Appeal No 1308 of 1970
Appeal by special leave from the order dated September 8
1970 of the Calcutta High Court in Income Tax Reference No 50 of 1971
N A Palkhivala Veda Vyasa T A Ramachandran and D N Gupta for the appellant
Y section Desai section K A iyar and H D Sharma for the respondent
The Judgment of the Court was delivered by Grover J
This is an appeal by special leave from an order of the Calcutta High Court directing the Income tax Appellate Tribunal B  Branch Calcutta to draw a statement of case relating to four questions of law which it was stated arose out of the order of the Tribunal in the matter of assessment of the appellant which was the assessee in respect of the assessment year 1962 63
The Appellate Tribunal had rejected the application of the Commissioner of Income tax requiring it to refer those questions to the High Court
The High Court on being moved issued a rule nisi and then made it absolute after full arguments without giving any reasons whatsoever
140 The assessee is a 100 subsidiary of Imperial Chemical In dustries Ltd incorporated in the United Kingdom hereinafter referred to as ICI for convenience
ICI advanced large amounts by way of loans to the assessee from time to time
This it was claimed was done for subscribing to shares in three Indian Companies called Indian Explosives Ltd Alkalai  Chemical Corporation of India and Atic Industries Private Ltd hereinafter called as IEL ACCI and ATIC respectively
Subsequently the assessee transferred the shares in the aforesaid companies at par to ICI in satisfaction of the loans advanced by that company
The Income tax Officer applied section 52 of the Income tax Act 1961 hereinafter called the Act  and assessed the assessee to capital gains
The Appellate Assistant Commissioner took the contrary view and held that on the facts which had been established the assessee was not liable to capital gains under the aforesaid section
The Tribunal upheld the decision of the Appellate Assistant Commissioner by a detailed and well reasoned order
Broadly the case of the assessee was that ICI wanted to make investments in India in sterling currency
The assessee was already in existence but the other three companies which have been mentioned were incorporated later
ICI devised a scheme by which it could make the investment as desired by it and by which it could also take advantage of the tax relief which could be availed of by the new enterprises under section 15C and 56A of the Income tax Act 1922
The scheme in short was that ICI would arrange to let the assessee hold shares in the three com panies by investing the money which was to be given by ICI to the assessee
The modus operandi was that ICT would give that money by way of loans to the assessee who agreed that the shares in the three companies would be transferred to ICI in satisfaction of the loans at par or issue price as and when desired by ICI All this was done after negotiations with the concerned Department of the Government of India at the highest level and with the approval of the Reserve Bank of India
The entire scheme was conceived and was put into operation prior to 30th November 1956 when the Finance Bill was introduced reimposing capital gains tax which had remained abolished for certain years
There was a provision for charging interest by the ICI from the assessee at a rate not exceeding 12 above the Indian Bank rate which came to 51 per annum but the interest was not to exceed in any case the dividends received by the assessee from those shares
It was claimed on behalf of the assessee that this arrangement was advantageous both to ICI and the assessee ICI having taken the risk of depreciation in shares or otherwise attached to the new business pioneering adventures ensured that capital appreciation of the shares if any also went 141 to itself
The assessee did not suffer any disadvantage because it had to pay no interest if no dividend was received and it could keep and get the benefit of any dividend in excess of 5 12
As a result of ICI investments being held through the assessee instead of directly ICI achieved an advantage of saving tax in UK amounting to pound 68000 in the relevant years
In 1959 the structure of Indian taxation regarding the grossing up of dividends was radically changed and by the Finance Act 1959 the system of grossing up of dividends under section 162 and 185 of 1922 Act was abolished and intercorporate dividends became liable to income tax at each stage
Thus the dividends passing from the three companies through the assessee to ICI became liable to tax stages
This affected the net return of ICI on its investments in the three companies substantially
In these circumstances it was decided by ICI that the investments in the three companies should he held by it directly
For that reason it called upon the assessee in February 1961 to transfer to it the aforesaid shares in the three companies at the issue price in satisfaction of the sterling loans in accordance with the previous agreements
The approval of the Reserve Bank to these transfers was received in February 1961 and the transfers were made in MarchApril 1961
According to the assessee there was no question of the transfer of shares having been affected with the object of avoidance or reduction of the liability of the assessee to capital gains which alone could attract the applicability of section 52 of the Act
Section 52 is in the following terms Consideration for transfer in cases of under statement 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 Asstt
