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Attorney(S)
  • M/s. K.C Rajappa and N.C Rangesh
  • Mrs. Nalini Chidambaram
Judges
  • Kanakaraj, J.
Acts
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Citation Codes
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citation codes
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Attorney(S)
  • M/s. K.C Rajappa and N.C Rangesh
  • Mrs. Nalini Chidambaram
Judges
  • Kanakaraj, J.
Acts
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Smart Summary

Judgment Summary: Kanakaraj, J.

Factual and Procedural Background

The property in question was an approximately 8,563 sq. ft. site at 94, Poes Garden Street, Cathedral Road, Madras, comprised in R.S. No. 1567/32. On January 19, 1990, part of the property (2,831 sq. ft. land with superstructure of plinth area 2,400 sq. ft.) was sold to the petitioner for Rs. 9.5 lakhs. A wall was constructed dividing the remainder of the land (5,732 sq. ft., with building over 3,127 sq. ft.), and the petitioner and the owner, Mrs. Pushpa Rani, entered into an agreement on February 15, 1990 for the petitioner to buy that remaining portion for Rs. 32,50,000.

Pursuant to Chapter XX‑C of the Income‑tax Act and s. 269UC, a statement in Form No. 37‑I was filed on March 9, 1990 seeking a certificate of no‑objection. The respondent rejected the statement as defective on May 17, 1990. The petitioner filed a fresh statement on July 23, 1990. By an order dated September 19, 1990 the respondent rejected the latter application stating inability to either purchase the property under s. 269UD(1) or issue a no‑objection certificate under s. 269UL, and deemed the statement returned.

The petitioner filed a writ petition under Article 226 seeking to quash the impugned order (dated September 19, 1990) and to direct the respondent to pass an order granting a certificate of no‑objection under s. 269UL of the Income‑tax Act.

Legal Issues Presented

  1. Whether, upon receipt of a statement under s. 269UC/Form No. 37‑I, the Appropriate Authority has only two options — (a) to exercise the power of pre‑emptive purchase under s. 269UD(1) within the prescribed time, or (b) to issue a no‑objection certificate under s. 269UL(3) if no purchase order is made — such that it cannot reject the statement as "returned" for other reasons.
  2. Whether the Appropriate Authority may examine the validity, enforceability or the manner of subdivision or usability of the property (and the validity of the agreement for transfer) for the purposes of deciding the statement under Chapter XX‑C of the Income‑tax Act.
  3. Whether the Court should exercise discretionary relief under Article 226 in favour of a petitioner who has used a subdivision device that the respondent says is designed to evade the object of Chapter XX‑C (i.e., whether public policy or evasion should bar relief).
  4. Whether a statement under s. 269UC can be regarded as "received" by the Appropriate Authority (so as to commence the time limits under s. 269UD(1)) if the statement does not satisfy the statutory requirements because there is no valid, enforceable agreement.

Arguments of the Parties

Petitioner's Arguments (Mr. K.C. Rajappa)

  • The Appropriate Authority under Chapter XX‑C has only two legally available powers once a valid statement is received: to exercise the right of purchase under s. 269UD(1) within the prescribed period, or to grant the no‑objection certificate under s. 269UL(3). There is no other intermediate power to reject and “return” the statement.
  • The reasons given in the impugned order (that the division is contrary to municipal laws and that the divided portion cannot be independently used except by the petitioner) are not germane to Chapter XX‑C and are beyond the Authority's province.
  • Definitions in s. 269UA (of "immovable property" and "transfer") permit parties to enter into agreements to sell part/portion of immovable property; there is no statutory prohibition on such transfers at the stage of agreement.
  • Under the Madras City Municipal Corporation Act and Development Control Rules there is no prohibition on private subdivision per se at the agreement stage; only building permits/laying out may be affected later.

