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Commissioner of Income-tax Vs. Roche Products Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberFirst Appeal No. 765 of 1988
Judge
Reported in[1999]240ITR506(Bom)
ActsIncome Tax Act, 1961 - Sections 269D; Bombay Rent Act, 1973
AppellantCommissioner of Income-tax
RespondentRoche Products Ltd.
Appellant AdvocateD.Y. Chandrachud, Additional Solicitor-General and ;P.S. Jetley, Adv.
Respondent AdvocateSoli Dastoor, Sr. Counsel and ;Jehangir Mistri, Adv., i/b., Rajesh Shah and Co.
Excerpt:
.....on basis of rent capitalization method for purpose of compulsory acquisition - dispute regarding method of valuation for purpose of compulsory acquisition - respondent became tenant on 01.02.1973 by virtue of act of 1973 - rent capitalization method should be used to value suit property. - code of criminal procedure, 1973 [c.a. no. 2/1974]. section 41: [ swatanter kumar, cj, smt ranjana desai & d.b. bhosale, jj] arrest of accused - held, a police officer or a person empowered to arrest may arrest a person without intervention of the court subject to the limitations specified under the provisions of the code. the provisions of section 41 of the code provides for arrest by a police officer without an order from a magistrate and without a warrant. a distinct and different power under..........value on the basis of the land and building method. that, the said valuer had applied five different methods of valuation in which the lowest valuation was rs. 14.44 lakhs arrived at by the rent capitalisation method taking the property as fully tenanted whereas the other lowest valuation was of rs. 87.14 lakhs on the land and building method. the competent authority came to the conclusion that there was no merit in the contention of the respondent that the property was tenanted, particularly in view of the fact that both the above companies were controlled and managed by f. hoffman la roche company limited, switzerland, and as both the companies were owned by messrs. f. hoffman la roche company limited, switzerland, the real owner of the property was the said swiss company. the.....
Judgment:

S.H. Kapadia, J.

1. The respondent-company purchased the property in question situated at Plot No. 18 of 'Gamadia Estate' admeasuring 2,820.40 sq. yards with buildings standing thereon situated at 24/26, Pt. Madan Mohan Malviya Road, Bombay. This was by an indenture dated February 9, 1984, entered into between Anglo-French Drug Company (Eastern) Limited (hereinafter referred to, for the sake of brevity, as 'the vendors'), on the one hand, and the respondent-company, on the other hand. The said indenture was registered with the Sub-register of Bombay on April 18, 1984, and Section 37-C form was also filed by the parties to the said indenture. Thereafter, the competent authority initiated proceedings by issue of a notice under Section 269D(1) of the Income-tax Act, 1961 (as it then stood). This notice was issued on April 12, 1985. The reasons given for initiation of the proceedings were that the building had ground plus three upper floors, each of which had an area of 13,910 square feet. That, the fourth floor admeasured 2,524 square feet and the building had a frontage of 108 square feet falling on Tardeo Road. That, the building was a RCC structure having RCC beams and columns and slabs and all essential amenities including lift, storage tank, etc., were duly provided. Further, leave and licence agreement was entered into between the aforestated vendors on the one hand and the respondent herein on June 12, 1963, under which either party to the leave and licence agreement could determine the licence at any time by giving twelve calendar months notice. According to the reasons given, the licensee itself had purchased the premises and hence the present market value of the property was determinable by the land and building method. According to the said reasons, the possession of the licensee under the above agreement was a notional vacant possession. Pursuant to the notice issued by the competent authority on April 12, 1985, the parties were heard. The respondent herein contended before the competent authority that it was a protected tenant by virtue of the amendment to the Bombay Rent Act, 1973. That, the respondent was in exclusive possession of the property and in the circumstances capitalisation of the rental income was the only proper method of valuation and applying that method, which was the correct method, it was submitted that the price paid by the purchaser in the sum of Rs. 50,00,000 under the indenture dated February 9, 1984, was far in excess of the present market value arrived at on the basis of capitalisation of rental income. According to the respondents, the present market value was Rs. 14.44 lakhs on the basis of the rent capitalisation method. According to the Department, the correct method to be applied for ascertaining the present market value was land and building method. According to the Department, the land and building method indicated the present market value of Rs. 87 lakhs. According to the Department, the present market value was Rs. 87 lakhs, and, on that basis, it was contended before the competent authority, that it was under valuation of the property and hence the proceedings were rightly initiated.

