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TMI Blog1980 (4) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... or, Shri Jeetmal Shah and document of sale was also signed by him. For this purpose, Shri Jeetmal Shah had been duly authorised by the Company by its resolution passed on 12th Nov., 1973, a copy of which has been placed before us. It reads " Resolution No. 1 Resolved that Shah Jeetmal is authorised to negotiate and to sign all the sale documents with the Registrar for the Factory Building on Plot No. G-2 and G-3 Nirvan Marg, Bani Park, Jaipur." The property was sold for Rs. 1,65,000. However, it was valued by the Valuation Cell of the Department of 5th June, 1974 at Rs. 2,34,000. Since there was difference of more than 25 per cent between the apparent consideration as per the sale-deed and the market value as fixed by the Valuation Cell, the competent authority initiated the acquisition proceedings on 18th June,1974 after recording his reasons which are as under: "No. J 3/74(3)/14/5/ 18th June, 1974 I have gone through the report of the Valuation Cell and I agree with that report that the fair market value of the property transferred would be Rs. 2,34,000 on the date of registration as against the registered price of Rs. 1,65,000. Thus the fair market value exceeds the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with Shri S.M. Airen, the Valuation Officer of the Valuation Cell. At the very out-set Shri Dhadda urged referring to several High Courts and Supreme Court Decisions, such as, 55 ITR 1, 65 ITR 607, 96 ITR 612, 113 ITR 167, 118 ITR 906 and 119 ITR 83 that the proceedings suffered from a vital infirmity inasmuch as no notice had been served on the transferor, i.e., M/s. Shah Engineering Pvt. Ltd. Jaipur and also on the person who was at the relevant time in occupation of the property, namely, M/s. Jaipur Spinning and Weaving Mills Ltd. It was mandatory, Shri Dhadda pleaded referring to s. 269D(2)(a), that notices were served by the competent authority on the transferor, the transferee, the person in occupation of the property, and on every person whom the competent authority knows to the interested in the property. Since these notices contemplated under the law and not been issued to all the parties, the initiation was void. He placed before us a copy of the notice that was issued by the competent authority to the transferor and pointed out that it was issued to Shri Jeetmal Shah and not to the Private Limited Company who was, in fact, the transferor in this case. Shri Dhadda emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oidance of tax. The second point made by Shri Dhadda was that there was no material at all before the competent authority on the basis of which it could be said that the consideration had been understated with any ulterior motive of tax avoidance, and, therefore, the conditions laid down in s. 269C(1) for the initiation of the proceedings had remained unfulfilled and hence the proceedings were void-ab-initio. Proceeding further, it was urged that even on merits there was no justification at all for the initiation of the proceedings. Shri Dhadda pointed out that the property in question was a Godown constructed on covered area of 781 sq. yds. Out of the total land area of 1833 sq. yds. The property was constructed more than 15 years back. It was in a state of disrepair. The flooring was broken and it did not have proper doors and windows. In 1961 it was fetching Rs. 200 per month. After the present occupant vacated, it could be let out after a gap of a year or so at Rs. 1500 per month. Considering these facts the registered valuer of the assessee had determined the value by rent capitalisation method at Rs. 1,56,340 and by the land and building methods at Rs. 1,65,000 the sale deed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs inasmuch as the difference between the sale value as per the deed and market value as estimated by the Valuation Cell was far more than 25 per cent and therefore, the presumptions laid down in s. 269C(2) came into operation and the learned competent authority rightly held that the consideration had been under-stated with the ulterior motive stated in s. 269C(1). In support of this view, reliance was placed on Delhi High Court decision in the case of Mahavir Metal Works Pvt. Ltd.(5). Dealing with the non-service of notices, it was urged that service of the notice of Shri Jeetmal Shah, Director of the transferor-company was tantamount to service on the transferor itself. Shri Jeetmal Shah was a Director of the Company. He had conducted the negotiations for the sale and also signed the sale-deed. He had also replied the notice given by the competent authority and made objections knowing well that these related to the transfer which had been done by him on behalf of the transferor-company. With regard to the person in occupation of the property, it was urged that service of the notice should have been a mere formality since the occupier had vacated the premises before the acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ulterior objective of concealment of Income tax evasion prescribed under s. 269C (2), and more particularly having regard to the deeming fiction provided in s. 269-J(4) prescribing that the amount