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2001 DIGILAW 707 (KER)

Musthafa Ummer v. Appropriate Authority

2001-11-30

K.BALAKRISHNAN NAIR, K.S.RADHAKRISHNAN

body2001
Judgment :- K.S. Radhakrishnan, J. Both these appeals are preferred against the judgment in O.P. 6872 of 1999. Challenge is against an order passed by the Appropriate Authority, Income-tax Department, Bangalore under S.269 UD(1) of the Income Tax Act, 1961 ordering pre-emptive purchase of immovable property situated in survey No. 882/1 of Ernakulam Village by the Central Government. A writ of mandamus was also sought to issue no-objection certificate to the petitioners for transfer of the immovable property as envisaged under S.269UL of Income Tax Act. The order was set aside by the learned Single Judge holding that the Appropriate Authority has failed to take note of the unique circumstance in which the transfer was necessitated. Learned single judge therefore quashed the impugned orders. A direction was given to the authorities to consider the petitioner's application Ext. P6 afresh and pass appropriate orders in accordance with law. 2. Writ Petitioners are husband and wife. They are promoters of a private limited company by name Palm Court Hotels Private Ltd., a company incorporated as a private limited company by the certificate of incorporation No. 09-8831 of 1995. Petitioners are the only share holders of the company. Main object of the company is to construct buildings for hotels and to carry on business of hotels. Petitioners who are Promoters and Directors of the company decided to set up a Three Star Category Hotel Complex at Ravipuram in Kochi in the property mentioned hereinbefore. They approached the Kerala State Industrial Development Corporation Ltd. (in short K.S.I.D.C.) for financial assistance, K.S.I.D.C. vide its letter dated 13th April 1998 sanctioned a term loan of Rs. 250 lakhs to the company for setting up a Three Star Category Hotel Complex on certain terms and conditions. Sanction letter also stated that KSIDC's disbursement would commence only after the company complying with all the terms and conditions of sanction and completion of documentation ie., signing of loan agreement/hypothecation agreement by the company and guarantees by promoters and deposit of title deeds to create equitable mortgage on land of the company. Memorandum of understanding dated 17.2.98 was entered into between K.S.I.D.C. and first petitioner who was promoter of the company. Memorandum of conditions of loan was submitted inter alia on certain conditions such as land registered in the name of the promoter directors should be registered in the name of the company towards mortgaging to K.S.I.D.C.. Memorandum of understanding dated 17.2.98 was entered into between K.S.I.D.C. and first petitioner who was promoter of the company. Memorandum of conditions of loan was submitted inter alia on certain conditions such as land registered in the name of the promoter directors should be registered in the name of the company towards mortgaging to K.S.I.D.C.. Petitioners who are promoters of the company therefore decided to convey the property in question to the company which was a condition precedent for sanctioning the loan by the K.S.I.D.C. 3. Petitioners and the company submitted the application under S.269 UC of Income Tax Act in Form No. 37-1, R.48-L to the Appropriate Authority. Details of property was given in the application. The property is situated in survey No. 882/1 of Perumanoor Desom, Ernakulam District which was acquired by the first petitioner as joint holder as per document No. 1232/1994. Petitioners decided to transfer the said property to Palm Court Hotels Pvt. Ltd. of which they are the sole directors for a consideration of Rs. 66,99,106/- and an agreement of sale dated 7.10.90 was also entered into. Initially there was some defects in the application and the same was rectified on 13.11.1998. 4. The application was considered by the Appropriate Authority. They obtained an Engineering Report prepared by the Executive Engineer of the Valuation Cell, Income Tax Department, Trivandrum. Members of the Appropriate Authority had also inspected the property. After considering the report and evaluating what has been seen during the inspection Appropriate Authority came to the conclusion that the apparent consideration shown in Form 37 I is well below 15% of the market value of the property shown as being sold in Firm No. 37 I. Following are the reasons which weighed with the Appropriate Authority to reach such conclusion. "The property is located in Srikandeth Road off M.G. Road on the eastern side of M.G. Road. The distance from M.G. Road to the property is 70 metre. The locality is residential & commercial mixed. Multistoreyed apartments are existing nearby this property. The potential for commercial development is very high due to its location in the nucleus of Cochin City, the commercial capital of Kerala. The land rate works out to Rs. 2,16,1007- cent (without considering the cost of piles already driven). This is also comparable with the following instances: In the FileNo. AA/CHN/9(6) 12/97-98 for the sale of the property situated at Sy. The land rate works out to Rs. 2,16,1007- cent (without considering the cost of piles already driven). This is also comparable with the following instances: In the FileNo. AA/CHN/9(6) 12/97-98 for the sale of the property situated at Sy. No. 995/1, Part of Ernakulam Village on Kurusupally Road, Ernakulam South, the land rate works out to Rs. 435811/- per sq. ft. situated about 300 in. from the property under consideration towards south." The Appropriate Authority noticed under valuation of the property, therefore drew a presumption that under valuation of the property was done with a view to evade tax. Appropriate-Authority therefore proposed to pass an order for pre-emptive purchase of the schedule property under S.269 UD(1) of the Income Tax Act, 1961 for Rs. 66,99,100/- which is the discounted value of apparent consideration for the Central Government. 