1988 (6) TMI 98 - AT - Income Tax

Summary

Issues Involved:
1. Validity of initiation of acquisition proceedings under Section 269C of the IT Act.
2. Determination of fair market value (FMV) of the property.
3. Applicability of statutory presumptions under Section 269C(2).
4. Methodology used for property valuation.
5. Compliance with procedural requirements for acquisition.

Detailed Analysis:

1. Validity of Initiation of Acquisition Proceedings:
The first issue concerns whether the Competent Authority had valid reasons to believe that the market value was Rs. 7,10,250, thereby justifying the initiation of acquisition proceedings. The judgment referenced the case of Rai Bahadur G.V. Swaika Estate P. Ltd. vs. M.N. Tewari, which clarified that the Competent Authority's belief should be based on subjective satisfaction derived from objective factors, not arbitrary decisions. The court concluded that the Competent Authority had sufficient reason to believe the fair market value was as estimated by the Income-tax Inspector, thus justifying the initiation of proceedings.

2. Determination of Fair Market Value (FMV):
The FMV was a critical issue, with initial estimates by the Income-tax Inspector and subsequent valuation by the Departmental Valuation Officer. The Valuation Officer used the "Development method" and arrived at a value of Rs. 14.16 lakhs. However, the transferees contested this valuation, arguing that the property was already a developed residential site, and thus, the development method was inappropriate. They suggested that comparable sales in the neighborhood should have been considered instead.

3. Applicability of Statutory Presumptions Under Section 269C(2):
The court examined whether the statutory presumptions under Section 269C(2) could be invoked at the initiation stage. The judgment cited multiple High Court decisions, including those from Gujarat, Calcutta, Bombay, and Punjab & Haryana, which held that statutory presumptions could only be applied after the initiation of proceedings and not before. The court concluded that the presumptions under Section 269C(2) do not apply at the stage anterior to the initiation of proceedings.

4. Methodology Used for Property Valuation:
The court scrutinized the development method used by the Valuation Officer and found it inappropriate for a fully developed residential site. The judgment cited the Supreme Court's observations in Administrator Genl. of West Bengal vs. Collector, Varanasi, emphasizing that market value should be based on comparable sales rather than hypothetical development. The court noted the lack of comparable sales data in the Valuation Officer's report and concluded that the development method was not suitable for this case.

5. Compliance with Procedural Requirements for Acquisition:
The court also addressed procedural compliance, particularly the requirement under Section 269D(2)(a) to serve notices to all interested parties. The judgment highlighted that no notices were issued to the numerous flat-holders who had purchased an undivided share in the land. Although this point was not decisive in quashing the acquisition order, it underscored the importance of procedural compliance.

Conclusion:
The court quashed the order of acquisition on multiple grounds. Firstly, it held that the initiation of proceedings was not validly made due to the lack of evidence showing that the apparent consideration was understated with the intention of tax avoidance. Secondly, the court found the development method inappropriate for determining the FMV of a fully developed residential site. Lastly, the court noted procedural lapses in serving notices to all interested parties. Consequently, the appeals were allowed, and the acquisition order was quashed.