Appropriate Authority Vs. Lytton Hotel (P) Ltd. - Court Judgment

Excerpt:
- orderd.k. seth, j.a notice for pre-emptive purchase under section 269ud of chapter xx-c, income tax act, 1961, as it stood then, was initiated against the assessee-respondent. the said proceeding was challenged in writ petition no. 1833 of 1993 by the assessee. by a judgment and order dated 15-11-2000, the learned single judge of this court was pleased to quash the said notice and the proceeding. it is against this order, the revenue has preferred this appeal.2. the learned counsel for the appellant-revenue mr. agarwal has pointed out that while exercising writ jurisdiction in respect of the proceedings under section 269ud, against which no appeal is provided for, this court does not sit on appeal, as was decided by the apex court in various decisions, a few of which have since been cited.....

Judgment:
ORDER

D.K. Seth, J.

A notice for pre-emptive purchase under section 269UD of Chapter XX-C, Income Tax Act, 1961, as it stood then, was initiated against the assessee-respondent. The said proceeding was challenged in writ petition No. 1833 of 1993 by the assessee. By a judgment and order dated 15-11-2000, the learned Single Judge of this court was pleased to quash the said notice and the proceeding. It is against this order, the revenue has preferred this appeal.

2. The learned counsel for the appellant-revenue Mr. Agarwal has pointed out that while exercising writ jurisdiction in respect of the proceedings under section 269UD, against which no appeal is provided for, this court does not sit on appeal, as was decided by the Apex Court in various decisions, a few of which have since been cited by him. He has then contended that the court cannot sit on appeal with regard to the valuation given in the valuation report while deciding such a question. The learned Single Judge had, however, virtually acted as the court of appeal. Therefore, the order should be set aside.

3. Mr. Bajoria, learned senior counsel for the assessee-respondent, on the other hand, has contended that the object and purpose of introduction of Chapter XX-C was to prevent evasion of tax. Therefore, the provisions are to be decided in the context of the purpose and object. He has relied on the decision in C.B. Gautam v. Union of India : [1993]199ITR530(SC) and has pointed out that in the said decision the Apex Court had observed that in the process, a bona fide transfer may not be suspected bringing slur upon the parties who did not ever intend to evade tax. While exercising writ jurisdiction, this court does not exercise the power of the appellate authority. Even though no appeal is provided for in Chapter XX-C, the court can look into the perversity of the valuation made. If the valuation is not made in terms of the valuation method applicable, in such a case, the court can interfere. According to him, it is not the procedure for valuing the property under the Wealth Tax Act that is applicable. It is the system of valuation of the property as is applicable in the acquisition proceeding that is to be adopted. But, at the same time, he has relied on various decisions of this court and other Courts where it has been held that in respect of properties under lease or tenancies, the valuation is to be made on rental method, not on the land and property method. We will refer to those decisions at appropriate stage. He has further pointed out that in this case the property belonged to the trust established in Gujarat governed by the Bombay Public Trust Act, 1950. Under section 36 of the said Act, no property belonging to a Trust can be transferred without previous sanction of the 'Charity Commissioner' defined in the said Act. In the present case, an application for such sanction was made before the 'Charity Commissioner'. Thereupon, a notification was issued and published in newspaper. Offers were invited with a reserve price of Rs. 75 lakhs. But no one had offered except the purchaser herein being the respondent. This price was fixed at Rs. 75 lakhs together with interest at the rate of 12.5 per cent payable on the said amount calculated till the date of finalization of the same. Therefore, according to him, there was no scope for evasion of tax by undervaluing the property. He further contends that the property is under occupation of tenants, which was held to be an encumbrance in the valuation report itself, where it is noted that there was no possibility of eviction of the tenants. Therefore, these factors are to be weighed with and the valuation could not have been made on the basis of future prospect of the property under tenancy. In the circumstances, according to him, this appeal should be dismissed.

4. We have heard the respective counsel for the parties. The scope of jurisdiction under article 226 of the Constitution in respect a proceeding under section 269UD of the 1961 Act is very restrictive and limited. It is confined to the scope of scrutinizing the perversity and illegality of the process of valuation for the purpose of arriving at a conclusion that the property was undervalued by more than 15 per cent of the market value. It does not sit on appeal of the market value determined in the valuation report. Admittedly, the provisions of Chapter XX-C were introduced to prevent evasion of taxes by undervaluing the properties. Therefore, this would be applied only in a case where there are materials to show that the property has been undervalued to evade tax which is a primary proposition. If this proposition is not satisfied, in that event, even if the market value is higher than 15 per cent of the apparent value, still then this provision cannot be attracted.

