Ross Murarka (India) P. Ltd. vs Appropriate Authority, S.K. Laul, Member and Others

A.V. Nirgude, J.—This writ petition challenges the order dated February 26, 1993, passed by the Appropriate Authority u/s 269UD(1) of the Income Tax Act, 1961 ("the Act" for short).

Before the arguments could begin, learned Counsel for the petitioners Mr. Pardiwalla stated that the petitioners would not proceed against respondent No. 3 and accepting this statement, respondent No. 3 is dropped.

The relevant facts of the case may be stated as under:

One flat in a building called "Twin Towers" situated at Prabhadevi, Mumbai, was offered for sale by its owner one Scale Investments Ltd. to the petitioners in November, 1984. The petitioner agreed to purchase the flat (Flat No. A-271 and four covered car parking spaces) for an aggregate consideration of Rs. 44,00,000 on March 5, 1985, paying Rs. 4,00,000 as earnest money and agreeing to pay the remaining amount of Rs. 40,00,000 by April 30, 1985. It was specifically contemplated that either the petitioners would buy the said flat or it would be bought by one of its associate companies.

Ultimately, one of the petitioner''s associate companies Ross Murarka Finance Ltd., respondent No. 3 (whose name is deleted from the array of respondent No. 3 today) paid the balance amount of Rs. 40,00,000 to the owner on April 17, 1985. The owner on April 24, 1985, made an application under Chapter XX-A of the Act in Form No. 37EE for transfer of the flat in favour of respondent No. 3. The Appropriate Authority did not choose to take any steps under the said Chapter. In October, 1985, respondent No. 3 company decided to sell the flat to the petitioner for Rs. 44,00,000. The petitioner disbursed the amount in three installments in October and November, 1985, and took possession of the flat. They also handed over Rs. 2 lakhs more soon after. In December, 1985, respondent No. 3 made an application to the co-operative housing society for transfer of the flat in the name of the petitioner but, the society agreed to effect the transfer only after November, 1986. The society in February, 1987, further delayed the transaction of transfer. In the meantime, respondent No. 3 filed its return of Income Tax for the assessment year 1987-88 wherein it declared capital gain arising on the sale of the flat based on the said consideration of Rs. 46,00,000. Similar returns the petitioner filed in which it claimed depreciation on the flat. The formal agreement of sale of the flat was entered into between the petitioner and respondent No. 3 recording various events that took place since then and they agreed that the petitioner would pay Rs. 65,00,000 as consideration for the flat. Thereafter, application in Form No. 37-I of the Act was filed in which the apparent consideration for transfer was mentioned as Rs. 65,00,000. Respondent No. 3 further informed respondent No. 1 Appropriate Authority appointed u/s 269UB of the Act in March, 1988. That the effective price of the flat was more than Rs. 65,00,000. They said they had received the amount of Rs. 46,00,000 earlier and used it and thereby interest at 18 per cent. per annum on the said sum was incurred. They stated that the amount of interest would be Rs. 19,17,258. However, on March 23, 1988, the Appropriate Authority passed the order u/s 269UD(1) of the Act and directed purchase of the flat for apparent consideration of Rs. 65,00,000. The petitioner filed a writ petition bearing No. 1007 of 1988 in March, 1988. This Court disposed of the writ petition on December 16, 1988, in the light of the judgment of the Supreme Court in C.B. Gautam Vs. Union of India and Others, and directed the Appropriate Authority to treat the application filed under Form No. 37A as filed on that day. In December, 1992, the Appropriate Authority issued a show-cause notice directing the petitioner and respondent No. 3 to show cause as to why the order of purchase should not be passed against them. Along with this notice, reasons recorded on March 23, 1988, in support of the earlier order of acquisition were also enclosed and the petitioner was asked to deal with them. The petitioner filed a detailed reply on January 19, 1993, but, on February 26, 1993, the impugned order u/s 269UD(1) of the Act came to be passed.

The question before the court is whether the Appropriate Authority was justified in passing the impugned order.

Mr. Pardiwalla, learned Counsel appearing for the petitioner, firstly, submitted that the Appropriate Authority did not determine the fair market value of the flat. He said that the material used by the Appropriate Authority, namely, report dated February 29, 1988, of the District Valuation Officer and the noting dated March 8, 1988, of the Inspecting Assistant Commissioner of Income Tax were not furnished for perusal and thereby the principles of natural justice were breached. He also took us through the facts of the case to suggest that even on the facts, the flat in question was not transferred below the market value.

On the other hand, Mr. Asokan, learned Counsel appearing for the Revenue explained that prior to the decision of this Court in the case of Vimal Agarwal Vs. Appropriate Authority and others, there was no practice of determining the fair market value. He also said that that was for the petitioner to proceed before the Appropriate Authority on such material and also as to justify the amount for which the flat was purchased. Mr. Asokan also suggested that since the Appropriate Authority had inspected the flat and since the order came to be passed after hearing the petitioner unless it is shown to be perverse, it cannot be interfered with.

On a careful consideration of the rival contentions, it is difficult for us to uphold the impugned order.

