The AO says I sold below market value and wants to tax the difference. Can he do that?
Not on the gap alone. Section 52(2) applied only where the consideration had actually been understated; a difference of more than fifteen per cent between fair market value and the declared price was not by itself enough, and the burden of establishing actual understatement lay on the Revenue.
Decided by the Supreme Court (Supreme Court of India — P.N. Bhagwati and E.S. Venkataramiah, JJ. (judgment of the Court delivered by Bhagwati, J.)) on 1981-09-04, reported as (1981) 131 ITR 597 (SC); 24 CTR 358; 7 Taxman 13; Civil Appeal No. 412(NT) of 1973. It bears on section 52(2), section 48, section 45, section 148, section 119 of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
The provision construed here no longer exists, so this is not authority to defeat a s.50C or s.43CA addition. What survives is the reasoning, and it is quoted constantly: that a literal reading producing a manifestly absurd and unjust result may be modified to reach the legislative intention, that a marginal note and the scheme of the section control the sub-section within it, that CBDT circulars directing officers not to invoke a provision in bona fide transactions bind the department, and that Entry 82 of List I confines the tax to income, so a gain neither accrued nor received is hypothetical. Section 48 itself speaks of consideration received or accruing.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The assessee owned a house in Ernakulam bought in 1958 for Rs 16,500. On 25 December 1965 he sold it for the same Rs 16,500 to his daughter-in-law and five of his children. The assessment for 1966-67, the accounting year being calendar 1965, was completed without any capital gain. On 4 April 1968 the Income-tax Officer issued a notice under s.148 which did not state what income had escaped, and by letter of 4 March 1969 told the assessee that he proposed to fix the fair market value at Rs 65,000 and tax the difference of Rs 48,500 as capital gains. The officer could not use s.52(1), because it was admitted that there was no understatement and no object of avoiding liability under s.45; he rested the reassessment on s.52(2) alone, on the view that it needed no understatement and applied wherever fair market value exceeded declared consideration by 15 per cent or more. Isaac, J. of the Kerala High Court quashed the reassessment on a writ petition; a Full Bench, by majority, set his order aside and upheld the officer. The assessee appealed by certificate.
The appeal was allowed, the Full Bench order set aside and Isaac, J.'s order restored, quashing the reassessment; the Revenue was ordered to pay the assessee's costs throughout. Section 52(2) can be invoked only where the consideration for the transfer has been understated — that is, where the assessee actually received more than he declared. Two conditions must be satisfied: that fair market value exceeds declared consideration by not less than 15 per cent, and that the consideration has in fact been understated. The burden of establishing both is on the Revenue, and may be discharged by facts and circumstances from which understatement can reasonably be inferred. The sub-section has no application to an honest and bona fide transaction where the consideration is correctly disclosed. Since the transfer here was found as a fact to be bona fide, s.52(2) did not apply and the officer could have had no reason to believe that income had escaped assessment, so the s.148 notice and the reassessment were without jurisdiction.
A literal reading would tax an amount that never accrued and was never received, and would produce absurd results — for example where a person is contractually bound to resell at the original price. Where a plain literal reading produces a manifestly absurd and unjust result that Parliament could never have intended, the court may modify the language, or read in a condition that is implicit as the basic assumption of the provision. The setting supports that course: s.52's marginal note reads 'Consideration for transfer in cases of under-statement', sub-section (2) was inserted into that section by the Finance Act 1964 rather than enacted separately, and the words 'the full value of the consideration declared by the assessee' point to the declared as against the actual consideration. Two CBDT circulars, of 7 July 1964 and 14 January 1974, explained the sub-section as aimed at evasion through understatement, the second expressly instructing officers not to invoke it in bona fide transactions; under s.119, and on Navnit Lal C. Jhaveri v. K.K. Sen [1965] 56 ITR 198 (SC) and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC), such circulars bind the Revenue even where they depart from the provision. The 15 per cent threshold is a safeguard against hardship in marginal valuation cases and has nothing to do with the burden of proof. Section 52 is a computation and not a charging provision and must be read with s.48, whose starting point is 'the full value of the consideration received or accruing'; what never accrued or was received cannot be computed as capital gains. The Revenue's construction would also duplicate what the Gift-tax Act already charges, would take the provision outside entry 82 of List I, which permits Parliament to tax only what can rationally be regarded as income, and would offend article 19(1)(f) as it then stood by penalising an owner for selling at a price of his choice; a construction that keeps the provision valid must be preferred.
