Holding

Section 52(2) of the Income‑Tax Act can be invoked only where the consideration for the transfer has been understated, and the burden of proving such understatement rests on the Revenue.

Summary

The appellant, K.P. Varghese, sold a house to his daughter‑in‑law and five children for the same price he had paid for it (Rs 16,500) and reported no capital gain for the 1966‑67 assessment year. The Income‑Tax Officer later issued a notice under section 148 and reassessed the assessee, fixing the fair market value at Rs 65,000 and invoking section 52(2) of the Income‑Tax Act to tax the difference of Rs 48,500 as capital gains. The High Court initially allowed the writ petition, holding that section 52(2) required an understatement of consideration, but a Full Bench reversed that view. The Supreme Court allowed the appeal, holding that section 52(2) applies only where the consideration is understated and that the burden of proving such understatement lies on the Revenue, rendering the reassessment jurisdictionally invalid. Consequently, the order of reassessment was set aside and the appeal was allowed.

Issues considered

Whether an understatement of consideration is a necessary condition for the applicability of section 52(2) of the Income‑Tax Act, 1961.
Who bears the burden of proving that the consideration has been understated or concealed.
Whether the notice issued under section 148 was justified in the absence of any allegation of escaped income.
How to interpret section 52(2) in light of its object, purpose, marginal note, and the Central Board of Direct Taxes circulars.

Legislation cited

Constitution of Indias. Article 19(1)(f)
Gift Tax Act, 1958
Income Tax Act, 1961s. 119, s. 148, s. 2(24), s. 48, s. 52(1), s. 52(2)

Subjects

capital gainsunderstatement of considerationsection 52(2)section 148burden of proofstatutory interpretationfair market valuetax avoidancemarginal notecirculars

Judgment

629 A

K.P. VARGHESE
v.
THE INCOME-TAX OFFICER,
B
ERNAKULAM, AND ANOTHER

September 4, 1981

[P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ.]
c
- Capital gains-Whether understatement of consideration in a transfer of pro·
perty Is a necessary condition for attracting the applicability of sub-.section (2) of
section 52 of the Income Tax Act, 1961-Burden of proof of such understatement
is on the Revenue-Interpretation of statutes, explained,

The appellant assessee sold his house in Ernakularn on 25th of December,
) 1965 to his daughter-in-law and five of his children for the same price of
Rs. 16,500 at which he purchased in the year 1958. The assessment of the D
assessee for the assessment year 1966-67 for which the relevant accounting year
was the calendar year 1965 was thereafter completed in the normal course and in
this assessment, oo amount was included by way of capital gains in respect of the
transfer of the house, since the house was sold by the assessee at the same price
at which it was purchased and no capital gains accrued or arose to him as a
result of the transfer. On 4th April 1968, however, the Income Tax Officer issued
a notice under. section 148 of the Act seeking to reopen the assessment of the E
assessee for the assessment year 1966-67 and requiring the assessee to submit a
return of income within thirty days of the service of the notice, without stating
what was the income alleged to have escaped assessment. However, by his
subsequent Jetter dated 4th March, 1969, the Income Tax Officer stated that he
proposed to fix the fair market value of the house sold by the assessee at
Rs, 65,000 as against the consideration of Rs. 16,500 for which the house was
sold and assess the difference of Rs. 48,500 as capital gains in the hands of F
• the assessee. The objections raised by the assessee were overruled and an order
of re-assessment was passed by the Income Tax Officer including the sum of
Rs. 4&,500 as capital gains and bringing it to tax under sub-section (2) of section
52, taking the view that this sub-section did not require as a condition precedent
that there should be under statement of consideration in respect of the transfer
and it was enough to attract the applicability of the sub-section if the fair market
value of the property as on the date of the transfer exceeded the full value of G
the consideration declared by the assessee by an amount of not less than 15% of
the value so declared. The assessee thereupon filed a writ petition in Kerala
High Court challenging the validity of the order of re· assessment insofar as it
brought a sum of Rs. 48,500 to tax relying on sub-section (2) of section 52 of tho
th~ Income Tax Act, 1961. The writ petition was allowed, but in appeal the
Full Bench by a majority judgment agreed with the views of the Income Tax H
Officer and dismissed the writ petition. Hence the assessee's appeal by certifi..
cate.
630 SUPREME COURT REPORTS (1982] I s.c.a.

A Allowing the appeal, the Court

HELD : l : l. Sub-section (2) of section 52 of the Income Tax Act, 1961
can be invoked only where the consideration for the transfer has been under·
stated by the assessee or in other words, the consideration actually received by
the assessee is more than what is declared or disclosed by him. Sub-section (2)
has no application in case of an honest and bonafide transaction where the consi-
B deration received by the assessee has been correctly dec1ared or disclosed by him
and there is no concealment or suppression of the consideration. [657 B, C-D]

1 : 2. The burden of proving an understatement or concealment is on the
Revenue, which may be discharged by it .by establishing facts and circumstances
from which a reasonable inference can be drawn that the assessee has not
correctly declared or disclosed the consideration received by him and there is
c understatement or concealment of the consideration in respect of the transfer.
[657 B-C]

1 : 3. Sub-section (~), in the instant case, had no application and the
Income Tax Officer could have no reason to believe that any part of the incom.e
of the assessee had escaped assessment so as to justify the issue of a notice under
section 148. It was a common ground between the parties and that was a
D finding of fact reached by the Revenue Authorities that the transfer of the pro-
perty by the assessee was a perfectly honest and bona:ide transaction where the
full value of the cons;deration received by the assessee was correctly disclosed at
the figure of Rs. 16,500. The order of re-assessment made by the Income Tax
Officer pursuant to the notice issued under section 148 was accordingly without
jurisdiction. (657 D-G]

E 2 : 1. The task of interpretation or the statutory enactment 1s not a
mechanical task. It is more than mere reading of mathematical formula
because few words possess the precision of mathematical symbols. It is an
attempt to discover the intent of the legislature from the language used by it
and it must always be remembered that language is at best an in1perfect instru·
meat for the expression of human thoughts and it would be idle to expect every
statutory provision to be "drafted with divine prescience and perfect clarity".
F Courts, therefore, must eschew literalness in the interpretation of a statutory •
provision and construe the language having regard to the object and purpose
which the legislature had in view in enacting that provision and in the context
and the setting in which it occurs. [640 C-D, F·G, 642 B-C]

2: 2. Where the plain literal interpretation of a statutory provision produ·
G ces a manifestly absurd and unjust result which could never have been int~nded
by the Iegislatu1e, the Court may modify the language used by the legislature or
even "do some violence" to it so as to achieve the obvious intention of the legis-
lature and produce a rational construction. The Court may also in such a case
read into the statutory provision a condition which, though not expressed, is
implicit as constituting the basic assumption underlying the statut..:>ry provision.
H It is true that the consequences of a suggested construction cannot alter the
meaning of a statutory provision but they can certainly help to fix its meaning.
[64l·A 642 C-E]
K.P. VARGHESE V. 1.T.0. 631

Luke v. Revenue Commissioner, [1963] A.C. 557; Headan's case [1584] 3 A
Co. Rep. 7(a); In re May Fair Property Company, LR [1898] 2 Ch. Dn; Eastman
Photographii: Material Company v. Comptroller.General of Patents, Designs and
Trade Marks, L. R. [1898] A.C. 571, quoted with approval,

2:3. The speeches made by the Members of the Legislature on the floor of
the House when a Bill for enacting a statutory provision is being debated are
inadmissible for the purpose of interpreting the statutory provision but the speech
made by the Mover of the Bill explaining the reason for the introduction of the
Bill can certainly be referred to for the purpose of ascertaining the mischief
sought to be remedied by the legislation and the object and purpose for which
the legislation is enacted. [654 E-G]

Lok Shikshana Trust v. Co1nmissioner af Income-Tax, 101 I.T.R. 234; Indian
Chamber of Commerce v, Commissioner of Income-tax, 101 I.T.R. 796; Additional C
Commissioner of Income-tax v. Su~at Art Silk Cloth 1\fanufacturers Association,
121 I.T.R. I, referred to.

2:4. Again it is undoubtedly true that the marginal note to a section can-
not be referred to for the purpose of construing the section but it can certainly
) be relied upon as indicating the drift of the section or to show what the section
dealing with. It cannot control the interpretation of the words of a section D
particularly when the language of the section is clear and unambiguous but,
being part of the statute, it prima facie furnishes some clue as to the meaning
and purpose of the section. [647 A-Bl

Bushel v. Ham1nond, [l904] 2 KB 563, quoted with approval.