of difference in compensation payable for such acquired property and its fair market value will be treated as penalty penalised by the Central Government with clarification that the transferee will not be exposed to further penalty under the IT Act to WT Act, we do not feel any doubt in our mind that the nature of the power is a penal power and the proceedings in respect thereto are quasi-criminal". Dealing with burden of proof in these proceedings and the argument for the Revenue raised in this connection before their Lordships that the burden contemplated in the penalty proceedings could not be the same in these proceedings. Their Lordships observed, thus "We are afraid this is too broad a submission which we cannot accord to for the simple reason, as we have stated that it is not merely the untrue statement of consideration in the instrument of transfer that attracts the exercise of the power under s. 269C but coupled with that untrue statement the ulterior motive of tax evasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he objective facts must be correct, full and relevant facts. If any irrelevant material or extraneous consideration is taken into account, the satisfaction reached by the competent authority, would not be proper. The competent authority thus, must have honest and reasonable belief that in the instrument of transfer the market value of the property has been under-stated and further that under-statement is with the ulterior motive of avoidance of tax. 8. In the present case, the only material which the competent authority had before him was the valuation done on 5th June, 1974 by the Valuation Cell of the Department. This valuation had been done on land and building method. The value was estimated at Rs. 2,34,000 against the sale consideration of Rs. 1,65,000 as per instrument of transfer. The question is whether on the basis of this material alone it could be said that the competent authority had come to an honest and reasonable conclusion that there was under-statement of value in the instrument of transfer and further that the under-statement was with ulterior motive of avoidance of tax. On behalf of the assessee it has been urged that the valuation done by the Valuation Cell wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rapidly and several authorities have come up which have questioned the correctness of the yield of return from different type of properties adopted by Parks. The Valuation Cell adopted the normal yield at 7 per cent on the other basis of Parks authority while according to other authorities the yield could be between 9 per cent to 10 per cent. That alone would make a vital difference. On the basis of 7 per cent yield, the Valuation Cell capitalised the net maintainable rent at 14.2 times while on the basis of return of 8 per cent to 10 per cent, the capitalisation should be between 10 times to 12 times. Further, collection charges were allowed at 3 per cent. IT Act has allowed upto 6 per cent of the annual value. In 77 ITR 193, Their Lordships of Punjab High Court held that the deductions from the gross annual value should be made according to the rates laid down in the IT Act while determining the valuation of property on rent capitalisation method. These glaring facts were ignored by the competent authority. 10. Another vital question that arises is whether the presumption laid down in s. 269C(2) could be resorted to at the initiation stage. The Revenue's case seems to be that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as originally placed under s. 269F which provided for hearing of objections when the matter was set out in the Bill before it passed in Parliament. Thereafter, when the matter was referred to the Select Committee, it was placed as sub-s. (2) under s. 269C without in any way altering the language thereof. It would appear that since the language remains the same it must refer to the stage of proceedings which is to be initiated after the competent authority would form his reason to believe under sub-s. (1) independently of the said presumption of the said matter of proof which are provided for simplifying the law of evidence. But in view of the clear language used in the said sub-section, it is not necessary for this Court to look into the original Bill from the recommendations of the Select Committee, as discussed above. More so, no specific reason has been mentioned any where in the report of the Select Committee as to why such sub-s (2) has been placed under sub-s. (1) of s. 296C except in paragraph (6) of the report of the Select Committee which appears in (1972) 85 ITR (Statutes) 2 as follows; "(6) Special rules of evidence should be provided to ensure effective operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the initial stage. The learned advocate for the respondent transferees has joined issue by urging that till the initiation is directed by the competent authority, there are no proceedings, and in no case the presumption can operate at the stage prior to the commencement of the proceedings. cl. (b) of sub-s. (2) provides in effect that where the apparent consideration is less than fair market value of the property transferred, it shall be presumed, unless the contrary is proved, that the agreed consideration has