Commissioner of Income Tax vs Rikadas Dhuraji and Another

V. Ramaswami, J.—The assessee is a registered firm of partnership consisting of four partners. Their names and the different shares held by

them are given below :

Dhuraji Khusalji ... 12/28 share

Rikadas Dhuraji ... 5/28 share

Devichand Dharmachand ... 4/28 share

Chaganlal Kesarimal ... 7/28 share

The firm had purchased a house property bearing No. 34, Perumal Mudali Street, Madras, on November 21, 1947, for Rs. 36,000. It had

effected some improvements and the total cost as per accounts as on November 1, 1962, amounted to Rs. 63,327. This sum stood to the debit of

the property account in the books of the firm. The income from this property was returned by the firm from the date of its purchase. On November

1, 1962, the 1st, 3rd and 4th partners executed what is styled as release deed by which they had released all their rights and interests in the said

property in favour of the second partner. This deed also was registered under the Registration Act. The value of the property as per the release

deed was Rs. 64,000. In the accounts of the partnership the book value of the property, namely, Rs. 63,327, was transferred to the debit of the

second partner with the following narration:

Cost of Daya Sadan purchased from M/s. Dhuraji Khusalji & Co. on November 1, 1962.

For the assessment year 1964-65, corresponding to the year ending October 17, 1963, the assessee-firm filed a return in which under the

heading ""Capital gains"" a sum of Rs. 18,353 was shown. This had been done by arriving at the net annual value of the property as Rs. 4,084 and

determining the market value at 20 times the annual value. From the resultant figure of Rs. 81,680 it had deducted a sum of Rs. 63,327 which is

the value of the property as per books, and arrived at the capital gain of Rs. 18,353. After making certain enquiries and considering the market

condition and the rent the property fetched, the Income Tax Officer, with the approval of the Inspecting Assistant Commissioner, determined the

market value at Rs. 1,05,000. He took the cost at a round figure of Rs. 64,000 and thus computed the capital gain at Rs. 41,000.

For the same assessment year 1964-65, corresponding to the year ending October 17, 1963, in the individual assessment of the second

partner, Rikadas Dhuraji, the Income Tax Officer added a sum of Rs. 7,321 as his share of the capital gains. The assessee-firm and the individual,

Rikadas Dhuraji, filed appeals before the Appellate Assistant Commissioner. In the appeal, the assessee-firm contended that there was neither a

sale nor a transfer of the property by the firm to one of the partners and that the release deed did not amount to a sale or transfer and that,

therefore, no question of assessment to capital gains arose, though they themselves had voluntarily filed a return showing the transaction as sale and

a capital gain of Rs. 18,353. The Appellate Assistant Commissioner accepted this contention and held that there was no sale by the firm and that

the release deed dated November 1, 1962, would not constitute a sale by the firm to a partner. In this view, the appeal was allowed and the

Income Tax Officer was directed to modify the assessment. Consequently, the appeal filed by the individual partner in respect of the assessment of

his share of capital gain was also allowed. The department filed two appeals to the Tribunal which were heard and disposed of together. The

Tribunal dismissed the appeals. The view of the Tribunal on the point raised in their own words may be set out here as some arguments were

advanced as to what exactly was the decision of the Tribunal. That passage reads as follows :

The point for consideration is whether there was a transfer by the firm in favour of one of the partners so as to attract capital gains. The

department have proceeded on the assumption that a market value of the property transferred had to be adopted. There is no warrant for this.

There is no finding that the transfer was to reduce tax liability. The property had been transferred only at book cost. Therefore, there is no question

of any capital gains arising at all. Moreover, the property belonged to the firm and if there was to be a sale, it can only be by the firm as such or by

one of the partners acting on behalf of others. Apart from the entry there is no document evidencing the transfer. In the case of immovable

properties mere book entries would not operate to effect a transfer. Moreover, it would appear to be open to the partner to agree to confer

exclusive right in favour of any one partner in respect of any property belonging to the firm. This is what has been done under the release deed.

Having regard to all the facts of the case, we have to hold that there has been no sale by the firm so as to attract capital gains. We uphold the

decision of the Appellate Assistant Commissioner and dismiss the appeal.