Bengal Immunity Company limited v. State of Bihar, [1955] 2 SCR 603, E
referred to.

2:5. The rule of construction by reference to contemporanea expositio is a
well established rule for interpreting a statute by reference to the exposition it
has received from contemporary authority, though it must give way where the
language of the statute is plain and unambiguous. [650 B-C]

Baleshwar Bagarti v. Bhagirathi Dass, I.L.R. 35 Calcutta 701, approved.
F

Deshbandhu Gupta and Co. v. Delhi Stock Exchange Association Ltd,.
[1979] 4 S.C.C. 565, referred to.

2:6. Having regard to the well recognised rule of interpretation, a fair and
reasonable construction of section 52 sub·section (2) would be to read into it a G
condition that it would apply only where the consideration for the transfer is
understated or in other words, the asses.see has actually received a larger consi·
deration for the transfer than what is declared in the instrument of transfer and
it would have no application in case of a honafide transaction where the full
value of the consideration for the transfer is correctly declared by the assessee.
[642 E-FJ H
3. Several considerations which lead to this conclusion are :
632 SUPREME COURT REPORTS [1982] I S.C.R.

A (a) The first consideration is the object and purpose of the enactme~t of
section 52(2). The speech made by the Finance Minister while moving the
amendment introducing sub·section (2) clearly states what were the circumstances
in which such sub.section (2) came to be passed, what was the mischief for which
section 52 as it stood then did not provide and which was sought to be remedied
by the enactment of sub section (2) and why the enactment of that sub section
was found necessary. The object and purpose of sub section (2), as explicated
from the speech of the Finance Minister, was not to strike at honest and bonafidc~
B
transactions where the consideration for the transfei was correctly disclosed by
the assessee but to bring within the net of taxation those transactions where the
consideration in respect of the transfer was shown at a lesser figure than that
actually received by the assessee, so that they do not escape 1he chargeable tax
on capital gain by unde1statement of the ccnsideration. This was real object
and rurpose c·f the enac1ment of 5.Ub section (2) and the interpretation of this
c ~ub·!ecticn must fall in line with the advancerr:ent of that object and purpose.
[642 F, 646 B·F]

(b) Further the marginal note to section 52 as it now stands, was originalJy
a marginal note only to what is presently sub-section (1) and significantly enough,
this marginal note remained unchanged e\·en after the introduction of sub-section
(2)suggesting clearly that it was meant by Parliament to apply to both sub-sections
D of section 52 and it must therefo1e be taken as indicating that, like sub-section(l),
sub-section (2) is also intended to deal with cases where there is under-statement
of the consideration in respect of the transfer. [647 c.n]

(c) The placement of sub-section (2) in section 52 does indicate in son1e
~mall tteasure 1hat Parliament intended that sub-section to apply only to cases
where the consideration in respect of the transfer is under-stated by the asscssee.
E If Parliament intended sub-section (2) to cover all cases where the condition of
15% difference is satisfied, irrespective of whether there is under-statement of
consideration or not, it is reasonable to assume that Parliament would have
enacted that provision as a separate section and rot pitch-forked it into section 52
with a total stranger under an inappropriate marginal note. Moreover there is
inherent evidence in sub-section (2) which suggests that the thrust of that sub-
section is directed against cases of under-statement of consideration. The
crucial and important words in sub-section (2) are : "the full value of the consi-
deration declared by the assessee". The word 'declared' is very eloquent and
revealing. It clearly indicates that the focus of sub-section (2) is on the consi-
deration declared or disclosed by the assessee as distinguished from the consi-
deration actually received by him and it contemplates a case where the consi-
deration received by the assessee in respect of the transfer is not truly declared or
disclosed by him but is shown at a different figure. [647 D-G, 648 A-BJ
G (d) The two circulars issued by the Central Board of Direct Taxes
dated 7th July, 1964 and 14th January, 1974 are not only binding on the Tax
Department in administering or executing the provision enacted in sub-section
(2), but are in tl:e nature of conttmporonta txpo.sitio, furnishing legitimate aid in
the construction of sub-section (2). It is clear from these two circulars that tho
Central Board of Direct Taxes, which is the highest authority entrusted with the
H execution of the provisions of the Act understood sub-section (2) as limited to
K.P. VARGHESE V. 1.T.O. 633

cases where the consideratioa for the transfer has been under-stated by the A
assessee. These two circulars are legally ·binding on the Revenue and this legally
binding character attaches to the two circulars even if they be found not in
accordance with the correct interpretation of sub-section (2) and they depart or
deviate from such construction. [650 A, F-G]

Navnit/al C. Jhaveri v. K.K. Sen, 56 I.T.R. SC 198; Ellerman Lines ltd. v.
Commissioner oflncome·tax, West Bengal, 82 l.T.R. 913 (SC), followed. 8:
4: 1, It is a well settled rule of law that the onus of establishing that the
conditions of taxabiiity are fulfilled is always on the Revenue. To throw the
burden of showing that there is no understatement of the consideration, on the
assessee would be to cast an almost impossible burden upon him to establish the
negative, namely that he did not receive any consideration beyond that declared
by him. [653 F-H, 654 A] c
4 : 2. If the Revenue seeks to bring a case wilhin sub-section (2), it must
show not only that the fair market value of the capital asset as on the date of the
transfer exceeds the full value of the consideration declared by the assessee by not
less than 15% of the value so declared, but also that the consideration has been
under-stated and the assessee has actually received more than what is declared
by him. There are two distinct conditions which have to be satisfied before sub- D
section (2) can be invoked by the Revenue and the burden of showing that these
two conditions a!'e satisfied rests on the Revenue. It is for the Revenue to show
that each of these two conditions is satisfied and the Revenue cannot claim to
have discharged this burden which lies upon it, by merely establishing that the
fair market value of the capital asset as on the date of the transfer exceeds by
15% or more the full value of the consideration declared in respect of the transfer
and the first condition is therefore satisfied. The Revenue must go further and
prove that the second condition is also satisfied. Merely by showing that the
E
first condition is satisfied, the- Revenue cannot ask the Court to presume that the
second condition too is fulfilled, because even in case where the first condition
of 15% difference is satisfied, the transaction may be a perfectly honest and bona-
fid~ transaction and there may be no under•statement of the consideration. The
fulfilment of the second condition has therefore to be established indepen..
dently of the first condition and merely because the first condition is satisfied, no
inferenee can necessarily follow that the second condition is also fulfilled. Each
F
condition has got to be viewed and established independently before sub-section
(2) can be invoked and the burden of doing so is clearly on the Revenue.
[653 B-F]

4 : 3. The object of imposing the condition or difference or 15% or more
between the fair market value of the capital asset and the consideration declared G
in respect of the transfer clearly is to save the assessee from the rigour of sub-
seclioo (2) in marginal cases where difference in subjective valuation by different
individuals may result in an apparent disparity between the fair market value and
the declared consideration. This condition of 15% or more difference is merely
intended to be a safeguard against undue hardship which would be occasioned to
the assessee if the inflexible rule of the thumb enacted in sub-section (2) were ff
applied in marginal case and it has nothing to do with the question of burden of
proof, for the burden of establishing that there is understatement of the con~ide-
634 SUPREME COURT REPORTS [1982] I s.c:. R

A ration in respect of the transfer always rests on the Revenue. The postulate
underlying sub-section (2) is that the difference between one honest valuation
and another may range upto 15% and that constitutes the class of marginal
cases which are taken out of the purview of sub-section (2} in order to avoid
hardship to the assessee. [654 B-C, F-H]

4: 4. Once it is established by the Revenue that the consideration for 1he
B transfer has been under-stated, sub-section (2) is immediately attracted, subject
of course to the fulfilment of the condition of 15% or more difference, and the
Revenue is then not required to show what is the precise extent of the under-
statement or in other words, what is the consideration actually received by the
asseesee. That would in most cases be difficult, if not impossible, to show and
hence sub-section (2) relieves the Revenue of all burden of proof regarding the
extent of under-statement or concealment and provides a statutory measure of the
c consideration received in respect of the transfer. It does not create any fictional
receipt. It does not deem as receipt something which is not in fact received. It
merely provides a statutory best judgment assessment of the consideration actually
received by the assessee and brings to tax capital gains on the footing that the
fair market value of the capital asset reprt:sents the actual consideration received
by the assessee as against the consideration untruly declared or disclosed by him.
This approach in construction of sub-section (2) falls in 1ine with the scheme of
D the provisions relating to tax on capital gains. [665A-E]