Respondent's Arguments (Mrs. Nalini Chidambaram)

  • If the applicant does not have a good title or if the application is defective in material particulars, the Appropriate Authority may reject the application under s. 269UC.
  • The Appropriate Authority must have a discretion to reject defective applications to serve the object of Chapter XX‑C — namely to curb circulation of black money by undervaluation of properties. The Authority can and should examine the validity/enforceability of the agreement and the manner of division when deciding the statement.
  • Even if the petitioner is within the literal terms of law, the Court exercising judicial discretion under Article 226 should not assist a petitioner who is attempting to openly circumvent Chapter XX‑C.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Kelvin Jute Co. Ltd. v. Appropriate Authority (1990 185 ITR 453 Calcutta) Authority should not go into irrelevant considerations about usability/division of property when deciding whether to exercise purchase or issue certificate under Chapter XX‑C. The court relied on this decision to support the view that the Income‑tax Department was not justified in probing the manner of division of the property or whether the Department could utilise the property if it purchased it.
Mc. Dowell and Co. Ltd. v. CTO Courts may scrutinise transactions that are devices to avoid tax and refuse to give judicial approval to artifices that subvert tax law; but caution against making bad law out of hard facts. Referenced to show the court's power (and duty) to examine transactions designed to evade tax; used to balance reluctance to sanction device against strict adherence to statutory language.
Union of India v. Playworld Electronics Pvt. Ltd. (1990 184 ITR 308 SC) Passage relied on stressing the need to find the true nature of a transaction and not to make bad law out of hard facts; judicial role in exposing tax‑avoidance devices. The court quoted a passage from this decision to illustrate the principle that courts sometimes must look at the substance of sophisticated devices to avoid tax, but must do so cautiously.
Craven (Inspector of Taxes) v. White (Stephen) (1990 183 ITR 216 House of Lords) Authority of House of Lords decision cited as part of the line of authority on tax avoidance and judicial response to avoidance devices. Used alongside other authorities to justify careful judicial scrutiny of devices to evade tax, while warning against overstepping statutory text.
Creenberg v. IRC ((1971) 47 Tax Cases 240 (House of Lords)) Principle that one must find out the true nature of a transaction and avoid subverting the rule of law; cited in the quoted passage from Playworld. The court relied on the quoted passage invoking this principle to emphasise that while courts can expose avoidance devices, they must determine the true nature of the transaction and avoid creating bad law from hard facts.

Court's Reasoning and Analysis

The court proceeded by close textual analysis of the relevant statutory provisions and by assessing the competing policy and practical considerations argued by counsel. Key steps in the analysis were:

  1. Statutory framework examined: The court reviewed Chapter XX‑C provisions: s. 269UC(1) (requirement of agreement where value exceeds Rs. 10 lakhs), s. 269UC(2) (requirement to reduce agreement into a statement), s. 269UC(3) together with rule 48L and Form No. 37‑I (contents of the statement), s. 269UD(1) (power of Appropriate Authority to make an order for purchase by Central Government) and the proviso limiting time (two months from end of the month in which the statement is received), and s. 269UL (prevention of registration without a no‑objection certificate and s. 269UL(3) requiring issuance of certificate if no order is made under s. 269UD(1)).
  2. Literal and purposive interpretation: The court held that the statute makes clear that if the Appropriate Authority does not make an order under s. 269UD(1) within the prescribed time it "shall" issue the certificate under s. 269UL(3). Thus, the two statutory outcomes are (a) purchase order under s. 269UD(1) within time or (b) issuance of certificate under s. 269UL(3). The court viewed the impugned "via media" order (neither purchasing nor issuing certificate but returning the statement) as lacking statutory support.
  3. Limits to the Authority's inquiry: The court concluded there was "no scope" for the Income‑tax Department to probe into the manner of subdivision of the property or whether a purchaser from the Department could utilise the property. Consequently, the respondent was not justified in going into those considerations when deciding the statement.
  4. Recognition of equitable/statutory defect doctrine: The court nevertheless recognised an important qualification — a statement is "received" by the Appropriate Authority for the purposes of the time limit in the proviso only when it satisfies the statutory requirements of s. 269UC(2)/(3). If there is no valid/enforceable agreement (i.e., no proper basis for the statement), there is nothing upon which the Appropriate Authority can be required to act.
  5. Contract law overlay: To determine when an agreement is valid or void, the court referred to ss. 2(g) and 2(h), and ss. 23 and 24, of the Indian Contract Act regarding enforceability and illegality/public policy. These provisions were used to explain when an agreement might be unlawful/void and thus incapable of supporting a statement under s. 269UC.
  6. Consideration of municipal/regulatory law: The court heard submissions on the Madras City Municipal Corporation Act and Development Control Rules. The petitioner argued (and the court was inclined to accept) that those provisions do not prohibit a private agreement of subdivision at the sale/agreement stage, though they may affect building permits later. The court observed that any perceived loophole in Chapter XX‑C is for the legislature, not the court, to remedy.
  7. Policy/avoidance arguments and judicial restraint: The court engaged with authorities on tax avoidance (Mc. Dowell, Playworld, Craven, etc.) and accepted the need for judicial scrutiny of devices designed to evade tax, but emphasised that the court must act within the four corners of enacted law and avoid adding words to statute. The court balanced the objective of Chapter XX‑C (curbing black money) against the limitations of the statutory text and the proper role of the judiciary.
  8. Discretion under Article 226: The court rejected the respondent's submission that the petitioner should be denied relief under Article 226 merely because the petitioner sought to exploit an arguable loophole — the court found the petitioner was acting within the four corners of the law and not contrary to public policy.