5. Appropriate Authority then issued a show cause notice dated 12.2.99 to the writ petitioners as well as to the transferee M/s. Palm Court Hotels (P) Ltd. to show cause why the pre-emptive purchase should not be effected. Parties were directed to show cause on 26.2.99 at 11 a.m. failing which it was ordered that it would be presumed that they have no cause to show against such a pre-emptive purchase and the proceedings would be finalised accordingly. 6. Writ Petitioners then filed a detailed reply dated 22.2.99. They explained the circumstances under which the property was decided to be sold to the company. We may extract the relevant portion of the same for easy reference: "The company had applied for a loan of Rs. 250 lakhs for the Hotel Project from the Kerala State Industrial Development Corporation. According to the condition stipulated by the K.S.I.D.C. vide their sanction letter No. Scy 8/165 dated 13.4.98 (herein enclosed), the land on which the hotel was proposed to be constructed had to be transferred to the Company against shares to be allowed by the Company to the shareholders ie., the transferors. Even though it was advantageous to the shareholders (transferors) to show the price of the land on document at a much higher figure, in which case the value of their shareholding will be elevated and the Company could negotiate a higher loan on the security, of the land, with a view to reducing the total project cost and thereby the amount of loan to be sanctioned, KSIDC valued the land at Rs. 76.03 lakhs which includes the capitalised value of the registration charges and stamp duty, leaving the actual cost of the land at Rs. 66,99,106/- Petitioners pointed out that the transfer has been effected due to special circumstances and not for evading tax. Further it was stated since the transferor and transferee are the same there was no money transaction, but only allotment of shares. Petitioners stated that the transaction was, a bonafide transaction and unless and until the property is transferred in the name of the Company KSIDC would not disburse the loan. Reply submitted by the petitioners was not acceptable to the Appropriate Authority. They passed order on 26.2.99 directing the transferor/ transferee or any other person who may be in possession of the said property to surrender and deliver vacant possession of the scheduled property to the Appropriate Authority within 15 days from the date of receipt of the order. Another letter dated 3.3.99 was also served on the petitioners as well as to the company by the Appropriate Authority to surrender or deliver possession of the immovable property. Challenging those proceedings Writ Petition has been filed. Learned Single Judge quashed the impugned order and directed the Appropriate Authority to consider the matter afresh, against which both the petitioners and Appropriate Authority have filed appeals. When the matter came up for hearing we heard counsel on either side at length. 7. Counsel appearing for the petitioner Sri. Pathrose Mathai submitted the Appropriate Authority has committed a grave error in passing the order of pre-emptive purchase under S.269 UD(1) of the Income Tax Act, 1961 and also drawing a presumption that the transaction entered into between petitioner and the company as under valuation of the property with a view to evade tax. Counsel also submitted Appropriate Authority lost sight of facts and circumstances of the case which cannot be compared with any normal transfer of assets between two persons. Counsel submitted transferors as well as transferees are practically the same persons and the transfer of the property was effected due to peculiar circumstance. Counsel submitted that the petitioner and the company preferred a joint statement in Form 371 on 6.10.98 to the Income Tax Department declaring their intention to transfer the immovable property in favour of the company the promoters of which are petitioners. Counsel submitted that the petitioner and the company preferred a joint statement in Form 371 on 6.10.98 to the Income Tax Department declaring their intention to transfer the immovable property in favour of the company the promoters of which are petitioners. This is one of the special conditions agreed upon between the company and K.S.I.D.C. for sanctioning loan of Rs. 250 lakhs for hotel project. Since the petitioners are promoters of the company there was no money transaction between them but the value of the property was shown as consideration by allotment of shares. Petitioners are only share holders