4 : 5. Section 52 is not a charging section but is a computation section.
It has to be read atongwith section 48 which provides th~ mode of computation
and under which the starting point of computation 'is."the full value of the con-
sideration received or accruing". What in fact never accrued or was never
received cannot be computed as capital gains under section 41. Therefore sub·
E section (2) cannot be construed as bringing within the computation of capital
gains an amount which, by no stretch of imagination, can be said to have accrued
to the assessee or been received by him. [655 E-F]

4 : 6. This construction of sub-section (2) also marches in step with the
Gift Tax Act, 1958. If a capital asset is transferred for a consideration below its
market value, the difference between the market value and the full value of the
consideration received in respect of the transfer would amount to a gift liable to •
tax under the Gift Tax Act, 1958. Since the Income Tax Act, 1961 and the Gift
Tax Act, 1958 are parts of an integrated scheme of taxation the same amount
which is chargeable as gift could not be intended to be charged also as capital
gains. [656 A-Cl

4: 7. Besides, under Entry 82 in List I of the Seventh Schedule to the
G Constitution which deals with "Taxes on income" and under which the Income
Tax Act, 1961 bas been enacted, Parliament cannot "choose to tax as income an
item which in no rational sense can be regarded as a citizen's income or even
receipt. Sub-section (2) would, therefore, on the construction of the Revenue, go
.
outside the legislative power of Parliament, and it would not be possible to
justify it even as an incidental or ancillary provision or a provision intended to
H prevent evasion of tax. [656 E-F]
K.P. VARGHESE v. l.T.O. (Bhagwati, J.) 635

4: 8. Sub-section (2) would also be violative of the fundamental right of A
the assessee under Article 9(1) (f )-which fundamencal right was in existence at
the time when sub-section (2) came to be enacted-since on the construction can-
vassed on behalf of the Revenue, the effect of sub-section (2) would be to pena-
lise the assessee for transfering his capital asset for a consideration lessser by
15% or more than the fair market value·and that would constitute unreasonable
restriction on the fundamental right of the assessee to dispose of his capital asset
at the price of his choice. The Court must obviously prefer a construction which 8
renders the statutory provision constitutionally valid rather than that which
makes it void. (656 F-H, 657 A]
' CIVIL APPELLATE JURISDICTION: Civil Appeal No. 412(NT)
of 1973

From the judgment and order dated the 5th July, 1972 of the c
Kerala High Court at Ernakulam in Writ Appeal No. 127 of
1970.

M. M. Abdul Khadher, S.K. Mehta, E.M.S. Anam, P.N.Puri
and M.K. Dua for the appellant.
D
S.T. Desai and Miss A. Subhashini for the respondent.

Anil B. Diwan, Dinesh Vyas, P.H. Parekh and R.N. Karanja-
wala for the intervener.

S. Swaminathan, N. Srinivasan and Gopal Subramaniam for the
intervener.
~.

Debi Pal, Praveen Kumar and A.K. Sharma for the intervener.
K.R. Kazi and S.C. Patel for the intervener.

N.A. Palkhiwala, P.H. Parekh, J.B. Dadachanji, H. Salve and F
Ravinder Narain for interveners.

- S.C. Patel for the intervener.

J.B. Dadac hanji for the intervener.
c;
B.K. Mohanty and C.S. Rao for the intervener.

P.A. Francis and M.N. Shroff for the intervener.

The Judgment of the Court was delivered by H
BHAGWATI, J. The principal question that arises for deter-
636 SUPREME COURT REPORTS [1982] I s.c.R.

A mination in this appeal by certificate is whether understatement of
consideration in a transfer of property is a necessary condition for
attracting the applicability of section 52 sub-section (2) of the
Income Tax Act 1961 (hereinafter referred as the Act) or it is
enough for the Revenue to show that the fair market value of the
property as on the date of the transfer exceeds the full value of the
B consideration declared by the assessee in respect of the transfer by
an amount of not less than 15% of the value so declared. The
facts giving rise to the appeal are not very material but since they \
from the backdrop against which the question arises for considera-
tion, we may briefly state them.

c The assessee was the owner of a house situated in Ernakulam,
which he had purchased in 1958 for the price of Rs. 16,500. On
25th December 1965 the assessee sold the house for the same price
of Rs. 16,500 to his daughter· in-law and five of his children. The
assessment of the assessee for the assessment year 1966-67 for
D which the relevant accounting year was the calendar year 1965 was
thereafter completed 111 the normal course and in this assessment,
no amount was included by way of capital gains in respect of the
transfer of the house since the house was sold by the assessee at
the same price at which it was purchased and no capital gains
accrued or arose to him as a result of the transfer. On 4th April
E 1968 however the Income tax Officer issued a notice under section
148 of the Act seeking to reopen the assessmeut of the assessee for
.A
the assessment year 1966-67 and requiring the assessee to submit a
return of income within thirty days of the service of the notice. The
notice did not state what was the income alleged to have escaped
assessment but by his subsequent letter dated 4th March 1969 the
F Income-tax Officer intimated to the assessee that he proposed to
fix the fair market value of the house sold by the assessee on 25th
December 1965 at Rs. 65,000 as against the consideration of
Rs. 16,500 for which the house was sold and assess the difference
of Rs. 48,500 as capital gains in the hands of the assessee. The
-..
assessee raised objections against the reassessment proposed to be
G made by the Income-tax Officer but the objections were over-ruled
and an order of reassessment was passed by the Income- tax Officer
including the sum of Rs. 48,500 as capital gains and bringing it
to tax. Though the sale of the house by the assessee was in favour
of his daughter-in-law and five of his children who were persons
H directly connected with him, the Income-tax Officer could not invoke
the aid of section 52 sub-section (l) for bringing the sum of
K.P. VARGHESE v. l.T.O. (Bhagwati, J.) 637

Rs. 48,500 to tax, because there was admittedly no under-statement A
of consideration in respect of the transfer of the house and it was
not possible to say that the transfer was effected by the assessee
with the object of avoidance or reduction of his liability under
section 45. The Income-tax Officer therefore rested his decision to
assess the sum of Rs. 48,500 to tax on sub-section (2) of section 52
and taking the view that this sub-section did not require as a B
condition precedent that there should be under-statement of consi-
deration in respect of the transfer and it was enough to attract the
applicability of the sub-section if the fair market value of the pro-
perty as on the date of the transfer exceeded the full value of the
consideration declared by the assessee by an amount of not less
than 15% of the value so declared, which was indisputably the c
position in the present case, the Income-tax Officer assessed the sum
of Rs. 48,500 to tax as capital gains. The assessee thereupon
preferred a writ petition in Kerala High Court challenging the
validity of the order of reassessment in so far as it brought the sum
of Rs. 48,500 to tax relying on section 52 sub- section (2) of the
Act. D

The writ petition came up for hearing before Isaacs J. sitting
as a single Judge of the High Court and after hearing both parties,
the learned Judge came to the conclusion that under-statement of
consideration in respect of the transfer was a necessary condition
for attracting the applicability of section 52 sub-section (2) and since E
... in the present case there was admittedly no under-statement of
consideration and it was a perfectly bonafide transaction, section 52
sub-section (2) had no application and the sum of Rs. 48,500 could
not be brought to tax as capital gains under that provision. The
Revenue appealed against this decision to a Division Bench of the
High Court and having regard to the importance and complexity of
F
the question involved, the Division Bench referred the appeal to a
Full Bench of three Judges. The Full Bench heard the appeal but
there was a division of opinion, two Judges taking one view and
the third Judge taking another. While Raghvan C.J. agreed sub-
stantially with the view taken by Isaacs J., Gopalan Nambiar J. and
Vishwanath Iyer J. took a different view and held tbat in order to·
G
bring a case within section 52 sub-section (2), it is not at all necessary
that there should be under-statement of consideration in respect of
the transfer and . once it is found that the fair market value of the
property as on the date of the transfer exceeds the full value of the
consideration declared by the assessee in respect of the transfer by
H
638 SUPREME COURT REPORTS (1982] I s.c.R.

an amount of not less than 15% of the value so declared, section 52
sub-section (2) is straightaway attracted and the fair market value
of the property as on the date of the transfer is liable to be taken
as the full value of the consideration for the transfer. The writ
petition \\as accordingly dismissed and the order of re-assessment
suslained by the majority decision reached by the Full Bench.
8 Hence the present appeal by the assessee with certificate obtained
from the High Court.

