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Webster Industries Limited v. Union Of India & Ors.
Factual and Procedural Background
This matter arises from a writ petition under Article 226 brought by Webster Industries Pvt. Ltd. (petitioner No.1), a company, and its Managing Director (petitioner No.2), challenging an order dated 31 May 1994 passed by the Appropriate Authority (respondent No.2) under section 269-UD(1) of the Income Tax Act, 1961.
The Appropriate Authority had fixed the fair market value of the immovable property located at 24, Netaji Subhas Chandra Bose Road, Calcutta, at Rs. 60.72 lakhs (unencumbered value) while the declared apparent consideration in the sale agreement was Rs. 20 lakhs. On that basis the Appropriate Authority invoked the Central Government's pre-emptive purchase right under section 269-UD(1) and ordered purchase at the declared consideration.
Facts: Respondents 4–16 are successors-in-interest of Munshi Abdul Kader (deceased), who had been assessed as owner and had been in possession of the property. They claimed to be co-owners and joint sharers by inheritance under Muslim law. On 21 December 1993 the petitioners entered into a sale agreement with respondents 4–16 for the property for Rs. 20 lakhs. The petitioners filed Form 37-I (statement of transfer) under section 269-UC(3) on 18 February 1994. A show-cause notice dated 20 May 1994 was issued advising that pre-emptive purchase would be considered; petitioners replied on 26 May 1994 arguing that the transaction comprised separate transfers by 13 co-owners (each with a specific share) and therefore did not attract Chapter XX(C).
Procedural outcome in the opinion: After hearing, the Court concluded that Chapter XX(C) did not apply and quashed and set aside the impugned order dated 31 May 1994 and a subsequent communication dated 22 June 1996. The Court also issued a writ of mandamus directing respondent No.2 to issue a “No Objection Certificate” in favour of the petitioners. An oral prayer for stay of the order was rejected; the writ application was allowed.
Legal Issues Presented
- Whether the provisions of Chapter XX(C) of the Income Tax Act (pre-emptive purchase by the Central Government under section 269-UD(1)) are attracted where multiple co-owners who are heirs execute a single composite agreement to sell a jointly owned immovable property.
- Whether a composite agreement executed by co-owners should be treated as a single sale of the entire property for the purpose of Chapter XX(C), or as multiple individual transfers corresponding to each co-owner's definite share (thereby assessing the value of each share separately for threshold purposes, e.g., the Rs. 10 lakh limit referred to in the reasoning).
- Whether the respondents (4–16) had formed an “Association of Persons” or joint venture to sell the property (as alleged by respondents Nos.1–3), which would affect characterization of the transaction for the purposes of the pre-emptive purchase provisions.
Arguments of the Parties
Petitioners' Arguments
- The sale agreement executed on 21 December 1993 effectively comprised as many transfers as there were co-owners (13), each transferring their specific share as heirs under Muslim law of inheritance.
- Because each co-owner's share was a definite, specified portion of the undivided property, each transfer should be treated separately; the value of each individual share was less than Rs. 10 lakhs.
- Therefore, Chapter XX(C) (pre-emptive purchase provisions) should not be attracted even if the aggregate fair market value of the entire property exceeded statutory thresholds.
Respondents' Arguments
- Respondents denied the petitioners' characterization and contended that the property was one unit and, despite 13 co-owners, the provisions of Chapter XX(C) applied because the co-owners' shares were not specified, identified, or defined in a manner that would prevent aggregation.
- Respondents Nos.1–3 further contended that respondents 4–16 had formed an Association of Persons or a joint venture with the purpose of selling the property and sharing receipts and profits, and thus the transaction should be treated as a composite sale attracting the pre-emptive purchase provisions.