of a private limited company. Placing reliance on the decision of the Supreme Court in C.B. Gautam v. Union of India & Ors., 199 ITR 530 counsel submitted transaction in question would satisfy the principle laid down by the Apex court in Gautam's case. Counsel submitted they had no intention to under value the property for evading tax. Under valuation of the same was done in the peculiar nature of the case since the transferors and transferees are practically the same, transferees being the sole promoters of the company who are none other than the writ petitioners themselves. Counsel placing reliance of the decisions of the Apex Court in AIR 1965 SC 40, AIR 1986 SC 1370, AIR 1967 SC 819, AIR 1988 SC 1737, (1991) 70 Com. Cases 127 etc. submitted that Appropriate Authority as well as this Court ought to have examined the underlying purpose and object of the transaction and the reasons which prompted the petitioners and the company entered into such a transaction. Counsel submitted in order to appreciate the true character of the transaction, the Appropriate Authority for that matters the court can lift the corporate veil and examine the real purpose of the transaction. Counsel submitted if the object and purpose was to evade tax and to generate black money they could have sold the property in open market for higher price. This is a case where the parties agreed for the transfer of the property for a price so as to avail of loan from the KSIDC which would show the bonafide nature of the transaction. Counsel submitted learned Single Judge ought to have given a direction to the Appropriate Authority to issue no objection certificate for the transfer of the property. 8. Counsel also submitted Exts. Counsel submitted learned Single Judge ought to have given a direction to the Appropriate Authority to issue no objection certificate for the transfer of the property. 8. Counsel also submitted Exts. P7, P9 and PI 1 orders are bad in law since theyare issuedin iolationofnaturaljustice.Counsel submitted the Appropriate Authority has failed to take into consideration the relevant materials and relied upon irrelevant materials while issuing the impugned orders. Counsel submitted the orders were issued by the Appropriate Authority placing reliance on the Engineering Report prepared by the Executive Engineer of the Valuation Cell, Income Tax Department, Trivandrum. Reliance was also placed on file No. AA/CHN/9(6) 12/97-98 for sale of the property situated in Sy. No. 995/1, Part of Ernakulam Village on Kurisupally Road, Ernakulam South. Placing reliance on those materials Appropriate Authority decided to pass order for pre-emptive purchase under S.269 UD (1) of the Income tax Act. Those materials were never made available to the petitioners. Non-availability of those documents, counsel submitted, caused prejudice to the petitioners. 9. Senior counsel appearing for the Appropriate Authority Sri. P.K. Raveendranatha Menon submitted Appropriate Authority has issued Ext. P7 order dated 12.2.1999 under S.269 UD(1) of the Income Tax Act 1961 as well as Ext. P9 order dated 26.2.99 as per S.269 UD(1) of the Income Tax Act. Laying stress on the principle laid down by the Apex Court in Gautam's case (supra) as well as the decision of the Apex Court in Appropriate Authority & Ann v. Sudha Patil & Ann, 235 ITR 118, counsel submitted that there has been a gross under valuation of the property" which would attract S.269 UE of the Act. Counsel submitted that a mere fact that petitioners are promoters of the company would not change the character of the transaction. Counsel also submitted transaction would also attract the provisions of S.257 of the Income Tax Act which gives rise to capital gains taxable under the Act. Counsel submitted if there is under valuation of the property Appropriate Authority could always draw a presumption that transaction proposed to be entered into is to evade tax. Counsel submitted the mere fact that the company has issued shares to its promoters in consideration of the sale of the property would not render the transaction legal. Counsel submitted if there is under valuation of the property Appropriate Authority could always draw a presumption that transaction proposed to be entered into is to evade tax. Counsel submitted the mere fact that the company has issued shares to its promoters in consideration of the sale of the property would not render the transaction legal. Placing reliance on the passage in Kanga on Income Tax, 8th Edition, page 124 counsel submitted when a company sells its trading assets for fully paid shares in another company, the profit on the transaction is assessable although no cash passes. Reliance was also placed on the decision of the Apex Court in C.I.T. v. Kharwar, 72 ITR 603 and contended that the corporate personality should be ignored and the principle that no man can make a profit out of himself should be invoked. Counsel submitted that the order was passed not in violation of any principles of natural justice. Counsel submitted the materials relied on, especially, the Engineering Report clearly stated in the show cause notice itself and that no prejudice has been caused to the petitioners. Placing reliance on the decision of the Apex Court in Union of India & Ors. v. Shatabdi Trading and Investment (P) Ltd. & Ors., 251 ITR 93, counsel submitted this court sitting under Art.226 of the Constitution of India shall not sit in judgment over the order passed by the Appropriate Authority which was made on the basis of relevant materials. 