It will be noticed from the above statement of facts that the
principal question arising for determination in this appeal turns on
c the true interpretation of section 52 sub-section (2). But in order ....
to arrive at its proper interpretation, it is necessary to refer to some
other provisions of the Act as well. Section 2 clause (24) defines
the word 'income'. The definition is inclusive and covers 'capital
gains' chargeable under section 45. Section 4 is the charging section
and it provides that income tax shall be charged in respect of the
D total income of the previous year of every person. Section 5 defines
the scope of 'total income' by providing that the total income of the
previous year of a person who is resident shall include all income
from whatever source derived which is received or is deemed to be
received in India in such year by him or on his behalf or accrues
or arises or is deemed to accrue or arise to him in India during such
year or accrues or arises to him outside India during such year.
Section 14 enumerates the heads of income under which income
shall, for the purposes of charge of income tax and computation of
total income, be classified and they include "capital gains". Section
45 provides that any profits or gains arising from the transfer of a
capital asset effected in the previous year shall be chargeable to
·F
income rax under the head "capital gains" and shall be deemed to
be the income of the previous year in which the transfer took
place. He mode of computation of capital gains is laid down in
section 48 which provides that 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
G transfer of the capital asset, two amounts, namely, (i) expenditure
incurred wholly and exclusively in connection with such transfer and
(ii) the cost of acquisition of the capital asset and the cost of any
improvement thereto. Then follows section 52 which is the material
section requiring to be construed in the present appeal. That
H
section consists of two sub-sections and runs as follows :
K.P. VARGHESE v. I.T.0. (Bhagwati, J.) 639

(I ) Where the person who acquires a capital asset from an A
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 under section 45, the full value of the consi-
deration for the transfer shall, with the previous appro-
B
val of the Inspecting Assistant Commissioner, be taken
to be the fair market value of the capital asset on the
date of the transfer.

(2) Without prejudice to the provisions of sub-section (I), c
if in the opinion of the Income-tax Officer the fair
market value of a capital asset transferred by an
assessee as on the date of the transfer exceeds the full
value of the consideration declared by the assessee in
respect of the transfer of such capital asses! by an
amount of not less than fifteen per cent of the value D
declared, the full value of the consideration for such
capital asset shall, with the previous approval of the
Inspecting Assistant Commissioner, be taken to be
its fair market value on the date of its transfer.

There is a marginal note to section 52 which reads : Consideration E
for transfer in cases of under-statement". It may be pointed out
that originally when the Act came to be enacted, section 52 con-
sisted of only one provision which is now numbered as sub-sec-
tion (I) and it was by section 13 of the Finance Act 1964 that
sub-section (2) was added in that section with effect from !st April
1964. F

Now on these provisions the question arises what is the true
interpretation of section 52, sub-section (2). The argument of the
Revenue was and this argument found favour with the majority
Judges of the Full Bench that on a plain natural construction of
G
the language of section 52, sub·section (2), the only condition
for attracting the applicability of that provision is that the fair
market value of the capital asset transferred by the assessee as on
the date of the transfer exceeds the full value of the consideration
dc:clared by the assessee in respect of the transfer by an amount of
not less than 15% of the value so declared. Once the Income-tax
H
Officer is satisfied that this condition exists, he can proceed to
640 SUPREME COURT REPORTS [1982] 1 s.c.R.

A invoke the provision in section 52 sub·section (2) and take the fair
market value of the capital asset transferred by the assessee as on
the date of the transfer as representing the full value of the consi·
deration for the transfer of the capital asset and compute the capital
gains on that basis. No more is necessary to be proved, contended
the Revenue. To introduce any further condition such as under·
B statement of consideration in respect of the transfer would be to
read into the statutory provision something which is not there :
indeed it would amount to rewriting the section. This argument
was based on a strictly literal reading of section 52 sub-section (2)
but we do not think such a construction can be accepted. It
ignores several vital considerations which must always be borne in
c mind when we are interpreting a statutory provision. The task of
interpretation of a statutory enactment is not a mechanical task. It is
more than a mere reading of mathematical formulae because few
words possess the precision of mathematical symbols. It is an
attempt to discover the intent of the legislature from the language
used by it and it must always be remembered that language is at
D best an imperfect instrument for the expression of human thought
and as pointed out by Lord Denning, it would be idle to expect
every statutory provision to be "drafted with divine prescience and
perfect clarity." We can do no better than repeat the famous words
of Judge Learned Hand when he said : " - -it is true that the
words used, even in their literal sense, are the primary and ordina-
E rily the most reliable, source of interpreting the meaning of any
writing : be it a statute, a contract or anything else. But it is one
of the surest indexes of a mature and developed jurisprudence not
to make a fortress out of the dictionary; but to remember that
statutes always have some purpose or object to accomplish, whose
sympathetic and imaginative discovery is the surest guide to their
meaning." We must not adopt a strictly literal interpre-
tation of section 52 sub-section (2) but we must construe its
language having regard to the object and purpose which the legis·
lature had in view in enacting that provision and in the context of
the setting in which it occurs. We cannot ignore the context and
the collocation of the pro~isons in which section 52 sub-section (2)
G appears, because, as pointed out by Judge Learned Hand in most
felicitous language: "--the meaning of a sentence may he more
than that of the separate words as a melody is more than the notes,
and no degree of particularity can ever obviate recourse to the
setting in which all appear, and which all collectively create".
H
Keeping these observations in mind we may now approach the
construction of section 52 sub-section (2).
K.P. VARGHESE v. I.T.O. (Bhagwati, J.) 641

The primary objection against the literal construction of sec- A
tion 52 sub-section (2) is that it leads to manifestly unreasonable
and absurd consequences. It is true that the consequences of a
suggested construction cannot alter the meaning of a statutory pro·
vision but they can certainly help to fix its meaning. It is a well
recognised rule of construction that a statutory provision must be
so construed, if possible that absurdity and mischief may be B
avoided. There are many situations where the construction sug·
gested on behalf of the Revenue would lead to a wholly unreasona-
ble result which could never have been intended by the legislature.
Take, for example, a case where A agrees to sell his property to B
for a certain price and before the sale is completed pursuant to the
agreement and it is quite well-known that sometimes the completi· c
tion of the sale may take place even a couple of years after the
date of the agreement-the market price shoots up with the result
that the market price prevailing on the date of the sale exceeds the
agreed price at which the property is sold by more than 15% of
such agreed price. This is not at all an uncommon case in an
economy of rising prices and in fact we would find in a large number 0
of cases where the sale is completed more than a year or two after
the date of the agreement that the market price prevailing on the
date of the sale is very much more than the price at which the
poperty is sold under the agreement. Can it be contended with
any degree of fairness and justice that in such cases, where there is
dearly no under-statement of consideration in respect of the transfer E
.. and the transaction is perfectly honest and bonafide and, in fact,
in fulfilment of a contractual obligation, the assessee who has sold
the property should be liable to pay tax on capital gains which have
not accrued or arisen to him. It would indeed be most harsh and
inequitable to tax the assessee on income which has neither arisen
to him nor is received by him, merely because he has carried out F
the contractual obligation under-taken by him. It is difficult to
conceive of any rational reason why the legislature should have
thought it fit to impose liability to tax on an assessee who is bound
by law to carry out his contractual obligation to sell the property at
the agreed price and honestly carries out such contractual obliga ·
tion. It would indeed be strange if obedience to the law should G
attract the levy of tax on income which has neither arisen to the
assessee nor has been received by him. If we may take another
illustration, let us consider a case where A sells his property to B
with a stipulation that after some-time which may be a couple of
years or more, he shall resell the property to A for the same price. H
642 SUPREME COURT REPORTS [1982] 1 S.C.R.

