(1) THIS reference under S. 256 (1) of the Income Tax Act, 1961, hereinafter called the Act, made at the instance of the Commr. LT. , Mysore, relates to the assessment year 1965-66. The question of law referred by the Income tax Appellate Tribunal, Bangalore Bench, is :

" Whether, on the facets and circumstances of the case, the Tribunal was right in holding that the order of the Commr of IT. cannot be sustained"

(2) FOR the assessment year 1965-66, an assessment order was made by the ito on 8-6-1966, on a total income of Rs. 29,062 which included share of promts from various firms and also dividends and interest on securities. On 27-3-1965, in the year of account relevant TO the assessment year 1965-66, the a,ssessee, had sold 4,735 partly paid b class ordinary shares of Rs,10 each (Rs. 7-50 paid) of the Syndicate Bank Ltd. , Manipal, to Dr. T. M. A. Pai Benevolent Fund Trust at the cost price. The Commr. of IT issued under S. 263 of the Act 3 notice dt. 19-4-1968 requiring the assessee to show cause as to why the assessment order dt. 8-6-1966 should not be revised and the ITO asked to re-do the assessment by Assessing capital gains arising out of the sale of the shades by applying the provisions of S. 52 of the Act the assessee, through his authorised representative, filed objections to the proposed revision. It was contended in the said objections that the provisions of sub-section (1) of Section 52 of the Act are not applicable to the instant case arid that the provisions of sub-sec. (2) of the said section are also not applicable in view of the fact that partly paid up shares of the Syndicate Bank, are not quoted in the market and they also do not find ready buyers and therefore there is no basis to hold that their fair market value on the date of transfer was Rs. 16. 90 per share as stated in the notice of the Commr, The objections raised were rejected by the Commr. , and by order dt. 4-5-1968, he set aside the assessment order of the ITO and directed him to re-do the assessment in accordance with law. The assessee appealed to the ITAT, Bangalqre Bench. The Tribunal, after hearing the parties, set aside the order of the Commissioner on the ground that there was no definite material for the Commissioner on which he could have come to the conclusion that the order parsed by the ITO was erroneous in so far as it is prejudicial to the interests of the revenue. The department, being aggrieved by the order of the Tribunal, sought a reference to this Court.

(3) S. 263 of the Act confers on the Commissioner the power of revision; he is empowered to call for the record of any proceeding under the Act, and if he considers that anv order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the revenue, he may, a,ter giving the assessee an opportunity of being heald and after making qr causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. The section requires that two conditions should be satisfied in order to entitle the Commissioner to set aside an order passed by the ITO. The said conditions are: (1) that the order proposed to be revised is erroneous; and (2) that such order has resulted in prejudice to the interests of the revenue The satisfaction of these two conditions is essential for setting aside the order proposed to be revised. The question now is whether the Tribunal was right in the view it has taken that there was no material for the Commr. of I. T. to come to the conclusion that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the revenue.

(4) THE assessee had not suppressed the fact of sale of the shares in question. When the assessment order was passed that fact was before the ITO. According to the assessee the sale was at cost price and there were no profits. According to the Commr. the ITO ought to have, by applying the provisions of S. 52 of the Act, assessed the capital gains arising out of the sale of the shares. S. 52 of the Act consists of two sub-sections. Sub-sec. (1) can be invoked where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the ITO has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under S. 45. The order of the commr. of IT. does not show that the transferee, of the shares was directly or indirectly connected with the assessee, nor that the transfer was effected with the object of avoidance or reduction of the liability of the assesses under S. 45. Therefore, the Commissioner could not have corne to the conconclusion that the order of the ITO was erroneous for not applying the provisions of sub-sec. (1) of Section 52 of the Act.

(5) WHILE sub-sec. (1) deals with the case of transfer for less than the market value with the object of tax avoidance sub-sec. (2) has not pretentions whatever to a case of tax avoidance or tax reduction. The provisions of sub-sec. (2) is to, the effect that if in the opinion of the ITO the fair market value of the capital asset transferred by an assessese, on the date of transfer exceeds full value of the consideration declared by the assessee in respect of the transfer of such capital asset by not less than 15% of the value so declared, the full value of the consideration shall, with the previous approval of the Inspecting Asst. Commr. , be taken to be the fair market value on the date of the transfer. In other words, the provision confers power on the ITO to levy tax on the assessee on what may be called as deemed capital gains when the assessee in fact, does not earn any capital gams or make profits, if in the opinion of the, ITO the fair market value of the capital asset on the date of transfer exceeded he declared value of the consideration by more than 15% of the value declared. It is an extraordinary provision intended to levy tax not on actual capital gains but on. what is dqemed as capital gains. The transfer may be a bona fide transaction and the assessee might haye declared the actual value of the consideration received for the transfer of the capital assets and yet, the assessee can be taxed on deemed capital gains, if in the opinion of the ITO, the fair market value of the capital asset was more than the value received by the assessee.

(6) THE Commissioner could have exercised his jurisdiction under S. 263 of thq Act if there was material to come to the conclusion that to the case of the assessee sub-sec. (2) of S. 52 was attracted and the ITO had failed to apply the said provision. But, if there was no material to come tq any such conclusion, the Commissioner could not haye revised the order of the Income Tax Officer.

(7) THE Commissioner in the notice issued to the assessee had stated that the market value of the shares was Us. 16. 90 per share; but, that assertion was disputed by the assesses in his objections to the show-cause notice and it was submitted that the shares in question were partly paid-up shares which were not quoted in the market and that there were no ready buyers for the said shares. The Commissioner has not recorded any finding to the effect that the consideration declared by the assessee was nqt the fair market value on the date of transfer and that the fair market value as estimated by him was more than 16 per cent of the value declared, so as to altract the provisions of sub-sec (2) of S. 52. Dealing with the contention of the assessee tlia the fair market value was not Rs. 16. 90 per share as asserted by the Commissioner in his show-causes notice, this is what the commissioner has stated in his order :

" If the shares are not quoted in the market (which statement remains tq be checked by the ITO), it is open to the ITO to value the shares at their fair price. "

(8) THE Commissioner has left open the question as to the fair market value of the shares to be decided by the ITO without coming to the conclusaon that the value declared was less than the fair market value In our opinion, the Tribunal was right in setting aside the order of the Commr. Accordingly, we answer the question referred in the affirmative and agaunst the Department The assessee is entitled to the costs of this reference (Advocates fee Rs. 250).