Unique Associates Co-Operative Housing Society Ltd. v. Union Of India And Others

Pendse, J.:— Respondents Nos. 4 and 5 were owners of property known as Cleave House situate at 96, Wodehouse Road, Colaba, Bombay. The property originally consisted of a ground floor and two upper storeys and was constructed on a plot of land known as Plot No. 33 of the Reclamation Estates and admeasuring 818 square metres. Respondents Nos. 4 and 5 executed an agreement of sale of this property in favour of respondent No. 6 on September 15, 1964, and the consideration for the sale of the property was fixed at Rs. 1,35,000. Respondent No. 6 constructed two more storeys, each storey having two flats. On May 28, 1970, respondent No. 6 entered into an agreement of sale of the property in favour of respondents Nos. 7 to 9 for a consideration of Rs. 3,25,000. Respondents Nos. 7 to 9 in their turn executed an agreement of sale in favour of respondent No. 10 on November 19, 1971, for a consideration of Rs. 3,55,000. The property held by respondents Nos. 4 and 5 was tenanted, and respondent No. 10 entered into an agreement with the tenants to sell the respective flats on ownership basis. Respondent No. 10 was in occupation of an additional flat constructed by respondent No. 4. Respondent No. 10 entered into an agreement with the existing tenants with a view that the tenants will purchase the respective portions and ultimately form a co-operative society. Accordingly, on September 22, 1972, the petitioner-Co-operative Housing Society was registered under the provisions of the Maharashtra Co-operative Societies Act, 1960, and on the same day respondents Nos. 4 and 5 executed a deed in favour of the petitioner society. Respondents Nos. 6 to 10 were the confirming parties. The consideration for the purchase of the property stated in the deed was Rs. 3,55,000. The deed of conveyance was lodged for registration on September 25, 1972, and ultimately the document was registered only on October 12, 1976.

2. By the Taxation Laws (Amendment) Act, 1972, the I.T Act, 1961, was amended and Chapter XX-A was introduced consisting of 19 sections, namely, ss. 269A to 269S, with effect from November 15, 1972. Respondent No. 2, who is the competent authority, being the I AC of Income-tax, Acquisition Range I, issued notice dated June 13, 1977, under s. 269D(1) of the I.T Act, 1961, and the petitioner society was served with a notice on April 17, 1978. The notice, inter alia, recites that the competent authority has reason to believe that the immovable property having a fair market value exceeding Rs. 25,000 has been transferred under the Registration Act for an apparent consideration which is less than the fair market value of the property. The notice further recites that the competent authority has reason to believe that the fair market value of the property exceeds the apparent consideration by more than 15 percent, of such apparent consideration and the consideration for transfer as agreed to between the parties has not been truly stated in the document of transfer. The notice finally recites that the consideration was not truly stated with the object of facilitating the reduction or evasion of the liability of the transferor to pay the tax and/or facilitating the concealment of income or moneys or other assets which have not been or which ought to be disclosed by the transferee for the purpose of income-tax returns. The competent authority thereupon decided to initiate proceedings for acquisition of the property purchased by the petitioner society and the petitioners were called upon to lodge their objections, if any. The petitioners thereupon requested the competent authority to furnish a copy of the reasons and the reasons recorded by the competent authority were furnished to the petitioners. The reasons recorded, inter alia, state that the apparent consideration of Rs. 3,55,000 was found to be below the fair market value which was determined at Rs. 7,13,340 by the Valuation Officer of the income-tax department. The petitioners have approached this court by filing the present petition on September 27, 1978, under article 226 of the Constitution of India for quashing the proceedings initiated by the competent authority by service of notice dated June 13, 1977.

