K.S. Radhakrishnan, J.
1. Both these appeals are preferred against the judgment in O. P. No. 6872 of 1999 : [2001]248ITR436(Ker) . The challenge is against an order passed by the appropriate authority, the Income-tax Department, Bangalore, under Section 269UD(1) of the Income-tax Act, 1961, ordering pre-emptive purchase of immovable property situated in Survey No. 882/ 1 of Ernakulam Village by the Central Government. A writ of mandamus was also sought to issue no objection certificate to the petitioners for transfer of the immovable property as envisaged under Section 269UL of the Income-tax Act. The order was set aside by the learned single judge holding that the appropriate authority has failed to take note of the unique circumstance in which the transfer was necessitated. The learned single judge therefore quashed the impugned orders. A direction was given to the authorities to consider the petitioner's application exhibit P-6 afresh and pass appropriate orders in accordance with law.
2. The writ petitioners are husband and wife. They are promoters of a private limited company by name Palm Court Hotels Private Limited, a company incorporated as a private limited company by the certificate of incorporation No. 09-8831 of 1995. The petitioners are the only shareholders of the company. The main object of the company is to construct buildings for hotels and to carry on business of hotels. The petitioners who are promoters and directors of the company decided to set up a three star category hotel complex at Ravipuram in Kochi in the property mentioned hereinbefore. They approached the Kerala State Industrial Development Corporation Limited (in short 'the KSIDC') for financial assistance. The Kerala State Industrial Development Corporation vide its letter dated April 13, 1998, sanctioned a term loan of Rs. 250 lakhs to the company for setting up a three star category hotel complex on certain terms and conditions. A sanction letter also stated that the Kerala State Industrial Development Corporation's disbursement would commence only after the company complying with all the terms and conditions of sanction and completion of documentation, i.e., signing of loan agreement/ hypothecation agreement by the company and guarantees by the promoters and deposit of title deeds to create equitable mortgage on land of the company. The memorandum of understanding dated February 17, 1998, was entered into between the Kerala State Industrial Development Corporation and the first petitioner who was promoter of the company. The memorandum of conditions of loan was submitted, inter alia, on certain conditions such as land registered in the name of the promoter directors should be registered in the name of the company towards mortgaging to the Kerala State Industrial Development Corporation. The petitioners who are promoters of the company therefore decided to convey the property in question to the company which was a condition precedent for sanctioning the loan by the Kerala State Industrial Development Corporation.
3. The petitioners and the company submitted the application under Section 269UC of the Income-tax Act in Form No. 37-I, rule 48-L to the appropriate authority. The details of the property were given in the application. The property is situated in Survey No. 882/1 of Perumanoor Desom, Ernakulam District, which was acquired by the first petitioner as joint holder as per document No. 1232 of 1994. The petitioners decided to transfer the said property to Palm Court Hotels Pvt. Limited of which they are the sole directors for a consideration of Rs. 66,99,106 and an agreement of sale dated October 7, 1990, was also entered into. Initially there were some defects in the application and the same were rectified on November 13, 1998.
4. The application was considered by the appropriate authority. They obtained an engineering report prepared by the Executive Engineer of the Valuation Cell, Income-tax Department, Trivandrum. The members of the appropriate authority had also inspected the property. After considering the report and evaluating what has been seen during the inspection, the appropriate authority came to the conclusion that the apparent consideration shown in Form No. 37-I is well below 15 per cent, of the market value of the property shown as being sold in Form No. 37-I. The following are the reasons which weighed with the appropriate authority to reach such conclusion.
'The property is located in Srikandeth Road off M. G. Road on the eastern side of M. G. Road. The distance from M. G. Road to the property is 70 metre. The locality is residential and commercial mixed. Multistoreyed apartments are existing nearby this property. The potential for commercial development is very high due to its location in the nucleus of Cochin city, the commercial capital of Kerala. The land rate works out to Rs. 2,16,100 per cent, (without considering the cost of piles already driven).