At the instance of the revenue, the following two questions have been referred in the matter relating to the firm''s assessment:

Whether, on the facts and in the circumstances of the case, there was a transfer of the house property by the assessee-firm to a partner of the

firm ?

Whether, on the facts and in the circumstances of the case, capital gains was chargeable on the basis of the fair market value of the property as

on the date of the transaction ?

In the case of the individual assessment of the partner, the following question also has been referred at the instance of the revenue :

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee''s share of capital gains of Rs.

7,321 from the firm of M/s. Sanghvi Dhuraji Khusalji & Co. for the assessment year 1964-65 is not assessable in his hands ?

The learned counsel for the revenue contended that the property was that of the partnership and the parties intended to transfer the same to the

individual partners. Having regard to this intention and the fact that actually the property was shown later in the accounts of the firm as having been

transferred to the individual partner and the individual partner had become the owner of the same, the deed dated November 1, 1962, has to be

construed as a deed of conveyance though styled as a release deed. In support of his contention that the document will have to be construed with

reference to the intention of the parties, he also relied on Thayyil Mammo and Another Vs. Kottiath Ramunni and Others, and Kuppuswamy

Chettiar Vs. A.S.P.A. Arumugam Chettiar and Another, . The learned counsel for the assessee, on the other hand, argued that there was nothing

to show that the three partners who executed the document acted for and on behalf of the firm. On the other hand, the use of the words

releasors"", ""co-owners"" and ""released all their right, title and interest in the said property"" indicate that they were executing the document in their

individual capacity and not for the firm. In other words, the releasors were not the firm, but the individual partners. The further submission was that

since the property belonged to the firm, the individual partners had no right over it and that, therefore, the document was ineffective as a transfer.

The question of intention, therefore; does not arise. In this connection, he distinguished the Supreme Court cases referred to above on the ground

that in those cases there was no dispute about the capacity of the executant to execute and convey the property. Alternatively, the learned counsel

argued that, if it was construed that the property had just prior to the execution of the document become the joint property of the four individuals

who are partners, then they might have the capacity to execute the document, but the assessment will have to be in their individual capacity but not

on the firm.

The deed dated November 1, 1962, is styled as a deed of release and executed by three persons described as releasors in favour of another

who was described as releasee. The material portion of the document reads as follows:

Whereas the releasors and releasee are carrying on business in partnership under the name and style of Sanghvi Dhuraji Khusalji & Co. at

Madras, and whereas the house, ground and premises bearing door No. 34, Perumal Mudali Street, and 1/23, 2/23, and 3/33, Audiappa Naick

Street, G.T., Madras, more particularly described in the Schedule hereto, and hereinafter referred to as the said property, was purchased by the

said firm under a deed of sale dated November 21, 1947, from R. Seshagiri Rao and others, and as such the releasors and the releasee are the

co-owners of the said property and are in possession and enjoyment of the same as such and whereas the releasors at the request of the releasee,

have agreed to release all their right, title and interest in the said property in favour of the releasee.

Now this deed witnesseth that in pursuance of the said agreement, the releasors hereby jointly and severally release all their right and interest in the

said property in favour of the releasee, and hereby declare that as and from this date, the releasee shall own, possess and enjoy the said property

as his own property free from the claims of the releasors or any person or persons claiming through or under, all or any of the releasors.

The property is described in the schedule and its value shown as Rs. 64,000.

In Thayyil Mammo v. Kottiath Ramunni, the Supreme Court had held that a registered instrument, though styled as release deed, releasing the

right, title and interest of the executant in a property in favour of the releasee for valuable consideration, may operate as a conveyance, if it clearly

discloses an intention to effect a transfer. It was also held that the nomenclature of a deed and the amount of the stamp paid on it, though relevant,

are not conclusive on the question of construction. A deed of release can by using the words of sufficient amplitude transfer the title to one having

no title before the transfer. Again, the Supreme Court, in Kuppuswami Chettiar v. Arumugam Chettiar, held that even if there was no consideration

paid, a registered instrument styled as a release deed releasing the right, title and interest of the releasor, may operate as a transfer by way of gift

when the document clearly showed an intention to effect a transfer and is signed by or on behalf of the releasor and attested by at least two

