I sold shares well below market value. Can the officer compute my capital gain on the market price instead of the price I actually received?
Not under the general computation provision. The Supreme Court held that the consideration for a transfer is what the transferor receives in lieu of the asset he parts with, so the asset transferred cannot itself be the consideration. Full value of the consideration therefore means the whole price bargained for, without deduction, and has no necessary reference to the market value of the asset or to the adequacy of the price. Market value can be substituted only where a deeming provision says so - here a proviso requiring both a connection between the parties and an object of avoiding liability, conditions the Revenue conceded were not met.
Decided by the Supreme Court (Supreme Court of India - judgment delivered by Ramaswami J (the harvested page's bench line names J.C. Shah and S.M. Sikri)) on 1967-04-26, reported as [1967] 66 ITR 622 (SC). It bears on section 12B(2) of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 48, section 45 of the Income Tax Act 1961, in Capital Gains matters.
This is the case that separates the computation provision from the anti-avoidance provisions built on top of it. Its reasoning is structural and still sound: because the proviso expressly empowered the officer to take fair market value as the full value of the consideration in defined circumstances, the main provision cannot already mean market value, or the proviso would have nothing to do. The word full is contrasted with a part of the price, not with an inadequate price - the section is about the whole price, not about whether the price was enough. The practical consequence is that a substitution of market value must be traced to a specific provision, with its own conditions proved. The judgment is also a useful authority on references: a court is normally bound by the findings in the statement of the case, but where the statement does not correctly summarise or interpret the Tribunal's own order, the court may look at the order itself.
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Before 1 January 1939 the respondent company bought 1,500 shares of Bally Jute Company Limited, of which it was later the managing agent. On 1 April 1946 it transferred those shares to Giridhari Lal Mehta at Rs 136 a share, the market value that day being Rs 620. Mehta was described as the beneficial owner of the respondent, having bought all but five of its shares. On the same day he sold the shares to Jardine Skinner & Co at Rs 100 a share, keeping the scrips with blank transfer forms until May 1946, when they were registered in Jardine Skinner's name. Jardine Henderson & Co Ltd was incorporated in November 1946, and in March 1947 Jardine Skinner transferred the shares to it at Rs 493-10-0 a share. Assessing the respondent for 1947-48, the Income-tax Officer treated the difference of Rs 484 a share as capital gain under section 12B, acting under the first proviso to section 12B(2) with the Inspecting Assistant Commissioner's prior approval. The Appellate Assistant Commissioner affirmed him on 25 April 1950 but fixed the gain at Rs 6,93,000, taking Rs 153 a share, the market value on 1 January 1939, as the actual cost under the third proviso, and holding the parties directly connected and the sale made to avoid tax. The Tribunal, on 23 August 1951, held that the sale was not effected to avoid or reduce liability under section 12B so the first proviso did not apply, yet affirmed the Appellate Assistant Commissioner. On a reference the Calcutta High Court divided - Sinha J answering for the Revenue, Datta J against, and Bachawat J agreeing with Datta J - and on 15 July 1963 the question was answered in the respondent's favour. The Commissioner appealed on a certificate. Before this Court the Revenue conceded that the first proviso could not apply, because the transfer took place before section 12B was enacted and so could not have been made to avoid liability under it.
The High Court's judgment was set aside, the appeal allowed to the extent indicated, and the case remanded, the parties bearing their own costs to that stage. On the law, the Revenue's contention that full value of the consideration in the main part of section 12B(2) means the market value of the asset transferred was rejected. On the facts, the Court found it could not answer the referred question because the Tribunal's language recording its finding on the actual contract price paid was obscure and its import could not be determined. The best course was for the Tribunal to rehear the appeal and record a clear finding after hearing the parties, giving the respondent an opportunity to explain the unusual nature of the transaction and the conduct of the parties, and then to dispose of the appeal. If the assessee offers an explanation the Tribunal may call for documentary or other evidence in support and for elucidation of it, and the Revenue may lead evidence in rebuttal.