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.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNot on the gap alone. Section 52(2) applied only where the consideration had actually been understated; a difference of more than fifteen per cent between fair market value and the declared price was not by itself enough, and the burden of establishing actual understatement lay on the Revenue. This was decided by the Supreme Court (Supreme Court of India — P.N. Bhagwati and E.S. Venkataramiah, JJ. (judgment of the Court delivered by Bhagwati, J.)) and bears on section 52(2), section 48, section 45, section 148, section 119 of the Income Tax Act 1961. It is reported as (1981) 131 ITR 597 (SC); 24 CTR 358; 7 Taxman 13; Civil Appeal No. 412(NT) of 1973. The provision construed here no longer exists, so this is not authority to defeat a s.50C or s.43CA addition. What survives is the reasoning, and it is quoted constantly: that a literal reading producing a manifestly absurd and unjust result may be modified to reach the legislative intention, that a marginal note and the scheme of the section control the sub-section within it, that CBDT circulars directing officers not to invoke a provision in bona fide transactions bind the department, and that Entry 82 of List I confines the tax to income, so a gain neither accrued nor received is hypothetical. Section 48 itself speaks of consideration received or accruing. If it applies to you, the first step is this: Check which provision the notice actually invokes and argue s.50C or s.43CA on their own terms; use this case only for burden of proof, real income and interpretation.
The assessee owned a house in Ernakulam bought in 1958 for Rs 16,500. On 25 December 1965 he sold it for the same Rs 16,500 to his daughter-in-law and five of his children. The assessment for 1966-67, the accounting year being calendar 1965, was completed without any capital gain. On 4 April 1968 the Income-tax Officer issued a notice under s.148 which did not state what income had escaped, and by letter of 4 March 1969 told the assessee that he proposed to fix the fair market value at Rs 65,000 and tax the difference of Rs 48,500 as capital gains. The officer could not use s.52(1), because it was admitted that there was no understatement and no object of avoiding liability under s.45; he rested the reassessment on s.52(2) alone, on the view that it needed no understatement and applied wherever fair market value exceeded declared consideration by 15 per cent or more. Isaac, J. of the Kerala High Court quashed the reassessment on a writ petition; a Full Bench, by majority, set his order aside and upheld the officer. The assessee appealed by certificate. The matter was decided on 1981-09-04 by the Supreme Court (Supreme Court of India — P.N. Bhagwati and E.S. Venkataramiah, JJ. (judgment of the Court delivered by Bhagwati, J.)). On those facts the Supreme Court held as follows. The appeal was allowed, the Full Bench order set aside and Isaac, J.'s order restored, quashing the reassessment; the Revenue was ordered to pay the assessee's costs throughout. Section 52(2) can be invoked only where the consideration for the transfer has been understated — that is, where the assessee actually received more than he declared. Two conditions must be satisfied: that fair market value exceeds declared consideration by not less than 15 per cent, and that the consideration has in fact been understated. The burden of establishing both is on the Revenue, and may be discharged by facts and circumstances from which understatement can reasonably be inferred. The sub-section has no application to an honest and bona fide transaction where the consideration is correctly disclosed. Since the transfer here was found as a fact to be bona fide, s.52(2) did not apply and the officer could have had no reason to believe that income had escaped assessment, so the s.148 notice and the reassessment were without jurisdiction.
A literal reading would tax an amount that never accrued and was never received, and would produce absurd results — for example where a person is contractually bound to resell at the original price. Where a plain literal reading produces a manifestly absurd and unjust result that Parliament could never have intended, the court may modify the language, or read in a condition that is implicit as the basic assumption of the provision. The setting supports that course: s.52's marginal note reads 'Consideration for transfer in cases of under-statement', sub-section (2) was inserted into that section by the Finance Act 1964 rather than enacted separately, and the words 'the full value of the consideration declared by the assessee' point to the declared as against the actual consideration. Two CBDT circulars, of 7 July 1964 and 14 January 1974, explained the sub-section as aimed at evasion through understatement, the second expressly instructing officers not to invoke it in bona fide transactions; under s.119, and on Navnit Lal C. Jhaveri v. K.K. Sen [1965] 56 ITR 198 (SC) and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC), such circulars bind the Revenue even where they depart from the provision. The 15 per cent threshold is a safeguard against hardship in marginal valuation cases and has nothing to do with the burden of proof. Section 52 is a computation and not a charging provision and must be read with s.48, whose starting point is 'the full value of the consideration received or accruing'; what never accrued or was received cannot be computed as capital gains. The Revenue's construction would also duplicate what the Gift-tax Act already charges, would take the provision outside entry 82 of List I, which permits Parliament to tax only what can rationally be regarded as income, and would offend article 19(1)(f) as it then stood by penalising an owner for selling at a price of his choice; a construction that keeps the provision valid must be preferred. In the words reproduced by the source cited on this page: "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."