witnesses. Thus, the document will have to be construed with reference to all the circumstances and the intention of the parties to the document. In

this case, the property dealt with under the release deed belonged to the partnership firm. The value of the same was entered in the property

account in the books of the firm. Subsequent to the execution of the deed dated November 1, 1962, it ceased to be the property of the firm. The

cost of the property was debited to the individual account of Rikadas Dhuraji and the entry was to the effect that lie had purchased the property

from the partnership firm on November 1, 1962. Thus, the property which was once that of the firm had ceased to be its property immediately

after the transfer. It had become the property of the individual partner. Surely, therefore, the intention of the firm was to convey or transfer the

property which belonged to it, to the individual partner.

It is true that the executants were described as the releasors but not as partners representing the partnership firm. But the document recites that

the releasors and the releasee were carrying on business in partnership, that the property was purchased by the partnership firm under the deed

dated November 21, 1947, and as such the releasors and the releasee are the co-owners of the said property. The use of the words ""as such

conjoint with the recitals of their relationship as partners and the fact that the property was purchased by the partnership clearly show that the

releasors referred to their right as partners in the partnership property and were releasing their right as partners in the property in favour of the

releasee who was again one of the partners. The entries in the accounts of the partnership which were referred to earlier also show that the firm

was transferring the property to the individual partner. In the return filed also the firm has disclosed the capital gain on the basis that there was a

sale by the firm to the individual partner. These circumstances clearly show that, though the executants described themselves as releasors without

any reference to the firm, they were in fact acting for and on behalf of the firm and executing the document in their Capacity as partners. They have

no separate right in the property of the firm. They conveyed only the right of the firm in the property to the individual partner. Since the transfer is in

favour of one of the partners, the transferee was not shown as a releasor. Further, the entry in the account books showed that the total value of the

property was debited to the individual partner''s account and not the value of the share of the three executant-partners alone. These circumstances,

in our opinion, clearly show that it was the firm which was conveying the property to the individual partner and that there was an effective and valid

conveyance of the entirety of the interest in the property in favour of the individual partner. That leads us to the consideration of the next question.

Now, u/s 45 of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), any profit or gains arising from the transfer of a capital asset

would be chargeable to Income Tax under the heading ""capital gains"". The mode of computation of the capital gains is contained in Section 48,

which reads as follows :

Mode of computation and deductions.--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 the following amounts namely :--

(i) expenditure incurred wholly and exclusively in connection with such transfer ;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.

The ""full value of the consideration received"" by the partnership firm as a result of the transfer in this case was Rs. 63,327.

Relying on Section 52, the revenue sought to take ""the fair market value"" of the property as ""the full value of the consideration received"" in

determining the capital gains chargeable. The question for consideration is whether the revenue had the power u/s 52(1) to substitute the fair

market value for ""the full value of the consideration received or accruing as a result of the transfer"" in computing the capital gains u/s 48.

There was some discussion at the Bar as to whether Section 52(2) could not have been invoked in this case by the revenue. One of the

requirements for the applicability of Section 52(1) is that the Income Tax Officer shall have reason to believe that the transfer was effected with the

object of avoidance or reduction of the liability of the assessee u/s 45. The Tribunal pointed out in the passages extracted above that there was no

finding that the transfer was to reduce any tax liability. This could only be a reference to Section 52(1). In fact, learned counsel for the revenue

contended, as against this statement, that there was an implied finding in the order of assessment that the transfer was to reduce tax liability.

Therefore, we are satisfied that Section 52(1) alone was invoked by the assessing officer and considered by the Tribunal and, therefore, the

applicability of Section 52(2) does not arise for consideration in this reference.

Section 52(1) reads as follows :

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 u/s 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.

