AJIT K. SENGUPTA, J.

( 1 ) THIS is a reference under Section 256 (2) of the Income-tax Act, 1961. This reference relates to the assessment year 1964-65.

( 2 ) ON appeal, before the Appellate Assistant Commissioner, it was urged that no intention to avoid or reduce the appellant's tax liability was made out in this case. The transfer was made merely for the purpose of benefiting the lady and it was an honest transaction entered into out of love and affection. It was urged that the Income-tax Officer was wrong in coming to the conclusion that the transfer was made with the object of avoidance of liability under Section 45. The Appellate Assistant Commissioner agreed with this argument and observed that the Income-tax Officer had brought on record no material to substantiate that the transaction was effected with the object of avoidance or reduction of liability under Section 45. He, therefore, cancelled the Income-tax Officer's order in respect of capital gains.

( 3 ) BEFORE the Tribunal, no serious argument was made in regard to the applicability of Section 52 (1) of the Act. The Tribunal held that in the absence of any evidence to show that the transfer was made with the object of avoidance or reduction of tax liability in relation to the assets, Section 52 (1) would not apply. The main argument of the Department before the Tribunal was that Section 52 (2) applied to this case and on this basis, the order of the Income-tax Officer should have been sustained.

( 4 ) THE Tribunal found on a clear reading of the Income-tax Officer's and the Appellate Assistant Commissioner's orders that they never proceeded to consider the question from the point of view of Section 52 (2) but they had proceeded only on the ground that the transfer being to a near relative there was reason to believe that it was effected with the object of avoidance or reduction of the liability of the assessee under Section 45. To make sure regarding the correct position in this regard, the Tribunal saw the order of the Appellate Assistant Commissioner and it showed that the order was one under Section 52 (1) and not under Section 52 (2 ). It was, therefore, held that the entire argument of the departmental representative in regard to Section 52 (2) was without any foundation in fact. Accordingly, the departmental appeal was dismissed.

( 5 ) ON the aforesaid facts, the following question stated to be the question of law has been referred to this court: "whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that Section 52 (2) of the Income-tax Act, 1961, was not applicable ?"

( 6 ) SECTION 52 (1) provides us 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 under Section 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. "

( 7 ) THE necessary ingredients of the section are firstly, that there should be a direct or indirect connection between the person who acquires the capital asset and the assessee. Secondly, the Income-tax Officer should have reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to capital gains and, thirdly, if the first two conditions are satisfied, then the full value of the consideration for the transfer can be taken to be the fair market value of the capital asset on the date of the transfer.

( 8 ) SECOND requirement of Section 52 (1) can be satisfied only if there is cogent material on which the Income-tax Officer would have reason to believe that the transfer was effected with the object of avoidance or reduction of the liabilit

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