Holding and Implications

Holding:

The writ petition is allowed as prayed for; the rule nisi is made absolute.

Direct implications for the parties:

  • The impugned order dated September 19, 1990 (which rejected the statement and deemed it returned) has been quashed by the court in favour of the petitioner (the petition was allowed as prayed for).
  • The court rejected the respondent's attempt to neither exercise the purchase power under s. 269UD(1) nor to issue the no‑objection certificate under s. 269UL(3); the statutory scheme requires one of those outcomes where a valid statement has been received.
  • There will be no order as to costs in the matter.

Broader implications and precedent:

The court emphasised that it has interpreted Chapter XX‑C in a manner consistent with statute and existing authorities: it will not permit the Appropriate Authority to expand its inquiry into matters (such as the manner of subdivision or potential usability by a government purchaser) that the statute does not authorize. At the same time the court recognised the Authority may decline to act where there is no valid, enforceable agreement (in which case the statement is not properly "received"). The judgment does not purport to create new statutory obligations; it construes and applies existing statutory provisions and related contract law principles. The court observed that if there is a legislative loophole enabling tax avoidance by subdivision, it is for Parliament to rectify it.

RR/VCS
Show full summary ...

    Naresh M. Mehta v. Appropriate Authority, Government Of India, Office Of The Appropriate Authority, Income-Tax Department, Madras-17.

    Kanakaraj, J.

    There was a total extent of about 8, 563 square feet of land with building at 94, Poes Garden street, Cathedral Road, Madras-86, comprised in R.S No. 1567/32, Block 31, Mylapore Division. Part of the said property comprising of 2, 831 square feet of land together with superstructure with a plinth area of 2, 400 square feet, had been sold to the petitioner on January 19, 1990, for a consideration of Rs. 9.5 lakhs. It is stated that a wall was constructed to separate the rest of the land, being an extent of 5, 732 square feet, with a building over an extent or 3, 127 square feet. The division of this property is such that the rest of the land, being 5, 732 square feet with a building cannot be used by anybody except by the petitioner who is the purchaser of the portion already sold or with his permission. On February 15, 1990, the petitioner entered into an agreement with Mrs. Pushpa Rani, the owner of the property to buy the rest of the land, namely, 5, 732 square feet, for a sum of Rs. 32,50,000.

    2. In accordance with S. 269UC of the Income-tax Act, a statement in Form No. 37-I was filed on March 9, 1990, before the respondent, seeking a certificate of no-objection for the sale of said extent of land. On May 17, 1990, the respondent issued a letter rejecting the statement as being defective in material particulars. The petitioner pointed out that he is entitled to purchase the property even if there are defects and filed a fresh statement under Form, No. 37-I on July 23, 1990. By the impugned order, dated September 19, 1990, the respondent rejected the application stating that the Department is unable to either purchase the property under S. 269UD(1) or issue a certificate of no-objection under S. 269UL. It is stated that the statement is deemed to be returned to the petitioner. Reasons are given in the order mainly pointing out that the division is contrary to municipal laws and the property which is the subject-matter of the statement cannot be independently used or developed having regard to the manner of division. The writ petition is to quash the said order, dated September 19, 1990, and to direct the respondent to pass an order granting a certificate of noobjection under S. 269UL of the Income-tax Act.