Commissioner be taken to be the fair market value of the capital asset on the date of the transfer
The necessary ingredients of the section are ithere should be a direct or indirect connection between the person who acquires a capital asset and the assessee ii 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 iii if the first two conditions are satisfied then the full value of consideration for the 142 transfer can be taken to be the fair market value of the capital asset on the date of the transfer
As regards the first requirement that was admittedly satis fied in the present case
The second requirement could be satisfied only if there was any cogent material on which the Income tax Officer could have reason to believe that the transfers were effected with the object of avoidance and reduction of liability to capital gains
It is abundantly clear that the intention with which a particular transfer is made and the object which is to be achieved by such transfer is essentially a question of fact the conclusion relating to which is to be arrived at on a consideration of the relevant material
In other words before the Income tax Officer can have any reason to believe that a transfer was effected with the object mentioned in the section facts must exist showing that the object was to avoid or reduce the liability to capital gains
The Tribunal examined fully the correspondence and the other material with regard to each of the three Indian companies in which the investment had been made of the money advanced by ICI to the assessee
We may briefly notice the discussion relating to each company
It was in or about 1949 that ICI was asked by the Government of India to consider the manufacture of commercial Lasting High Explosives in India
Negotiations advanced more towards October 1953 when the representatives of ICI met the officials of the Government of India
The Tribunal referred to the minutes of the meeting held on October 1 1953 as also on the 6th October 1953
In the final draft of the Declaration of Intention dated November 5
1953 it was mentioned that the Government had agreed that if TCI made a loan to the assessee the latter would hold the shares in IEL and that the loan may be repaid by a transfer of the shares to ICI at any time
On 21st December 1954 the assessee applied to the Reserve Bank of India for formal sanction for borrowing Rs 160 lakhs from ICI for the purchase of shares in IEL in terms of the agreement dated November 5 1953
It was stated in the letter that ICI would charge no interest until such time as the shares began to yield dividends
The loans were advanced from 30th September 1954 to 30th June 1957 by the ICI to the assessee of the equivalent of Rs 160 lakhs in Sterling
The other correspondence relating to the aforesaid amount was also noticed by the Tribunal
In 1958 there was a Rights Issue by IEL ICI agreed to give a loan of Rs 80 lakhs to the assessee to cover the Sterling requirement of IEL The assessee was to take up shares of that amount
The terms of the loan were that ICI had the right to acquire at any time the shares held by the assessee in IEL 143 at par in satisfaction of the loan and the rate of interest payable on the loan was to be I above the Indian Bank rate
This was followed by other correspondence and a resolution which was recorded on 30 9 1958 containing terms of the second loan of Rs 8000000 
It is not necessary to refer to the other correspondence looked into by the Tribunal with regard to that loan
On 15 2 1961 the assessee was called upon by ICI to transfer the investments in satisfaction of the loans
After the sanction was obtained from the Reserve Bank of India the shares were transferred at par
The Tribunal referred to the undisputed facts relating to the circumstances in which the scheme for advancing the loan to the assessee for investment in IEL came to be mooted and was ultimately approved by the Government
This is what the Tribunal said  The above background would show that the idea was not to make the assessee the real beneficial owner of the shares
The fact that the shares should be held only for a time beneficially by the assessee is clear from the Declaration of Intention dated 5 11 1953
Before the Tribunal the counsel for the Department had accepted the position that if there was an arrangement or agreement before the reintroduction of capital gains tax he would have no case
According to him until the transfers were actually made of the shares there was no agreement on which the parties could have gone to court in order to obtain the share transfers at par in favour of ICI
The Tribunal proceeded first to examine whether there was any kind of understanding between the assessee and ICI regarding the transfer of shares at par
After recapitulating the correspondence and the relevant facts the Tribunal came to the following conclusion Taking this along with the minutes of the meeting with the officials of the Government of India in October 1953 it is clear that the whole idea of ICI throughout was to make some funds available to the assessee so that the shares could be acquired in its name and that the shares could be transferred to ICI as and when it demanded
It was however stated by the Tribunal that taking into account the correspondence and the documents referred to earlier it was satisfied with the assessee s case that the transfer of shares to London at issue price or at par was throughout the basis of the advances of loans to the assessee
