Law:

Section:

Section 52 of the Income-tax Act, 1961 [Corresponding to section 12B(2) of the Indian Income-tax Act, 1922] - Capital gains - Understatement of consideration for transfer - Assessment year 1957-58 - Whether where transaction of transfer of shares by assessee-firm to its partners for less than market value was effected prior to date on which first proviso to section 12B(2) and section 12B of 1922 Act came into effect, it could not be said that assessee had effected transaction with intention and/or object of avoidance or reduction of tax liability under section 12B of 1922 Act - Held, yes FACTS The assessee-firm acted as the managing agent of a company year received a larger commission. Out of its commission, the assessee purchased shares of that company on 23-5-1955, for the total price of Rs. 7,15,399. On 26-4-1956, the assessee transferred the aforesaid shares to the various partners in proportion to their shares in the firm at book value , i.e., actual cost. The Income-tax Officer, however, found that the market value of the shares on 26-4-1956, was Rs. 8,03,080. He held that the transaction was made in order to avoid the tax liability on the assessee; both capital gains tax as well as the tax on registered firm; that this transaction was a device when the shares were transferred at cost and that to this transaction the provisions of section 12B(2) applied. He therefore, held that the difference of Rs. 87,681 was capital gain of the assessee and included this amount as income in computing the tax liability of the assessee for the assessment year 1957-58. On appeal, the Appellate Assistant Commissioner affirmed the action of Income-tax Officer. On second appeal, the Tribunal held in favour of the assessee-firm that a transfer was not involved in the transaction as required under the provisions of section 12B(2). On reference : HELD By the Finance Act, III of 1956, the capital gains tax was imposed and section 12B was made operative as from 1-4-1957. As per proviso to this section, in respect of capital assets transferred by the assessee to a person directly or indirectly connected with the assessee, capital gains tax would be payable, i.e., the provisions in…

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