3. Shri Dastur, learned counsel appearing in support of the petition, submitted that the satisfaction reached by the competent authority is clearly vitiated and erroneous, as there was no material or basis to reach the conclusion that the valuation stated in the document of transfer was undervalued or such undervaluation was with the object of facilitating the reduction or evasion of liability under the provisions of the I.T Act, 1961, or the W.T Act, 1957. The learned counsel urged that the only material available before the competent authority was the valuation report and that was not sufficient to warrant the conclusion that the consideration for the transfer has not been truly stated in the instrument of transfer with the object of facilitating the reduction or evasion of tax. Shri Dastur further submitted that the mode or the basis of valuation was not correct and the reliance by the competent authority on the report was misconceived. It was also urged that the provisions of Chapter XX-A of the I.T Act, 1961, are not attracted, as there was no consideration for the transfer between respondents Nos. 4 and 5 on the one hand and the petitioners on the other. The petitioners have also challenged the vires of Chapter XX-A of the I.T Act on the ground that it infringes the fundamental rights guaranteed under article 19 of the Constitution of India. The petitioners also claim that proceedings under Chapter XX-A of the Act could not be initiated in respect of documents which were lodged for registration prior to the introduction of the Chapter. Shri Joshi, learned counsel for the Department, on the other hand, submitted that the initiation of the proceedings by the competent authority was in accordance with law and the competent authority was justified in relying upon the report of the Valuation Officer and drawing an inference therefrom and the satisfaction of the competent authority that the conditions requisite for initiating the proceedings were fulfilled need not be disturbed in exercise of writ jurisdiction.

4. In view of these rival contentions, it is necessary to find out whether initiation of the proceedings by the competent authority under s. 269C of the I.T Act, 1961, is in accordance with law and whether the conditions pre-requisite for exercise of the powers are satisfied. Section 269C of the Act reads as under:

“269C. Immovable property in respect of which proceedings for acquisition may be taken.—(1) Where the competent authority has reason to believe that any immovable property of a fair market value exceeding twenty-five thousand rupees has been transferred by a person (hereafter in this Chapter referred to as the transferor) to another person (hereafter in this Chapter referred to as the transferee) for an apparent consideration which is less than the fair market value of the property and that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of—

(a) facilitating the reduction or evasion of the liability of the transferor to pay tax under this Act in respect of any income arising from the transfer; or

(b) facilitating the concealment of any income or any moneys or other assets which have not been or which ought to be disclosed by the transferee for the purposes of the Indian Income-tax Act, 1922 (XI of 1922), or this Actor the Wealth-tax Act, 1957 (XXVII of 1957),

the competent authority may, subject to the provisions of this Chapter, initiate proceedings for the acquisition of such property under this Chapter:

Provided that before initiating such proceedings, the competent authority shall record his reasons for doing so:

Provided further that no such proceedings shall be initiated unless the competent authority has reason to believe that the fair market value of the property exceeds the apparent consideration therefor by more than fifteen per cent, of such apparent consideration.

(2) In any proceedings under this Chapter in respect of any immovable property,—

(a) where the fair market value of such property exceeds the apparent consideration therefor by more than twenty-five per cent, of such apparent consideration, it shall be conclusive proof that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer;

(b) where the property has been transferred for an apparent consideration which is less than its fair market value, it shall be presumed, unless the contrary is proved, that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with such object as is referred to in clause (a) or clause (b) of sub-section (1).”

5. It is not in dispute that immovable property of a fair market value exceeding Rs. 25,000 has been transferred by respondents Nos. 4 and 5 to the petitioners. The consideration mentioned in the deed of conveyance is Rs. 3,55,000 and that is the apparent consideration. For exercise of powers under s. 269C, the conditions requisite are—

(i) that the immovable property of a market value exceeding Rs. 25,000 is transferred;

(ii) that the fair market value of the property exceeds the apparent consideration by more than 15 per cent, of such apparent consideration;

(iii) that the consideration for transfer as agreed between the parties has not been truly stated in the instrument of transfer; and

(iv) that such untrue statement of consideration is with the object of facilitating the reduction or evasion of the liability of the transferor or the transferee to pay tax under the provisions of the I.T Act and the W.T Act. Section 269C of the Act enables the competent authority to initiate proceedings for the acquisition of the property if these conditions are satisfied, and the competent authority is required to record its reasons for initiating the proceedings. Sub-s. (2) of s. 269C provides that in the proceedings undertaken for acquisition of the property and where the fair market value of the property exceeds the apparent consideration by more than 25 per cent, of such apparent consideration, then it shall be conclusive proof that the consideration for transfer has not been truly stated in the instrument of transfer. It also provides that where the property has been transferred for an apparent consideration which is less than the fair market value, it shall be presumed, unless the contrary is proved, that the consideration as agreed to between the parties has not been truly stated in the instrument of transfer with the object of facilitating the reduction or evasion of the liability to pay tax.