A could it be contended in such a case that when B transfers the
property to A for the same price at which he originally purchased
it, he should be liable to pay tax on the basis as if he has received
the market value of the property as on the date of resale, if, in the
meanwhile, the market price has shot up and exceeds the agreed
price by more than 15%. Many other ·similar situations can be
B contemplated where it would be absurd and unreasonable to apply
section 52 sub-section (2) according to its strict literal consrruction.
We must therefore eschew literalness in the interpretation of section
52 sub-section (2) and try to arrive at an interpretation which avoids
this absurdity and mischief and makes the provision rational and
sensible, unless of course, our hands are tied and we cannot find
c any escape from the tyranny of the literal interpretation. It is now
a well settled rule of construction that where the plain literal inter-
pretation of a statutory provision produces a manifestly absurd and
unjust result which could never have been intended by the legisla-
ture, the court may modify the language used by the legislature or
even 'do some violence' to it, so as to achieve the obvious intention
D of the legislature and produce a rational construction, Vide: Luke v.
Inland Reuenue Commissioner(') The Court may also in such a case
read into tbe statutory provision a condition which, though not
expressed, is implicit as constituting the basic assumption underly-
ing the statutory provision. We think that, having regard to this
well recognised rule of interpretation, a fair and reasonable cons-
E truction of section 52 sub-section (2) would be to read into it a con-
dition that it would apply only where the consideration for the
transfer is under-stated or in other words, the assessee has actually
•
received a larger consideration for the transfer than what is declared
in the instrument of transfer and it would have no application in case
F of a bonafinde transaction where the full value of the consideration ....
for the transfer is correctly declared by the assessee. There are
several important considerations which incline us to accept this
construction of section 52 sub-section (2).

The first consideration to which we must refer is the
G object and purpose of the enactment of section 52 sub-section (2).
Prior to the introduction of sub-section (2), section 52 consisted
only of what is now sub-section (I). This sub-section provides that
where an assessee transfers a capital asset and in respect of the
transfer two conditions are satisfied' namely, (I) the transferee is a
person directly or indirectly connected with the assessee and (ii) the
H
(I) [1963] AC 557.
K.P. VARGHESE v. l.T.O. (Bhagwati, J.) 643

Income-lax Officer has reason to believe that the transfer was effected A
with the object of avoidance or reduction of the liability of the
assessee to tax on capital gains, the fair market value of the capital
asset on the date of the transfer shall be taken to be the full value
of consideration for the transfer and the assessee shall be taxed on
capital gains on that basis. The second condition obviously involves
under-statement of the consideration in respect of tho transfer because B
it is only by showing the consideration for the transfer at a
• lesser figure than that actually received that the assessee can achieve
the object of avoiding or reducing his liability to tax on capital
gains. And that is why the marginal note to section 52 reads :
"Consideration for the transfer in cases of under-slatement". But,
it must be noticed that for the purpose of bringing a case within c
sub-section (l), it is not enough merely to show understatement
of consideration but it must be further shown that the object of the
under-statement was to avoid or reduce the liability of the assessee
to tax on capilal gains. Now it is necessary to bear in mind that
when capital gains are computed by invoking sub-section (l) it is
not any fictional accrual or receipt of income which is brought to
tax. Sub-section (I) does not deem income to accrue or to be
received which in fact never accrued or was never received. It
seeks to bring within the net of taxation only that income which
has accrued or is received by the assessee as a result of the capital
asset. But since the actual consideration received by the assessee
is not declared or disclosed and in most of the cases, if not all, it E
would not be possible for the Income-tax Officer to determine pre-
cisely what is actual consideration received by the assessee or in
• other words how much more consideration is received by the
assessee than that declared by him, sub-section (I) provides that
the fair market value of the property as on the date of the transfer
shall be taken to be the full value of the consideration for the
F
transfer which has accrued to or is'received by the assessee. Once
it is found that the consideration in respect of the transfer is under-
stated and the conditions specified in sub-section (I) are fulfilled,
the Income-tax Officer will not be called upon to prove the precise
extent of the undervaluation or in other words, the actual extent
G
of the concealment and the full value of the consideration received
for the transfer shall be computed in the manner provided in sub-
section (!). The net effect of this provision is as if a statutory
best judgment assessment of the actual consideration received by
the assessee is made, in the absence of reliable materials.
B
644 SUPREME COURT REPORTS (1982) I s.c.a.

A But the scope of sub·section (I) of section 52 is extremely
restricted because it applies only where the transferee is a person
directly or indirectly connected with the assessee and the object of
the under-statement is to avoid or reduce the income-tax liability of
the assessee to tax on capital gains. There may be cases where the
consideration for the transfer is shown at a lesser figure than that
B actually received by the assessee but the transferee is not a person
directly or indirectly connected with the assessee or the object of
under-statement of the consideration is unconnected with tax on
capital gains. Such cases would not be within the reach of sub-
section (1) and the aseessee, though dishonest, would escape the
rigour of the provision enacted in that sub-section. Parliament
c therefore enacted sub-section (2) with a view to extending the
coverage of the provision in sub-section (I) to other cases of under-
statement of consideration. This becomes clear if we have regard
to the object and purpose of the introduction of sub-section (2) as
appearing from travaux preparataire relating to the enatment of that
provision. It is a sound rule of construction of a statute. firmly
D established in England as far back as 1584 when Heydon's case(')
was decided that" .. for the sure and true interpretation of all
statutes in general --four things are to be discerned and con-
sidered : (1) What was the common law before the making of the
Act, (2) What was the mischief and defect for which the common
law did not provide, (3) What remedy the Parliament hath resolved
E and appointed to cure the disease of the Commonwealth, and (4)
The true reason of the remedy, and then the office of all the Judges
is always to make such construction as shall suppress the mischief,
and advance the remedy". In in re Mayfair Property Company(')
Lindley. M.R. in 1898 found the rule "as necessary now as it was
when Lord Coke reported Heydon' s case". The rule was reaffirmed
F by Earl of Halsbury in Eastman Photographic Material Company v.
Comptroller General of Patents, Designs and Trade Marks(') in the
following words.

"My Lords, it appears to me that to construe the
G Statute fn question, it is not only legitimate but highly con-
venient to refer both to the former Act and to the ascer-
tained evils to which the former Act had given rise, and to

(I) [1584] 3 Co. Rep. 7a.
H (2) LR [1898] 2 Ch. 28.
(3) LR [1898] AC 571.
K.P. VARGHESE v. I.T.O. (Bhagwati, J.) 645

the later Act which provided the remedy. These three being
A
compared I cannot doubt the conclusion."

This Rule being a Rule of construction bas been repeatedly
applied in India in interpreting statutory provisions. It would
•
therefore be legitimate in interpreting sub-section (2) to con- B
sider that was the mischief and defect for which section 52 as it then
stood did not provide and .vhich was sought to be remedied by the
enactment of sub-section (2) or in other words, what was the object
and purpose of enacting that sub-section. Now in this connection
)
the speech made by the Finance Minister while moving the amend-
ment introducing sub-section (2) is extremely relevant, as it throws c
considerable light on the object and purpose of the enactment' or
sub-section (2). The Finance Minister explained the reason for
introducing sub-section (2) in the following words :

"Today, particularly every transaction of the sale of D
property is for a much lower figure than what is actually
received. The deed of registration mentions a particular
amount; the actual m~:mey that passes is considerably more.
It is to deal with these classes of sales that this amendment
has been drafted--lt does not aim at perfectly bona fide
transactions ...... but essentially relates to the day-to-day E
occurrences that are happening before our eyes in regard to
• the transfer of property. I think, this is one of the key
sections that should help us to defeat the free play of un-
:accounted money and cheating of the Government."

Now it is true that the ·speeches made by the Members of the F
Legislature on the floor of the House when a Bill fohmactillg·a
statutory pro\~Sion is being debated are i~admissibfo for the purpose
'.of interpreting ·the statutory prdvisio:ti ',but the speech· made by' the
Mover Of lhe Bill eiplaining 'tire reason for the i1itrodu'cti6nof the
·~Ill can i:eiitrunly be referred ' tb fo~ di~ i'mrpose 'l>f as'eerlliill1ng the
mischief smighi to'oe'reniediecl· J5'y • t:he':'1egisfati6Ji 'alltl ·the"cil'IJ~bt
and purpose for which the legislation is enacted. This is in accord
with the recent trend in juristic thought not only in Western
countries but also in India that interpretation-of'!! stiitut:i:-being an-
exercise in the ascertainment of meaning, everything 'which is
logically relevant should be admissible. In factthele'ate ai' least
646 SUPREME COURT REPORTS ( 1982) 1 S.C.R.

