Commissioner of Income Tax vs Madurai Ramnad Transports (P.) Ltd.

Ramaprasada Rao, J.—At the instance of the revenue the following question has been referred for our decision :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that there was no capital gain on the sale of

route rights, liable to be included in the assessment year 1965-66 ?

The subject-matter relates to the assessment year 1965-66. A private company owned several buses in relation to which they held what are

known as route permits and which, under the motor vehicles parlance, are called permits attached to motor vehicles. There were certain transfers

effected by this firm in view of some domestic arrangements as between the shareholders. Consequent upon such arrangements, nine of the buses

were transferred to three of the shareholders. Simultaneous with such transfers, the Tribunal records, "" The rights to ply them on the respective

routes were also transferred simultaneously in each case."" We shall make a comment on this in the course of our judgment. When the buses were

transferred, the written down value was taken into consideration for the purposes of such transfers. The Income Tax Officer felt, during the

assessment proceedings, that the fair market value of each bus was the sum arrived at by adding back to the written down value as per the

assessment records, the depreciation allowed for purposes of Income Tax assessment. At any rate, the Income Tax Officer would not accept the

value for which the buses were transferred by one batch of shareholders to the other. Whilst the assessee adopted the figures of Rs. 12,367 and

Rs. 14,435 respectively in respect of the transfer of two buses, the Income Tax Officer thought that the considerations ought to be evaluated at Rs.

13,829 and Rs. 15,151 respectively. Similar revaluation was made by the Income Tax Officer in respect of the transfer of other buses also. In the

ultimate analysis, as against the assessee''s value of Rs. 1,50,645, the Income Tax Officer''s alleged market value of such buses transferred would

be Rs. 1,75,085. In the course of his order, however, the Income Tax Officer was of the view that the "" route rights "" attached to the buses were

very valuable and on the basis of the range of income earned by plying the buses in question, he thought that the value thereof should be taken at

Rs. 74,463. By some reasoning, which is not very clear, he took this amount of Rs. 74,463 as the capital gain which the assessee should be

deemed to have secured as a result of the transfer. In the result, therefore, the Income Tax Officer based his assessment order on his revaluation of

the buses as above and added on the sum of Rs. 74,463 as assessable income in the hands of the assessee by reason of the transfer of the "" route

rights "". Another addition was made, with which we are not concerned. The Appellate Assistant Commissioner accepted the contention of the

assessee that, in the absence of any material on record to show that the transfer was with the object of avoidance or reduction of the liability of the

assessee and as there is no finding either to that effect, the additions are not supportable. The department took it up in appeal before the Appellate

Tribunal. The Appellate Tribunal, once again agreed with the Appellate Assistant Commissioner, but found factually as follows :

(i) There is no material to show that the transaction was put through with the object of avoidance or reduction of liability ; and

(ii) There is no evidence brought on record to show that the '' route rights '' were actually intended to be sold and were sold as such "". They,

however, refrained from expressing an opinion as to whether the route rights could be acquired and sold, but held that the assessee cannot be

taken to have sold any route rights which had to be valued. As stated already, at the request of the department, the question extracted above has

been referred to us.

In the instant case, some time was taken before us on the question whether route rights are transferable inter se and whether it could be the

resultant of a voluntary arrangement or agreement between the parties. Whatever may be said of the trade practice, we are unable to concede,

having regard to the stringent, but mandatory, provisions of the Motor Vehicles Act, that such route rights which, in effect, mean permits obtained

from a statutory functionary, could be the subject-matter of a voluntary transfer between two individuals without reference to the expressly

nominated statutory authority with the intervention of whom alone such transfers could be made. We are, however, not called upon to decide this

issue in this case, in the view that we intend taking. Section 52(1) of the Income Tax Act, 1961, while dealing with the consideration for transfer in

cases of understatement runs 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."" The two essential limits of this sub-section can be stated as follows :--

(i) the person who acquires a capital asset from an assessee is directly or indirectly connected with him, and

(ii) 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 which deals with capital gains. If these two essential pre-requisites for further action on the part of the Income Tax Officer are

satisfied, then the Income Tax Officer is enabled to proceed further to assess the consideration for such transfers. He must, therefore, be initially

satisfied that there has been a demonstrative intention to avoid tax. If he comes to that conclusion, then, with the previous approval of the

Inspecting Assistant Commissioner, he is enabled, under Sub-section (1) of Section 52, to evaluate the full value of the consideration for the

transfer and then arrive at what, according to him, would be the fair market value of the capital asset as on the date of the transfer. Mr.

Rangaswami, learned counsel for the revenue, would seriously contend that Sub-section (2) of Section 52 of the Act would apply in the

circumstances of this case. There is a marked distinction between these two sub-sections. Whilst Sub-section (2) of Section 52 deals with a

transfer which need not necessarily be to one who is directly or indirectly connected with the assessee, Sub-section (1) of that section lays an

accent on this situation. The Tribunal also finds, in the instant case, that it is Sub-section (1) of Section 52 which would apply to the facts and

circumstances of the case. We are unable to agree with the learned counsel for the revenue that the provisions of Sub-section (2) of Section 52

would apply. This is a case in which one set of shareholders in a private company transfer their shares which are in the nature of stock to another

set of shareholders. Therefore, it is not a transfer which would squarely come within the language of subsection (2) of Section 52. But on the other

hand, it fits in with the description given in Sub-section (1). As already stated, the objection to the transfer contemplated in Sub-section (1) of

Section 52, in relation to which the Income Tax Officer is given a privilege to reassess and find what is known as the fair market value, is

dependent upon his finding that the transfer was effected with the object of avoidance or reduction of the liability. The Tribunal finds, as a fact,

which we are bound to accept exercising advisory jurisdiction under the Act, that there was no such proof. In the view that we hold that Sub-

section (2) of Section 52 would not apply to the facts and circumstances of this case, because it is not a transfer by an assessee to a stranger, it

follows that the order of the Tribunal which confirmed the order of the Appellate Assistant Commissioner has to be accepted by us also. But Mr.

Rangaswami for the revenue would say that once there is some dispute as between the shareholders, any transfer effected in such a situation has to

be viewed as if it is a transfer coming within the purview of Section 52(2). We are unable to agree. The arrangement of the contract to transfer, as

evidenced by the record, shows that there was a voluntary effort on the part of one set of shareholders to transfer it to another set so as to adjust

their differences inter se amicably.

We have already referred to the two findings of fact given by the Tribunal that there is no material to show that the transaction was put through

with the object of avoidance or reduction of liability u/s 45. We have also referred, incidentally, to the finding that it cannot be said in the instant

case, in the absence of any evidence, that the route rights which are the permits granted under the Motor Vehicles Act in relation to buses which

were transferred, were actually intended to be sold and were sold as such. The first finding of fact referred to is sufficient to dispose of the question

referred to us.

We answer the question against the department and dismiss the tax case, with costs. Counsel''s fee Rs. 200.