Citation Codes

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Case Number

Special Civil Application No. 7066 of 1995

Judges

Hon'ble Mr. Justice Mohit Shantilal Shah
Hon'ble Mr. Justice Rajesh Balia

Acts

s. 269UD(1) of the IT Act, 1961."

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This petition under Article 226 challenged orders dated 31st July, 1995 passed by the Appropriate Authority under s. 269UD(1) and s. 269UE(2) of the Income-tax Act, 1961 (the Act). The petitioner also sought a direction requiring Respondent No. 1 to issue a no-objection-certificate under s. 269UL of the Act.

On 27th March, 1995 the petitioner and Respondents Nos. 3 to 5 entered into an agreement for the purchase of land with a building (about 1,961 sq. metres) for a stated consideration of Rs. 1,75,90,125. Form 37-I was submitted to the Appropriate Authority on 6th April, 1995. On 11th July, 1995 the Appropriate Authority issued a notice under s. 269UD(1A) inviting the parties to show cause because the apparent (discounted) consideration was found to be lower by more than 15% of the fair market value and believed to have been understated to avoid taxes. Respondents 3 to 5 replied on 25th July, 1995 and filed objections from a Government-registered valuer dated 24th July, 1995.

By orders dated 31st July, 1995 (Annexures 'F' and 'G' to the petition), the Appropriate Authority (a) exercised the power of pre-emptive purchase under s. 269UD(1), and (b) directed respondents to deliver vacant possession under s. 269UE(2). The present petition challenges those orders and seeks issuance of the s. 269UL no-objection-certificate.

Legal Issues Presented

Whether the Appropriate Authority failed to determine the fair market value of the property under consideration (PUC) and whether the Authority's finding that the PUC was comparable to the Sale Instance Property (SIP) was so unreasonable that no reasonable person could have reached it (i.e., challenge to valuation and comparability).
Whether the impugned order under s. 269UD(1) was invalid because the Appropriate Authority did not record any finding that the apparent consideration was understated with a view to evading income-tax (i.e., failure to record requisite satisfaction about tax-evasion intent as a prerequisite for pre-emptive purchase).

Arguments of the Parties

Petitioners' Arguments

The Appropriate Authority failed to determine the fair market value of the PUC properly and erred in treating the PUC as comparable to the SIPs; the SIP quoted by the transferors ought to have been accepted.
Factual differences undermining comparability: the PUC was in a residential zone and not on Ashram Road (about 300 metres from Ashram Road-Usmanpura crossing) whereas SIP(s) were much closer (about 15 metres), opposite Gujarat Vidyapith and nearer a commercial centre; SIP-2 was commercial and located in a potential commercial area.
SIP plots were smaller and therefore would naturally fetch higher prices, making them non-comparable to the PUC.
The PUC's proximity to Usmanpura mosque (within 300 metres) meant constraints under the Ancient Monuments Act; this affects usability and value.
The agreement provided that the vendors would receive three residential flats (with a 20% discount) in the superstructure to be constructed on the land, showing that purchasers intended residential construction rather than commercial use; the obligation to provide flats and to bear rents during construction (estimated at Rs. 15,000 per flat per month for about three years) would add an additional financial burden (estimated in the petition as about Rs. 5,40,000 total or Rs. 375 per sq. metre) which should affect valuation.
The Government-registered valuer's objections (dated 24th July, 1995) pointed to non-comparability with SIPs and supplied comparable cases where the Appropriate Authority had granted no-objection-certificates.
The petitioners would bear full stamp duty and registration charges, which would be substantial at the stated consideration.
As a separate and constitutional challenge, the impugned order is silent on any finding that the understatement of consideration was with intent to evade tax, a requirement the petitioners relied upon from C. B. Gautam v. Union of India and subsequent authorities.