6. Shri Dastur first submitted that the provisions of Chapter XX-A of the Act have no application to the facts of the case because the deed of transfer was lodged for registration on September 25, 1972, that is, prior to November 15, 1972, when Chapter XX-A was introduced in the Act. The submission is that the property was transferred by a document which was lodged for registration prior to the introduction of the Chapter and, therefore, the competent authority had no jurisdiction to exercise its powers. The submission cannot be entertained, because by my judgment dated October 12, 1981, delivered in Miscellaneous Petition No. 952 of 1978 (Amarchand J. Agarwal v. Union of India, [1983] 142 ITR 402) I have taken a view that the provisions of the Chapter would be attracted even in cases where the documents are lodged for registration earlier, provided the registration is not complete on the date of introduction of the Chapter. My decision was taken in appeal and was upheld in Appeal No. 563 of 1981 decided on 5th April, 1982. [Amarchand Jainarain Agarwal v. Union of India, [1983] 142 ITR 410 (Bom)]. In view of the decision of the Division Bench, it is not open to the petitioners to raise this contention in the present proceedings.

7. Shri Dastur then submitted that the provisions of s. 269C are not attracted to the facts of the case, because the deed of assignment of transfer does not amount to sale. In support of the submission, reliance is placed on the definition of the expression “transfer” in s. 269A(h) of the Act, where the word “transfer,” has been defined as transfer of property by way of sale or exchange. The learned counsel urged that there is a transfer but it is not by way of sale, because the consideration has not flown from the petitioners to respondents Nos. 4 and 5. The submission is entirely misconceived. It is undoubtedly true that the housing society has not paid any consideration to respondents Nos. 4 and 5, who were the original owners and the transferors, but the consideration has been paid by respondent No. 10, who had agreed to purchase the property from the original owners and who had also collected the amounts from the tenants of the property who became members of the society. In such circumstances, it is futile to claim that the transfer effected by respondents Nos. 4 and 5 in favour of the petitioner society is not by way of sale.

8. Shri Dastur then submitted that the proceedings were initiated by the competent authority only on the strength of the report made by the Valuation Officer of the Department. The learned counsel urged that the competent authority came to the conclusion that the apparent consideration mentioned in the deed of transfer was far less than the fair market value of the property and the fair market value exceeded the apparent consideration thereof by more than 15 per cent, only on the basis of the report and the valuer has committed an error apparent on the face of the record in ascertaining the fair market value of the property. A copy of the valuation report was made available at the hearing and a perusal of the same indicates that the valuer, Shri A.D Gupta, proceeded to value the property at Rs. 7,13,340 on the assumption that the ground and the two upper floors and one flat out of the newly constructed four flats were tenanted and the tenants were entitled to protection under the provisions of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, and therefore, the valuation of that part of the property by capitalising the net income for the balance lease period of 33 years and allowing redemption of capital at 6 per cent, of the capital value would come to Rs. 1,15,535. The property was a leasehold property and the lease was for a period of 99 years, and the balance period of lease was 33 years on the date of transfer in favour of the petitioners. The valuer then proceeded to value the rest of the property on the assumption that it is vacant and available to the petitioners for being let out. The valuer felt that the total value of flats Nos. 8, 9 and 10 and the terrace room, including the attached open terrace, would be Rs. 5,97,805, and thus the total valuation was arrived at at Rs. 7,13,340. It is obvious from aperusal of the valuation report that the valuer has assumed that part of the property was vacant and was at the disposal of the petitioner society. Shri Dastur has seriously challenged the correctness of the report on the ground that the assumption of the valuer about certain portion of the property being vacant and available is erroneous, and the grievance of the learned counsel is just. A perusal of the deed of transfer dated September 22, 1972, in favour of the petitioner society clearly indicates that the petitioner society had agreed with respondent No. 10 (who was referred as the third confirming party in the document) that respondent No. 10 shall be at liberty to sell, assign or otherwise deal with and/or dispose of the unsold flats of the building to any person or persons and the society shall accept the purchaser of such flat as its member without taking any objection or demanding any charges. This covenant in the deed of transfer makes it crystal clear that though the society has purchased the entire property from respondents Nos. 4 to 10, the right to dispose of the vacant flats was retained by respondent No. 10 and the society accepted the obligation to accept the purchasers of these flats as members of the society. It is, therefore, obvious that the valuer had clearly misdirected himself while reaching the value of the property by assuming that a portion of the property was vacant and available to the society for sale. The valuer, it seems, was conscious of the fact that a part of the property was disposed of by respondent No. 10, and reference to that fact is made in the report. In spite of the valuer being conscious of the fact that the society had agreed that respondent No. 10 would be entitled to dispose of the flat, has proceeded to value the property on the basis that the vacant flats were available for disposal to the society. In my judgment, in view of this serious infirmity in the report, the competent authority was not justified in assuming that the apparent consideration mentioned in the deed of transfer was less than the fair market value by 15 per cent, of such apparent consideration or the fair market value was not truly stated in the instrument of transfer. Once that conclusion is reached, it is obvious that initiation of the proceedings was clearly without jurisdiction.

