2008 (6) TMI 545 - HC - Income Tax

Whether the Appropriate Authority was justified in passing the impugned order determining the probable market value of the flat? Held that - It is difficult for us to uphold the impugned order as it was necessary for the Appropriate Authority to first record a finding about the flat s fair market value. The impugned order does not show any attempt being made to determine the fair market value. Had the price been less by 15 per cent. or more than the fair market value then probably they could have taken further steps in the matter there would have been rebuttable presumption of attempt to evade tax etc. This important exercise as said above was essential but was not resorted to and is conspicuously absent. The Appropriate Authority even ignored the fact that both the purchaser and the vendor showed this transaction in their income-tax returns and took a cynical view saying unless full statement of accounts are furnished it cannot be ascertained whether the consideration in reality flowed from the intending transferee to the intending transferor. This finding is so grossly erroneous that it borders on perversity. The more serious error in appreciation of the factual aspect of the case is the Appropriate Authority s reliance on their own guess work while determining the probable market value of the flat. Thus quash and set aside the impugned order passed under section 269UD(1) of the Act.

Summary

Issues:
Challenge to order under section 269UD(1) of the Income-tax Act, 1961.

Analysis:
The judgment challenged an order passed by the Appropriate Authority under section 269UD(1) of the Income-tax Act, 1961. The petitioner agreed to purchase a flat in Mumbai in 1985, and the ownership was eventually transferred to one of the petitioner's associate companies. The Appropriate Authority issued a show-cause notice in 1992, directing the petitioner and the associate company to justify the purchase. The petitioner contended that the Authority failed to determine the fair market value of the flat, breaching natural justice principles. The respondent argued that determining fair market value was the petitioner's responsibility. The court observed that the Authority did not ascertain the fair market value, a crucial step as per Supreme Court precedents. The failure to determine market value was deemed a fatal error in the proceedings.

The court further criticized the Authority's lack of adherence to natural justice principles. The show-cause notice provided annexures indicating a preconceived decision against the petitioner, denying a fair opportunity to present a case. The Authority's refusal to allow inspection of crucial documents used against the petitioner violated natural justice. The judgment emphasized that even in summary procedures, strict observance of natural justice principles is essential.

Regarding the factual aspect, the court found the impugned order unconvincing. The transaction details did not indicate a significant undervaluation, as the flat was acquired for a reasonable price. The Authority's doubts about the cash flow between the parties were unfounded, ignoring documented evidence. The reliance on guesswork rather than expert valuation for determining market value was criticized. The court deemed the Authority's findings grossly erroneous and set aside the order under section 269UD(1) of the Act.

In conclusion, the court quashed the impugned order and made the rule absolute with no order as to costs. The judgment highlighted the importance of determining fair market value, adherence to natural justice principles, and reliance on expert valuation in such proceedings to prevent errors and ensure procedural fairness.