Respondents' (Revenue) Arguments

Through learned Standing Counsel Shri M. J. Thakore, the Revenue opposed the petition and contended that the Appropriate Authority had considered relevant facts and circumstances and had correctly concluded that the apparent consideration was less than the fair market value of the PUC by more than 15%, and therefore the impugned order should not be interfered with.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
C. B. Gautam vs. Union of India & Ors., (1993) 199 ITR 530 (SC)	The Supreme Court examined the scope and ambit of powers under Chapter XX-C (s. 269UD etc.) and held that the provisions were intended to be used where there is an attempt at tax evasion by significant undervaluation. If the apparent consideration in an agreement is less than fair market value by 15% or more, the Appropriate Authority may draw a presumption that the undervaluation was to evade tax; such presumption is rebuttable. Any order for compulsory purchase under s. 269UD must be supported by reasons in writing germane to the object of countering tax evasion.	The Court relied on this authority to require that the Appropriate Authority must record a specific finding as to intention to evade tax; absence of such a finding vitiates the order. The decision formed the foundational legal standard applied by the High Court in quashing the impugned orders.
Anagram Finance Ltd. vs. Appropriate Authority (Gujarat High Court)	As described in the opinion, this High Court decision followed the principles laid down in C. B. Gautam (i.e., treating the Supreme Court approach as governing exercise of powers under Chapter XX-C).	The Court noted that the Supreme Court's decision was followed in Anagram Finance Ltd.; the High Court treated that line of authority as precedential when analysing the requirements for exercise of s. 269UD powers.
Krishnakumar Agrawal & Anr. vs. Appropriate Authority & Anr. (Special Civil Application No. 3853 of 1995) [reported]	The High Court held that essential concomitants of exercising s. 269UD(1) are (1) a finding of significant undervaluation by 15% or more, and (2) a finding that such undervaluation was an attempt at tax evasion. The presumption of evasion is rebuttable, but whether the Authority draws that presumption must appear in the order; the order must reflect the Authority's satisfaction and not leave it to guesswork.	The present Court quoted this decision at length and used it to emphasize that the Appropriate Authority must explicitly record satisfaction as to nexus between understatement and intention to evade tax; absence of such recording invalidates the order.
Special Civil Application No. 5328 of 1995 (Gujarat High Court, decision dated 19th Sept., 1995)	The High Court reiterated that where apparent consideration is less than fair market value by 15% or more, the Appropriate Authority may raise a presumption of understatement intended to evade tax but that this presumption is not mandatory. The court further explained that mere finding of understatement without recording the Authority's conclusion about a nexus to tax evasion is insufficient; it is necessary to determine fair market value and conclude that the apparent consideration is not the real consideration.	The Court relied on this authority to reinforce that an order for pre-emptive purchase must record the Authority's satisfaction linking understatement to intent to evade tax and must demonstrate how fair market value was arrived at and why the apparent consideration is not the real consideration.

Court's Reasoning and Analysis

The Court began by setting out the competing contentions and the material on record, including the impugned orders and the parties' submissions. It then examined the legal standard established by the Supreme Court in C. B. Gautam and followed by the Gujarat High Court in subsequent decisions.

The Court identified the governing legal principles as follows (drawn from the authorities quoted in the opinion):

Chapter XX-C provisions are intended to address attempts at tax evasion through significant undervaluation of immovable property agreed to be sold.
If the apparent consideration shown is less than the fair market value by 15% or more, the Appropriate Authority may draw a presumption of tax evasion; this presumption is rebuttable.
An order for compulsory/pre-emptive purchase under s. 269UD must be supported by reasons in writing germane to preventing tax evasion; the Authority's satisfaction on the question of intent to evade tax must be recorded in the order itself.
The presumption of evasion is not mandatory in every case; whether it is drawn depends on the Authority's application of mind to the available material and that reasoning must be reflected in the order.
Mere numerical finding of understatement (percentage difference) is insufficient unless the Authority also reaches and records a conclusion that the apparent consideration is not the real consideration and that understatement indicates intent to evade tax.

Applying these principles to the impugned order, the Court examined the key passage of the Appropriate Authority's order which quantified the discounted consideration (Rs. 8,491 per sq. m.) and stated that the understatement was about 34% (well above the 15% threshold) and concluded that it was "a fit case for pre-emptive purchase".

The Court observed that the impugned order contained "not a whisper" about any satisfaction by the Authority that the understatement was with a view to evade tax. Because the statutory power to pre-emptively purchase property under s. 269UD is to be exercised only where the Authority has arrived at the additional finding of intent to evade tax, the absence of a recorded finding on that point meant the Authority had not applied its mind to an essential element. The Court treated this omission as a non-application of mind and fatal to the validity of the order.