The first and foremost reason : This Court had remanded the matter back to the Appropriate Authority with a specific direction to decide the case in the light of the directions given by the Supreme Court in the case of C.B. Gautam Vs. Union of India and Others, in which the apex court categorically mentioned that the provisions u/s 269UD of the Act can be resorted only when there is significant undervaluation of the property to the extent of 15 per cent. or more than the "fair market value." In view of this, it was necessary for the Appropriate Authority to first record a finding about the flat''s "fair market value." The impugned order does not show any attempt being made to determine the fair market value. Respondent No. 1 did have certain material on their record such as the District Valuation Officer''s report, one sale instance of the adjoining property, namely, flat No. 3 of Taragni Apts and certain notings of the Inspecting Assistant Commissioner of Income Tax. On utilising this material or by resorting to any other method such as obtaining valuation report from the District Valuation Officer, respondent No. 1 could have certainly first determined the fair market value of the flat at the relevant date. Then they could have compared the price the petitioner paid for the flat. Had the price been less by 15 per cent. or more than the fair market value, then probably they could have taken further steps in the matter, there would have been rebuttable presumption of attempt to evade tax, etc. This important exercise, as said above, was essential but was not resorted to and is conspicuously absent.

Mr. Asokan''s submission noted earlier that earlier to the decision in the case of Vimal Agarwal Vs. Appropriate Authority and others, there was no such practice is a lame excuse. We have mentioned above as to why the determination of the "fair market value" was necessary. It was necessary in the light of the judgment of the Supreme Court in the case of C.B. Gautam Vs. Union of India and Others, . So failure to determine the market value was a fatal error in the proceeding.

Second reason : Respondent No. 1 while passing the impugned order hardly had any regard for the principles of natural justice. The powers given to them u/s 269UD(1) of the Act have serious civil consequences and the party against whom an order is passed is deprived of his property. So, even though the procedure prescribed was of summary nature, it was necessary for the Appropriate Authority to meticulously observe the principles of natural justice before passing the order under this provision. In this case, the first lapse in this regard is the manner in which the show-cause notice was given. Although the show-cause notice referred to the order of this Court, remanding the case back, it specifically invited the petitioner''s attention to the annexures. Annexure A is nothing but an earlier order passed by the Appropriate Authority u/s 269UD(1). The annexure in the last para clearly mentioned the final opinion drawn by the Appropriate Authority as to why the case was fit for exercising the preemptive right to purchase the flat, etc. A show-cause notice which is annexed with such a annexure would certainly show that the Authority issuing the show-cause notice had almost decided the case against them. The show-cause notice in such a situation should have only prima facie adverse material against the noticee so that he could present his case accordingly. The second violation of the principles of natural justice is the Appropriate Authority''s refusal to give inspection of the material used by it before issuing the show-cause notice. As said above, it perused the District Valuation Officer''s report and also the notings of the Inspecting Assistant Commissioner of Income Tax. The petitioner in his reply requested inspection of these two documents but, in vain. This resulted in denial of opportunity to peruse the documents which were used against the petitioner and thus the principles of natural justice were violated. The refusal to show these documents to the petitioner would prompt the court to draw an adverse inference against the Appropriate Authority inasmuch as, we are tempted to hold that the documents referred to above were really not supporting the action but, probably favourable to the petitioner''s case.

Even on the facts the impugned order is not convincing at all. It is an admitted fact that the flat in question was acquired by respondent No. 3 as late as in March, 1985, for a consideration of Rs. 44,00,000. The vendor''s application in Form No. 37EE was allowed and the Appropriate Authority did not take any steps and thereby indicated that they did not find the price lower than the "fair market value". A few months thereafter, i.e., in October/November, 1985, the transaction in question took place. The petitioner showed in their books of account that they purchased the property for a sum of Rs. 46,00,000 then and took possession of the same also. The parties, however, did not complete the formality of the sale. The question is whether the transaction that took place till then showed an unusually lower price for the flat in question. The answer is in the negative. There was nothing on the record of the Appropriate Authority to draw a conclusion that within six months the market value of the property went up drastically. The parties probably out of abundant precaution and due to passage of time between October, 1985, till January 25, 1988, thought it fit to increase the consideration for the flat to Rs. 65,00,000. In addition to this apparent price paid, there was the interest component on the amount of Rs. 46,00,000 which was handed over as far back in October/November, 1985.

The Appropriate Authority in the impugned order expressed serious doubts about the actual cash flow between the parties when they asserted that the amount of Rs. 65,00,000 had changed hands. The appreciation on this aspect by the Appropriate Authority has serious flaw when they perfunctorily relied on the receipts and ignored the record of the bank showing the actual cash flow at the given dates.

The Appropriate Authority even ignored the fact that both the purchaser and the vendor showed this transaction in their Income Tax returns and took a cynical view saying "unless full statement of accounts are furnished, it cannot be ascertained whether the consideration in reality flowed from the intending transferee to the intending transferor." This finding is so grossly erroneous that it borders on perversity.

The more serious error in appreciation of the factual aspect of the case is the Appropriate Authority''s reliance on their own guess work while determining the probable market value of the flat. On the one hand, they placed reliance on the only sale instance of a flat in the nearby building, on the other hand, they also held that "since there was a vast difference between the two buildings that if the flat in the adjoining building was sold at the rate of Rs. 2,024 per sq. ft. the price of the flat in question should have been at least Rs. 3,000 per sq. ft". This conclusion is not based on any methodical calculation. The valuation of the property is a technical work. No doubt, some amount of guess work is involved in it. But, it is done by experts in the field using scientific methods. Members of the Appropriate Authority could not have simply visited the flats, compared their appearances and then made their guess. They resorted to such empirical method and rather naively recorded a finding "we are of the considered opinion that the fair market value of the impugned property far exceeded the apparent consideration on the material date. The difference between the fair market value and the apparent consideration on the material date is in any case much more than 15 per cent. margin as contemplated by the hon''ble Supreme Court in the case of C.B. Gautam Vs. Union of India and Others, ."

This finding for the reasons mentioned above is grossly and patently erroneous and we have no hesitation to set it aside.

In the circumstances, we quash and set aside the impugned order passed u/s 269UD(1) of the Act.

Accordingly, rule is made absolute with no order as to costs.