2. By order dated November 26, 1986, the competent authority came to the conclusion that the fair market value of the property was Rs. 87.15 lakhs whereas the apparent consideration under the indenture was Rs. 50 lakhs and, therefore, the apparent consideration not only fell short by 15 per 'cent, of the fair market value, but also fell short by more than 25 per cent, of the fair market value. The competent authority applied the land and building method. The competent authority rejected the plea of tenancy on the ground that F. Hoffman La Roche Company Limited, Switzerland, was managing the affairs of the vendor-company and also of the respondents. That Voltas Limited was the minority shareholder in both the companies. That, the managing director of the vendor-company was also the director in the respondent-company. That, the managing director of the respondent was the chairman of the vendor-company. That, two of the directors were common in both the above companies. That, F. Hoffman La Roche Company Limited., Switzerland, had transferred 40 per cent, of the shareholding in favour of the financial institutions and employees. That, F. Hoffman La Roche Company Limited was managing the affairs of the vendor-company. That P. R. Dave and Associates, the valuers of the respondent had filed a valuation report which itself shows that the lowest valuation of Rs. 87.14 lakhs represented the fair market value on the basis of the land and building method. That, the said valuer had applied five different methods of valuation in which the lowest valuation was Rs. 14.44 lakhs arrived at by the rent capitalisation method taking the property as fully tenanted whereas the other lowest valuation was of Rs. 87.14 lakhs on the land and building method. The competent authority came to the conclusion that there was no merit in the contention of the respondent that the property was tenanted, particularly in view of the fact that both the above companies were controlled and managed by F. Hoffman La Roche Company Limited, Switzerland, and as both the companies were owned by Messrs. F. Hoffman La Roche Company Limited, Switzerland, the real owner of the property was the said Swiss company. The competent authority also came to the conclusion that under the above circumstances, the owner was claiming the tenancy against itself. The competent authority also found that the vendor-company had no interest of its own other than the interest of Messrs. F. Hoffman La Roche Company Limited. The competent authority found that the interest of the vendor-company stood merged with the interest of the respondent-company as the principal shareholder. This finding is given on the basis of the shareholding pattern of the companies referred to hereinabove. In the circumstances, the competent authority came to the conclusion that the valuation based on the rent capitalization method was not correct. On the above facts and circumstances of the case, the competent authority found that there was under valuation as stated hereinabove and accordingly, directed acquisition of the property.

3. Being aggrieved by the said decision of the competent authority, the respondent-company preferred Income-tax Acquisition Application No. 13 (Bombay) of 1986 before the Income-tax Appellate Tribunal. By judgment and order dated February 12, 1987, the Tribunal allowed the appeal and set aside the order of the competent authority. The Tribunal found that the entire building was given on licence to the respondent-company under the leave and licence agreement dated June 12, 1963. It came into force with effect from April 1, 1961. The Tribunal found that with effect from February 1, 1973, the Bombay Rent Act, 1947, stood amended and the effect of the said amendment was that licensees in occupation of the. premises on the appointed date, i.e., February 1, 1973, became protectedtenants and as a result, the respondent-company, as a purchaser, became the tenant with effect from February 1, 1973. The Tribunal found that at the time of the indenture dated February 9, 1984, the premises was fetching a rent of Rs. 17,200 per month. The Tribunal found that the property being tenanted, the landlord had no power to evict the tenant, except by due process of law and in the circumstances, any hypothetical purchaser would pay the seller a price not exceeding the price arrived at by the rent capitalisation method. The Tribunal also found that 32 per cent, of the shareholding in the vendor-company was owned by the financial institutions. The Tribunal found that although the above companies are connected, the property was fully tenanted and the tenancy was protected by the Bombay Rent Act and, in such a case, the only correct method of valuation would be the rent capitalisation method. According to the Tribunal, even the report submitted by the Departmental Valuation Officer indicates that the property was valued by the rent capitalisation method. The Tribunal found that even the Departmental Valuer in his report, valued the property at Rs. 13.54 lakhs by taking the rate of capitalization at 9.5 per cent., i.e., multiple of 10.53. The Tribunal found that the competent authority had failed to apply its mind to the report of the Departmental Valuation Officer. In the circumstances, the Tribunal came to the conclusion that the tenancy could not have been ignored by the competent authority. Accordingly, the Tribunal allowed the application. Being aggrieved by the decision of the Tribunal, the Department has preferred this first appeal.