Therefore, the Court concluded the impugned orders were legally deficient: although they established the quantitative understatement, they did not contain the requisite qualitative satisfaction (nexus to tax evasion) and the necessary reasons in writing connecting the undervaluation to tax-evasion intent, as required by the authorities.

Holding and Implications

Holding: The Court quashed and set aside the impugned orders dated 31st July, 1995 (Annexures 'F' and 'G').

Direct orders made by the Court (direct effect):

Respondent No. 1 is directed to issue the no-objection-certificate contemplated under s. 269UL of the Act within six weeks from the date of furnishing a certified copy of this order or six weeks from receipt of the writ of this Court, whichever is earlier.
Respondent No. 1 is directed to take all consequential steps pursuant to setting aside of the impugned orders dated 31st July, 1995 at Annexures 'F' and 'G'.
The rule is made absolute with no order as to costs.

Implications:

The decision directly restores the position of the parties by vacating the pre-emptive purchase and vacant-possession directions and by directing issuance of the s. 269UL no-objection-certificate within the specified time. The Court applied established precedents (C. B. Gautam and subsequent Gujarat High Court decisions) to enforce the requirement that the Appropriate Authority must record its satisfaction about intent to evade tax; the opinion does not purport to create a new principle beyond the line of authority it follows. In short, the immediate effect is to invalidate the Authority's orders for lack of a recorded finding as to tax-evasion intent; no broader new precedent was announced in the opinion beyond the application of existing authorities.

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Shriniketan Members Association And Anuj Members Association v. Appropriate Authority And Others

1. This petition under Art. 226 of the Constitution of India challenges the order dt. 31st July, 1995 passed by the Appropriate Authority under s. 269UD(1) in Chapter XX-C of the IT Act, 1961 (hereinafter referred to as "the Act"). The petitioner has also prayed for an order directing respondent no. 1 to issue no-objection-certificate in terms of s. 269UL of the Act.

2. On 27th March, 1995 the petitioner on the one hand and respondents Nos. 3 to 5 on the other hand entered into an agreement for purchase of the property in question, being land with building admeasuring about 1961 square metres for a consideration of Rs. 1,75,90,125. The petitioner and respondents Nos. 3 to 5 submitted Form 37-I before Appropriate Authority on 6th April, 1995. On 11th July, 1995 the Appropriate Authority issued notice under s. 269UD(1A) of the Act to petitioners and respondents Nos. 3 to 5 to show cause as to why the Appropriate Authority should not exercise power of pre-emptive purchase as the Appropriate Authority was satisfied that the stated and discounted consideration of the property under consideration (PUC) is lower by more than 15 per cent and it has been kept so with a view to avoid taxes. Respondents Nos. 3 to 5 submitted their reply to the Appropriate Authority on 25th July, 1995 along with objections dt. 24th July, 1995 from Shri J. B. Patel, a Government registered valuer. Thereafter, by order dt. 31st July, 1995 (Annexure "F" to the petition), the Appropriate Authority has exercised power of pre-emptive purchase under s. 269UD(1) of the Act. By another order dt. 31st July, 1995 (Annexure 'G' to the petition), in exercise of powers under s. 269UE(2) of the Act, the Appropriate Authority directed respondents Nos. 3 to 5 to deliver the vacant possession of the property under consideration. It is the aforesaid orders dt. 31st July, 1995 passed in exercise of s. 269UD(1) and s. 269UE(2) of the Act which are assailed in the present petition.

3. At the hearing of this petition, the learned counsel for the petitioners contended that :

(1) the Appropriate Authority had failed to determine the fair market value of the PUC and that the finding given by the Appropriate Authority that the PUC is comparable to the Sale Instance Property (SIP) is so unreasonable that no reasonable person would arrive at such a conclusion. Further the sale instance quoted by the transferors ought to have been accepted by the Appropriate Authority;

(2) the impugned order under s. 269UD(1) is even otherwise bad in view of the fact that the Appropriate Authority has not given any finding to the effect that the apparent consideration was understated with a view to avoiding income-tax.

