Section 52 (1) of the I. T. Act, 1961 is not automatically applicable in every case where the market price is found to be higher than the transfer price. The ITO must have reason to believe that the object of the transaction was to avoid or reduce the tax liability.

( 1 ) THE facts found and/or admitted in these proceedings are, inter alia, as follows : Mrs. Leela Nath, the assessee, sold 1,100 fully paid-up shares and 294 partly paid-up shares of E. M. C. Ltd. on the 25th July, 1962, at their face value in the assessment year 1963-64, the previous accounting year ending on the 31st March, 1963, to another company named Electrical Machines Corporation (P.) Ltd. During the assessment, the ITO found that the purchaser-company was connected with the assessee. The majority of the shares in the purchaser-company were owned by the assessee, her husband, her children or other close relatives, the said company being thus controlled by the assessee and her family. The ITO further found that the market value of the shares sold was more than their face value on the basis of their break-up value as also on the basis of their yield or return inasmuch as there were huge accumulations of reserves and that dividend had been declared at the rate of 30% during the accounting year. Accordingly, the ITO had reasons to believe that the transfer was effected at a low price with the object of avoidance or reduction of the liability of the assessee under Section 45 of the I. T. Act, 1961, and, under the provisions of Section 52 (1) of the Act of 1961, he determined the full value of consideration of the transfer of the said shares at Rs. 466'50 for each fully paid-up share and Rs. 186. 60 for each of the partly paid-up share with the previous approval of the IAC.

( 2 ) BEING aggrieved, the assessee preferred an appeal. The AAC found that it was reasonable to hold that the purchaser-company was directly or indirectly connected with the assessee and that the first condition of Section 52 (1) was satisfied. He found further that the net effect of the sale of the shares was that the assessee was transferring the benefit of the enhanced value of the shares to her husband and children through the shareholdings of the purchaser-company. But taking into account the fact of the issue of bonus shares by the E. M. C. Ltd. at the material time, the declaration of dividend by the said company, the break-up value of the shares and several advertisements publishing the financial position of the company offering its shares to the public, the AAC came to the conclusion that the primary motive for selling the said shares at their face value which was much less than the fair market value was prima facie the avoidance or reduction in liability to capital gains tax. It was for the assessee to prove otherwise that the sale was effected for other reasons. The AAC did not accept the explanation of the assessee that she was constructing a house at Dehra Dun and that she sold the said shares to meet the cost of such construction. The AAC, however, recomputed the fair market value of the shares and held that such value for each fully paid-up share would be Rs. 375 per share.

( 3 ) BOTH the assessee and the revenue preferred appeals from the order of the AAC to the Income-tax Appellate Tribunal. It was contended on behalf of the assessee in her appeal that there was no material on record to show that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45 of the I. T. Act, 1961. The Tribunal held that the explanation given by the assessee for the said transfer was not the real reason for the transaction. The finding of the AAC that the object of the transfer was to pass the benefit of the enhanced value of the said shares to the family members of the assessee was mooted and the Tribunal concluded as follows :" We do not agree with the Appellate Assistant Commissioner that unless the assessee proves by substantial evidence that the sale was effected for other motives, the only conclusion to be arrived at from the facts would be that the object of the transfer was to avoid of reduce the tax liability. From the facts proved, two conclusions are possible, viz.