5. In C.B. Gautam's case (supra), the Apex Court had noted the facts relevant for the purpose of the difference of 15 per cent in respect of market value and the apparent value. It had observed in the said decision at page 538 that in the interim report (1970) the Wanchoo Committee pointed out that understatement of prices in sale deeds of immovable properties was a widespread method of tax evasion and recommended a drastic remedy to empower the government to acquire the property, the consideration whereof was found to be understated in the sale deeds. Thus Chapter XX-A was introduced in the Income Tax Act. These were found inadequate. Chapter XX-C was then introduced. The very historical setting in the introduction of this Chapter suggested 'that it was intended to be resorted to only in cases where there is an attempt at tax evasion by significant undervaluation of immovable propriety agreed to be sold. This conclusion is strengthened by Instruction No. 1A88 issued by the Central Board of Direct Taxes of the Government of India, Ministry of Finance, department of revenue. . ..' This document emphasized that the main object of Chapter XX-C was to check proliferation of black money in real estate transactions and to enforce declaration of the true value of immovable properties that were the subject of transfer between the parties. In administering the said Chapter, it was to be ensured that no harassment was caused to bona fide and honest purchasers or sellers of immovable property and there was no erosion of the confidence of the public in the sense of justice and fair play of the income-tax department. The right of pre-emptive purchase had to be exercised only if the fair market value was found to be at least 15 per cent more than the apparent consideration. In coming to a conclusion as aforestated, a reasonable margin of probable errors in estimation needed to be kept in view, particularly as the law did not provide for any opportunity of being heard. in the affidavit filed, the revenue asserted that the provisions of the said Chapter ought to be resorted to only in cases of undervaluation of immovable properties in agreements of sale to the extent of 15 per cent or more. It was further pointed out that right from the beginning the provisions of the said Chapter were being applied in such manner that the rights and interests of the third parties unconnected with tax evasion were not affected. The affidavit of the Union of India pointed out that where an order was made under sub-section (1) of section 269UD for the purchase by the Central Government of any immovable property, there was no compulsory acquisition involved and hence no solatium was payable and that what the Chapter provided for was pre-emptive purchase of a property already offered for sale. Transfer to a relative, on account of natural love and affection, were excluded from the provisions of the scheme. The affidavit of the revenue further stated that the following types of properties should not ordinarily be purchased : (a) cases of doubtful or disputed titles; (b) transactions by and with government, semi-government organizations, public sector undertakings, universities, etc.; (c) properties with bona fide tenancies of long standing; and (d) properties with too many restrictions on user. It was clarified in the said affidavit (paragraph 14) that, although the appropriate authorities would not normally purchase buildings, which were leased, in a few cases they might do so when it was felt that even taking into account the property was encumbered with lease, the apparent consideration was grossly understated. The said affidavit stated that the above practice was uniformly followed.

6. In the light of the above observation, in C.B. Gautam's case (supra), the Apex Court had held that Chapter XX-C can be resorted to in case of significant undervaluation of property to the extent of 15 per cent or more. Although a presumption of attempted tax evasion may be raised in the established circumstances but such a presumption is rebuttable, implying an opportunity to the purchaser to show cause. In a given transaction, there might be several bona fide considerations inducing a seller to sell his immovable property at a price less than the fair market value, viz: he might be in immediate need of money and unable to wait; there might be some dispute as to the title of the immovable property; or a subsisting lease in favour of the intending purchaser; there might similarly be other genuine reasons leading 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. An order for compulsory purchase is followed by an imputation of tax evasion casting a slur on the parties to the agreement to sell. This leads to the conclusion that the parties must be given an opportunity, before such an imputation can be made, to show cause that the undervaluation in the agreement for sale was not with a view to evade tax. Although Chapter XX-C does not contain any express provision for giving opportunity to be heard before an order for purchase is made under section 269UD, the principles of natural justice, the pragmatic requirement of fair play in action, must be read into the provisions of Chapter XX-C.