4. In support of the first contention, the learned counsel for the petitioners submitted that the PUC was in a residential zone and was not on the Ashram Road. The PUC was at a distance of about 300 metres away from the main Ashram Road-Usmanpura crossing, whereas the SIP one was at a distance of only 15 metres from the Ashram Road and that too opposite the Gujarat Vidyapith and nearer to Ajanta Commercial Centre which are in the commercial zone of the city of Ahmedabad. The learned counsel further pointed out that use of the SIP-2 is also commercial and its location was in a potential commercial area. It was further submitted that 2 SIPs were smaller plots and were, therefore, bound to fetch higher prices. It was also submitted that the PUC is within 300 metres from Usmanpura mosque and, therefore, under the Ancient Monuments Act, permission for construction is to be obtained from the concerned authority at Delhi. It was also submitted that under the agreement, the vendors have agreed to purchase 3 residential flats for residential use in the superstructure to be constructed on the said land, which shows that the petitioners are going to construct residential premises and not commercial shops or offices on the land in question with a further rider that the petitioners were to provide such flats at 20 per cent discount. Till the constructed flats are handed over to the vendors, the purchasers had to provide three-bed room flats to the vendors. Considering that since the construction of the residential blocks is going to take about 3 years and that the petitioners shall have to pay a monthly rent of about Rs. 15,000, for each such flat, the petitioner will have to spend about Rs. 5,40,000 for 3 years, which would be an additional bundren of Rs. 375 per square metre by way of additional price of the PUC. The petitioners further pointed out that the Government registered valuer had, in his objections dt. 24th July, 1995, pointed out the facts regarding non-comparability of the PUC with SIPs and that the Government registered valuer had given comparable cases where no-objection-certificate was given by the Appropriate Authority. The learned counsel further pointed out that the petitioners were to bear full stamp duty and registration charges which would be substantial looking to the consideration being Rs. 1.75 crores.

5. It was then submitted by the learned counsel for the petitioners in support of his second contention that the impugned order is conspicuously silent about the motive to evade tax which is sine qua non for the pre-emptive purchase by the Appropriate Authority, as laid down by their Lordships of the Hon'ble Supreme Court in the case of C. B. Gautam vs. Union of India & Ors. (1993) 199 ITR 530 (SC) and subsequent decisions of this Court.

6. There is no affidavit in reply on behalf of the respondents.

However, Shri M. J. Thakore, learned Standing Counsel for the Revenue has opposed the petition on behalf of respondents Nos. 1 and 2 and has contended that the Appropriate Authority has considered all the relevant facts and circumstances and has arrived at the conclusion that the apparent consideration is less than the market value of the PUC by more than 15 per cent and that, therefore, the order is not required to be interfered with.

7. Having considered the rival contentions and the material on record, in our opinion, the petition deserves to be allowed, as the impugned order is vitiated by non-application of mind inasmuch as the Appropriate Authority has passed the impugned order dt. 31st July, 1995 without arriving at a specific finding that it was with a view to evade tax that the apparent consideration has been understated in the agreement. In the case of C. B. Gautam vs. Union of India (supra), their Lordships of the Hon'ble Supreme Court examined the scope and ambit of the powers conferred on the Appropriate Authority under Chapter XX-C of the Act and have held that the very historical setting in which the provisions of this Chapter XX-C were enacted, suggests that it was intended to be resorted to only in cases where there is an attempt at tax evasion by significant undervaluation of immovable property agreed to be sold. It was further held that if the Appropriate Authority concerned is satisfied that, in an agreement to sell immovable property in such areas as set out earlier, the apparent consideration shown in the agreement for sale is less than the fair market value by 15 per cent or more, it may draw a presumption that this undervaluation has been done with a view to evade tax. Of course, such a presumption is rebuttable and the intending seller or purchaser can lead evidence to rebut such a presumption. Moreover, an order for compulsory purchase of immovable property under the provisions of s. 269UD requires to be supported by reasons in writing and such reasons must be germane to the object for which Chapter XX-C was introduced in the IT Act, namely, to counter attempts to evade tax.