It is necessary to reproduce paragraph 31 of the order of the Tribunal  In October 1953 there was no mention of any capital gains tax being revived
At that time the asses 144 see could not have had any idea of avoiding or reducing any liability to capital gains tax
The learned counsel for the department laid some emphasis on the fact that there was no enforceable arrangement
The question as to whether there was an enforceable arrangement or not is not really material
What we have to find out is whether the object in putting through these transactions of taking over the shares at par or at issue price was one of avoidance or reduction of liability to capital gains tax
That object does not get established by the mere absence of an enforceable arrangement
Having regard to the assessee being the subsidiary of ICI there is nothing surprising about the arrangement not being so formal or not being put through after complying with all the necessary legal formalities
The absence of formal agreement is thus understandable in this context and cannot by itself suggest anything in favour of the department
Businessmen are not always motivated by legalistic considerations
Even taking that the arrangement was only binding morally and not legally still so long as the assessee wanted to fulfil a moral obligation and had not the capital gains tax in mind it cannot be said that the transaction was entered into with the object of avoidance or reduction of liability to capital gains tax
The Tribunal proceeded to say We have to find out the object of the transaction
It is removed in point of time from the result
In such a case one cannot try to infer the object from the results
We really have to put ourselves at a point of time when the transaction was conceived
Taking the materials before us we consider that there is nothing to suggest that the parties had the capital gains tax in their mind in 1953 and later when they put through the aforesaid transactions
We have therefore to hold that the factual requisites of section 52 have not been established here
In dealing with the second Company namely ACCI it was pointed out by the Tribunal that the scheme for manufactur ing Polythene was placed before the Government of India by a letter of the assessee dated 13 12 1955 addressed to Mr H V R lengar Secretary Minister of Commerce  Industry in which it was specifically stated that to enable the assessee to subscribe for the new shares ICI would lend the subscription monies to the assessee on the understanding that at a later date ICI could acquire at the issue price these new shares in satisfaction of its 145 loan
The Tribunal dealt with all the relevant facts relating to the loan advanced to ACCI including those stated in the affidavits of P T Manzies dated 17 8 1966 and U R Newbery dated 10 1 1967 and considered that the transaction relating to this Company was not in any way different from those relating to the IP L ATIC the third Company was incorporated primarily for the manufacture of certain Dye stuffs
On 29 12 1955 ICI agreed to advance Rs 25 lakhs as loan to the assessee
The shares acquired under the loan could be transferred to ICI on request by the latter at the issue price
ICI waived its right to interest on the loan until the commencement of the period in respect of which ATIC paid the dividend
There was a further loan of Rs 3500000 on the same terms
These shares were age subsequently required to be transferred to ICI in February 1961
The Appellate Assistant Commissioner had referred to the affidavits which had been filed on behalf of the assessee and had mentioned that the Department had not cross examined the deponents
Before the Tribunal the counsel for the Department stated that he accepted the affidavits as correct in so far as facts were concerned but he only disputed the inferences therefrom
The Tribunal in this connection observed In our opinion once the facts mentioned therein are taken as correct the inference that the transaction was not for he purpose of avoiding or reducing liability to capital gains tax has to follow
Finally the Tribunal as stated before confirmed the decision of the Appellate Assistant Commissioner that the material on record did not justify the conclusion of the Income tax Officer that the object of the transfer of the shares of all the three Companies by the assessee to ICI was the avoidance of liability to capital gains which would attract the applicability of section 52 of the Act
The Commissioner of Income tax asked for a reference on six questions
The Tribunal again examined the further contentions of the Department in its order dated 28 7 1969 by which it declined to make the reference on the ground that no question of law arose out of the order of the Appellate Tribunal Only four questions appear to have been pressed for being referred
As regards question No 1 which was No 3 before the Tribunal it was pointed out that it proceeded on the basis that there was some dispute about the construction of the correspondence or documents
The Tribunal observed that there was no such dispute and it had not been suggested that a particular expression in any letter or document had been wrongly construed
Regarding question No 2 which was No 4 before the Tribunal the Departmental representative was asked to particularise the docu 146 ments or evidence omitted from consideration
He referred to certain documents and evidence which according to him had not been considered by the Tribunal