This is also comparable with the following instances :
In the File No. AA/CHN/9(6)12 of 1997-98 for the sale of the property situated at Survey No. 995/1, Part of Ernakulam Village on Kurusupally Road, Ernakulam South, the land rate works out to Rs. 4,35,811 per sq. ft. situated about 300 metres from the property under consideration towards south.'
5. The appropriate authority noticed undervaluation of the property, therefore drew a presumption that undervaluation of the property was done with a view to evade tax. The appropriate authority therefore proposed to pass an order for pre-emptive purchase of the schedule property under Section 269UD(1) of the Income-tax Act, 1961, for Rs. 66,99,100 which is the discounted value of apparent consideration for the Central Government.
6. The appropriate authority then issued a show-cause notice dated February 12, 1999, to the writ petitioners as well as to the transferee, Palm Court Hotels (P.) Ltd., to show cause why the pre-emptive purchase should not be effected. The parties were directed to show cause on February 26, 1999, at 11 a.m. failing which it was ordered that it would be presumed that they have no cause to show against such a pre-emptive purchase and the proceedings would be finalised accordingly.
7. The writ petitioners then filed a detailed reply dated February 22, 1999. They explained the circumstances under which the property was decided to be sold to the company. We may extract the relevant portion of the same for easy reference :
'The company had applied for a loan of Rs. 250 lakhs for the hotel project from the Kerala State Industrial Development Corporation. According to the condition stipulated by the Kerala State Industrial Development Corporation vide their sanction letter No. Scy 8/165, dated April 13, 1998 (herein enclosed), the land on which the hotel was proposed to be constructed had to be transferred to the company against the shares to be allotted by the company to the shareholders, i.e., the transferors. Even though it was advantageous to the shareholders (transferors) to show the price of the land on document at a much higher figure, in which case the value of their shareholding will be elevated and the company could negotiate a higher loan on the security of the land, with a view to reducing the total project cost and thereby the amount of loan to be sanctioned, the Kerala State Industrial Development Corporation valued the land at Rs. 76.03 lakhs which includes the capitalised value of the registration charges and stamp duty, leaving the actual cost of the land at Rs. 66,99,106.'
8. The petitioners pointed out that the transfer has been effected due to special circumstances and not for evading tax. Further it was stated since the transferor and the transferee are the same there was no money transaction, but only allotment of shares. The petitioners stated that the transaction was a bona fide transaction and unless and until the property is transferred in the name of the company, the Kerala State Industrial Development Corporation would not disburse the loan. The reply submitted by the petitioners was not acceptable to the appropriate authority. They passed order on February 26, 1999, directing the transferor/transferee or any other person who may be in possession of the said property to surrender and deliver vacant possession of the scheduled property to the appropriate authority within 15 days from the date of receipt of the order. Another letter dated March 3, 1999, was also served on the petitioners as well as to the company by the appropriate authority to surrender or deliver possession of the immovable property. Challenging those proceedings, a writ petition has been filed. The learned single judge quashed the impugned order and directed the appropriate authority to consider the matter afresh, against which both the petitioners and the appropriate authority have filed appeals. When the matter came up for hearing we heard counsel on either side at length.