- They asserted the impugned order (dated 31 May 1994) for pre-emptive purchase was legal and justified.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Surinder Gupta v. Chief Commissioner of Income Tax (ITR 221, 375) | Held that where co-owners (heirs) transfer property by one deed, Section 269-C was inapplicable because each transferee had an absolute right to his respective share; the fact of a common instrument did not convert separate transfers into one for statutory purpose. | The Court cited this decision as a similar view supporting the proposition that multiple co-owners executing a single document may be treated as having effected individual transfers of their respective shares; it reinforced the view that Chapter XX(C) should not be invoked where individual shares fall below the statutory threshold. |
| CIT v. T.V. Suresh Chandran, (1980) 121 ITR 985 (Ker) | Affirmed that transfers by co-owners who inherited property, even under a single instrument, amounted to separate transfers of definite shares and Section 269-C was not applicable merely because a single deed covered multiple transfers. | This case was quoted (through Surinder Gupta) to support the legal principle that a common instrument effecting transfers by multiple co-owners does not render the transaction a single sale for the purpose of acquisition under the relevant statutory provision. |
| K.V. Kishore, K.R.V. Ratinam v. Appropriate Authority, Income-Tax Department (ITR 189 264) | Held that where heirs acquired vested, definite quantified shares (by operation of succession law) each share is an immovable property that can be transferred separately; aggregation of values in a composite agreement cannot invoke Chapter XX-C if each share's value is below the statutory threshold. | The Court relied on these observations to conclude that the agreement should be understood as conveying individual undivided shares and that taking the collective value to invoke Chapter XX(C) was unsustainable. |
| Appropriate Authority, Income-Tax Department v. J.S.A Raghava Reddy (ITR 199 508) | Stated that plurality of ownership means each co-owner has a definite share and may alienate it independently; for the purposes of section 269-UC the value of each co-owner's share must be considered rather than the total collective value when they together sell under one deed. | The Court treated this decision as corroborative authority for the proposition that co-owners executing one deed do not necessarily create a single transaction for statutory aggregation; the Court applied the principle to reject aggregation of shares for Chapter XX(C) purposes. |
Court's Reasoning and Analysis
The Court proceeded by first establishing the legal status of respondents 4–16: they were inheritors and legal representatives of Munshi Abdul Kader and thereby became co-owners holding definite shares in the property by operation of Muslim succession law. The Court held that:
- The fact of a composite agreement does not extinguish the individual ownership rights of each co-owner. Each co-owner had a transferable, definite share and could have executed partition or separate sale agreements by metes and bounds if they had chosen.
- Execution of a single, composite sale instrument by multiple co-owners does not automatically convert the transaction into a single sale for the purpose of invoking Chapter XX(C). The legal character of the transaction is determined by the underlying ownership rights (definite shares) and not merely by the form of a single instrument.
- The Court considered and relied on earlier case law (cited in the opinion) holding that where owners have definite quantified shares by succession law, each share is an immovable property capable of separate transfer, and aggregation for statutory thresholds is improper when each share is below the threshold amount.
- Applying the above principles to the facts, the Court found that although the fair market value of the entire property could be considered to exceed Rs. 60 lakhs, the share of each seller (each of the 13 co-owners) was admittedly less than Rs. 10 lakhs. Consequently, Chapter XX(C) (and the pre-emptive purchase power under section 269-UD(1)) was not attracted in this transaction.
- The Court rejected the contention that respondents had formed an Association of Persons for the purpose of jointly selling the property, finding instead that the respondents took the property as heirs and held distinct shares; no formation of an AOP or joint venture altered the legal position on separate transferable shares.
On this reasoning, the Court concluded that respondents Nos.1–3 were not justified in invoking pre-emptive purchase powers and that the impugned order was legally unsupportable.
Holding and Implications
Holding:
The writ petition is allowed. The Court quashed and set aside the impugned order dated 31 May 1994 passed by respondent No.2 and the consequential communication dated 22 June 1996 issued by respondent No.3. A writ of Mandamus is issued directing respondent No.2 to issue a “No Objection Certificate” in favour of the petitioners. The oral prayer for stay of the Court's order was rejected.
Implications:
- Direct effect on the parties: The pre-emptive purchase order and consequential communication were nullified; the petitioners are entitled to proceed with the transaction subject to the mandated issuance of the No Objection Certificate by respondent No.2.