The Tribunal made it cleat that all the relevant materials which had been referred to had been considered by it
These materials were distributed over four bulky volumes of typed records and therefore each document could not have been mentioned in the order
Nothing relevant was actually over looked
At any rate the documents on which particular reliance was placed on behalf of the Department were considered and the Tribunal observed that the grievance of omission of materials from consideration related to irrelevant matters
As regards the other two questions the Tribunal observed that the charge of perversity was only a disparate attempt at extracting a question of law where none existed and that the object or intention of an assessee was always a question of fact
It was a factual inference to be drawn from other facts
It was pointed out that on the construction of section 52 the parties had not joined any issue
We may now mention the four questions which the High Court directed to be referred  1 whether on the facts and in he circumstances of the case and on a proper construction of the documents referred to andor considered by it the Tribunal was right in arriving at the finding that the transfer of the shares to Imperial Chemical Industries Ltd London at the issue price or par was throughout the basis of the advance of loans to the assessee  2
Whether in arriving at the said finding the Tribunal misdirected itself in law in basing the said finding on evidence covering some matters only and ignoring evidence on other essential matters  3
Whether on the facts and in he circumstances of the case and particularly in view of the finding that there was no enforceable agreement making it obligatory upon the assessee to transfer the shares to Imperial Chemical Industries Ltd London at par or issue price the conclusion of the Tribunal that the transfer of the shares by the assessee to the latter company at par was not effected with the object of avoidance or reduction of the liability of the assessee to capital gains tax was unreasonable or perverse  4
Whether on the facts and in the circumstances of the case the Tribunal was right in holding that 147 section 52 of the Income tax Act 1961 was not applicable to the facts of the case  On the analysis of section 52 of the Act made by us at a previous stage and the clear cogent and precise findings and conclusions of the Appellate Tribunal we are wholly unable to comprehend how any question of law of the nature sought to be referred arose or arises from the order of the Appellate Tribunal
It is unfortunate that in a case of this nature and magnitude the High Court did not choose to record a speaking order to enable us to appreciate the reasons which prevailed with it for directing the four questions to be referred
The jurisdiction in the matter of reference can be exercised i when the point for determina tion is a pure question of law such as construction of a statute or document of title ii when the point for determination is a mixed question of law and fact
While the finding of the Tribunal on the facts is final its decision as to the legal effect of those findings is a question of law iii a finding on a question of fact is open to attack as erroneous in law when there is no evidence to support it or if it is perverse
Where however the finding is one of fact the fact that it is an inference from other basic facts will not alter its character as one of fact See Sree Meenakashi Mills Ltd vs Commissioner of Income tax Madras1
In that case it was held that there was no question of construction of any statutory provision or document of title
The issues which arose for determination whether the sales entered in books of the ap pellant in the names of the intermediaries were genuine and if not to whom the goods were sold and for what price were all questions of fact
Their determination did not involve the application of any legal principles to facts established by the evidence
The findings of the Tribunal were amply supported by evidence and were eminently reasonable
It therefore followed that there was no question which could be referred to the Court under section 661 of the Income tax Act 1922
The same principles will apply when a reference is sought under section 256 of the Act
We are altogether unable to see how findings of the Appellate Tribunal that the transfer of shares in the present case was not made with the intention or object of avoidance or reduction of liability to capital gains were not questions of fact and did not depend on inference of facts from the evidence or the material before the Tribunal
It can well be said that the determination of the question whether the object of the assessee was to avoid or reduce its liability to capital gains by making the transfers in question did not involve the application of any legal principles to the facts established by the evidence
The findings of the Tribunal were amply supported by evidence and were eminently reasonable
It 1 148 is true that the amount involved is very large but that cannot Justify a reference as under section 256 of the Act neither the Appellate Tribunal could make a reference nor could the High Court direct the reference to be made to it by the Tribunal on pure questions of fact
