1992 (11) TMI 1 - SC - Income Tax

Whether the provisions of Chapter XX-C are bad in law as there is no provision for giving the concerned parties an opportunity of being heard before an order is passed under the provisions of section 269UD of the said Chapter for the purchase by the Central Government of an immovable property agreed to be sold in an agreement of sale?

Summary

Issues Involved:
1. Validity of Chapter XX-C of the Income-tax Act, 1961.
2. Compulsory purchase of immovable property by the Central Government.
3. Absence of guidelines and natural justice principles in Chapter XX-C.
4. Impact on leaseholders and encumbrance holders.
5. Lack of appeal or revision against the orders of compulsory purchase.

Issue-Wise Detailed Analysis:

1. Validity of Chapter XX-C of the Income-tax Act, 1961:
The petitioner challenged the validity of Chapter XX-C, introduced by the Finance Act of 1986, which conferred powers of compulsory purchase of immovable property to the Central Government. The petitioner argued that these provisions were arbitrary and violated Article 14 of the Constitution due to the absence of guidelines for exercising such drastic powers. The court, however, noted that the historical context and the objective of curbing tax evasion provided adequate guidelines for the exercise of these powers. The court emphasized that the provisions were intended to counter significant undervaluation of immovable property to evade tax.

2. Compulsory Purchase of Immovable Property by the Central Government:
The petitioner contended that the compulsory purchase order issued by the appropriate authority lacked specific reasons and was arbitrary. The court acknowledged that the order did not provide specific reasons and emphasized the need for reasons to be recorded in writing. The court also highlighted that the order must be supported by reasons germane to the objective of countering tax evasion.

3. Absence of Guidelines and Natural Justice Principles in Chapter XX-C:
The petitioner argued that Chapter XX-C lacked guidelines for exercising the power of compulsory purchase and did not provide an opportunity for the affected parties to be heard. The court agreed that the provisions did not explicitly provide for a hearing but emphasized the necessity of reading the requirement of a reasonable opportunity to show cause into the provisions. The court held that the principles of natural justice must be observed, and the affected parties must be given a fair opportunity to rebut the presumption of tax evasion.

4. Impact on Leaseholders and Encumbrance Holders:
The petitioner argued that the provisions of Chapter XX-C adversely affected leaseholders and encumbrance holders by destroying their rights without adequate compensation. The court agreed that the expression "free from all encumbrances" in Section 269UE(1) was arbitrary and violative of Article 14. The court struck down this expression and held that the property would vest in the Central Government subject to bona fide encumbrances and leasehold interests. The court clarified that the provisions of Section 269UE(2) must be read down to protect the rights of bona fide lessees and encumbrance holders.

5. Lack of Appeal or Revision Against the Orders of Compulsory Purchase:
The petitioner argued that the absence of an appeal or revision mechanism against the orders of compulsory purchase rendered the provisions arbitrary and excessive. The court noted that the affected parties could challenge the orders by filing a writ petition and that the reasons for the orders must be communicated to them. The court emphasized that the recording of reasons served as a deterrent against arbitrary action by the authorities.

Conclusion:
The court allowed the writ petition to the extent that the compulsory purchase order was set aside due to the lack of a show-cause notice and an opportunity for the petitioner to be heard. The court directed that the statement in Form No. 37-I submitted by the petitioner would be treated as if submitted on the date of the judgment. The court also provided clarifications and directions for pending cases to ensure the proper implementation of the principles laid down in the judgment. The court emphasized the need for a fair opportunity to be given to the affected parties and struck down the arbitrary provisions affecting leaseholders and encumbrance holders.