9. Counsel appearing for the petitioner, Sri Pathrose Mathai, submitted that the appropriate authority has committed a grave error in passing the order of pre-emptive purchase under Section 269UD(1) of the Income-tax Act, 1961, and also drawing a presumption that the transaction entered into between the petitioner and the company as undervaluation of the property with a view to evade tax. Counsel also submitted, that the appropriate authority lost sight of facts and circumstances of the case which cannot be compared with any normal transfer of assets between two persons: Counsel submitted that the transferors as well as the transferees are practically the same persons and the transfer of the property was effected due to peculiar circumstance. Counsel submitted that the petitioners and the company preferred a joint statement in Form No. 37-I on October 6, 1998, to the Income-tax Department declaring their intention to transfer the immovable property in favour of the company the promoters of which are the petitioners. This is one of the special conditions agreed upon between the company and the Kerala State Industrial Development Corporation for sanctioning the loan of Rs. 250 lakhs for the hotel project. Since the petitioners are promoters of the company there was no money transaction between them but the value of the property was shown as consideration by allotment of shares. The petitioners are the only shareholders of a private limited company. Placing reliance on the decision of the Supreme Court in C.B. Gautam v. Union of India : [1993]199ITR530(SC) , counsel submitted that the transaction in question would satisfy the principle laid down by the apex court in C.B. Gautam's case : [1993]199ITR530(SC) . Counsel submitted that they had no intention to undervalue the property for evading tax. Undervaluation of the same was done in the peculiar nature of the case since the transferors and the transferees are practically the same, the transferees being the sole promoters of the company who are none other than the writ petitioners themselves. Counsel placing reliance on the decisions of the apex court in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar : [1964]6SCR885 ; Life Insurance Corporation of India v. Escorts Ltd. : 1986(8)ECC189 ; CIT v. Sri Meenakshi Mills Ltd. : [1967]63ITR609(SC) ; State of U. P. v. Renusagar Power Co. : AIR1988SC1737 , etc., submitted that the appropriate authority as well as this court ought to have examined the underlying purpose and the object of the transaction and the reasons which prompted the petitioners and the company to enter into such a transaction. Counsel submitted that in order to appreciate the true character of the transaction, the appropriate authority or for that matter the court can lift the corporate veil and examine the real purpose of the transaction. Counsel submitted that if the object and purpose was to evade tax and to generate black money they could have sold the property in the open market for a higher price. This is a case where the parties agreed for the transfer of the property for a price so as to avail of loan from the Kerala State Industrial Development Corporation which would show the bona fide nature of the transaction. Counsel submitted that the learned single judge ought to have given a direction to the appropriate authority to issue a no objection certificate for the transfer of the property.
10. Counsel also submitted that exhibits P-7, P-9 and P-11 orders are bad in law since they are issued in violation of natural justice. Counsel submitted that the appropriate authority has failed to take into consideration the relevant materials and relied upon irrelevant materials while issuing the impugned orders. Counsel submitted that the orders were issued by the appropriate authority placing reliance on the engineering report prepared by the Executive Engineer of the Valuation Cell, Income-tax Department, Trivandrum. Reliance was also placed on file No. AA/CHN/9(6) 12 of 1997-98 for sale of the property situated in Survey No. 995/1, Part of Ernakulam Village on Kurisupally Road, Ernakulam South. Placing reliance on those materials the appropriate authority decided to pass the order for pre-emptive purchase under Section 269UD(1) of the Income-tax Act. Those materials were never made available to the petitioners. Non-availability of those documents, counsel submitted, caused prejudice to the petitioners.
11. Senior counsel appearing for the appropriate authority, Sri P.K. Raveendranatha Menon, submitted that the appropriate authority has issued exhibit P-7 order dated February 12, 1999, under Section 269UD(1) of the Income-tax Act, 1961, as well as exhibit P-9 order dated February 26, 1999, as per Section 269UD(1) of the Income-tax Act. Laying stress on the principle laid down by the apex court in C. B. Gautam's case : [1993]199ITR530(SC) as well as the decision of the apex court in Appropriate Authority v. Smt. Sudha Patil : [1999]235ITR118(SC) , counsel submitted that there has been a gross undervaluation of the property which would attract Section 269UE of the Act. Counsel submitted that the mere fact that the petitioners are promoters of the company would not change the character of the transaction. Counsel also submitted that the transaction would also attract the provisions of Section 257 (sic) of the Income-tax Act which gives rise to capital gains taxable under the Act. Counsel submitted that if there is undervaluation of the property, the appropriate authority could always draw a presumption that the transaction proposed to be entered into is to evade tax. Counsel submitted that the mere fact that the company has issued shares to its promoters in consideration of the sale of the property would not render the transaction legal. Placing reliance on the passage in Kanga and Palkhivala's the law and Practice of Income-tax, 8th edition, page 124, counsel submitted that when a company sells its trading assets for fully-paid shares in another company, the profit on the transaction is assessable although no cash passes. Reliance was also placed on the decision of the apex court in CIT v. B.M. Kharwar : [1969]72ITR603(SC) and contended that the corporate personality should be ignored and the principle that no man can make a profit out of himself should be invoked. Counsel submitted that the order was passed not in violation of any principles of natural justice. Counsel submitted that the materials relied on, especially, the engineering report clearly stated in the show-cause notice itself and that no prejudice has been caused to the petitioners. Placing reliance on the decision of the apex court in Union of India v. Shatabadi Trading and Investment (P) Ltd. : [2001]251ITR93(SC) counsel submitted that this court sitting under article 226 of the Constitution of India shall not sit in judgment over the order passed by the appropriate authority which was made on the basis of relevant materials.