The construction turns on what consideration means. What the transferor receives in lieu of the asset he parts with - money or money's worth - is the consideration, so the very asset transferred cannot be the consideration for its own transfer. Full value of the consideration therefore names the full value of the thing received in exchange, and in a sale that is the full sale price actually paid; the legislature used the phrase rather than price because the section covers exchanges too, where the consideration is not money. The word full is contrasted with a part of the price: full price means the whole price, which is why sub-section (2) provides for deductions from it, and the expression means the whole price without any deduction whatsoever, with no reference to the adequacy or inadequacy of the price bargained for and none to the market value of the asset. The structure of the section confirms this. In the first proviso the expression full value of the consideration is used in contradistinction to fair market value of the capital asset, and the officer is expressly empowered to take the latter as the former where two conditions are satisfied - that the transferor was directly or indirectly connected with the transferee, and that the transfer was effected with the object of avoiding or reducing liability under section 12B. That fiction would be unnecessary if the main provision already meant market value; where its conditions are not satisfied, the main part applies and the officer must take the full value of the consideration for the transfer. On the facts, the Tribunal had rejected the proviso yet affirmed an assessment built on it, reasoning that the officer has a right to know the full value, that an assessee cannot shut him out by merely putting a figure on the document of transfer, and that his right to determine the full value is always there, particularly where the assessee refuses information and the stated value is suspiciously low. The Tribunal recorded that the shares were transferred at the book value of Rs 136 while the market value was admittedly Rs 620, that the assessee refused to explain that or the subsequent resales, and that prima facie the transaction was not bona fide. The Court held that language too obscure to yield a finding on the price actually received. It also dealt with a procedural point: the statement of the case, drawn up by a differently constituted Bench, said the Tribunal had concluded that the sale was effected at Rs 620 and that the market price must have been paid. A court normally proceeds on the findings in the statement of the case, but where the statement does not correctly summarise or interpret the finding in the Tribunal's order, which is part of the case, the court may look at the order itself.
The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for.
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Handle my notice → Ask a CA on WhatsAppNot under the general computation provision. The Supreme Court held that the consideration for a transfer is what the transferor receives in lieu of the asset he parts with, so the asset transferred cannot itself be the consideration. Full value of the consideration therefore means the whole price bargained for, without deduction, and has no necessary reference to the market value of the asset or to the adequacy of the price. Market value can be substituted only where a deeming provision says so - here a proviso requiring both a connection between the parties and an object of avoiding liability, conditions the Revenue conceded were not met. This was decided by the Supreme Court (Supreme Court of India - judgment delivered by Ramaswami J (the harvested page's bench line names J.C. Shah and S.M. Sikri)) and bears on section 12B(2) of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 48, section 45 of the Income Tax Act 1961. It is reported as [1967] 66 ITR 622 (SC). This is the case that separates the computation provision from the anti-avoidance provisions built on top of it. Its reasoning is structural and still sound: because the proviso expressly empowered the officer to take fair market value as the full value of the consideration in defined circumstances, the main provision cannot already mean market value, or the proviso would have nothing to do. The word full is contrasted with a part of the price, not with an inadequate price - the section is about the whole price, not about whether the price was enough. The practical consequence is that a substitution of market value must be traced to a specific provision, with its own conditions proved. The judgment is also a useful authority on references: a court is normally bound by the findings in the statement of the case, but where the statement does not correctly summarise or interpret the Tribunal's own order, the court may look at the order itself. If it applies to you, the first step is this: Insist that any substitution of value be traced to a specific deeming provision, and make the Revenue prove each of that provision's conditions rather than argue undervaluation at large.