The learned counsel for the Commissioner has sought to invite our attention to certain parts of the order of the Tribunal and in particular to the statement extracted by us at an earlier stage about the question whether the assessee had held the shares beneficially and the point which was debated before the Tribunal whether there was any binding legal agreement between the assessee and ICI for transfer of the shares at par
We are unable to see how these matters were relevant for the purpose of determining the intention or object under lying the transfer of the shares to ICI by the assessee
Once the Tribunal came to the conclusion which was purely one of fact that before there was any proposal to reimpose capital gains tax which came to be embodied in the Finance Bill towards the end of November 1956 the scheme had been fully evolved between the assessee and ICI of making the loans by the latter to the former for being invested in the three companies and that the shares would be transferred at par by the assessee to ICI whenever desired the applicability of section 52 could not be attracted as the same depended on certain facts which must exist or must be found and which had not been so found by the Tribunal
In the result the appeal is allowed and the order of the High Court is hereby set aside
The assessee shall be entitled to its costs in this Court
VPS Appeal allowed


Summary:
After negotiations in 1953 with the concerned Department of the Government of India and the Reserve Bank a Company incorporated in UK advanced large sums by way of loans to its subsidiary in India namely the assessee for subscribing for shares in some Indian Companies
The correspondence showed that the UK Company had the right to acquire at any time the shares at par in satisfaction of the loans
In 1961 the assessee transferred the shares when called upon by the UK Company to do so
The Income tax Officer applied section 52 of the Income tax Act 1961 and assessed the assessee to capital gains tax which was not in existence in 1953 but was Reintroduced in the Finance Bill of 1959
The Income tax Officer held that the object of the transfer was to avoid or reduce the assessee s liability to capital gains tax
The Appellate Assistant Commissioner however held that the assessee was not liable to capital gains tax and the Appellate Tribunal after an elaborate discussion of the correspondence confirmed the order holding that the transfer was not effected with that object
The Department applied to the Tribunal to refer the questions i whether certain documents were not properly construed ii whether the Tribunal ignored evidence on essential matters iii whether the finding of the Tribunal was perverse and iv whether section 52 was not applicable as arising out the Tribunal s order
The Tribunal rejected the application
The Department then moved the High Court and the High Court directed the Tribunal to state a case in relation to the four questions but the High Court did not give any reasons for doing so
Allowing the appeal to this Court HELD  The High Court can exercise its jurisdiction in the matter of reference a when the point for determination is a pure question of law such as the construction of a statute or a document of title b when the point for determination is a mixed question of law and fact While the findings of the Tribunal on the facts are final its decision as to the legal effect of the findings is a question of law
Where however the finding is one of fact the fact that it is an inference from other basic facts will not alter its character as one of fact and c when a finding on a question of fact is perverse
147C E The necessary ingredients of section 52 are  i there should be a direct or indirect connection between the person who acquires a capital asset and the assesee ii 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 iii if the first two conditions 139 are satisfied then the full value of consideration for the transfer may be taken to be the fair market value of the capital asset on the date of the transfer
The intention with which a particular transfer is made and the object which is to be achieved by such transfer are essentially questions of fact the conclusion relating to which are to be arrived at on a consideration of relevant material that is before the income tax officer can have any reason to believe that a transfer was effected with the object mentioned in the section facts must exist showing that the object was to avoid or reduce the liability to capital gains
141 H 142 A D In the present ease the orders of the Tribunal show that there was no dispute as to the construction of any expression in any letter or document that no relevant evidence was overlooked that the inference was drawn from other facts and that no question was raised on the construction of section 52
When the Tribunal found as a fact that before there was any proposal to reimpose the capital gains tax which had remained abolished for some time the scheme between the assessee and the UK Company bad been fully evolved the applicability of section 52 could not be attracted
The findings of the Tribunal that the object mentioned in the section could not be held to be established from the mere absence of a formal agreement between the assessee and the UK Company is not perverse but is supported by evidence and is eminently reasonable
in view of the clear cogent and precise findings and conclusions of the Tribunal the High Court should at least have recorded a speaking order showing how the questions of law of the nature sought to be referred arose from the order of the Tribunal
146 B D 141 A C F 148 CD Shree Meenakshi Mills Ltd vs CIT Madras  followed