    3. The argument of Mr. K.C Rajappa, learned counsel for the petitioner, is simple. Under the provisions of law, the respondent has the power either to exercise the right of pre-emptive purchase for the consideration shown in the agreement within the prescribed time under S. 269UD(1) or to grant the no-objection certificate under S. 269UL(3). There is no other power conferred on the respondent. The impugned order stating that the respondent will exercise neither of those powers but simply return the statement as being defective, is without jurisdiction. The further argument is that the reasons given in the impugned order are neither germane nor warranted under Chapter XX-C of the Income-tax Act. The question whether the sub-division of the property is in accordance with law or not is not within the province of the respondent. Referring to the definitions of the words “immovable property” and “transfer” in S. 269UA, it is contended that it is open to the parties to enter into an agreement for sale of a part of or a portion of an immovable property.

    4. As against this, the contention of Mrs. Nalini Chidambaram, learned counsel for the respondent, is that if an application is made by a person who does not have a good title to the property under S. 269UC, the Appropriate Authority can reject the application. It is next contended that the interpretation sought to be placed by the petitioner on Chapter XX-C of the Income-tax Act, that if option is not exercised to purchase the property within the prescribed time, the Appropriate Authority has no other option except to issue the no-objection certificate under S. 269UL(3), cannot be accepted. Having regard to the purpose of the introduction of Chapter XX-C, namely, to curb large scale circulation of black money by undervaluing the properties, it is argued that the Appropriate authority must be deemed to have a discretion to reject a defective application under S. 269UC.

    5. I have given my anxious consideration to the rival submissions made at the Bar. What emerges from the facts and arguments in this case is that the rigorous provisions of Chapter XX-C are sought to be legally evaded by the parties by adopting the device of splitting up the property according to the whims and fancies of the transferor and transferee. Mr. K.C Rajappa learned counsel for the petitioner, does not make a secret of the attempt of the parties to legally evade the provisions of law.

    6. The court must be careful and guarded in accepting such a proposition of law. However much the object and purpose of introducing Chapter XX-C is laudable and in the interest of the nation, the court has to acted only within the four corners of law and cannot seek to add to or infer any words or sentences beyond what is enacted by Parliament. But, the court can examine the provisions of law and interpret it in such a manner as to subserve the objects and reasons without doing violence to the language employed by the statute.

    7. With the above background let us examine the provisions of law, I will refer only to those provisions which are relevant for this case. S. 269UC(1) insists on an agreement in respect of transfer of immovable property of such value exceeding Rs. 10 lakhs. S. 269UC(2) requires the agreement to be reduced in the form of a statement and S. 269UC(3) read with rule 48L and Form No. 37-I prescribe the contents of the statement. S. 269UD(1) enables the Appropriate Authority to make an order for purchase of the property by the Central Government. The proviso is important and it says that no such order can be passed after the expiration of a period of two months from the end of the month in which the statement is received by the Appropriate Authority. We are next concerned only with S. 269UL, S. 269UL(1) prevents registration of a document relating to such property without a no-objection certificate under S. 269UL(3). S. 269UL(3) says that if the Appropriate Authority does not make an order under S. 269UD(1), the Appropriate Authority shall issue a certificate of non-objection referred to in S. 269UL(1). Therefore, it is clear that if an application is made under S. 269UC and if no order is passed within the prescribed time under S. 269UD(1), it automatically follows that a certificate under S. 269UL(3), must be issued. That is precisely what the petitioner is asking for. As a corollary, the impugned order which takes a via media course that the Appropriate Authority does not either exercise power under S. 269 UD(1), but at the same time, says that it will not issue a no-objection certificate as per S. 269UL(3) and the reason given therein are attacked as without jurisdiction. The question is whether it is appropriate for the authority to go into the validity of the agreement and find out whether it is capable of enforcement, whether the property can be used or developed by any other person other than the transferee under the agreement and such other related questions. So long as there is one purchaser who is willing to purchase the property with defects, if any, in the property or its division into two parts, can the Income-tax Department probe into the question for the purpose of Chapter XX-C of the Income-tax Act? It appears to me that there is no scope for such examination. Either the Appropriate Authority should be prepared to exercise the right to purchase with all the defects, shortcomings and limitations or he should issue a certificate of no-objection. I do not think that the respondent was justified in going into the manner of division of the property and whether any purchaser from the Income-tax Department can utilise the property at all. I am fortified in this respect by a decision of the Calcutta High Court reported in Kelvin Jute Co. Ltd. v. Appropriate Authority 1990 185 ITR 453Calcutta No doubt this will give the real estate dealer a handle to circumvent the provisions of law. It is for the Legislature to plug the loophole.