Before 1 January 1939 the respondent company bought 1,500 shares of Bally Jute Company Limited, of which it was later the managing agent. On 1 April 1946 it transferred those shares to Giridhari Lal Mehta at Rs 136 a share, the market value that day being Rs 620. Mehta was described as the beneficial owner of the respondent, having bought all but five of its shares. On the same day he sold the shares to Jardine Skinner & Co at Rs 100 a share, keeping the scrips with blank transfer forms until May 1946, when they were registered in Jardine Skinner's name. Jardine Henderson & Co Ltd was incorporated in November 1946, and in March 1947 Jardine Skinner transferred the shares to it at Rs 493-10-0 a share. Assessing the respondent for 1947-48, the Income-tax Officer treated the difference of Rs 484 a share as capital gain under section 12B, acting under the first proviso to section 12B(2) with the Inspecting Assistant Commissioner's prior approval. The Appellate Assistant Commissioner affirmed him on 25 April 1950 but fixed the gain at Rs 6,93,000, taking Rs 153 a share, the market value on 1 January 1939, as the actual cost under the third proviso, and holding the parties directly connected and the sale made to avoid tax. The Tribunal, on 23 August 1951, held that the sale was not effected to avoid or reduce liability under section 12B so the first proviso did not apply, yet affirmed the Appellate Assistant Commissioner. On a reference the Calcutta High Court divided - Sinha J answering for the Revenue, Datta J against, and Bachawat J agreeing with Datta J - and on 15 July 1963 the question was answered in the respondent's favour. The Commissioner appealed on a certificate. Before this Court the Revenue conceded that the first proviso could not apply, because the transfer took place before section 12B was enacted and so could not have been made to avoid liability under it. The matter was decided on 1967-04-26 by the Supreme Court (Supreme Court of India - judgment delivered by Ramaswami J (the harvested page's bench line names J.C. Shah and S.M. Sikri)). On those facts the Supreme Court held as follows. The High Court's judgment was set aside, the appeal allowed to the extent indicated, and the case remanded, the parties bearing their own costs to that stage. On the law, the Revenue's contention that full value of the consideration in the main part of section 12B(2) means the market value of the asset transferred was rejected. On the facts, the Court found it could not answer the referred question because the Tribunal's language recording its finding on the actual contract price paid was obscure and its import could not be determined. The best course was for the Tribunal to rehear the appeal and record a clear finding after hearing the parties, giving the respondent an opportunity to explain the unusual nature of the transaction and the conduct of the parties, and then to dispose of the appeal. If the assessee offers an explanation the Tribunal may call for documentary or other evidence in support and for elucidation of it, and the Revenue may lead evidence in rebuttal.
The construction turns on what consideration means. What the transferor receives in lieu of the asset he parts with - money or money's worth - is the consideration, so the very asset transferred cannot be the consideration for its own transfer. Full value of the consideration therefore names the full value of the thing received in exchange, and in a sale that is the full sale price actually paid; the legislature used the phrase rather than price because the section covers exchanges too, where the consideration is not money. The word full is contrasted with a part of the price: full price means the whole price, which is why sub-section (2) provides for deductions from it, and the expression means the whole price without any deduction whatsoever, with no reference to the adequacy or inadequacy of the price bargained for and none to the market value of the asset. The structure of the section confirms this. In the first proviso the expression full value of the consideration is used in contradistinction to fair market value of the capital asset, and the officer is expressly empowered to take the latter as the former where two conditions are satisfied - that the transferor was directly or indirectly connected with the transferee, and that the transfer was effected with the object of avoiding or reducing liability under section 12B. That fiction would be unnecessary if the main provision already meant market value; where its conditions are not satisfied, the main part applies and the officer must take the full value of the consideration for the transfer. On the facts, the Tribunal had rejected the proviso yet affirmed an assessment built on it, reasoning that the officer has a right to know the full value, that an assessee cannot shut him out by merely putting a figure on the document of transfer, and that his right to determine the full value is always there, particularly where the assessee refuses information and the stated value is suspiciously low. The Tribunal recorded that the shares were transferred at the book value of Rs 136 while the market value was admittedly Rs 620, that the assessee refused to explain that or the subsequent resales, and that prima facie the transaction was not bona fide. The Court held that language too obscure to yield a finding on the price actually received. It also dealt with a procedural point: the statement of the case, drawn up by a differently constituted Bench, said the Tribunal had concluded that the sale was effected at Rs 620 and that the market price must have been paid. A court normally proceeds on the findings in the statement of the case, but where the statement does not correctly summarise or interpret the finding in the Tribunal's order, which is part of the case, the court may look at the order itself. In the words reproduced by the source cited on this page: "The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for."
