Section 52(2) of the Income-tax Act applies only to cases of understatement of consideration for transfer and does not apply to bona fide transactions where the full value of consideration has been correctly declared by the assessee.

Govinda Bhat, C.J.

1. The Income-tax Appellate Tribunal, Bangalore Bench, has stated a case under section 256(1) of the Income-tax Act, 1961, (hereinafter called "the Act"), and referred the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there were no capital gains arising to the assessee on the sale of property for the assessment year 1964-65 ?"

2. The assessment is for the year 1964-65 and the relevant accounting year is the year ending on December 31, 1963. The assessee is a Hindu undivided family. Sri M. Ranga Pai is the karta of the said family. His father, M. Ventkatesha Pai, purchased a house property in Mangalore Town from Manel Raghunatha Naik for a sum of Rs. 25,000 on March 25, 1950. Venkatesha Pai died in the year 1951, and Manel Raghunatha Naik died some time thereafter. In the year 1963, the assessee reconveyed the said property to Manel Mukunda Naik, son of Manal Raghunatha Naik, for the same consideration amount of Rs. 25,000. According to the assessee, the reconveyance was done in accordance with the oral understanding between the parties to the sale transaction which had been entered into to help Manel Raghunatha Naik, then in financial difficulties. In the proceedings for assessment to gift-tax for the assessment year 1964-65, the Gift-tax Officer being of the opinion that the market value of the property in the year 1963 was Rs. 55,000 whereas it had been acquired for Rs. 25,000, the difference, viz., Rs. 30,000 should be brought to tax as "deemed gift" and, therefore, included the said sum in the gift-tax assessment of the assessee by an order dated October 22, 1965.

3. In the assessment for the year 1964-65 to income-tax, the Income-tax Officer did not levy income-tax on capital gains on the transaction in question. The Commissioner of Income-tax, acting under section 263 of the Act, set aside the assessment order being of the opinion that section 52(2) of the Act, was attracted to the transaction as the market value of the property was found to be Rs. 55,000 in the gift-tax assessment proceedings whereas the purchase was for Rs. 25,000. He directed the Income-tax Officer to make a fresh assessment after giving the assessee on opportunity of being heard. The assessee challenged the said order before the Income-tax Appellate Tribunal on various grounds. One of the grounds was that section 52(2) of the Act was not attracted to the transaction in question. The Tribunal was of the view that prima facie the provision was attracted, but it left the question open and directed the Income-tax Officer to determine the fair market value of the property as on January 1, 1954, and on the date of reconveyance and to compute the capital gains. Pursuant to the order of the Tribunal, the Income-tax Officer determined the fair market value of the property in the year 1953 at Rs. 55,000 and its value as on January 1, 1954, at Rs. 30,000. The difference between the two sums, viz., Rs. 25,000, was held to be the capital gains liable to income-tax under the Act.

4. The assessee appealed to the Appellate Assistant Commissioner who, on the view that section 52(2) of the Act will be attracted only when there is an understatement of the sale price and as in the instant case there was no dispute as to the correct amount of consideration received by the assessee on reconveyance and there was no understatement of the sale price, held that there were no capital gains arising on the reconveyance of the property by the assessee. The department went up in appeal before the Income-tax Appellate Tribunal, Bangalore Bench. The department's representative contended that the Appellate Tribunal Assistant Commissioner had exceeded the directions given by the Tribunal by going into the question of the applicability of the provisions of section 52(2) as the Tribunal in its order of remand had held that the said provisions are