Learned counsel for the revenue argued that while Section 45 and the computation provision u/s 48 deal with the actual gain, Section 52(1)

brings in a fictional gain. If the conditions prescribed u/s 52(1) are satisfied, the full value of the consideration for the transfer for the purpose of

computation of the capital gain u/s 48 shall be taken to be the fair market value of the capital asset on the date of transfer. According to the learned

counsel, the words ""full Value of the consideration for the transfer"" in Section 52(1) mean ""full value of the consideration received or accruing as a

result of the transfer"" and the omission in Section 52(1) of the words ""received or accruing as a result of the transfer"" which find a place in Section

48, makes no difference as, according to him, consideration is either received or accrued and there is no consideration which is not either received

or accrued. In fact, the argument of the learned counsel was that the use of the words ""received or accruing as a result of"" in Section 48 is

redundant and even without those words the section would have been effective. Learned counsel also contended that any other construction of

Section 52(1) will not give effect to the intention of Parliament and will make the provision ineffective and inoperative. Having given our anxious

consideration, we are unable to agree with this contention of the learned counsel. Now, undoubtedly, Section 52(1), subject to the condition

specified therein, deems the market value of the capital asset on the date of transfer as the full value of the consideration for the transfer. The result

of it is that by this fiction not only the consideration agreed to between the parties but the difference between that amount and the fair market value

shall be deemed to be the consideration for the transfer. Now, therefore, this deemed consideration, which is the fair market value, consists of the

consideration which was actually received or accruing and the consideration which was not in fact received or accruing. While the section deemed

that portion of the consideration which was not received or accruing also to be included in the full value of the consideration for the transfer, it did

not deem it to have been received or accruing though it was not received or accrued. If the difference between the fair market value and full value

of the consideration received or accruing as a result of the transfer shall also be taken into consideration in computing the capital gains, that portion

should also have been deemed as having been received or accrued as a result of the transfer which the section failed to do. We cannot also accept

the contention that the consideration is always either received or accrued and there is no consideration which is not either received or accrued. The

words ""full value of the consideration"" referred to in Section 48, in our opinion, relate to the factual receipt of the consideration and have no

reference to the adequacy or inadequacy of the consideration. In the case of a transaction for inadequate consideration, the difference between the

adequate consideration and the consideration actually received or accrued, though not received or accrued, is deemed by Section 52 as

consideration. Section 4 of the Gift-tax Act, 1958, treats that portion as a gift. In other words, a person may transfer his property for less than

adequate consideration instead of writing two separate documents, one for adequate consideration and the other as a gift. So far as the portion of

the gift is concerned, no consideration is received or accrued. We are also unable to agree with the learned counsel that the words ""received or

accruing as a result of the transfer"" in Section 48 are redundant. We cannot read a section, omitting certain words used therein or inserting certain

words which are not found there. That is what the learned counsel for the revenue would suggest. He would require us either to drop the words

received or accruing as a result of the transfer"" in Section 48 or to incorporate those words in Section 52. That, in our opinion, would amount to

amending the provisions which we are not entitled to do. A reference to the earlier provisions in the old Act also confirm our view. A different

language had been used in Section 12B(2) of the old Act to bring in such deemed capital gain. The Law Commission also, in their twelfth report,

had used language similar to the one in Section 12B(2); but in the Bill and the Act the language had been changed. In support of his contention that

we have to construe the provision to give effect to the intention of Parliament, the learned counsel for the revenue referred us to the decision in

Seaford Court Estates Ltd. v. Asker, [1949] 2 All ER 155, and, in particular, to the following passage therein :

Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts

which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an

instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have

often been unfairly criticised. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else,

laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges

trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot

simply fold his hands and blame the draftsmen. He must set to work on the constructive task of finding the intention of Parliament, and he must do

this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it

was passed to remedy, and then he must supplement the written word so as to give ''force and life'' to the intention of the legislature. That was

clearly laid down 3 Co. Rep 7b by the resolution of the judges [Sir Roger Manwood C.B. and other barons of the Exchequer] in Heydon''s case,

[1584] 3 Co. Rep. 7b, and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden in his note

(2 Plowd. 465) to Eyston v. Studd, [1574] 2 Plowd 463. Put into homely metaphor it is this : A judge should ask himself the question how, if the

makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out ? He must then do as they would

have done. A judge must not alter the material of which the Act is woven, but he can and should iron out the creases.

It is not necessary for us to refer to those catena of cases where it was held that in taxing statutes we have to construe a provision with

reference to the language employed and not with reference to the supposed indentions of Parliament of any presumptions or assumptions. The

decision referred to by the learned counsel does not in any way propound a different principle. The question there for consideration was as to the

meaning to be given to the word ""burden"" appearing in, Section 2(3) of the Increase of Rent and Mortgage Interest Restrictions Act, 1920. Having

regard to the governing principles embodied in the legislature, the learned judges held that contingent burden was not included within the meaning

of ""burden"" in that provision. We are of the view that the provisions creating fictions will have to be construed strictly and unless clear terms are

employed, we cannot construe the provision with the supposed intentions of Parliament.