7. In the said decision, it was further observed that in a given case, it might happen that property is intended to be sold under an agreement to sell subject to encumbrance and leasehold rights, and very often agreements to sell immovable property do not provide that the property sold would be free from encumbrances or leasehold rights. In such a case, the apparent consideration, even if it is equivalent to the fair value, would be indicative of the market value of the properly subject to such encumbrances. If', in such a case, an order for compulsory purchase is made, the result would be that the property would be compulsorily purchased and the amount to be paid for the purchase would be only equal to the apparent consideration and this apparent consideration would not take into account the value of the encumbrances on the property like mortgages and so on or the leasehold rights. It is well-known that a property may be heavily encumbered and its value can be considerably depressed if it were sold subject to encumbrances. It is equally well known that a property in respect of which there is a subsisting lease for a substantial period of time would fetch a comparatively low price because the purchase thereof would not carry with it the right to possession or occupation during the subsistence of the leasehold interests. In such cases, the amount of apparent consideration could be even less than the value of the encumbrances or the leasehold interests. An order for compulsory purchase in such cases would necessarily result in gross injustice to the encumbrance holders or the lessees and to their being deprived of their rights without their being in any way involved in the attempt at tax evasion.

8. This makes it clear that the purpose and object of Chapter XX-C would be satisfied if the undervalued transactions are arrested. At the same time, it exempts bona fide transactions even if sold at a lesser price than the market value and what are the circumstances in which transactions can be held as attempted tax evasion has since been discussed in the said judgment.

9. In the present case, it appears that the property was encumbered. Thus encumbrances noted in the valuation report are that :

'(i) The property is fully tenanted for more than 35 years or so. The present tenants have taken two properties No. 14 and 14/1 on rent and developed Plot No. 14 by renovation and additions by paying extra rent to the owner where the tenants are running a hotel.

(ii) The tenants under an agreement dated 12-2-1978 increased the rent of property at 14/1 from Rs. 1100 per month to Rs. 3100 per month and got permission from the owner for construction and development on Plot 14/1. The increased rent is being paid by the tenants but the tenants could not start the construction probably due to financial constraints.

(iii) Although the total area under tenancy is only 1618 sq. mtr. But due to above agreement, the tenants can make full use of FAR on this land and would never vacate the premises.

(iv) The tenants are already running their hotel in adjoining plot and as such would never vacate the premises.

(v) The property as such has a very high encumberancy.

(iv) The joint charity commission has already approved the sale of this property at the said apparent consideration being a wakf property, after getting bids from open market through press publication.'

10. Having regard to these encumbrances noted above, it is very difficult to accept the valuation as has been sought to be made in the valuation report which proceeded to consider the valuation on the basis of the three properties which were situated at a distance and at better locations. It is already pointed out that the property was situated at a distance from the main road and the approach was narrowed down and it appears to be waterlogged in rainy seasons. At the same time, it has not taken into consideration the question of encumbrance by reason of unevictable tenancy. While considering the valuation, it has taken the normal valuation with the prospect of raising construction on the open land. But that might be a question for the purchaser who may get the property vacated. But it may have a special value to the purchaser but the same cannot be the market value. Market value is something, which a person can obtained from the market. A person might have special value for a particular property, but such special value for the particular person may not be the market value. Therefore, the system of valuation that has been adopted does not seem to be in accordance with law.

11. On the other hand, we have every reason to find that this valuation is made contrary to the proposition laid down by this court in CIT v. Smt. Ashima Sinha : [1979]116ITR26(Cal) , followed in CIT v. Panchanan Das : [1979]116ITR272(Cal) ; CIT v. Anup Kumar Kapoor : [1980]125ITR684(Cal) ; Subhkaran Chowdhury v. IAC : [1979]118ITR777(Cal) . In all these cases, it was held that in respect of a property, which is tenanted, the rental method applies. In Appropriate Authority v. Kailash Suneja : [2001]251ITR1(SC) , it was held that where there are loopholes and lacunae in the reason given by the appropriate authority and where two different method of valuation adopted for similar properties and no reason is stated, the High Court is entitled to examine the valuation adopted by the authority. In Om Shri Jigar Association v. Union of India : [1994]209ITR608(Guj) , the Gujarat High Court had held that where the property was sold after inviting offers from the public at large by advertisement in the newspapers and that too after proper verification by the statutory authority under the Bombay Public Trust Act, even after executing the agreement for sale, objections were invited as provided in rule 24, there, even if a lower amount is received, it would not mean that the power to purchase the said property under section 269UD of the Income Tax Act, 1961 could be exercised by the authorities under Chapter XX-C as it would be difficult to draw a presumption that there was an attempt to evade tax.