not been stated truly in the instrument with the object of tax evasion. cl. (a) provides that if the fair market value of a property exceeds the apparent consideration by more than 25 per cent, it shall be conclusive proof that the agreed consideration has not been truly stated. The learned Government pleader has taken us through the Bill where this provision was to be found in s. 269F which provides for hearing of objections. The learned Government pleader has invited our attention that the legislature has clearly evinced its intent by shifting the provision from one dealing with hearing of objections, to the one dealing with initiation of proceedings and also has emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he competent authority may on satisfaction of two conditions mentioned in s. 269C(1) initiate proceedings for acquisition of such property under Chap. XX-A subject to the provisions of the chapter, and the competent authority can initiate proceedings for acquisition under the Chapter, s. 269C, by notice to that effect published in the official Gazette as provided in s. 296D. In our opinion, the competent authority can initiate proceedings for acquisition on the conditions precedent being satisfied only by an appropriate notice in the Official Gazette to that effect therefore it follows that till the appropriate notice in the Gazette is not published the proceedings for acquisition under Chapter XX-A of an immovable property referred to in s. 269C, are not initiated. The learned Government pleader, therefore, attempted to persuade that the decision of the competent authority to initiate proceedings for acquisition is "subject to the provisions of this Chapter" and therefore, the presumptions prescribed in cls. (a) and (b) of sub-s. (2) of s. 269C, would govern such a decision. We are afraid the learned Government pleader is reading more in the clause "subject to the provisions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and independent judgment on the material before him, s. 269C(2) has no application, because the formation of such judgment precedes the commencement of any proceedings under the chapter. It is only after such judgment is formed that the competent authority can initiate proceedings under the Chapter and s. 269C(2) can come into operation". 11. Respectfully following the Gujarat and Calcutta views, we hold that the presumptions in s. 269C(2) come into play after the proceedings have been properly initiated by the competent authority by the issue of the Gazette Notification mentioned in s. 269D(1). If these presumptions are ignored, in the present case, then, as already stated above, the learned competent authority had before him the only material consisting of the valuation report dt. 5th June, 1974 of the Valuation Cell and in our view a reasonable conclusion could not be reached on the basis of this report alone that there was under-statement in the instrument of transfer with the ulterior motive mentioned in s. 269C(1). Thus the initiation of the proceedings was not proper and we could have cancelled the acquisition order and allowed the three appeals on this basis alone. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of acquisition was passed, and therefore, failure to serve the notice on this party also had ceased to be material and the objection in respect thereto was also technical. 13. We have considered the facts and the rival submissions. It does appear from the wording of s. 269D(2)(a) that it is mandatory for the competent authority to issue notice to the parties specifically mentioned therein. It has been claimed in the present case that notices were not served on the transferor and also on the person in the occupation of the property at the relevant time and, therefore, the proceedings were void-ab-initio. Dealing with this provision, their Lordships of the Andhra Pradesh High Court held that s. 269D(2)(a) being a mandatory provision, any violation of the same vitiated the entire acquisition proceedings. Their Lordships of the Gujarat High Court also observed in Vimalaben's case "In view of this settled legal position, therefore, we have to consider whether the provisions contained in s. 269D(2)(a) and (b) of the IT Act, 1961 can be said to be provisions conceived in public interest so as to constitute essential minimum procedural requirements, the violation of which would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f had not been communicated and, therefore, detailed objections could not be filed. A request, however, was made that this letter may be treated as letter of objection. Clearly, Director Shri Jeetmal Shah, moreover, was made that this letter may be treated as letter of objection. Clearly, Director Shri Jeetmal Shah had received the notice on behalf of the company and it was in respect of the sale transaction which was the subject matter of the acquisition proceedings Shri Jeetmal Shah, moreover, had himself conducted the sale and was, therefore, conversant with the issue. In these circumstances, in our view, no harm was done to the transferor as it did have proper representation before the competent authority through its Director, Shri Jeetmal Shah. As such we are unable to hold that the entire acquisition proceedings were vitiated by failure to serve the notice on the transferor or on the person in the occupation of the property. 