Thus, on a plain reading of the section, we are of the view that the difference between the fair market value and the full value of the

consideration received or accruing as a result of the transfer could not be taken into account as consideration deemed to have been received in

computing the capital gain u/s 48. Our view also finds support in the dissenting judgment of the learned Chief Justice of the Kerala High Court in

Income Tax Officer, B-Ward and Another Vs. K.P. Varghese, , where he had held :

There is nothing in the language of these two sub-sections to show that the full value of the consideration for the transfer of the capital asset

appearing in Section 52 should be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital

asset. If the legislature wanted to have that effect, it could have easily used the expression ''the full value of the consideration received or accruing''

in Section 52. Since this has not been done, there is no justification for holding that the full value of the consideration which is deemed to be the fair

market value of the capital asset, in Section 52, is the full value of the consideration received or accruing; if it is so held, what is being done is

ignoring the expression ''received or accruing'' in Section 48. I reiterate that what is chargeable to Income Tax as ''capital gains'' u/s 45 is only the

profits or gains arising from the transfer of a capital asset.

We are not persuaded to agree with the view of the majority in that decision on the reasonings given therein.

We have also another reason to come to this conclusion. This court, in Sundaram Industries Private Ltd. Vs. Commissioner of Income Tax, , in

regard to the scope of the corresponding provisions in the Indian Income Tax Act, 1922, observed:

The proviso to Section 12(B)(2) does not discourage or avoid honest transactions made out of love and affection or for other conceivable

reasons on pain of being hauled up for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference

between the consideration for the transaction and the fair market value nor does it treat what is not an actual capital gain as a deemed capital gain

but it must be limited to escaped capital gain, which is so in truth and in fact, and is not intended to bring about a fictional gain on an assumption

and charge the same.

Thus, Section 52 applies to cases of under-statement of consideration where the consideration received is more and not to cases of bona fide

transfers were nothing more is received than that recited in the document itself. This was also one of the reasons given by the learned Chief Justice

in his dissenting judgment in Income Tax Officer v. Varghese. A similar view was taken by the Mysore High Court in Additional Commissioner of

Income Tax, Mysore Vs. M. Ranga Pai and Others, (unreported judgment in I.T.R.C. 30/1973/dated January 2, 1975), and by the learned single

judge who decided the case reported in K.P. Varghese Vs. Income Tax Officer, B-Ward and Others, , and whose decision was the subject-

matter of consideration by the Full Bench in Income Tax Officer v. Varghese above referred to. The Delhi High Court in Shiv Shanker Lal Vs.

Commissioner of Income Tax, Delhi, , and the Andhra Pradesh High Court in Buragadda Satyanarayana Murthi Vs. Income Tax Officer, B-Ward,

had also held that Section 52(1) would not be applicable to bona fide transactions, on the ground that the difference in value between the fair

market value and the actual consideration received or accruing would amount to a gift and such gifts are to be excluded from the income

chargeable under the head ""capital gains"" in view of Section 47(iii) of the Act. For taking this view, the learned judges held that the definition given

for ""gift"" in the Gift-tax Act would be applicable in construing the provision of Section 47(iii). Though each of the courts has given different

reasonings, except the majority in Income Tax Officer v. Varghese, the other learned judges are in agreement in holding that in a case where there

is no under-statement of the value merely on the ground that there is a difference between the fair market value and the full value of the

consideration received or accruing, such difference cannot be brought to capital gains on the basis of Section 52.

In the foregoing circumstances, we answer the first question referred in T.C. No. 168 of 1969 in the affirmative and against the assessee, and

the second question in the negative and against the revenue.

In view of our answers to the questions referred in T.C. No. 168 of 1969, we have to answer the question referred in T.C. No. 166 of 1969

in the affirmative and in favour of the assessee.

The assessee will be entitled to his costs in both these references. Counsel''s fee in each Rs. 150.