12. We may at the outset indicate that counsel on either side relied upon the decision of the apex court in C.B. Gautam's case : [1993]199ITR530(SC) to bring home their rival contentions. Before we examine the rival contentions it is profitable to refer to certain passages of the said decision for our purpose. The apex court was considering the validity of the various provisions in Chapter XX-C inserted in the Income-tax Act, 1961, by the Finance Act, 1986. While considering the scope of Section 269UD(1), the apex court held as follows (page 553):
'In the light of what we have observed above, we are clearly of the view that the requirement of a reasonable opportunity being given to the concerned parties, particularly, the intending purchaser and the intending seller must be read into the provisions of Chapter XX-C. In our opinion, before an order for compulsory purchase is made under Section 269UD, the intending purchaser and the intending seller must be given a reasonable opportunity of showing cause against an order for compulsory purchase being made by the appropriate authority concerned ... We have further pointed out that, although a presumption of an attempt to evade tax may be raised by the appropriate authority concerned in case of the aforesaid circumstances being established, such a presumption is rebuttable and this would necessarily imply that the concerned parties must have an opportunity to show cause as to why such a presumption should not be drawn. Moreover, in a given transaction of an agreement to sell, there might be several bona fide considerations which might induce a seller to sell his immovable property at less than what might be considered to be the fair market value. For example: he might be in immediate need of money and unable to wait till a buyer is found who is willing to pay the fair market value for the property. There might be some dispute as to the title of the immovable property as a result of which it might have to be sold at a price lower than the fair market value or a subsisting lease in favour of the intending purchaser. There might similarly be other genuine reasons which might have led the seller to agree to sell the property to a particular purchaser at less than the market value even in cases where the purchaser might not be his relative. Unless an intending purchaser or intending seller is given an opportunity to show cause against the proposed order for compulsory purchase, he would not be in a position to rebut the presumption of tax evasion and to give an interpretation to the provisions which would lead to such a result would be utterly unwarranted. The very fact that an imputation of tax evasion arises where an order for compulsory purchase is made and such an imputation casts a slur on the parties to the agreement to sell leads to the conclusion that, before such an imputation can be made against the parties concerned, they must be given an opportunity to show cause that the undervaluation in the agreement for sale was not with a view to evade tax.'
13. We have to examine the issue raised in this case in the light of the above-mentioned principle laid down by the apex court.