- Scope and precedent: The Court relied upon and applied existing authorities to reach its conclusion. The opinion does not declare or elaborate any novel general rule beyond applying those precedents to the present facts; the immediate consequence is confined to the parties and the specific transaction under challenge.
Oral prayer for stay of this order was rejected. Writ application allowed.
Vinod Kumar Gupta, J.:— In this petition filed under Article 226 of the Constitution of India, the writ-petitioners Webster Industries Pvt. Ltd. which is a company incorporated under the Companies Act and petitioner No. 2 who is the Managing Director of this company have challenged an order dated 31st May, 1994 passed by the appropriate authority i.e respondent No. 2 in this petition, in terms of section 269-UD (1) of the Income Tax Act, 1961 whereby, after observing that the fair market: value of the property in question exceeds more than 1.5% of the declared total apparent consideration, an order has been passed for pre-emptive purchase of the said property by the Central Government under section 269-UD(1) of the Income Tax Act. While thus exercising such power the appropriate authority ordered the purchase of the said immovable property located at 24, Netaji Subhas Chandra Bose Road, Calcutta by the Central Government at an amount of declared apparent consideration of Rs. 19.405 lakhs only. The facts leading to the filing of the petition are that respondents 4–16, being the successors-in-interest of one Munshi Abdul Kader, (since deceased) son of late Chand Mistry claimed to be the co-owners and joint sharers of the property in question. According to them the said Munshi Abdul Kader claimed the rayet 100 Zaminder Pravash Chandra Mondal and others in respect of the property in question and after the abolition of the Zamindary Pratha, the said Abdul Kader became the absolute owner lawfully of the said property and came into its possession by constructing a two storeyed building which he used for his residence. The name of Munshi Abdul Kader was also mutated as the owner in possession of the property in question and he also started paying tax to the Tollygunge Municipality. The said property was duly assessed with Tollygunge Municipality in the name of deceased Abdul Kader as Municipal Premises No. 166/2, Russa Road South, Calcutta-700 033. It is also claimed that the said Abdul Kader who was absolutely seized and possessed of the property died intestate on 26th March, 1951 leaving behind him his widow and seven sons. Among other things, it has also been claimed that respondents 4-16 being the sole surviving legal heirs and representatives as also successors-in-interest of the said Abdul Kader became the absolute co-owners and joint sharers of the property in question which was also in their possession, except a portion thereof which was in the possession of some tenants of the property. At present the property is claimed to be measuring 19 kathas of land with a two storeyed building constructed thereupon and situated at 24, Netaji Subhas Chandra Bose Road, Calcutta. It is claimed by the petitioners that they entered into a agreement with respondents 4-16 on 21st December, 1993 whereby the respondents agreed to sell and the petitioners agreed to purchase the said property for a consideration of Rs. 20 lakhs.
2. Pursuant to the execution of the aforesaid agreement, the petitioners filed before the appropriate authority under the Income Tax Act, 1961 a statement of Transfer of Immovable Property required to be furnished to such appropriate authority in terms of section 269-UC(3) of the Income Tax Act in Form 37-I. This statement in Form No. 37-1 was filed on 18th February, 1994 but on 20th May, 1994 petitioner No. 1 was served with a showcause notice calling upon it to explain as to why the property sought to be transferred should not be purchased by the Central Government under its pre-emptive purchase right contained in section 269-UD(1) of the Income Tax Act. In the said notice the petitioner was also informed that the fair market value of the property in question as on the date of agreement for transfer had been fixed by the appropriate authority at Rs. 60.72 lakhs as unencumbered value of the property as against the apparent declared consideration of Rs. 20 lakhs as it was recorded in the agreement for sale. Petitioners submitted their reply on 26th May, 1994 to the aforesaid show-cause notice and pleaded that the agreement for sale between them and respondents 4–16 in effect and substance amounted to as many transfers as there were co-owners of the property, that is, 13 in all with respective specific shares of all the co-owners who succeeded the deceased Abdul Kader in terms of the Mohammedan Law of inheritence and therefore the transfer in the said case did not and could not attract the provisions relating to pre-emptive purchase as contained in chapter XX(C) of the Income Tax Act, 1961 and that the exercise of the pre-emptive power of purchase conferred by the said chapter of the Act was neither appropriate nor proper. The case of the petitioners is that the under the law of inheritance governing the Muslims, each co-owner is a co-transferer in the agreement for sale and he having a specific share in the undivided joint ownership property can sell his own share and thus, even if one composite agreement is executed by 13 co-owners and co-sharers, each of them could be deemed to have executed an agreement for sale and therefore even if the total apparent unencumbered consideration of the property may be considered to be above Rs. 60 lakhs, yet the property could not attract the provisions of pre-emptive purchase by the Central Government because the share of each of the 13 co-owners would in any case come to be less than Rs. 10 lakhs per sale transaction. The petitioners claimed that even though there was a composite agreement for sale, this should be construed as 13 sale agreements because all the 13 co-owners have sold their respective specified shares in the property and since the value of each respective specified share is less than Rs. 10 lakhs, the exercise of the power under chapter XX(C) of the Income Tax Act was neither warranted nor called for.