14. The next point is with regard to the merits of the proceedings, namely, whether the consideration shown in the deed of sale represented the market value of the property or whether the estimate of the learned competent authority was correct. The valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be too hazardous to prefer one of the recognised methods of valuation which may be advantageous to the cause of the Revenue and arrive at an estimation of fair market value of a property on the basis thereof. Such a lopsided approach on the part of the competent authority would not be in consonance with the burden of proof required to be discharged in such quasi-criminal proceedings. It would be virtually acing on too slender a material since the decision of the competent authority to acquire would expose not only the transferee to the consequences of being deprived of the property but also the transferor to the liability of capital gains under s. 52 of the IT Act, 1961, and, in a given case, may affect also the persons interested in the said property having tenancy rights or any encumbrance thereon. The principle of resorting to the method of capitalisation of return in case of land with building used for commercial purposes should not be imported wholly and applied mechanically in the perspective of the proceedings in Chap. XX-A of the IT Act, 1961. It is desirable, and we feel incumbent, on the part of the competent authority, to assure himself fully lest there may be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o others. On the contrary, as indicated by the Supreme Court in Tribeni Devi's case AIR 1972 SC 1417, the requirement being always to arrive as near as possible at an estimate of market value, it is necessary for him to collect all the necessary and available relevant, cogent and satisfactory materials and evidence from any reliable source and arrive at the estimation of the market value by applying all the three aforesaid methods, and, if possible by adopting the land residual technique a building residual technique and compare each of th estimations with the municipal valuation for purposes of property tax assessment and adopt, generally, the minimum valuation of those arrived at by application of all the relevant methods and tests, unless there may be some special facts and circumstances in a given case where be may be constrained to apply one or two methods only and/or adopt the higher valuation than the minimum one for reasons to be recorded by him. We are of the opinion, that this approach commends to us having regard to the over all circumstances including the nature of the power and proceedings under Chap. XX-A and the pitfalls in applying one of the other methods and picki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blished the securities of different classes of properties based on his lifelong experience on page 28 of his book entitled 'Principles of Valuation' as given here under: . Rate of interest per annum Ground Rent Secured 41/2 per cent to 5 per cent Ground Rent Unsecured 5 per cent to 6 per cent Residential House Good Class 5 per cent to 6 per cent Small Type 6 per cent to 71/2 per cent Flats 7 per cent to 10 per cent Shops and Business premises 6 per cent to 8 per cent Godowns and Warehouses 6 per cent to 8 per cent industrial Premises 7 per cent to 10 per cent It must be noted that the aforesaid figures were published in 1942 when not more than 3.5 per cent interest was obtainable on gilt-edged securities. Much water has flowed down the river since then and fiscal legislations like Rent Control Acts, Nationalisation of Banks, Moneylenders Act have altered, if not basically changed, the financial outlook prevalent in the age of Mr. Parks. Before introduction of the Rent Control Act the attraction for real properties compared to investments i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count future potentiality of which, according to Allhabad High Court decision in the case of Bhartiya Udyog(4) should not have been taken into account. Similarly, the valuation of land done by the Valuation Cell is highly excessive. The basis adopted by the Valuation Cell is not proper. Reference has been made to sales of certain plot in Sikar House Scheme which were of much smaller size. As against that the registered valuer, M/s. K.N. Bhargava Co. have given a proper basis for their valuation. We reproduce below the observations occurring at page 19 of the valuation report: "Recently the Urban Improvement Trust, Jaipur has sold two plots in Bani Park adjoining this area by open auction and the value fetched is Rs. 52 per sq. yd. for Plot No. B-20 measuring 805 per sq. yds. auctioned on 6th Feb., 1974 and a value of Rs. 55.50 per sq. yd. For Plt No. H. 37 measuring sq. 890 yds. auctioned on 3rd March, 1974. The above two auctions are latest and give a correct idea of the value of land. A sale of plot No. A-27/4/A measuring 564 sq. yds. located on Kanti Chandra Road which is one of the roads of Bani Park was registered at Rs. 50 per sq. yd. on 19th Oct., 1972. The land was pu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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