10. We may at the outset indicate that counsel on either side relied upon the decision of the Apex Court in Gautam's case to bring home their rival contentions. Before we examine the rival contentions it is profitable to refer to certain passages of the said decisions for our purpose. Apex Court was considering the validity of the various provisions in Chapter XXC inserted in the Income Tax Act, 1961 by the Finance Act, 1986. While considering the scope of S.269 UD(1) the Apex Court held as follows: "In the light of what we have observed above, we are clearly of the view that the requirement of a reasonable opportunity being given to the concerned parties, particularly, the intending purchaser and the intending seller must be read into the provisions of Chapter XXC. While considering the scope of S.269 UD(1) the Apex Court held as follows: "In the light of what we have observed above, we are clearly of the view that the requirement of a reasonable opportunity being given to the concerned parties, particularly, the intending purchaser and the intending seller must be read into the provisions of Chapter XXC. In our opinion, before an order for compulsory purchase is made under S, 269 UD, the intending purchaser and the intending seller must be given a reasonable opportunity of showing case against an order for compulsory purchase being made by the appropriate authority concerned We have further pointed out that, although a presumption of an attempt to evade tax may be raised by the appropriate authority concerned in case of the aforesaid circumstances being established, such a presumption is rebuttable and this would necessarily imply that the concerned parties must have an opportunity to show cause as to why such a presumption should not be drawn. Moreover, in a given transaction of an agreement to sell, there might be several bona fide considerations which might induce a seller to sell his immovable property at less than what might be considered to be the fair market value. For example, he might be in immediate need of money and unable to wait till a buyer is found who is willing to pay the fair market value for the property. There might be some dispute as to the title of the immovable property as a result of which it might have to be sold at a price lower than the fair market value or a subsisting lease in favour of the intending purchaser. There might similarly be other genuine reasons which might have led the seller to agree to sell the property to a particular purchaser at less than the market value even< We have to examine the issue raised in this case in the light of the above mentioned principle laid down by the Apex Court. 11. Chapter XXC of the Income Tax Act consisting of Ss.269U to 269UO was inserted in the Income Tax Act by the Finance Act, 1986 with effect from 1.10.1986. Many of the provisions of the earlier Chapter XXA was found to be unworkable and the task of satisfactory determination of the fair market value of the property in question was also found to be difficult. Many of the provisions of the earlier Chapter XXA was found to be unworkable and the task of satisfactory determination of the fair market value of the property in question was also found to be difficult. This chapter defines what is agreement for transfer under S.269UA(a). 269UA(b) defines aparent consideration. S.269 UC deals with restrictions on transfer of immovable property subject to certain conditions. This section makes it obligatory that any transfer of property of such value as mentioned above should be preceded by an agreement reduced to writing in the form of a statement in Form No. 37-1 and should be furnished to the appropriate authority. Form No. 37-1 must be filed before the transfer is effected. The statement required to be furnished to the appropriate authority under sub-s.(3) of S.269UC shall be in Form No. 37-1 and shall be signed and verified in the manner indicated therein by each of the parties to the transfer. If the Authority finds transaction is genuine it could grant permission under S.269 UC of the Act. The function of the appropriate authority is not merely confined to issuing a no objection certificate. It is coupled with a duty to make a decision as to pre-emptive purchase, if the real market value of the immovable property warrants it. S.269UD empowers the appropriate authority within two months from the end of the month in which the section 269 UC statement is received, to order the purchase of the property by the Central Government at an amount equal to the apparent consideration set out in the agreement of sale and serve such order on the transferor and transferee. In this connection it is profitable to extract S.269 UD on which the impugned orders have been issued in this case: "269UD. Order by appropriate authority for purchase by Central Government of immovable property (1) Subject to the provisions of sub-ss.(1A) and (IB) the appropriate authority after the receipt of the statement under sub-s.