3. The respondents have denied the contentions of the petitioners and have stated that the property in question was one and that even though there were 13 co-owners, still the provisions contained in chapter XX(C) of the Income Tax Act were attracted in such cases because the shares of the co-owners were neither specified nor identified, nor defined. Various other submissions were also made in support of the action of the respondents for resorting to pre-emptive purchase and was alleged that the order impugned in the petition passed on 31st May 1994 by the Appropriate Authority was both legal and justified.
4. The main thrust of the arguments of respondents Nos. 1 to 3 is that respondents 4–16 have entered into an agreement among themselves to form an Association of Persons to transact a joint venture to sell the property in question and share the receipts and profits arising therefrom amongst themselves. According to respondents Nos. 1 to 3, respondents Nos. 4–16 entered into the agreement dated 21st September, 1993 with the petitioners only with the purpose of forming an Association of Persons and to transact joint venture for selling the property. They have disputed that the said property devolved upon them because of the inheritance of the property under Muslims Law of Succession.
5. Respondents Nos. 4–16 undoubtedly are the inheritors of the property in question from their predecessor-in-interest, namely Munshi Abdul Kader. It cannot be said that they formed themselves into an Association of persons for a joint venture of selling the property. In fact at the time that Munshi Abdul Kader died, the property devolved upon these respondents by virtue of their being his successors-in-interest under the Muslim Law of Inheritance. The property inherited by these respondents was undoubtedly received by them in their capacity as the legal representatives and heirs of the deceased Munshi Abdul Kader and therefore they became its co-owners. Each one of them had his/her share in the property. The question whether they partitioned or divided the property or not is not a material question because in law each one of them had his/her respective share in the property which they were holding as co-owners. Each of the respondents Nos. 4–16 could have the property partitioned by metes and bounds and thus could have executed separate sale agreements, if they so chose. Instead of executing separate sale agreements, however, they decided to enter into one composite agreement. It did not take away their right of selling the property individually. The respondents Nos. 1–3 therefore could not have in law treated the transaction as a composite transaction attracting the imposition of the provisions contained in chapter XX(C) of the Income Tax Act. In my opinion, even though there is one agreement to sell, it must be deemed that there are as many as 13 transactions of sale of immovable property enterned into by 13 co-owners in favour of the petitioners.
6. In the case of Surinder Gupta v. Chief Commissioner of Income Tax reported in ITR 221, 375, a Division Bench of Delhi High Court took a similar view in an identical matter. Their Lordships observed as under:—
“CIT v. T.V Suresh Chandran, (1980) 121 ITR 985 (Ker) was a case under Section 269-C of the Income Tax Act. The transferors were co-owners having inherited the property from ancestors. They transferred the property to four persons with one deed. The competent authority initiated proceedings for acquisition of the property by treating the entire property as one. It was held that each one of the four transferees had absolute right to the property so transferred to him and in the property transferred to one, the other transferees had no right. The right of each of the transferees to the property was absolute. The fact that the transferees may make common use of the property purchased by them is a factor which would have no bearing on the purchase itself. Had the sale been effected by four instruments the case urged by the Revenue may not have arisen. It would make no difference merely because the four sales were covered by one instrument. Section 269-C was held to be inapplicable.”