A three decisions of this Court, one in Loka Shikshana Trust v.
Commissioner of Income-Tax(') the othet in Indian Chamber of
Commerce v. Commissioner of Income-tax(') and the third in
Additional Commissioner of Income-tax v. Surat Art Silk Cloth
Manufacturers Association(') where the speech made by the Finance
Minister while introducing the exclusionary clause in section 2
B clause (I 5) of the Act was relied upon by the Court for the purpose
of ascertaining what was the reason for introducing that clause.
The speech made by the Finance Minister while moving the amend-
ment introducing sub-section (2) clearly states what were the circum·
stances in which sub-sec1ion (2) came to be passed, what was the
mischief for which. section 52 as it then stood did not provide and
c which was sought to be remedied by the enactment of sub-section (2)
and why the enactment of sub-section (2) was found necessary. It i.s
apparent from the speech of the Finance Minister that sub-section(2J
was enacted for the purpose of reaching those cases where there was
under-statement of consideration in respect of the transfer or to put
D it differently, the actual consideration received for the transfer was
'considerably more' than that declared or shown by the assessee,
but which were not covered by sub-section (I) because the transferee
was not directly or indirectly connected with the assessee. The
object and purpose of sub-section (2), as explicated from the speech
of the Finance Minister, was not to strike at honest and bonafide
transactions where the consideration for the transfer was correctly
E disclosed by the assessee but to bring within the net of taxation
those transactions where the consideration in respect of the transfer
was shown at a lesser figure than that actually received by the
assessee, so that they do not escape the charge of tax on capital
gains by under-statement of the consideration. This was real
object and purpose of the enactment of sub-section (2) and the
F interpr<tation of this sub-section must fall in line with the advance-
ment of that object and purpose. We must therefore accept as the
underlying assumption of sub-section (2) that there is under-state·
ment of consideration in respect of the transfer and sub-section (2)
applies only where the actual consideration received by the assessee
is not disclosed and the consideration declared in respect of the
G transfer is shown at a lesser figure than that actually received.

(I) 101 ITR 234.
(2) IOI !TR 796.
ff (3) 121 !TR I.
K.P. VARGHESE v. I.T.O. (Bhagwati, J.) 647

This interpretation of sub-section (2) is strongly supported by A
the marginal note to section 52 which reads 'Consideration for
transfer in cases of under-statement'. It is undoubtedly true that
the marginal note to a section cannot be referred to for the purpose
of construing the section but it can certainly be relied upon as
indicating the drift of the section or, to use the words of Collins
• MR in Bushel v. Hammond(') to show what the section is dealing B
with. It cannot control the interpretation of the words of a section
particularly when the language of the section is clear and unambi-
guous but, being part of the statute, it prima facie furnishes some
clue as to the meaning and purpose of the section. Vide Bengal
Immunity Company Limited v. State of Bihar(') The marginal note
to section 52. as it now stands, was originally a marginal note only c
to what is presently sub-section (l} and significantly enough, this
marginal note remained unchanged even after the introduction of
sub-section (2) suggesting clearly that it was meant by Parliament
to apply to both sub-sections of section 52 and it must therefore be
taken as indicating that, like sub·section (I), sub-section (2) is also D
intended to deal with cases where there is under-statement of the
consideration in respect of the transfer.

But apart from these considerations, the placement of sub-
si:ction (2) in section 52 does indicate in some small measure that
Parliament intended that sub-section to apply only to cases where
E
the consideration in respect of the transfer is under-stated by the
• assessee. It is not altogether without significance that the provision
in sub-section (2) was enacted by Parliament not as a separate
section, but as part of section 52 which, as it originally stood, dealt
only with cases of under-statement of consideration. If Parliament
intended sub-section (2) to cover all cases where the condition of
F
15% difference is satisfied, irrespective of whether there is under-
statement of consideration or not, it is reasonable to assume that
Parliament would have en&cted that provision as a separate section
and not pitch-forked it into section 52 with a total stranger under
an inappropriate marginal note. Moreover there is inherent evidence
G
in sub-section (2) which suggests that the thrust of that sub-section
is directed against cases of under-statement of consideration. The
crucial and important words in sub-section (2) are : "the full value
of the consideration declared by the assessee", The word 'declared'

(1) [1904] 2 KB 563.
(l) (1955] 2 SCR 603.
H
648 SUPREME COURT REPORTS (1982] I S.C.R.

A is very eloquent and revealing. It clearly indicates that the focus of
sub.section (2) is on the consideration declared or disclosed by the
assessee as distinguished from the consideration actually received by
him and it contemplates a case where the consideration received by
the assessee in respect of the transfer is not truly declared or dis-
closed by him but is shown at a different figure. This of course is
B a very small factor and by itself of little consequence but alongwith
the other factors which we have discussed above, it assumes same
significance as throwing light on the true intent of sub.section (2).

There is also one other circumstance which strongly reinforces
the view we are taking in regard to the construction of sub-section (2).
c Soon after the introduction of sub-section (2), the Central Board of
Direct Taxes, in exercise of the power conferred under section 119
of the Act, issued a circular dated 7th July, 1964 explaining the
scope and object of sub-section (2) in the following words :

"Section 13 of the Finance Act has introduced a new
n sub-section (2) in section 52 of the Income-tax Act with a
view to countering evasion of ta:x on capital gains through
the device of an under-statement of the full value of the
consideration received or receivable on the transfer of a
capital asset.
E
The provision existing in section 52 of the Income-tax
Act before the amendment {which has now been remem- •
. bered · as sub-section (2) enables the computation of
capital gains arising on transfer of a capital asset with
reference to its fair market value as on the date of its
F transfer, ignoring the amount of the consideration shown
by the assessee, only if the following two conditions
are satisfied :

(a) the transferee: is' a· perSOn • who is directly,. or.
indirectly connected with•asseS!~e. a:nif' •. "; r '." ., •·•'
G ~,;J I (bl 'the'Income-tax Office¥ has feason fa' believe th'at .:
·'_,_,_,; r;':
tile .tf!.'risfer'·Was -effected 'with object of•avbidance ''
· · • or· reduc!in'ir of ttte · lillbi!itY of asse~see''te ta\<'•ciil'
capital gains.

Jn view of these conditions, this provision has a Jln\i-
ted operation and does not apply to other cases where the
K.P. VARGHBSB v. I.T.O. (Bhagwati, J.) 649

tax liability on capital gains arising on transfer of capital A
assets between parties not connected with each other, is
sought to be avoided or reduced by an under-statement of
the consideration paid for the transfer of the asset."

The circular also drew the attention of Income-tax Authorities to
the assurance given by the Finance Minister in his speech that sub- B
section (2) was not aimed at perfectly honest and bonafide trans·
actions where the consideration in respect of the transfer was
correctly disclosed or declared by the assessee, but was intended to
deal only with cases where the consideration for the transfer was
under-stated by the assessee and was shown at a lesser figure than
that actually received by him. It appears that despite this circular, c
the Income-tax Authorities in several cases levied tax by invokmg
the provision in sub-section (2) even in cases where the transaction
was perfectly, honest and bone fide and there was no under-statement
of the consideration. This was quite contrary to the instructions
issued in the circular which was binding on the Tax Department and
the Central Board of Direct Taxes was, therefore, constrained to D
issue another circular on 14th January, 1974 whereby the Central
Board, after reiterating the assurance given by the Finance Minister
in the course of his speech pointed out :

"It has come to the notice of the Board that in some
cases the Income-tax Officers have invoked the provisions
of section 52(2) even when the transactions were bonafide.
In this context reference is invited to the decision of the
Supreme Court in Navnitlal C. Jhaveri v. K. K. Sen(')
and Ellerman Lines Ltd. v. Commissioner of Income-tax,
West Benga/(2) wherein it was held that the circular issued
by the Board would be binding on all officers and persons F
employed in the execution of the Income-tax Act. Thus,
the Income-tax Officers are bound to follow the instructions
issued by the Board."

and instructed the Income-tax Officers that "while completing the
assessments they should keep in mind the assurance given by G
the Minister of Finance and the provisions of section 52(2) of
the Income-tax Act may not be invoked in cases of bonafide trans-

(I) 56 JTR 198. H
(2) 82 !TR 913.
650 SUPREME COURT REPORTS [1982] I S.C.R.