8. The aforesaid decision of the Hon'ble Supreme Court came to be followed by this Court in the case of Anagram Finance Ltd. vs. Appropriate Authority and in Special Civil Applications Nos. 3853 of 1995 and 5328 of 1995, both decided on 19th Sept., 1995. In Special Civil Application no. 3853 of 1995 [since reported as Krishnakumar Agrawal & Anr. vs. Appropriate Authority & Anr.] this Court has held as under :

"Thus necessary concomitants of exercise of powers under s. 269UD(1) are that firstly the Appropriate Authority must arrive at a decision that there is significant undervaluation of the property by 15 per cent or more and secondly, such undervaluation is an attempt at tax evasion. It is only on the existence of second indicia and not merely in the case of undervaluation that the Authority has been empowered to have resort to the power of pre-emptive purchase. It is true that in a case of significant undervaluation of the property to the extent of 15 per cent, the Appropriate Authority may draw a presumption about undervaluation having been done with a view to evading tax, a presumption which is rebuttable. However, such presumption is not an obligation under statutory provision. It is for the Appropriate Authority to raise presumption or not on the basis of the estimated valuation. Whether such presumption has in fact been resorted to and has not been rebutted must in our opinion be reflected in the order which is finally passed by the Appropriate Authority disclosing application of mind to all available material on record..... Its satisfaction about the facts must be reflected in the order and cannot be left to the guess work or for raising the presumption by the Court in favour of the Appropriate Authority, if the order is challenged. The order must speak for itself. The impugned order in our opinion, does not even whisper about the satisfaction of Appropriate Authority about the undervaluation being with an intention to evade tax. It must be noticed that the presumption is rebuttable one and what evidence is required to rebut depends upon facts and circumstances of each case. The presumption may even be rebutted, without leading evidence, on the basis of material already available on record."

9. Thereafter, in the decision dt. 19th Sept., 1995 rendered in Special Civil Appln. No. 5328 of 1995, this Court held as under :

"It may further, be noticed that if in the estimate of Appropriate Authority apparent consideration of the property situated in the agreement to sell is less by 15% or more of its fair market value, the presumption of understatement having been made with the intention to evade the tax may be raised by it. However, such presumption is not a statutory presumption which is mandatorily required to be drawn in all cases....."

" Mere finding of understatement, without recording the conclusion of the Appropriate Authority himself, about nexus between understatement of consideration and attempt to tax evasion, it is not permissible to raise presumption that Appropriate Authority has also found that such understatement was an attempt to evade the tax when such an order is challenged before Courts. It is to be seen that for element of a nexus being present with the understatement of consideration and attempt to evade tax, it is essential that apparent consideration is not the real consideration. Therefore, merely on the finding that the apparent consideration is less than fair market value without there being any satisfaction that the apparent consideration is not real consideration, the nexus cannot be established with an attempt to evade tax. Therefore, it is also necessary in the chain of decision making not only to arrive at conclusion of the differentiation but it is required that the fair market value of the property concerned is arrived at and a conclusion is reached that apparent consideration is not the real consideration."

10. The relevant part of the impugned order in the instant case reads as under :

"The discounted consideration shown in Form No. 37-I is Rs. 8491 per sq. mt. As such the understatement in the discounted (net) consideration of the PUC as compared to its fair market value is by about 34% which is far higher than the limit of 15% set out by the Hon'ble Supreme Court in C. B. Gautam's case (supra). It is also in conformity with the various decisions of the Hon'ble Gujarat High Court on the same point. Whatever may be the margin of error in our estimate of the fair market value the understatement in the consideration of PUC is very high and could not be reconciled by the parties.

In view of the above findings we are satisfied that it is a fit case for pre-emptive purchase under s. 269UD(1) of the IT Act, 1961."

11. There is not a whisper about satisfaction of the Authority as to whether the difference between the apparent consideration and fair market value is on account of any attempt or intention to evade tax. The order, therefore, clearly falls short of the requirement that the power under s. 269UD of the Act is to be exercised only in the case where the Appropriate Authority has arrived at the finding that the difference between the apparent consideration and fair market value is with a view to evading tax.

12. In view of the above discussion, the impugned orders dt. 31st July, 1995 at annexures 'F' and 'G' are quashed and set aside. Respondent No. 1 is directed to issue no-objection-certificate as contemplated under s. 269UL of the Act within a period of six weeks from the date of furnishing of certified copy of this order or six weeks from the date of receipt of writ of this Court, whichever is earlier. Respondent No. 1 is directed to take all consequential steps pursuant to setting aside of the impugned orders dt. 31st July, 1995 at Annexures "F" and "G" to the petition.

13. Rule is made absolute accordingly with no order as to costs.

Shriniketan Members Association And Anuj Members Association v. Appropriate Authority And Others

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioners' Arguments

Respondents' (Revenue) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Shriniketan Members Association And Anuj Members Association v. Appropriate Authority And Others

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