(1981) 131 ITR 597 (SC)
Mode of computation; full value of consideration for immovable property; reference to Valuation Officer
No. The burden lies on the Revenue to establish that the consideration was in fact understated. A provision aimed at tax evasion cannot be turned on an honest transaction merely because market value exceeds the stated price.
May the Assessing Officer substitute fair market value for the consideration actually declared, without any evidence that the taxpayer understated the price?
The assessee had purchased a house in Ernakulam in 1958 for ₹16,500. In 1965 he sold it to his daughter-in-law and five children for the same sum of ₹16,500. The Income Tax Officer formed the view that the fair market value of the property at the date of sale was ₹65,000, and invoked Section 52(2) — which permitted the full value of the consideration to be taken at fair market value where that value exceeded the declared consideration by more than fifteen per cent — to assess the difference of ₹48,500 as capital gains. There was no allegation, and no material, to suggest that the assessee had in fact received anything more than the ₹16,500 recorded.
The assessee challenged the assessment by writ petition before the Kerala High Court, which dismissed it. A Full Bench of the same High Court subsequently took the view that the sub-section applied on its literal terms wherever the fifteen per cent threshold was crossed. The matter reached the Supreme Court on appeal.
For the assessee
The sub-section is directed at understatement of consideration. Read literally it would tax an amount never received, which is beyond the legislative competence to tax 'income' and produces manifestly unjust results in honest transactions. The provision should be read as requiring the Revenue to show that the declared consideration was understated and that the assessee actually received more.
For the Revenue
The language is plain: where fair market value exceeds the declared consideration by more than fifteen per cent, the fair market value may be substituted. No further condition is written into the sub-section, and the Court should not add one. The objective test of the fifteen per cent margin is itself the safeguard Parliament chose.
Justice Bhagwati held that a literal construction producing results the legislature could not have intended must yield to a purposive one. He traced the provision to its Budget Speech and Memorandum, which described it as a measure to counter understatement of consideration in transfers of property — an evasion device — rather than a charge on notional gains. The Court reasoned that 'full value of the consideration received or accruing' cannot mean an amount that was neither received nor accrued; to read it otherwise would tax a hypothetical receipt. It therefore held that two conditions must be satisfied before the sub-section can be applied: the consideration must in fact have been understated, and the onus of establishing that understatement rests on the Revenue. The Court accepted that direct proof of an under-the-table payment will rarely be available and that the Revenue may discharge its burden by circumstantial evidence, but it insisted that some material beyond the mere disparity in value is required. Since the Revenue had led nothing to show that the assessee received more than the recorded price, the assessment was quashed.
Section 78 is a deeming provision — where the stamp duty value exceeds the declared consideration, the stamp duty value is taken as the full value. To that extent the statute now does expressly what K.P. Varghese would not allow to be done by construction, and the case no longer prevents the substitution itself. What survives is the safeguard: where the stamp duty value is disputed as exceeding true market value, the matter can be referred to the Valuation Officer under Section 91, and the assessee is entitled to have the genuineness of the transaction considered rather than assumed away. The interpretive method — purpose over literalism where the literal result is absurd — is cited across the whole Act.