A actions". These two circulars of the Central Board of Direct
Taxes are, as we shall presently point ont, binding on the Tax
Department in administering or executing the provision enacted in
sub-section (2), but quite apart from their binding character, they
are clearly in the nature of contemporanea expositio furnishing legiti-
mate aid in the construction of sub-section (2). The rule of
B construction by reference to contemporanea expositio is a well
established rule for interpreting a statute by reference to the exposi-
tion it has received from contemporary authority, though it must .
give way where the language of the statute is plain and unambiguous.
This rule has been succinctly and felicitously expressed in Crawford
on Statutory Construction (1940 ed) where it is stated in paragraph
c 219 that "administrative construction (i.e. contemporaneous
construction placed by administrative or executive officers charged
with executing a statute) generally should be clearly wrong before
it is overturned; such a construction, commonly referred to as
practical construction, although non-controlling, is nevertheless
entitled to considerable weight; it is highly persuasive." The
D validity of this rule was also recognised in Ba/eshwar Bagarti v.
BhagirMhi Dass(') where Mookerjee, J. stated the rule in these
terms:
"It is a well-settled principle of interpretation that
courts in construing a statute will give much weight to the
E interpretation put upon it, at the time of its enactment
and since, by those whose duty it has been to construe,
execute and apply it."

and this statement of the rule was quoted with approval by this
Court in Deshbandhu Guptu & Ca. v. Delhi Stock Exchange Asso-
F ciation Ltd.(2) It is clear from these two circulars that the Central
Board of Direct Taxes, which is the highest authority entrusted
with the execution of the provisions of the Act, understood sub-
section (2) as limited to cases where the consideration for the
transfer has been under-stated by the assessee and this must be
regarded as a strong circumstance supporting the construction which
G we are placing on that sub-section.

But the construction which is commending itself to us does
not rest merely on the principle of contempo1anea expositio. The

H O) ILR 35 Cal. 701.
<2> [J979J 4 sec 565.
K.P. VARGHESE v. l.T.O. (Bhagwati, J.) 651

two circulars of the Central Board of Direct Taxes to which we A
have just referred are le gaily binding on the Revenue and this
binding character attaches to the two circulars even if they be
found not in accordance with the correct interpretation of sub-
section (2) and they depart or deviate from such construction. It
is now well-settled as a result of two decisions of this Court, one in
Navnitla/ C. Jhaveri v. K.K. Sen(1) and the other in Ellerman Lines
B
Ltd. v. Commissioner of Income-tax, West Bengal(') that circulars
issued by the Central Board of Direct Taxes under section 119 of
the Act are binding en all Officers and persons employed in the
execution of the Act even if they deviate from the provisions of the
Act. The question which arose in Navnitlal C. Jhaveri's case (supra)
was in regard to the constitutional validity of sections 2(6A) (e) and
c
12(!B) which were introduced in the Indian Income Tax Act 1922
by the Finance Act 1955 with effect from !st April, 1955. These
two sections provided that any payment made by a closely held
company to its shareholder by a way of advance or loan to the
extent to which the company possesses accumulated profits shall be D
treated as dividend taxable under the Act and this would include
any loan or advance made in any previous year relevant to any
assessment year prior to the assessment year 1955-56, if such loan
or advance remained outstanding on the first day of the previous
year relevant to the assessment year 1955-56. The constitutional
validity of these two sections was assailed on the ground that they E
imposed unreasonable restrictions on the fundamental right of the
assessee under Article 19( I) (f) and (g) of the Constitution by taxing
outstanding loans or advances of past years as dividend. The
Revenue however relied on a circular issued by the Central Board
of Revenue under section 5(8) of the Indian Income-tax Act 1922
which corresponded to section 119 of the Present Act and this F
circular provided that if any such outstanding loans or advances
of past years were repaid on or before 30th June 1955, they would
not be taken into account in determining the tax liability of the
shareholders to whom such loans or advances were given. This
circular was clearly contrary to the plain language of section 2(6A)(e)
and section 12l(B), but even so this Court held that it was binding G
on the Revenue and since "past transactions which would normally
have attracted the stringent provisions of section 12(!B) as it was
introduced in 1955, were substantially granted exemption from the

(l) 56 !TR 198. H
(2) 82 !TR 913.
652 SUPREME COURT REPORTS (1982] I s.c.11.

A operation of the said provisions by making it clear to all the
companies and their shareholders that if the past loans were
genuinely refunded to the companies they would not be taken into
account under section 12(1B)" sections 2(6A) (e) and 12(1B) did
not suffer from the vice of unconstitutionality. This decision was
followed in Ellerman Lines case (supra) where referring to anoth1~r
B circular issued by the Central Board of Revenue under section 5(8}
of the Indian Income Tax Act 1922 on which reliance was placed on •
behalf of the assessee, this Court observed :

"Now, coming to the question as to the effect of
instructions issued under section 5(8) of the Act, this
c Court observed in Navnit Lal C. Jhaveri v. K. K. Shah
Appellate Assistant Commissioner, Bombay.

"It is clear that a circular of the kind which was issued
by the Board would be binding on all officers and persons
D employed in the execution of the Act under section 5(8) of
the Act. This circular pointed out to all the officers that
it was likely that some of the companies might have advan-
ced loans to their shareholders as a result of genuine trans-
actions of loans, and the idea was not to affect such trans-
actions and not to bring them within the mischief of the
E new provision.

The directions given in that circular clearly deviated
from the provisions of the Act, yet this Court held that
circular was binding on the Income-tax Officers."

F The two circulars of the Central Board of Direct Taxes referred to
above must therefore be held to be binding on the Revenue in the
administration or implementation of sub·section (2) and this srnb-
section must be read as applicable only to cases where there is
under-statement of the consideration in respect of the transfer.

Thus it is not enough to attract the applicability of sub-section
G (2) that the fair market value of the capital asset transferred by
the assessee as on the date of the transfer exceeds the full value of
the consideration declared in respect of the transfer by not kss
than 15% of the value so declared, but it is furthermore necessa.ry
that the full value of the consideration in respect of the transfer is

" under-stated or in other words, shown at a lesser figure than that
actually received by the assessee. Sub-section (2) has no application
K.P. VARGHESE v. l.T.O. (Bhagwati, J.) 653

in case of an honest and bonafide transaction where the considera-
A
tion in respect of the transfer has been correctly declared or dis-
closed by the assessee, even if the condition of 15% difference
between the fair market value of the capital asset as on the date of
the transfer and the full value of the consideration declared by the
assessee is satisfied. If therefore the Revenue seeks to bring a case
B
within sub-section (2), it must show not only that the fair market
value of the capital asset as on the date of the transfer exceeds the
\ full value of the consideration declared by the assessee by not less
than 15% of the value so declared, hut also that the consideration
has been under-stated and the assessee has actually received more
than what is declared by him. There are two distinct conditions
which have to be satisfied before sub-section (2) can be invoked by
c
the Revenue and the burden of showing that these two conditions
are satisfied rests on the Revenue. It is for the Revenue to show
/ that each of these two conditions is satisfied and the Revenue cannot
claim to have discharged this burden which lies upon it, by merely
establishing that the fair market value of the capital asset as on the D
date of the transfer exceeds by 15% or more the full value of the
consideration declared in respect of the transfer and the first condi-
tion is therefore satisfied. The Revenue must go further and prove
that the second condition is also satisfied. Merely by showing that
the first condition is satisfied, the Revenue cannot ask the Court to
presume that the second condition too is fulfilled, because even in a E
case where the first condition of 15% difference is satisfied, the
..
, transaction may be a perfectly honest and bonafide transaction and
there may be no under-statement of the consideration. The fulfil-
ment of the second condition has therefore to be established
independently of the first condition and merely because the first
condition is satisfied, no inference can necessarily follow that the F
second condition is also fulfilled. Each condition has got to be
viewed and established independently before sub-section (2) can be
invoked and the burden of doing so is clearly on the Revenue.
It is a well settled rule of law that the onus of establishing that the
conditions of taxability are fulfilled is always on the Revenue and
the second condition being as much a condition of taxability as the G
first, the burden lies on the Revenue to show that there is under-
statement of the consideration and the second condition is fulfilled.
Moreover, to throw the burden of showing that there is no under-
statement of the consideration, on the assessee would be to cast an
almost impossible burden upon him to establish the negative, .B
654 SUPREME COURT REPORTS [1982] 1 S.C.R.

A namely, that he did not receive any consideration beyond that
declared by him.