9. Shri Dastur then submitted that even assuming that the competent authority was justified in holding that the apparent consideration mentioned in the instrument of transfer was less than the fair market value by 15 per cent, of such apparent consideration, still the initiation of the proceedings was not proper, and urged that the other conditions that the consideration for transfer was not truly stated in the instrument of transfer with the object of facilitating the reduction or evasion of the liability to pay tax were not at all satisfied. Shri Dastur submitted that there was no material whatsoever before the competent authority to hold, even prima facie, that the consideration stated was not true or the property was undervalued in the instrument of transfer with the object of evading tax. It is not disputed on behalf of the Department that there was no material whatsoever before the competent authority save and except the report of the Valuation Officer. Shri Dastur submitted that in the absence of any material it was not open to the competent authority to assume that the consideration stated in the deed of transfer was not true and such untrue statement was made with the object of evading tax. Shri Dastur submitted that the competent authority could exercise the powers under s. 269C of the Act provided there was material to reach the conclusion that the consideration stated was untrue and the object was to evade tax, and in the absence of any such material; the competent authority had no jurisdiction to initiate the proceedings. In support of the submission, reliance is placed on the decision of the Gujarat High Court in CIT v. Smt. Vimlaben Bhagwandas Patel, [1979] 118 ITR 134. The Division Bench of the Gujarat High Court observed (headnote p. 135):

“Having regard to the purpose underlying the power invested in the competent authority under s. 269C(1) and particularly the condition precedent for the exercise of such power and the presumptions to be raised in connection therewith under s. 269C(2) and more particularly having regard to the deeming fiction provided in s. 269J(4) with the clarification that the transferee will not be exposed to further penalty under the I.T Act or the W.T Act, it is clear that the nature of the power is a penal power and the proceedings in respect thereto are quasi-criminal. It is not merely the untrue statement of consideration in the instrument of transfer but, coupled with that, the ulterior motive of tax evasion or concealment of income is the gist of the offence and till that ulterior motive is established and found, the power in question cannot be exercised. Since for purposes of effectuating the said objective, immovable properties are transferred, Parliament has, in its legislative wisdom, thought it fit to provide for the acquisition thereof at something more than the grossly understated consideration and, consequently, provided for forfeiture of the amount of the difference between the consideration and the fair market value to the Government as penalty. The decision of the Supreme Court in Joshi, STO v. Ajit Mills Ltd., [1977] 40 STC 497, establishes that forfeiture of property or a sum of money would amount to penalty. The power under s. 269C is penal in nature and the proceedings are quasi-criminal.

10. The legislature has adopted a known and recognised phraseology for describing the condition precedent for initiating acquisition proceedings under s. 269C. The competent authority must have reason to believe that the fair market value of the property of more than Rs. 25,000 exceeds the apparent consideration stated in the instrument of transfer and the parties have agreed to make the untrue statement with the ulterior motive of tax evasion or concealment of income. The satisfaction of the competent authority for initiation of acquisition proceedings is a subjective satisfaction of the objective facts stated above. The reasons for the formation of the belief must have a rational and direct connection with the material coming to the notice of the competent authority, though the question of sufficiency or adequacy of the material is not open to judicial review.