It was decided by the Supreme Court on 1967-04-26 and is reported as [1967] 66 ITR 622 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 12B(2) of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 48, section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The High Court's judgment was set aside, the appeal allowed to the extent indicated, and the case remanded, the parties bearing their own costs to that stage. On the law, the Revenue's contention that full value of the consideration in the main part of section 12B(2) means the market value of the asset transferred was rejected. On the facts, the Court found it could not answer the referred question because the Tribunal's language recording its finding on the actual contract price paid was obscure and its import could not be determined. The best course was for the Tribunal to rehear the appeal and record a clear finding after hearing the parties, giving the respondent an opportunity to explain the unusual nature of the transaction and the conduct of the parties, and then to dispose of the appeal. If the assessee offers an explanation the Tribunal may call for documentary or other evidence in support and for elucidation of it, and the Revenue may lead evidence in rebuttal. It arises in Capital Gains matters, on section 12B(2) of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 48, section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India - judgment delivered by Ramaswami J (the harvested page's bench line names J.C. Shah and S.M. Sikri). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Be ready to explain an unusual transaction on the evidence. The Court remanded precisely so the assessee could explain the sale at a fraction of market value and the chain of resales, and made clear that the Tribunal could require documents in support and allow rebuttal. Where the Tribunal's finding is obscure, say so and ask for a clear finding; here the Court declined to answer the reference at all and sent the appeal back for one. Check whether one of the modern deeming provisions applies to your transfer before relying on the price in the document; several now substitute a statutory value for the consideration in defined cases.
Still good law. I read the full judgment to its order of remand. I checked no later authority or statutory history in this session. The construction of full value of the consideration as the price received, not the market value, is applied to the corresponding provision of the 1961 Act and is the reason substitutions of value must be traced to a specific section. A reader must, however, check the deeming provisions now in force - I state from my own knowledge, unverified here, that there are provisions substituting a stamp duty value for land or buildings and a fair market value for certain unquoted shares - because on facts like these one of them may supply what the proviso in this case did not. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court did not decide the case: it held the Tribunal's finding on the price actually received to be obscure and remanded the appeal for a clear finding, so nothing here settles what the respondent in fact received or whether the transaction was genuine, and the outcome after remand is not recorded. The judgment also does not deal with whether the assessee's refusal to explain could support an inference that a higher price was received, beyond noting the Tribunal's own remarks - that question was left to the rehearing. The harvested page's bench line names J.C. Shah and S.M. Sikri while the judgment is delivered by Ramaswami J, so I cannot give the composition of the Bench with confidence. The judgment also gives the Tribunal's order date as 23 August 1951 in one place and 23 August 1961 in another, and the statement of the case as dated 20 July 1952 in one place and 29 July 1952 in others. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The High Court's judgment was set aside, the appeal allowed to the extent indicated, and the case remanded, the parties bearing their own costs to that stage. On the law, the Revenue's contention that full value of the consideration in the main part of section 12B(2) means the market value of the asset transferred was rejected. On the facts, the Court found it could not answer the referred question because the Tribunal's language recording its finding on the actual contract price paid was obscure and its import could not be determined. The best course was for the Tribunal to rehear the appeal and record a clear finding after hearing the parties, giving the respondent an opportunity to explain the unusual nature of the transaction and the conduct of the parties, and then to dispose of the appeal. If the assessee offers an explanation the Tribunal may call for documentary or other evidence in support and for elucidation of it, and the Revenue may lead evidence in rebuttal.
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