12. In this case the appropriate authority did not come to the conclusion that there was any fraud at the time of public auction or that the amount offered by the petitioner was not genuine for some or any reasons. Unless it is shown that the sale apparently was not bona fide the said provision cannot be applied. Having regard to the facts of this case, apparently it appears that it was a bona fide sale of the property after inviting offers from the public at large by public advertisement in the newspaper. The public trust was not required to wait till it found a buyer who was willing to pay the prices of the property, which is considered to be the market value. From the valuation report, it appears that the annual rent received by the trust was for a paltry sum of Rs. 36,000 and odd per annum. The attempt to evict tenants by filing two successive suits, one at City Civil Court, Calcutta and the other at this High Court, were unsuccessful. This is also noted in the valuation report itself. In the valuation report, it was further pointed out that the tenants were not evictable and there was no likelihood of the tenants allowing construction in the vacant portion. In such a situation, it does not seem to us that Rs. 75 lakhs was not a reasonable price for the trust. This would fetch at least Rs. 7.5 lakhs per year, a monthly yield little higher than the annual rent of Rs. 36,000 for the trust in lieu of a property occupied by tenant for more than 30 years. We find from the valuation report that the valuer had proceeded to calculate the encumbrance in a manner which does not seem to be correct method and which is full of loopholes and lacunae.

13. Mr. Agarwal has relied on Prima Reaty v. Union of India : [1997]223ITR634(Bom) , to contend that adoption of proper method of valuation by the authority will not entitle the High Court to interfere with the order of valuation in a writ proceeding. The proposition is well settled. Having regard to the facts and circumstances of the case, we find that the proper valuation has not been adopted. Therefore, we are unable to agree with the contention of Mr. Agarwal. In Krishna Kumar Rawat v. Union of India , it was held that :

'The principles for valuation in respect of an immovable property under the Wealth Tax Act or the other taxation laws are different than the principles which are applicable to acquisition proceedings. The proceedings under Chapter XX-C are akin to the acquisition proceedings and not to the valuation principles which are applicable for assessing the tax on the basis of the valuation of the property.

The valuation has no doubt to be made objectively and not on the subjective satisfaction of the appropriate authority. The figure which is arrived at has to be based on the material on record. There may be certain element of arbitrariness while estimating the market value and it is for that reason alone, that without there being any mandate of the Act, the respondents have issued a circular that the acquisition of the property under Chapter XX-C would be if the difference of the market value and agreed value shown in the instrument is more than 15 per cent. Thus, the 15 per cent margin covers the estimation part of the valuation, so that no injustice is (done while acquiring any property. The right of the pre-emptive purchase by the Central Government of immovable property is at an amount equal to the amount of apparent consideration so as to relieve the transferor of any grievance.'

14. Mr. Agarwal has further relied on Appropriate Authority v. Smt. Sudha Patil : [1999]235ITR118(SC) , where it was held that :

'Merely because no appeal is provided for, against the order of the appropriate authority directing compulsory acquisition by the government, the supervisory power of the High Court does not get enlarged nor can the High Court exercise an appellate power. On the materials, if two views are possible, one which has been given by the inferior Tribunal and the other which the High Court may, on examining the materials itself, come to a conclusion, even then it would not be possible for the High Court to substitute its conclusion for that of the Tribunal.'

But this decision does not apply in the facts and circumstances of the case and is distinguishable. Inasmuch as from the material available in this case, it is very difficult to accept that there was an attempt to evade tax.

