Co1nmissioner af Income-Tax, 101 I.T.R. 234; Indian
Chamber of Commerce v, Commissioner of Income-tax, 101 I.T.R. 796; Additional
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Commissioner of Income-tax v. Su~at Art Silk Cloth 1\fanufacturers Association,
121 I.T.R. I, referred to.
2:4.
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-Bl
Bushel v. Ham1nond, [l904] 2 KB 563, quoted with approval.
Bengal Immunity Company limited v. State of Bihar, [1955] 2 SCR 603,
referred to.
2:5. 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 v. Bhagirathi Dass, I.L.R. 35 Calcutta 701, approved.
Deshbandhu Gupta and Co. v. Delhi Stock Exchange Association Ltd,.
[1979] 4 S.C.C. 565, referred to.
2:6. Having regard to the well recognised rule of interpretation, a fair and
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reasonable construction of section 52 sub·section (2) would be to read into it a
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condition that it would apply only where the consideration for the transfer is
understated or in other words, the asses.see has actually received a larger consi·
deration for the transfer than what is declared in the instrument of transfer and
it would have no application in case of a honafide transaction where the full
value of the consideration for the transfer is correctly declared by the assessee.
[642 E-FJ
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3. Several considerations which lead to this conclusion are :
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SUPREME COURT REPORTS
[1982] I S.C.R.
(a) The first consideration is the object and purpose of the enactme~t 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 bonafidc~
transactions where the consideration for the transfei 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 1he chargeable tax
on capital gain by unde1statement of the ccnsideration. This was real object
and rurpose c·f the enac1ment of 5.Ub section (2) and the interpretation of this
~ub·!ecticn must fall in line with the advancerr:ent of that object and purpose.
[642 F, 646 B·F]
(b) Further the marginal note to section 52 as it now stands, was originalJy
a marginal note only to what is presently sub-section (1) and significantly enough,
this marginal note remained unchanged e\·en 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 therefo1e 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.n]
(c) The placement of sub-section (2) in section 52 does indicate in son1e
~mall tteasure 1hat Parliament intended that sub-section to apply only to cases
where the consideration in respect of the transfer is under-stated by the asscssee.
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 subsection 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-BJ
(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 tl:e nature of conttmporonta txpo.sitio, furnishing legitimate aid in
the construction of sub-section (2). It is clear from these two circulars that tho
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
K.P. VARGHESE V. 1.T.O.
633
cases where the consideratioa 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]
Navnit/al C. Jhaveri v. K.K. Sen, 56 I.T.R. SC 198; Ellerman Lines ltd. v.
A
Commissioner oflncome·tax, West Bengal, 82 l.T.R. 913 (SC), followed.
8:
4: 1, It is a well settled rule of law that the onus of establishing that the
conditions of taxabiiity 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 wilhin 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 subsection (2) can be invoked by the Revenue and the burden of showing that these
two conditions a!'e 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 bonafid~ transaction and there may be no under•statement of the consideration. The
fulfilment of the second condition has therefore to be established indepen ..
dently of the first condition and merely because the first condition is satisfied, no
inferenee can necessarily follow that the second condition is also fulfilled. Each
condition has got to be viewed and established independently before sub-section
(2) can be invoked and the burden of doing so is clearly on the Revenue.
[653 B-F]
4 : 3. The object of imposing the condition or difference or 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 subseclioo (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 con~idec
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SUPREME COURT REPORTS
[ 1982] I s.c:. R
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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]
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4: 4. Once it is established by the Revenue that the consideration for 1he
transfer has been under-stated, 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
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 on the footing that the
fair market value of the capital asset reprt:sents 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 1ine 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 atongwith section 48 which provides th~ 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·
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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]
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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
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-Cl
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 bas 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 not be possible to
justify it even as an incidental or ancillary provision or a provision intended to
prevent evasion of tax. [656 E-F]
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K.P. VARGHESE v. l.T.O. (Bhagwati, J.)
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4: 8.
Sub-section (2) would also be violative of the fundamental right of
the assessee under Article 9(1) (f )-which fundamencal 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 transfering his capital asset for a consideration lessser 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]
CIVIL APPELLATE JURISDICTION:
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.
S. Swaminathan, N. Srinivasan and Gopal Subramaniam for the
intervener.
Debi Pal, Praveen Kumar and A.K. Sharma for the intervener.
K.R. Kazi and S.C. Patel for the intervener.
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N.A. Palkhiwala, P.H. Parekh, J.B. Dadachanji, H. Salve and
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Ravinder Narain for interveners.
S.C. Patel for the intervener.
J.B. Dadac hanji for the intervener.
c;
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
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BHAGWATI, J. The principal question that arises for deter-
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636
SUPREME COURT REPORTS
[1982] I s.c.R.
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 111 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 assessmeut 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 (l) for bringing the sum of
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K.P. VARGHESE v. l.T.O. (Bhagwati, J.)
637
Rs. 48,500 to tax, because there was admittedly no under-statement
of consideration in respect of the transfer of the house and it was
not possible to say that the transfer was effected by the assessee
with the object of avoidance or reduction of his liability under
section 45.
The 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.
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 tbat 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
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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 \\as accordingly dismissed and the order of re-assessment
suslained by the majority decision reached by the Full Bench.
8
Hence the present appeal
by the assessee with certificate obtained
from the High Court.
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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 include "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 rax under the head "capital gains" and shall be deemed to
be the income of the previous year in which the transfer took
place. He 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 :
....
K.P. VARGHESE v. I.T.0. (Bhagwati, J.)
(I ) 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.
639
(2) Without prejudice to the provisions of sub-section (I),
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 asses! 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 !st 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
dc:clared 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
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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 consi·
deration 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 under·
statement 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 legis·
lature 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 pro~isons in which section 52 sub-section (2)
appears, because, as pointed out by Judge Learned Hand in most
felicitous language: "--the meaning of a sentence may he 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).
..
K.P. VARGHESE v. I.T.O. (Bhagwati, J.)
641
The primary objection against the literal construction 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 pro·
vision 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 sug·
gested 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 B
for a certain price and before the sale is completed pursuant to the
agreement and it is quite well-known that sometimes the completi·
tion 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
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
poperty is sold under the agreement.
Can it be contended with
any degree of fairness and justice that in such cases, where there is
dearly 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 obliga ·
tion. 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 B
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.
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could it be contended in such a case that when B 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 consrruction.
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 v.
Inland Reuenue Commissioner(') The Court may also in such a case
read into tbe 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.