11. The conditions precedent for the exercise of jurisdiction to initiate acquisition proceedings are—(i) transfer of immovable property worth more than Rs. 25,000 in value; (ii) fair market value of the property exceeding the apparent consideration by more than 15%; (iii). ulterior motive of tax evasion or concealment of income for such untrue statement of apparent consideration in the instrument of transfer of such property; (iv) recording of reasons by the competent authority; and (v) publication of notice to that effect in the Official Gazette.”

12. I am in respectful agreement with the conclusion reached by the Division Bench. Another Division Bench of the Gujarat High Court followed this decision in Sdrabhai M. Chemicals Pvt. Ltd. v. Mittal, Competent Authority, [1980] 126 ITR 1 (Guj). This view is also taken by the Calcutta High Court in Subhkaran Chowdhury v. IAC, [1979] 118 ITR 777, Smt. Bani Roy Chowdhmry v. Competent Authority, IAC, [1978] 112 ITR 111 (Cal) and Rai Bahadur G.V Swaika Estate P. Ltd. v. Tewari, [1980] 126 ITR 310 (Cal). Shri Dastur also relied upon the decision of the Supreme Court in Varghese v. ITO, [1981] 131 ITR 597. In this decision, the Supreme Court was considering the powers of the income-tax authority to invoke sub-s. (2) of s. 52 of the I.T Act, 1961, and observed that the powers can be exercised where the consideration for the transfer of the capital asset has been understated by the assessee, or, in other words, the full value of the consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee and the burden of proving such understatement or concealment is on the Revenue. Mr. Justice Bhagwati, speaking for the court, observed (p. 614):

“Thus, it is not enough to attract the applicability of sub-s. (2), that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeds the full value of the consideration declared in respect of the transfer by not less than 15% of the value so declared, but it is furthermore necessary that the full value of the consideration in respect of the transfer is understated or, in other words, shown at a lesser figure than that actually received by the assessee. Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration in respect of the transfer has been correctly declared or disclosed by the assessee, even if the condition of 15% difference between the fair market value of the capital asset as on the date of the transfer and the full value of the consideration declared by the assessee is satisfied. If, therefore, the revenue seeks to bring a case within sub-s. (2), it must show not only that the fair market value of the capital asset as on the date of the transfer exceeds the full value of the consideration declared by the assessee by not less than 15% of the value so declared, but also that the consideration has been understated and the assessee has actually received more than what is declared by him. There are two distinct conditions which have to be satisfied before sub-s. (2) can be invoked by the revenue and the burden of showing that these two conditions are satisfied rests on the revenue. It is for the revenue to show that each of these two conditions is satisfied and the revenue cannot claim to have discharged this burden which lies upon it, by merely establishing that the fair market value of the capital asset as on the date of the transfer exceeds by 15% or more the full value of the consideration declared in respect of the transfer, and the first condition is, therefore, satisfied. The revenue must go further and prove that the second condition is also satisfied. Merely by showing that the first condition is satisfied, the revenue cannot ask the court to presume that the second condition too is fulfilled, because even in a case where the first condition of 15% difference is satisfied, the transaction may be a perfectly honest and bona fide transaction and there may be no understatement of the consideration. The fulfilment of the second condition has, therefore, to be established independently of the first condition and merely because the first condition is satisfied, no inference can necessarily follow that the second condition is also fulfilled. Each condition has got to be viewed and established independently before sub-s. (2) can be invoked, and the burden of doing so is clearly on the revenue. It is a well-settled rule of law that the onus of establishing that the conditions of taxability are fulfilled is always on the revenue and the second condition being as much a condition of taxability as the first, the burden lies-on the revenue to show that there is an understatement of the consideration and the second condition is fulfilled. Moreover, to throw the burden of showing that there is no understatement of the consideration, on the assessee, would be to cast an almost impossible burden upon him to establish a negative, namely, that he did not receive any consideration beyond that declared by him.”