15. The object and purpose for introducing Chapter XX-A followed by Chapter XX-C in the Act was to arrest evasion of tax in property deals through understatement of valuation in the deeds while unaccounted money passed hands without being brought within the tax-net. This provided for exercise of power of pre-emptive purchase under Chapter XX-C where the fair market value of the property exceeds by 15 per cent the apparent value mentioned in the deed. From the various circulars and the object and purpose and the decision in C.B. Gautam's case (supra), it appears that this provision was never intended to affect genuine bona fide transactions where there was no attempt to evade tax, In fact, this provision creates a legal fiction under which a presumption of attempt to evade tax is assumed. Such presumption, however, is rebuttable. At the same time, this was not aimed at acquiring property by the Government through pre-emptive purchase. Neither it was made for use as a tool of oppression upon people transacting bona fide and genuine deals. Therefore, while applying these provisions, the first test is to be determined on the materials available on record as to whether there is any reason to presume an attempt to evade tax if it appears that the apparent value is 15 per cent lesser than the fair market value. This determination of market value is the primary consideration on which the presumption if founded. Unless the fair market value exceeds by 15 per cent than the apparent value, attempt to evade tax cannot be presumed under Chapter XX-C. Therefore, determination of the primary consideration leading to such presumption of tax evasion is the valuation of the property for determining that the apparent value is less by 15 per cent from the market value. The method of arriving at the valuation is similar to that of valuing a property in the process of acquisition of such property by the government, but without the solitium. In CB. Gautam's case (supra), the Apex Court had struck off the expression 'free from all encumbrances' from section 269UD This protected the interest of tenants. Therefore, the valuation for acquisition of land or property has to be considered with the encumbrances by which the property is encumbered. For a seller and a buyer, a tenancy is definitely an encumbrance to depress the value of the property. It is not the value, which a particular person having special interest in the property would offer is the market value. It is the value of the property, which could be fetched in the open market from a willing buyer, who might not have any special interest in the property. Therefore, the value offered by the tenant in possession would not be the determinative factor for determining the market value. The market value would be the value which an ordinary buyer will be agreeable to pay having regard to the encumbrance of the tenancy that is to be treated as market value. Therefore, when a property is so encumbered, the valuation in land and building method may not be appropriate unless the question of depression in the value on account of unevictable tenancy is considered. There might be several grounds for the seller for agreeing to sale at a lower price. It might be an eminent need of money or ground that the property does not yield sufficient income while the sale would fetch much higher income.

16. Having regard to the present facts and circumstances of the case, this property was sought to be sold through public auction with a reserve price fixed by the 'Charity Commissioner' under section 36 of the Bombay Public Trust Act after inviting objection under rule 24 of the Bombay Public Trust Rules. The reserve price was fixed by the 'Charity Commissioner while granting sanction under section 36. Rule 24 provided payment of 12.5 per cent interest on the amount till finalisation. The purchaser was the only bidder in the auction. It might be a case that no one was interested in purchasing the property at such a price in view of the encumbrance of tenancy. We have noted that attempt for eviction through two suits was unsuccessful. Therefore, at least we may come to the definite conclusion that there was no attempt to evade tax. Therefore, this transaction cannot come within the purview of Chapter XX-C even if the apparent price is lesser by 15 per cent than the market value. Whereas the purchaser is himself the tenant in possession, therefore, it had agreed to pay the price and participated in the auction. Holding of auction was advertised, however, without any response except from the purchaser, the tenant itself. The fact that no one else responded to the advertisement published indicates that no one was prepared to offer even the reserve price. The encumbrances might be the reason. Therefore, it seems to be a genuine and bona fide transaction. The valuation having been made through land and building method when the income from the property was Rs. 36,000 per annum would not be a correct method to be applied when the property is sold with the encumbrance. Even if the property might be free from encumbrances by reason or acquisition through pre-emptive purchase under Chapter XX-C, but this would not be so to an ordinary purchaser, who has to put up with the tenancies yielding only Rs. 36,000 per annum. Whereas Rs. 75 lakhs would fetch an annual income of Rs. 7.5 lakhs at a modest yield at the rate of 10 per cent per annum, which calculates a little over than Rs. 36,000 per month, namely, almost 12 times the yield. Therefore, in our view, it seems that the valuation has not been made correctly and that apart there being no attempt to evade tax and the transaction being bona fide the provision of Chapter XX-C cannot be attracted in the present case.

17. For all these reasons, we agree with the judgment of the learned Single Judge and the reasoning given therein and as such we affirm the said judgment. The appeal is hereby dismissed. No costs.

18. It is recorded that pursuant to an interim order the petitioner has deposited rent equivalent to Rs. 3,100 per month with the Registrar, Original Side of this court. The petitioner shall be at liberty to withdraw the same without any security.