Supreme Court Allows Assessee in Income Tax Appeal Against High Court's Direction to State Case on Capital Gains Avoidance. High Court's Order Quashed as No Question of Law Arose from Tribunal's Findings Under Section 52 of Income-tax Act, 1961.

Income tax reference jurisdiction appeal against High Court's direction to Tribunal to state a case under Section 256 of the Income-tax Act, 1961, relating to assessment of capital gains under Section 52 for assessment year 1962-63.

Assessee sought to have the Supreme Court set aside the Calcutta High Court's order directing the Income-tax Appellate Tribunal to refer four questions of law, contending that no question of law arose from the Tribunal's order.

The Commissioner of Income-tax was aggrieved by the Tribunal's refusal to refer questions and moved the High Court under Section 256(2); the High Court allowed the application without giving reasons, leading the assessee to appeal by special leave.

Income-tax Officer assessed capital gains under Section 52; Appellate Assistant Commissioner held assessee not liable; Income-tax Appellate Tribunal upheld the appellate order and rejected the Commissioner's reference application; Calcutta High Court reversed the Tribunal's refusal and directed a reference.

Whether the Calcutta High Court was justified in directing the Income-tax Appellate Tribunal to state a case and refer four questions of law under Section 256 of the Income-tax Act, 1961, when the Tribunal had held that no question of law arose. Whether the transfer of shares by the assessee to its parent company was effected with the object of avoidance or reduction of capital gains tax liability within the meaning of Section 52 of the Income-tax Act, 1961. Whether the Income-tax Appellate Tribunal's findings were perverse, based on misconstruction of documents or ignoring of evidence, so as to give rise to a question of law.

The assessee contended that the entire scheme of holding shares through the Indian subsidiary and transferring them at par in satisfaction of loans was evolved before capital gains tax was reimposed in 1956, and the 1961 transfers were made pursuant to that pre-existing arrangement, not to avoid tax. The assessee argued that the High Court could not direct a reference without recording reasons and that the Tribunal's findings were pure findings of fact, based on evidence, and not perverse. The Revenue contended that the transfer of shares was effected with the object of avoiding or reducing the assessee's liability to capital gains under Section 52, that the Tribunal misconstrued documents and ignored relevant evidence, and that the finding was perverse. The Revenue maintained that questions of law arose from the Tribunal's order and the High Court was justified in directing the Tribunal to state a case.

Under Section 256 of the Income-tax Act, 1961, the High Court can direct a reference only when a pure question of law arises, or a mixed question of law and fact where the legal effect of findings is in issue, or when a finding of fact is perverse. Findings of fact by the Tribunal are final, and an inference from basic facts remains a question of fact. The intention and object of a transfer under Section 52 of the Income-tax Act, 1961 are questions of fact, and the Income-tax Officer must have cogent material showing that the transfer was effected with the object of avoidance or reduction of capital gains liability before invoking the section. Absence of a formal agreement alone does not establish such object. The High Court must give reasons when directing a reference, especially when the Tribunal's findings are clear, cogent, and not perverse.

The intention with which a particular transfer is made and the object which is to be achieved by such transfer is essentially a question of fact the conclusion relating to which is to be arrived at on a consideration of the relevant material. The High Court, on being moved, issued a rule nisi and then made it absolute after full arguments without giving any reasons, whatsoever. The necessary ingredients of the section are (i) there should be a direct or indirect connection between the person who acquires a capital asset and the assessee; (ii) the Income tax Officer should have reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to capital gains; (iii) if the first two conditions are satisfied then the full value of consideration for the transfer can be taken to be the fair market value of the capital asset on the date of the transfer.

For assessment year 1962-63, the Income-tax Officer applied Section 52 of the Income-tax Act, 1961 and assessed the assessee to capital gains tax on transfer of shares to Imperial Chemical Industries Ltd. The Appellate Assistant Commissioner allowed the assessee's appeal and held no capital gains was chargeable. The Income-tax Appellate Tribunal, 'B' Branch, Calcutta, after detailed consideration of correspondence, upheld the appellate order. The Commissioner of Income-tax applied to the Tribunal under Section 256(1) to refer four questions of law to the High Court; the Tribunal rejected the application. The Commissioner moved the Calcutta High Court under Section 256(2); the High Court issued rule nisi and made it absolute without recording any reasons, directing the Tribunal to state a case. The assessee appealed to the Supreme Court by special leave.

• Income-tax Act, 1961: 52, 256
• Income-tax Act, 1922: 15(C), 56(A), 16(2), 18(5)
• Finance Act, 1959: