1992 (1) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the notice issued under section 269D(1) of the Income-tax Act.
2. Fairness of the property valuation by the Valuation Officer.
3. Requirement of material evidence for initiating proceedings under section 269C.
4. Interpretation of section 269C(1) concerning ulterior motives for tax evasion or concealment of income.

Issue-wise Detailed Analysis:

1. Validity of the Notice Issued under Section 269D(1) of the Income-tax Act:
The petitioner challenged the notice issued under section 269D(1) of the Income-tax Act, arguing that it was illegal on its face due to the lack of material evidence for concluding that the consideration for the transfer was not truly stated to facilitate tax evasion or concealment of income. The court observed that the notice was vague because it used the term "and/or," failing to definitively state whether it was for object (a) or (b) as required by the Act. The court referenced the decision in CIT v. Vimlaben Bhagwandas Patel [1979] 118 ITR 134, which emphasized that the competent authority must have a reason to believe in the ulterior motive of tax evasion or concealment of income. The court concluded that the conditions precedent for exercising jurisdiction under section 269C(1) and section 269D(1) were not fulfilled, rendering the notice invalid.

2. Fairness of the Property Valuation by the Valuation Officer:
The petitioner contended that the Valuation Officer did not fairly assess the property, ignoring factors such as the unit's substantial losses, inadequate power supply, labor unrest, and the plant's age. The court noted that the Valuation Officer's report did not consider these aspects, which were crucial for determining the property's fair market value. The court found that the valuation method used was inappropriate for a unit purchased as a going concern with significant operational challenges.

3. Requirement of Material Evidence for Initiating Proceedings under Section 269C:
The court emphasized that the competent authority must have material evidence to believe that the consideration for the transfer was not truly stated with the intent of tax evasion or concealment of income. The court referenced the decisions in Vimlaben Bhagwandas Patel and Sarabhai M. Chemicals (P.) Ltd. v. P. N. Mittal, which held that the presumption under section 269C(2) does not operate before the decision to initiate acquisition proceedings. The court found no material evidence suggesting that any amount over and above the stated consideration passed between the parties, invalidating the initiation of proceedings under section 269C.

4. Interpretation of Section 269C(1) Concerning Ulterior Motives for Tax Evasion or Concealment of Income:
The court interpreted section 269C(1) to require the competent authority to have reason to believe that the consideration for the transfer was not truly stated with the ulterior motive of facilitating tax evasion or concealment of income. The court noted that the Legislature would not have included specific language in the section if mere inference from the fair market value and the stated consideration was sufficient. The court concluded that the competent authority must have concrete material evidence to support the belief in ulterior motives, which was absent in this case.

Conclusion:
The court allowed the petition, quashing the impugned notice dated March 21, 1983, and restraining the respondents from taking further action pursuant to the notice. The court found that the initiation of proceedings under section 269C was invalid due to the lack of material evidence and the improper valuation of the property. The court made the rule absolute with no order as to costs.