    8. However, there is still an area where the court can exercise its power to prevent the citizens from openly and definitely evading the provisions of the Act. It is one thing to avoid the clutches of law by a prudent and intelligent interpretation of law. But, it is totally another to defy the provisions of law with impunity as if to say that they will continue to indulge in undervaluing the properties by adopting this method of sub-division of property. Reference may be usefully made to Mc. Dowell and Co. Ltd. v. CTO, Union of India v. Playworld Electronics Pvt. Ltd. 1990 184 ITR 308 SC and Craven (Inspector of Taxes) v. White (Stephen). 1990 183 ITR 216 House of lords In particular, the following passage in the second of the above cases is relied on by counsel for the respondent (at p. 317 of 184 ITR):

    “While it is true, as observed by Chinnappa Reddy, J. in Mc Dowell and Co. Ltd. v. CTO((1985) 154 ITR 148 (SC)) that it would be too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Creenberg v. IRC((1971) 47 Tax Cases 240 (House of Lords)) that one must find out the true nature of the transaction. It is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law.”

    9. Therefore, I have given anxious thoughts to the issues involved in the case and examined the correctness of the last sentence of the impugned order which is as follows

    “The statement is, therefore, rejected and is deemed to be returned to you.”

    Following this trend, I proceed to ask the question, as to whether a defective application cannot be returned on the ground that the prescribed particulars have not been furnished. A statement under S. 269UC can be said to be received by the Appropriate Authority for the purpose of the proviso under S. 269UD(1), only when it satisfies the requirements of S. 269UC(2). The basis of the statement referred to in S. 269UC(3) is the agreement for transfer of immovable property. If there is no valid agreement, then there cannot be a statement on which the Appropriate Authority is called upon to act. Ss. 2(g) and 2(h) of the Indian Contract Act are as follows:

    “S. 2(g). An agreement not enforceable by law is said to be void;

    S. 2(h). An agreement enforceable by law is a contract.”

    Necessarily we got on to Ss. 23 and 24 of the Contract Act which are as follows:

    “S. 23. The consideration or object of an agreement is lawful, unless

    it is forbidden by law; or

    is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or

    involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy

    In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the, object or consideration is unlawful is void.

    S. 24. If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.”

    10. I gave opportunity to both counsel to address arguments on this aspect of the case. Mr. K.C Rajappa, learned counsel for the petitioner, says that neither under the Madras City Municipal Corporation Act nor under the Development Control Rules of the Town and Country Planning Act, is there a prohibition against the sale of a property privately sub-divided without sanction from the Appropriate authorities. Reference is made to S. 234 of the former Act and R. 19 of the latter Rules. The only inhibition is against the grant of a building permit. The authority may refuse permission on the ground that the layout is not authorised or the sub-division is not authorised. But, we are now at a much earlier stage of the agreement. There is no rule of law which prohibits such a transfer of property. The reference to R. 17 by Mrs. Nalini Chidambaram for the respondents does not help the Department because that also relates to the stage of building construction. Mr. K.C Rajappa also contends that it is well open to the parties to sell a property in two or three parts so long as there is no law which prohibits such division and sale. He refers to gifts made in two financial years to avoid the incidence of tax. I am inclined to accept the argument advanced on behalf of the petitioner. There appears to be a gaping loophole in Chapter XX-C, which it is for the lawmakers to rectify, if they so choose.

    11. The last contention of the respondent is that in any event this court exercising discretionary rights under Art. 226 of the Constitution should not come to the help of the petitioner, who is trying to openly circumvent Chapter XX-C of the Income-tax Act. This again flows from the earlier arguments whether it is prudent planning or whether it is conscious defiance of law. I am inclined to hold that the law of pre-emption is bordering on a law of acquisition of property and must be strictly construed. I cannot say that the petitioner is acting against public policy when he is clearly acting within the four corners of law. I, therefore, reject this objection. In fine, the writ petition is allowed as prayed for. Rule nisi is made absolute. There will, however, be no order as to costs.

    RR/VCS

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    Comments

    Naresh M. Mehta v. Appropriate Authorit...
    (Jan 10, 1991)