7. To the same effect are the following observations in the case of K.V. Kishore, K.R.V. Ratinam v. Appropriate Authority, Income-Tax Department reported in ITR 189 264.
“After giving deep consideration to these rival submissions, the following facts would clinchingly establish the case in favour of the petitioners. It is not denied or it is not disputed that the original allottee, A. Srinivasan, died in the year 1962. He being a Hindu, governed by the Hindu Succession Act, on his death, his wife and children accuired a vested right to the definite quantified shares in the property left behind by him. As owners of their respective shares, they were competent to enter into a family arrangement which they did on April 8, 1987, under the terms of which, each one of respondents Nos. 4 to 8 were allotted a definite shares in the property. After April 8, 1987, they were individual owners of definite shares in the property. Each one could deal with only his respective share and he cannot deal with the share of another. The property which so fell to the share of each individual will come definitely within the definition of the words “immovable property”. Such a sharer was entitled to transfer his immovable property to a third person. Merely because a plurality of such individual owners joined together to enter into one single agreement to transfer their respective shares in favour of one or more persons, that would not make any difference to the main issue that what each transferred is his definite share in the property. Viewed from that perspective, the agreement entered into between the petitioners and respondents Nos. 4 to 8 is to be understood only as an agreement to convey the respective undivided shares of respondents Nos. 4 to 8. It is not in dispute that the value of each such share is less than Rs. 10,00,000. The recitals in the agreement in more than one place refer to the fact that what is sold, is the individual undivided share in the property. Consequently, the impugned order made under Chapter XX-C of the Act taking the total consideration, the collective shares, cannot be sustained (sic). Both the writ petitioners are, accordingly, allowed. No costs.
8. In the case of Appropriate Authority, Income-Tax Department v. J.S.A Raghava Reddy*, reported in ITR 199 508, a Division Bench of Karnataka High Court took the following view:—
“Under the general law, a single property can be owned by more than one person and, in that event, each will be a co-owner along with others. Each one will be entitled to sell his share according to his own will and wish. The other co-owners will not be entitled to place any embargo nor is their consent required for such a sale. For all purposes, a co-owner will be the owner of his definite share in the property and he is entitled to alienate his share on his own account without the consent of the other co-owners. The fact that all the co-owners together agree to sell the property to one or more persons and agree to convey it under one sale deed does not in any way make them joint owners of the property. The property may be one item, in other words, it may be a building or a piece of land but, in law, it will have to be considered as consisting of as many different bits of property there are co-owners. The general law which is not overridden by section 269-UC of the Act permits and recognises plurality of ownership. Therefore, for the purpose of section 269-UC of the Act, the value of the share of each co-owner has to be taken into account and not the total value of the shares of the co-owners even when all of them together sell the property and convey the title under one deed.”
9. On a detailed consideration of all relevant facts and circumstances I have no doubt in my mind that the provisions of Chapter XX(C) are not attracted in the present case and in this transaction, because admittedly the share of each of the sellers was less than Rs. 10 lakhs, even if the fair market value of the property could be considered to be more than Rs. 60 lakhs. That being the case therefore, the respondents No. 1 to 3 were not justified in taking recourse to their power of pre-emptive purchase of the said property in terms of section 269-UD(1) of the Income Tax Act. While therefore allowing this petition I quash and set aside the Impugned order dated 31st May, 1994 passed by respondent No. 2 and the consequent communication dated 22nd June, 1996 issued by respondent No. 3 with all consequences. A writ of Mandamus is accordingly also issued directing the respondent No. 2 to issue “No objection Certificate” in favour of the petitioners.
Oral prayer for stay of this order is rejected. Writ application allowed.
Application allowed
A.K.G
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