2003 (4) TMI 73 - HC - Income Tax

Quashing of notice for pre-emptive purchase under section 269UD of Chapter XX-C of the Income-tax Act, 1961, which was initiated against the assessee - in our view, it seems that the valuation has not been made correctly and that apart there being no attempt to evade tax and the transaction being bona fide, the provision of Chapter XX-C cannot be attracted in the present case. We agree with the judgment of the learned single judge who quashed the said notice and the proceeding

Issues Involved:
1. Jurisdiction under Article 226 concerning Section 269UD of the Income-tax Act, 1961.
2. Valuation method for properties under tenancy.
3. Encumbrances affecting property valuation.
4. Applicability of Chapter XX-C in bona fide transactions.
5. Judicial review of valuation reports.

Detailed Analysis:

1. Jurisdiction under Article 226 concerning Section 269UD of the Income-tax Act, 1961:
The court's jurisdiction under Article 226 is "very restrictive and limited" in proceedings under Section 269UD of the Income-tax Act. It is confined to scrutinizing the "perversity and illegality" of the valuation process to determine if the property was undervalued by more than 15% of the market value. The court does not sit in appeal over the market value determined in the valuation report. The primary proposition is to prevent tax evasion by undervaluing properties.

2. Valuation method for properties under tenancy:
The appropriate method for valuing a tenanted property is the "rental method," not the land and property method. This principle is supported by precedents such as CIT v. Smt. Ashima Sinha, CIT v. Panchanan Das, CIT v. Anup Kumar Kapoor, and Subhkaran Chowdhury v. IAC of I.T. The valuation should consider the rental income and the encumbrances due to tenancy.

3. Encumbrances affecting property valuation:
The property in question was encumbered with long-standing tenancies, which were noted in the valuation report. The tenants had developed the property and were unlikely to vacate. The valuation should account for these encumbrances, which depress the market value. The court found that the valuation report did not adequately consider these factors and instead used properties at better locations for comparison, which was incorrect.

4. Applicability of Chapter XX-C in bona fide transactions:
Chapter XX-C aims to prevent tax evasion through significant undervaluation of property. However, it exempts bona fide transactions even if sold at a price lower than the market value. The court referred to C.B. Gautam v. Union of India, which emphasized that bona fide transactions should not be suspected of tax evasion. In this case, the sale was conducted through a public auction with a reserve price set by the Charity Commissioner, and no other bids were received. This indicated a bona fide transaction with no attempt to evade tax.

5. Judicial review of valuation reports:
The court can review valuation reports to ensure they are not perverse or illegal. In this case, the valuation adopted by the authority was found to be incorrect and full of "loopholes and lacunae." The court agreed with the learned single judge that the valuation was not made correctly and that the transaction was bona fide, thus Chapter XX-C could not be applied.

Conclusion:
The court dismissed the appeal, affirming the judgment of the learned single judge. The valuation method adopted was incorrect, and the transaction was bona fide with no attempt to evade tax. The provision of Chapter XX-C was not attracted in this case. The petitioner was allowed to withdraw the deposited rent without any security.

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