14. Chapter XX-C of the Income-tax Act consisting of Section 269U to 269UO was inserted in the Income-tax Act by the Finance Act, 1986, with effect from October 1, 1986. Many of the provisions of the earlier Chapter XX-A were found to be unworkable and the task of satisfactory determination of the fair market value of the property in question was also found to be difficult. This Chapter defines what is agreement for transfer under Section 269UA(a). Section 269UA(b) defines apparent consideration. Section 269UC deals with restrictions on transfer of immovable property subject to certain conditions. This section makes it obligatory that any transfer of property of such value as mentioned above should be preceded by an agreement reduced to writing in the form of a statement in Form No. 37-I and should be furnished to the appropriate authority. Form No. 37-I must be filed before the transfer is effected. The statement required to be furnished to the appropriate authority under Sub-section (3) of Section 269UC shall be in Form No. 37-I and shall be signed and verified in the manner indicated therein by each of the parties to the transfer. If the authority finds the transaction is genuine it could grant permission under Section 269UC of the Act. The function of the appropriate authority is not merely confined to issuing a no objection certificate. It is coupled with a duty to make a decision as to pre-emptive purchase, if the real market value of the immovable property warrants it. Section 269UD empowers the appropriate authority within two months from the end of the month in which the Section 269UC statement is received, to order the purchase of the property by the Central Government at an amount equal to the apparent consideration set out in the agreement of sale and serve such order on the transferor and transferee. In this connection it is profitable to extract Section 269UD on which the impugned orders have been issued in this case :
'269UD. Order by appropriate authority for purchase by Central Government of immovable property.--(1) Subject to the provisions of Sub-sections (1A) and (1B), the appropriate authority, after the receipt of the statement under Sub-section (3) of Section 269UC in respect of any immovable property, may, notwithstanding anything contained in any other law or any instrument or any agreement for the time being in force, make an order for the purchase by the Central Government of such immovable property at an amount equal to the amount of apparent consideration :
Provided that no such order shall be made in respect of any immovable property after the expiration of a period, of two months from the end of the month in which the statement referred to in Section 269UC in respect of such property is received by the appropriate authority :.. .
(2) The appropriate authority shall cause a copy of its order under Sub-section (1) in respect of any immovable property to be served on the transferor, the person in occupation of the immovable property if the transferor is not in occupation thereof, the transferee, and on every other person whom the appropriate authority knows to be interested in the property.'
15. We may indicate the words 'and for reasons to be recorded in writing' which were there in the earlier Section 269UD were omitted by the Finance Act, 1993, with effect from November 17, 1992. At the same time Sub-section (1A) reads as follows :
'(1A) Before making an order under Sub-section (1), the appropriate authority shall give a reasonable opportunity of being heard to the transferor, the person in occupation of the immovable property if the transferor is not in occupation of the property, the transferee and to every other person whom the appropriate authority knows to be interested in the property.'
16. It was inserted by the Finance Act, 1993, with effect from November 17, 1992.
17. The provisions of Chapter XX-C relate to the purchase by the Central Government of immovable properties in certain cases of transfer that the apparent consideration is less than the real consideration. All the same there are various exceptions as pointed out by the apex court in C.B. Gautam's case : [1993]199ITR530(SC) . There might be genuine reasons which might have led the seller to agree to sell the property to a particular purchaser at less than the market value even in cases where the purchaser might not be his relative. If there is undervaluation of property although a presumption could be drawn that there is attempt to evade tax such a presumption is a rebuttable one. If the parties could furnish materials to show that the transaction is genuine the presumption could be rebutted. In other words, all depends upon the facts and circumstances of each case. We are not prepared to say that the facts and circumstances highlighted in this case are irrelevant so as to warrant a conclusion that there has been undervaluation and the undervaluation was made so as to evade tax.
18. We also find force in the contention of the petitioners that there has been violation of the principles of natural justice since the report of the engineering department as well as the documents relied upon by the appropriate authority were not furnished to the petitioners. This is a case where if the order is given effect to the petitioners will have to part with their valuable immovable property in favour of the Central Government. The order to be passed under Section 269UD will have far reaching consequences as far as the petitioner is concerned. The materials on which the appropriate authority has based its conclusion have therefore necessarily to be supplied to the petitioners. Opportunity of being heard must be adequate and effective and shall riot be an empty formality. Arbitrariness which results from non-observance of the principles of natural justice leads to infringement of Article 14 of the Constitution of India and any act which is repugnant to the said provision is null and void. We have therefore no hesitation to say that the order passed is in violation of the principles of natural justice. We therefore uphold the judgment of the learned single judge. However, sitting in this jurisdiction under article 226 of the Constitution this court is not justified in giving any positive direction to the appropriate authority to issue no objection certificate. We therefore direct the appropriate authority to reconsider the matter in the light of the observations contained herein. Copy of the engineering report as well as other materials based on which they issued the impugned order should be made available to the writ petitioners and final orders would be passed by the appropriate authority within a period of two months from the dale or receipt of copy of this judgment.
19. Both the appeals are disposed of accordingly.