4. Dr. Chandrachud, learned Additional Solicitor-General appearing on behalf of the appellants, contended that the transferor and the transferee companies were interconnected as indicated by the pattern of the shareholding referred to hereinabove. He pointed out that apart from the shareholding, the managing director of the vendor-company was a director of the respondent-company. That, the abovementioned Swiss company-Messrs. F. Hoffman La Roche Company Limited--was managing the affairs of the transferor and the transferee companies. That Voltas Limited was the minority shareholder in both the companies. That, the managing director of the vendor-company was the director in the purchaser-company. That, the managing director, Mr. J. W. Tanner of Roche Products Limited, was the chairman of the vendor-company. That, the abovementioned Swiss company had transferred 40 per cent, of the shareholding to the financial institutions and their employees only on February 9, 1984, and yet, the Swiss company was managing the affairs of the vendor-company. Learned counsel for the Department further submitted that the valuer's report, as submitted by P. R. Dave and Associates, being the respondent's valuers, have given five different methods of valuation in which the lowest valuation is Rs. 14.44 lakhs which is based on the rentcapitalisation method which is not the correct method to be applied as, in this case, looking to the interconnection of the two companies and since the licensee itself had purchased the premises there was a notional vacant possession and, therefore, the rent capitalization method was not the correct method to be applied. Learned counsel for the Department submitted that the claim of the purchaser to tenancy was also not tenable. He accordingly submitted that the other lowest valuation method to be adopted in the present case was the land and building method and applying that method, the present market value was Rs. 87.14 lakhs which was the fair market value and, therefore, the competent authority was right in corning to the conclusion that there was understatement of the consideration, particularly when the sale was executed for a total consideration of Rs. 50 lakhs. On the other hand, Mr. Dastoor, learned counsel appearing on behalf of the respondent-company, contended that the tenancy cannot be overlooked in the present case. He contended that the building in its entirety was let out on leave and licence basis to the respondent way back in June, 1963. That, the licence came into force with effect from April 1, 1961. He further pointed out that it is not in dispute that the Bombay Rent Act was amended and the respondent-licensee became a protected tenant with effect from February 1, 1973, by deeming provisions of the Rent Act, more particularly Section 15A. It was pointed out that at the time of the sale, the premises were fetching rent of Rs. 17,200 per month at the time of sale in 1984 and, therefore, the rent capitalization method was the correct method for arriving at the fair market value and applying that method, it cannot be said by any stretch of imagination that there was under valuation of the property. He contended that the competent authority erred in coming to the conclusion that Rs. 50 lakhs represented understatement of consideration. Accordingly, he contended that the Tribunal was right in setting aside the order of the competent authority.

5. We do not find any merit in this appeal preferred by the Department. On the facts and circumstances of the present case, the position which emerges is that on June 12, 1963, a leave and licence agreement was entered into between the vendor-company on the one hand and the respondent-company on the other hand. The leave and licence agreement did not stipulate any particular period. The respondent-company was the licensee in possession of the property on February 1, 1973, when the Rent Act was amended. On that date, the respondent-company became the protected tenant. The competent authority erred in ignoring the provisions of the Bombay Rent Act as amended with effect from February 1, 1973. The sale in question took place on February 9, 1984. Under the above circumstances, the competent authority erred in coming to the conclusion that since the licensee had purchased the premises, the rent capitalisation method was not applicable. The Tribunal, in the present case, has come tothe conclusion that in view of the provisions of the Bombay Rent Act as amended with effect from February 1, 1973, the competent authority could not have ignored the tenancy. The Tribunal also found that even the Departmental Valuation Officer's report valued the property by the rent capitalisation method which was the only correct method applicable in the facts and circumstances of this case. The Tribunal found that this report has been totally overlooked by the competent authority. Even the Departmental Valuation Officer valued the property at Rs. 13.54 lakhs by taking the rate of capitalisation at 9.5 per cent. The Tribunal also found that although the companies are interconnected to some extent, and although there are common directors and shareholders, 32 per cent, of the shares in the vendor-company are owned by the financial institutions and, therefore, there was nothing to doubt the genuineness and the bona fides of the transaction and the purchaser paid a fair price which was in fact above the value arrived at by the rent capitalisation method. In fact, the vendor-company passed a specific resolution requiring 75 per cent, majority before the sale could be effected and, therefore, there was no understatement of consideration. On the facts and circumstances of this case, the Tribunal was right in coming to the conclusion that the competent authority had not applied its mind to the Departmental Valuation Officer's report applying the rent capitalisation method and, therefore, no case for acquisition was made out. Similarly, the competent authority has failed to consider that 32 per cent, of the shareholding in the vendor-company was owned by the financial institutions and that the whole transaction was supported by a special resolution of the vendor-company requiring 75 per cent, majority for effecting the sale. Similarly, the competent authority failed to consider the effect of the amendment to the Bombay Rent Act with effect from February 1, 1973. In the circumstances, we are satisfied that there was no case for acquisition of the properties. Applying the rent capitalisation method, the fair market value was Rs. 14.44 lakhs whereas the consideration involved in the sale was Rs. 50 lakhs and, therefore, there was no understatement of consideration as held by the competent authority. In view of the above, we do not see any infirmity in the decision of the Tribunal.

6. Accordingly the first appeal stands dismissed with costs.

7. C. C. expedited.


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