(3) of S.269UC in respect of any. In this connection it is profitable to extract S.269 UD on which the impugned orders have been issued in this case: "269UD. Order by appropriate authority for purchase by Central Government of immovable property (1) Subject to the provisions of sub-ss.(1A) and (IB) the appropriate authority after the receipt of the statement under sub-s.(3) of S.269UC in respect of any. immovable property, may, notwithstanding any thing contained in any other law or any instrument or any agreement for the time being in force make an order for the purchase by the Central Government of such immovable property at an amount equal to the amount of apparent consideration: Provided that no such order shall be made in respect of any immovable property after the expiration of a period of two months from the end of the month in which the statement referred to in S.269 UC in respect of such property is received by the appropriate authority: XXX XXX XXX XXX (2) The appropriate authority shall cause a copy of its order under sub-s.(1) in respect of any immovable property to be served on the transferor, the person in occupation of the immovable property if the transferor is not in occupation thereof, the transferee, and on every other person whom the appropriate authority knows to be interested in the property". We may indicate the words "and for reasons to be recorded in writing" which were there in the earlier S.269 UD were omitted by the Finance Act 1993 with effect from 17.11.1992. At the same time S.1A reads as follows: "1$. Before making an order under sub-s.(1) the appropriate authority shall give a reasonable opportunity of being heard to the transferor, the person in occupation of the immovable property if the transferor is not in occupation of the roperty, the transferee and to every other person whom the appropriate authority knows to be interested in the property". It was inserted by the Finance Act, 1993 with effect from 17.11.1992. 12.The provisions of Chapter XXC relate to the purchase by Central Government of immovable properties in certain cases of transfer that the apparent consideration is less than the real consideration. All the same there are various exceptions as pointed out by the Apex Court in Gautam's case (supra). It was inserted by the Finance Act, 1993 with effect from 17.11.1992. 12.The provisions of Chapter XXC relate to the purchase by Central Government of immovable properties in certain cases of transfer that the apparent consideration is less than the real consideration. All the same there are various exceptions as pointed out by the Apex Court in Gautam's case (supra). There might be genuine reasons which might have led the seller to agree to sell the property to a particular purchaser at less than the market value even in cases where the purchaser might not be his relative. If there is under valuation of property although a presumption could be drawn that there is attempt to evade tax such a presumption is rebuttable one. If the parties could furnish materials to show that transaction is genuine presumption could be rebutted. In other words, all depends upon facts and circumstances of each case. We are not prepared to say that the facts and circumstances highlighted in this case are irrelevant so as to warrant a conclusion that there has been undervaluation and the undervaluation was made so as to evade tax. 13.We also find force in the contention of the petitioners that there has been violation of principles of natural justice since the report of the Engineering Department as well as the documents relied upon by the appropriate authority were not furnished to the petitioners. This is a case where if the order is given effect to the petitioners will have to part with their valuable immovable property in favour of the Central Government. The order to be passed under S.269 UD will have far reaching consequence as far as the petitioner is concerned. The materials on which appropriate authority has based its conclusion have therefore necessarily to be supplied to the petitioners. Opportunity of being heard must be adequate and effective and shall not be an empty formality. Arbitrariness which results from non-observance of the principles of natural justice leads to infringement of Art.14 of the Constitution of India and any act which is repugnant to the said provision is null and void. We have therefore no hesitation to say that the order passed is in violation of the principles of natural justice. We therefore uphold the judgment of the learned single Judge. We have therefore no hesitation to say that the order passed is in violation of the principles of natural justice. We therefore uphold the judgment of the learned single Judge. However, sitting in this jurisdiction under Art.226 of the Constitution this Court is not justified in giving any positive direction to the Appropriate Authority to issue no objection certificate. We therefore direct the appropriate authority to reconsider the matter in the light of the observations contained herein. Copy of the Engineering Report as well as other materials based on which they issued the impugned order should be made available to the writ petitioners and final orders would be passed by the appropriate authority within a period of two months from the date of receipt of copy of this judgment. Both the appeals are disposed of accordingly.