It was decided by the Supreme Court on 1981-09-04 and is reported as (1981) 131 ITR 597 (SC); 24 CTR 358; 7 Taxman 13; Civil Appeal No. 412(NT) of 1973. 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 52(2), section 48, section 45, section 148, section 119, 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 helps the taxpayer. The appeal was allowed, the Full Bench order set aside and Isaac, J.'s order restored, quashing the reassessment; the Revenue was ordered to pay the assessee's costs throughout. Section 52(2) can be invoked only where the consideration for the transfer has been understated — that is, where the assessee actually received more than he declared. Two conditions must be satisfied: that fair market value exceeds declared consideration by not less than 15 per cent, and that the consideration has in fact been understated. The burden of establishing both is on the Revenue, and may be discharged by facts and circumstances from which understatement can reasonably be inferred. The sub-section has no application to an honest and bona fide transaction where the consideration is correctly disclosed. Since the transfer here was found as a fact to be bona fide, s.52(2) did not apply and the officer could have had no reason to believe that income had escaped assessment, so the s.148 notice and the reassessment were without jurisdiction. It arises in Capital Gains and How Tax Law Is Read matters, on section 52(2), section 48, section 45, section 148, section 119 of the Income Tax Act 1961, and was decided by Supreme Court of India — P.N. Bhagwati and E.S. Venkataramiah, JJ. (judgment of the Court delivered by Bhagwati, J.). 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. Where an addition rests on a valuation gap and nothing else, ask the AO in writing for the material showing you received more than the stated consideration. Put on record any departmental circular that directs officers not to apply the provision to bona fide transactions of your kind. Do not plead s.52(2) itself, and do not let the reply read as though the section were still on the statute book.
Superseded by amendment. Section 52 was omitted by the Finance Act, 1987 with effect from 1 April 1988, so the provision construed no longer exists; the ground is now held by the deeming provisions in ss.50C, 43CA and 56(2)(x), which do not carry the understatement condition read into s.52(2) here. What survives is not the result but the reasoning: the rule of construction that a manifestly absurd and unjust result may be avoided by modifying the language used; the holding that s.52 was a computation provision to be read with s.48, so that what neither accrued nor was received cannot be brought to tax; and the holding that CBDT circulars issued under s.119 bind the Revenue in administering a provision even where they depart from its terms, following Navnit Lal C. Jhaveri v. K.K. Sen [1965] 56 ITR 198 (SC) and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC). The judgment carries no numbered paragraphs, so no paragraph locators are given. 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.
Section 52 was omitted by the Finance Act, 1987 with effect from 1 April 1988, so the provision this judgment construes is gone and the field is now occupied by ss.50C, 43CA and 56(2)(x). Those provisions deem a value without requiring the Revenue to show understatement, which is the very condition read into s.52(2) here — so citing this case as a shield against a stamp-value addition misstates the position, and an officer will notice. Cite it for the rule of construction at para 6, for the principle that only real and not hypothetical income can be computed under s.48, and for the binding force of CBDT circulars under s.119. The correct references are Civil Appeal No. 412(NT) of 1973, decided 4 September 1981 by Bhagwati and Venkataramiah, JJ. 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 appeal was allowed, the Full Bench order set aside and Isaac, J.'s order restored, quashing the reassessment; the Revenue was ordered to pay the assessee's costs throughout. Section 52(2) can be invoked only where the consideration for the transfer has been understated — that is, where the assessee actually received more than he declared. Two conditions must be satisfied: that fair market value exceeds declared consideration by not less than 15 per cent, and that the consideration has in fact been understated. The burden of establishing both is on the Revenue, and may be discharged by facts and circumstances from which understatement can reasonably be inferred. The sub-section has no application to an honest and bona fide transaction where the consideration is correctly disclosed. Since the transfer here was found as a fact to be bona fide, s.52(2) did not apply and the officer could have had no reason to believe that income had escaped assessment, so the s.148 notice and the reassessment were without jurisdiction.
TaxSphere, “K.P. Varghese v ITO”, https://taxnotice.vittsphere.com/caselaw/case/kp-varghese-v-ito-52-2/ (validity last checked 2026-08-19)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
I got a section 148 notice for 2016-17 where the alleged escaped income is under Rs 50 lakh. Is three years the limit, or can they use ten?
My reassessment for an old year was restarted in 2022 on the strength of a Board instruction rather than a fresh notice. What does that instruction actually say, and how much of it is the Supreme Court's?
Can interest under ss.234A, 234B and 234C be waived?
A Board circular supports my reading of the section. Can I hold the Tribunal or the High Court to it, and can a circular settle what a provision means?