But the question then arises why has Parliament introduced
the first condition as a pre-requisite for the applicability of sub-
8 section (2) ? Why bas Parliament provided that in order to attract
the applicability of sub-section (2) the fair market value of the
capital asset as on the date of the transfer should exceed by 15% or
more the full value of the consideration for the transfer declared by
the assessee ? The answer is obvious. The object of imposing the
condition of difference of 15% or more between the market value
c of the capital asset and the consideration declared in respect of the
transfer clearly is to save the assessee from the rigour of sub-sec-
tion (2) in marginal cases where difference in subjective valuation
by different individuals may result in an apparent disparity between
the fair market value and the declared consideration. It is a well-
known fact borne out by practical experience that the determination
D of fair market value of a capital asset is generally a matter of esti-
mate based to some extent on guess work and despite the utmost
bonafides, the estimate of the fair market value is hound to vary
from individual to individual. It is obvious that if the restrictive
condition of difference of 15% or more between the fair market
value of the capital asset as on the date of the transfer and the
E. consideration declared in respect of the transfer were not provided in
sub-section (2), many marginal cases would, having regard to the
possibility of difference of opinion in subjective assessment of the
fair market value, fall within the mischief of that sub-section and
the statutory measure enacted in that sub-section for determining
the consideration actually received by the assessee would be appli-
F cable in au its rigour in such cases. This condition of 15% or more
difference is merely intended to be a safeguard against under
hardship which would be occasioned to the assessee if the inflexible
rule of the thumb enacted in sub section (2) were applied in marginal
cases and it has nothing to "do with the question of burden of proof,
for the burden of establishing that there is under-statement of the
G consideration in respect of the transfer always rests on the Revenue.
The postulate underlying sub-section (2) is that the difference
between one honest valuation and another may range upto 15 % and
that constitutes the class of marginal cases which are taken out of
the purview of sub-section (2) in order to avoid hardship to the
H assessee.
K.P. VARGHESE v. l.T.0. (Bhagwati, J.) 655

It is therefore clear that sub-section (2) cannot be invoked by A
I + the Revenue unless there is under-statement of the consideration in
respect of the transfer and the burden of showing that there is such
under-statement is on the Revenue. Once it is established by the
Revenue that the consideration for the transfer has been under-
stated or, to put it differently, the consideration actually received by
the assessee is more than what is declared or disclosed by him, sub- B
.... section (2) is immediately attracted, subject of course to the fulfil-
ment of the condition of 15% or more difference, and the Revenue
is then not required to show what is the precise extent of the under-
statement or in other words, what is the consideration actually
received by the assessee. That would in most cases be difficult,j,if
not impossible, to show and hence sub-section (2) relieves the c
Revenue of all burden of proof regarding the extent of under-
statement or concealment and provides a statutory measure of the
consideration received in respect of the transfer. It does not create
any fictional receipt. It does not deem as receipt something which
is not in fact received. It merely provides a statutory best judgment
assessment of the consideration actually received by the assessee D
and brings to tax capital gains on the footing that the fair market
value of the capital asset represents the actual consideration received
by the assessee as against the consideration untruly declared or
disclosed by him. This approach in construction of sub-section (2)
falls in line with the scheme of the provisions relating to tax on
capital gains. It may be noted that section 52 is not a charging
E
section but is a computation section. It has to be read alongwith
section 48 which provides the mode of computation and under
which the starting point of computation is "the full value of the
consideration received or accruing". What in fact never accrued or •
was never received cannot be. computed as capital gains under
F
section 48. Therefore sub-section (2) cannot be construed as
bringing within the computation of capital gains an amount
which, by no stretch of imigination, can be said to have
accrued to the assessee or been received by him and it must
be confined to cases where the actual consideration received
for the transfer is under-stated and since in such cases it is very
G
difficult, if not impossible, to determine and prove the exact quantum
of the suppressed consideration, sub-section (2) provides the statu·
tory measure for determining the consideration actually received by
the assessee and permits the Revenue to take the fair market value
of the capital asset as the full value of the consideration received in H
respect of the transfer.
656 SUPREME COURT REPORTS [1982] J S.C.R.

A This construction which we are placing on sub-section (2)
also marches in step wit;1 the Gift Tax Act, 1958. If a capital
asset is transferred for a consideration below its market value, the
difference between the market value and the full value of the consi-
deration received in respect of the transfer would amount to a gift
liable to tax under the Gift Tax Act, 1958, but if the construction
B of sub-section (2) contended for on behalf of the Revenue were
accepted, such difference would also be liable to be added as part
of capital gains taxable under the provisions of the Income Tax
Act, 1961. This would be an anomalous result which could never
have been contemplated by the legislature, since the Income Tax Act,
1961 and the Gift Tax Act, 1958 are parts of an integrated scheme
c of taxation and the same amount which is chargeable as gift could
not be intended to be charged also as capital gains.

Moreover, if sub-section (2) is literally construed as applying
even to cases where the full value of the consideration in respect of
D
the transfer is correctly declared or disclosed by the assessee and
there is no understatement of the consideration, it would result in
an amount being taxed which has neither accrued to the assessee
nor been received by him and which from no view point can be
rationally considered as capital gains or any other type of income.
It is a well settled rule of interpretation that the Court should as
E for as possible avoid that construction which attributes irrationality
to the legislature. Besides, under Entry 82 in List I of the Seven th
Schedule to the Constitution which deals with "Taxes on income"
and under which the Income Tax Act, 1961 has beeu enacted,
Parliament cannot "choose to tax as income as item which in no
rational sense can be regarded as a citizens income or even receipt.
F
Sub-section (2) would, therefore, ou the construction of the Revenue,
go outside the legislative power of Parliament, and it would not be
possible to justify it even as an incidental or ancillary provision or
a provision intended to prevent evasion of tax. Sub-section (2) would
also be violative of the fundamental right of the assessee under
G Article 19 (1) (f)-which fundamental right was in existence at the
time when sub-section (2) came to he enacted-since on the con-
struction canvassed on behalf of the Revenue, the effect of sub-
section (2) would be to penalise the assessee for transferring his
capital asset for a consideration lesser by 15% or more than the
H fair market value and that would constitute unreasonable restriction
on the fundamental right of the assessee to dispose of his capital
K.P. VARGHESE •• I.T.0. (Bhagwati, J.) 657

asset at the price of his choice. The Court must obviously prefer a A
construction which renders the statutory provision constitutionlly
valid rather than that which makes it void.

We must therefore hold that sub-section (2) of sec. 52 can be
invoked only where the consideration for the transfer has been B
understated by the assessee or in other words, the consideration
actually received by the assessee is more than what is declared or
disclosed by him and the burden of proving such under-statement
or concealment is on the Revenue. This burden-may be discharged
by the Revenue by establishing facts and circumstances from which
a reasonable inference can be drawn that the assessee has not 0
correctly declared or disclosed the consideration received by him and
there is understatement of concealment of the consideration in
respect of the transfer. Sub-section (2) has no application in case of
• an honest and bonafide transaction where the consideration received
by the assessee has been correctly declared or disclosed by him, and
there is no concealment or suppression of the consideration. We D
find that in the present case, it was not the contention of the
Revenue that the property was sold by the assesssee to his daughter-
in-law and five of his children for a consideration which was more
than the sum of Rs. 16,500 shown to be the consideration for the
property in the Instrument of Transfer and there was under·
statement or concealment of the consideration in respect of the
E
transfer. It was common ground between the parties and that was
a finding of fact reached by the Income·taic Authorities, that the
transfer of the property by the assessee was a perfectly, honest and
bonafide transaction where the full value of the consideration
received by the asseessee was correctly disclosed at the figure of
Rs. 16,500. Therefore, on the construction placed by us, sub-
F
section (2) had no application to the present case and the
Income-tax Officer could have no reason to believe that any part of
the income of the assessee bad escaped assessment so as to justify
the issue of a notice under section 148. The order of re-assessment
made by the Income-tax Officer pursuant to the notice issued under G
section 148 was accordingy without jurisdiction and the majority
judges of the Full Bench were in error in refusing to quash it.

We accordingly allow the appeal, set aside the order passed by
the Full Bench and restore the Order of Issac, J. allowing the writ H
658 SUPllEMJ! COURT R.EPOR.TS · (1982) l s.c.a.

petition and• quashing the .Order of. re-assessment made by the
Income-tax Officer. The Revenue will pay the costs of the assessee
throughout. _,

S.R; , , , . Appeal a/lowed.
B

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