13. The observations of the Supreme Court, though in a different context, can well be applied while construing the provisions of s. 269C of the Act. Indeed, the powers to be exercised under s. 269C of the Act are circumscribed by various conditions which are set out in the section itself. In my judgment, the submission of Shri Dastur that the competent authority had no jurisdiction to initiate the proceedings because there was no material whatsoever to come to the conclusion that the consideration stated in the instrument of transfer was not the true consideration and such statement was made with the object of facilitating the reduction or evasion of tax deserves acceptance. The powers under s. 269C could be exercised provided the requisite conditions for exercise of the powers are satisfied. In my judgment, in the absence of any material whatsoever available to the competent authority, it was impossible for any reasonable or prudent man to reach the conclusion that the consideration stated in the instrument of transfer was untrue and that was done with the object of facilitating the reduction or evasion of tax.

14. Shri Joshi relied upon the decision in Commissioner Of Income-Tax, Bombay v. Ganesh Builders, [1979] 116 ITR 911 (Bom), to claim that the provisions of Chapter XX-A were introduced in the Act as the legislature thought that mischief was being perpetrated by showing a lower price as apparent consideration in the document of sale, and that enables concealment of income, avoidance of taxes and gave rise to what is known as parallel black market. The learned counsel urged that in order to do away with the mischief, the remedy contemplated by the Chapter was provided and, taking this factor into consideration, the provisions of s. 269C should be construed. The learned counsel also relied upon the Full Bench decision of the Punjab and Haryana High Court in CIT v. Amrit Sports Industries, [1983] 144 ITR 113 and submitted that the court should take into consideration the object of the Act and the interpretation of the provisions must be well conducive to serve the avowed purpose of its enactment by Parliament and not one which in the ultimate analysis may tend to frustrate the same in actual practice. In my judgment, the submission is entirely misconceived. The court is required to construe the provisions of the taxing statute, and it is futile to claim that while doing so, the principles adopted by the court while interpreting a beneficial legislation enacted for the avowed object set out in the Directive Principles of the Constitution should be imported. While construing a taxing legislation, strict interpretation is necessary, and the mere fact that the true interpretation would cause difficulty for the Department in actual practice to implement the provisions is no answer. The Legislature in its wisdom has provided that the competent authority can initiate proceedings under s. 269C of the Act only on fulfilment of certain basic conditions and the mere fact that the Department finds some difficulty in gathering the material is no consideration to conclude that initiation of proceedings is permissible even without complying with the requirement of the section. Shri Joshi urged that it is difficult for the Department to ascertain what was the object of the parties in incorrectly stating the consideration in the instrument of transfer and the competent authority is justified in drawing an inference that the object was to evade the tax from the mere fact that the apparent consideration was less than the fair market value by 15% of such apparent consideration. This submission cannot be accepted because the competent authority cannot proceed to reach a conclusion that the object was to evade the tax from the mere fact that there is some material to indicate that the apparent consideration was less than the fair market value by 15% of such apparent consideration. The competent authority must have some material to reach the conclusion that the consideration stated in the instrument of transfer was untrue and such untrue statement was made with the object of evading tax. Shri Joshi had to concede that there is no such material and had to fall back upon the submission that an inference to that effect is permissible.

15. The learned counsel also urged with reference to sub-s. (2) of s. 269C that it is open to the competent authority to presume that the consideration stated in the document has not been truly stated with the object of evading the tax. The submission overlooks the fact that the presumption under sub-s. (2) is available not at the stage of initiation of the proceedings, but only at the later stage when an inquiry is to be concluded. The decisions of the Gujarat High Court and the Calcutta High Court, which I have followed with respect, are clear on the point that the presumption is not available at the initial stage. Shri Joshi relied upon the decision of the Delhi High Court in Mahavir Metal Works P. Ltd. v. Union of India, [1974] 95 ITR 197 (Delhi), but in my judgment, this decision would not assist the learned counsel in claiming that the presumption under sub-s. (2) is available even at the initial stage while initiating the proceedings. In my judgment, on the facts and circumstances of the case, it is clear that the initiation of the proceedings by the competent authority was clearly without jurisdiction and the same is required to be quashed. In view of this conclusion, it is not necessary to consider the claim of the petitioners about the validity of the provisions of Chapter XX-A of the Act.

16. Accordingly, the petition succeeds and the rule is made absolute in terms of prayer (a-1) of the petition only. In the circumstances of the case, there will be no order as to costs.