2015 (11) TMI 306 - SC - Income Tax

Compulsory pre-emptive purchase under Chapter XXC of the Income Tax Act, 1961 passed by the Appropriate Authority under Section 269UD - Whether the impugned order did not contain any finding that the consideration for the transaction was undervalued by the parties in order to evade taxes, which is the mischief sought to be prevented? - Held that - Undoubtedly one of the objects of the provision is to prevent evasion of taxes by showing an undervaluation which is more than 15% of the true value of the property and which in turn carries an implication that some portion of the value is not shown in the agreement or the deed but passes by way of unaccounted money. But it is not possible to say that it must be alleged in the show cause notice or a finding must be rendered in the order that there is evasion of taxes as a sine qua non for its validity. Nor is it possible to hold that the onus of establishing undervaluation with a view to evade tax is on the revenue. The true position seems to be that a significant undervaluation, greater than 15% below the fair market value raises a rebuttable presumption that there is an attempt to evade taxes. In C.B. Gautam s case (1992 (11) TMI 1 - SUPREME Court) this Court observed that an allegation of such undervaluation of more than 15% raises a rebuttable presumption of evasion of taxes which renders an opportunity to show cause necessary. Therefore, such an opportunity must be read into the provisions of Chapter XXC The High Court has failed to render a finding on the relevance of comparable sale instances, particularly, why a sale instance in an adjoining locality has been considered to be valid instead of a sale instance in the same locality. The other aspects of the impugned order of the appropriate authority in the earlier part of judgment seems to have been missed. In the result, we find that the appeal deserves to be allowed and is hereby allowed. The impugned order dated 20.02.2004 passed by the High Court of Bombay at Nagpur is set aside. Consequently, order dated 29.07.1994 passed by the appropriate authority under Section 269UD (1) of the Act is also set aside.

Issues Involved:
1. Compulsory pre-emptive purchase under Chapter XXC of the Income Tax Act, 1961.
2. Nature of the collaboration agreement between Vidarbha Engineering and Unitech.
3. Application of Chapter XXC to the collaboration agreement.
4. Valuation and consideration of the subject property.
5. Validity of the show cause notice and the order under Section 269UD.
6. Requirement of a finding of tax evasion for compulsory purchase.
7. Relevance of comparable sale instances.

Detailed Analysis:

1. Compulsory Pre-emptive Purchase Under Chapter XXC of the Income Tax Act, 1961:
The appellants challenged the order of compulsory pre-emptive purchase passed by the Appropriate Authority under Section 269UD of the Income Tax Act, 1961. The core issue was whether the collaboration agreement between Vidarbha Engineering and Unitech constituted a transfer of property subject to pre-emptive purchase under Chapter XXC of the Act.

2. Nature of the Collaboration Agreement Between Vidarbha Engineering and Unitech:
Vidarbha Engineering, holding the subject land on lease, entered into a collaboration agreement with Unitech to develop a commercial project. The agreement stipulated that Unitech would retain 78% of the constructed area, while Vidarbha Engineering would get 22%. The agreement explicitly stated that it was not to be construed as a partnership, demise, assignment, or conveyance of the subject land.

3. Application of Chapter XXC to the Collaboration Agreement:
The appellants argued that Chapter XXC did not apply as the agreement did not transfer any land but merely allowed Unitech to construct on the land. The court examined the true construction of the document and found that the agreement created a license in favor of Unitech to enter and build on the land, with Vidarbha Engineering receiving 22% of the built-up area as consideration.

4. Valuation and Consideration of the Subject Property:
The Appropriate Authority issued a show cause notice stating that the consideration for the transaction appeared understated by more than 15%, comparing it to a sale instance in an adjoining locality. The appellants contended that the authority erred in considering the consideration for the entire subject land as the consideration for the available FSI, leading to an incorrect undervaluation.

5. Validity of the Show Cause Notice and the Order Under Section 269UD:
The court found that the show cause notice and the subsequent order were vitiated by non-application of mind. The authority incorrectly compared the consideration of an industrial plot with a smaller residential plot and failed to account for the differences in locality and plot size. The court noted that the authority's calculation of the consideration was flawed, leading to a gross undervaluation.

6. Requirement of a Finding of Tax Evasion for Compulsory Purchase:
The appellants argued that the order lacked a finding of tax evasion, which is necessary for compulsory purchase. The court referred to the Supreme Court's judgment in C.B. Gautam v. Union of India, which held that a significant undervaluation raises a rebuttable presumption of tax evasion, necessitating an opportunity to show cause. The court disagreed with the view that an explicit finding of tax evasion is a sine qua non for the order's validity but emphasized the need for a rebuttable presumption and an opportunity to show cause.

7. Relevance of Comparable Sale Instances:
The High Court failed to address the relevance of comparable sale instances adequately. The court found that the Appropriate Authority's reliance on a sale instance in an adjoining locality was flawed, especially when a comparable sale instance in the same locality was available. The court highlighted the need for a proper comparison to determine the fair market value accurately.

Conclusion:
The appeal was allowed, setting aside the impugned order of the High Court and the order of the Appropriate Authority under Section 269UD (1) of the Act. The court found that the collaboration agreement did not constitute a transfer of property under Chapter XXC, and the valuation by the Appropriate Authority was flawed, leading to an unwarranted undervaluation. The requirement of an opportunity to show cause was emphasized, and the relevance of comparable sale instances was underscored.

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