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Wallace Flour Mills Co. Ltd. Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)12ITD577(Mum.)
AppellantWallace Flour Mills Co. Ltd.
Respondentinspecting Assistant
Excerpt:
1. these two appeals are filed against the order passed by the competent authority under section 269f(6) of the income-tax act, 1961 ('the act'), dated 24-2-1984, acquiring the property bearing flat nos.19 and 20 'asha mahal', naoroji gamadia road, bombay, along with all beneficial right, title, interest, claim and demand in respect thereof, which had been transferred by mrs. bina dilip gondalia to wallace flour mills co. ltd. by an agreement dated 26-7-1982. since the contentions raised by both the appellants and the respondents are identical in both the appeals and since they are against the same order of the iac, it would be convenient to dispose of them together by a common order.2. originally, it appeal (acq.) no. 1 (bom.) of 1984 was filed by both the appellants on 26-3-1984,.....
Judgment:
1. These two appeals are filed against the order passed by the competent authority under Section 269F(6) of the Income-tax Act, 1961 ('the Act'), dated 24-2-1984, acquiring the property bearing Flat Nos.

19 and 20 'Asha Mahal', Naoroji Gamadia Road, Bombay, along with all beneficial right, title, interest, claim and demand in respect thereof, which had been transferred by Mrs. Bina Dilip Gondalia to Wallace Flour Mills Co. Ltd. by an agreement dated 26-7-1982. Since the contentions raised by both the appellants and the respondents are identical in both the appeals and since they are against the same order of the IAC, it would be convenient to dispose of them together by a common order.

2. Originally, IT Appeal (Acq.) No. 1 (Bom.) of 1984 was filed by both the appellants on 26-3-1984, challenging the order of acquisition passed by the IAC. This memorandum of appeal has been signed by both the appellants, viz., Wallace Flour Mills Co. Ltd., the transferee, and Mrs. Bina Dilip Gondalia, the transferor. However, at the time of the hearing of the appeal when it was pointed out that there should be two separate appeals and memoranda, the learned Counsel for the appellants, Shri S.P. Mehta, submitted that IT Appeal (Acq.) No. 1 (Bom.) of 1984 may be treated as the appeal filed by the transferee, Wallace Flour Mills Co. Ltd., and that the transferor would be filing a separate appeal. Accordingly, the transferor, Mrs. Bina D. Gondalia, presented her appeal in IT Appeal (Acq.) No. 7 (Bom.) of 1984 on 10-8-1984 along with an application for condonation of the delay of 106 days in the presentation of the same. She has stated in her affidavit that she was under the mistaken impression that she need not file a separate appeal since she had also signed the memorandum of appeal filed by the transferee in IT Appeal No. 1 (Bom.) of 1984. She has, therefore, prayed for the condonation of this delay in the presentation of her appeal. Since this is only a technical formality and since Mrs. Bina D.Gondalia had already signed the memorandum of appeal presented by the transferee in IT Appeal (Acq.) No. 1 (Bom.) of 1984, we condone the delay in the presentation of appeal and proceed to dispose of the same along with the appeal filed by the transferee-company. In fact we may point out that the proceedings before us proceeded on the basis that there were two appeals filed by both the transferor and the transferee and the revenue had no objection to the condonation of delay as the transferor was only complying with a legal formality by filing a separate appeal.

3. By an agreement dated 26-7-1982, Mrs. Bina D. Gondalia sold her property owned by her in Flat Nos. 19 and 20, on the third floor of the building known as 'Asha Mahal' situated at Naoroji Gamadia Road (Off.

Dr. Gopalrao Deshmukh Marg), Bombay-400026, to Wallace Flour Mills Co.

Ltd. for a lump sum price of Rs. 12 lakhs. This sale was considered by the IAC to be hit by the provisions of Section 269C(1) of the Act. He, therefore, initiated proceedings for acquisition of this property by his notice dated 26-2-1983 issued under Section 269D(1) of the Act.

After considering the objections of both the transferor and the transferee to the acquisition proceedings, the IAC held, by his order dated 24-2-1984, that the fair market value of the property sold as per the valuation of the Departmental Valuation Officer amounted to Rs. 19.5 lakhs as against the apparent consideration of Rs. 12 lakhs stated in the sale deed, that the rate adopted by the District Valuation Officer amounted to Rs. 1,000 per sq. ft. of built up area as against the rate of Rs. 615 per sq. ft. shown by the parties and that sufficient evidence had been produced by him to prove that the rate adopted by the Valuation Officer was fair and reasonable by all standards. He, therefore, concluded that the fair market value of the property thus determined by him not only exceeded the apparent consideration by more than 15 per cent but also by more than 25 per cent, as specified in Section 269C. He, accordingly, passed the order of acquisition, acquiring the property in question under Section 269F(6) with the previous approval of the Commissioner. Both the transferor and the transferee feel aggrieved by this order of acquisition and have come up in appeal to the Tribunal.

4. Shri S.P. Mehta, the learned Counsel for the appellants, first challenged the initiation of the acquisition proceedings by the IAC. He took us through the reasons recorded by the IAC for initiation of acquisition proceedings, which is at page 33 of the assessee's paper book, and submitted that those reasons would not justify the initiation of acquisition proceedings in the present case. The learned Counsel submitted that the proceedings for acquisition of the property under Chapter XX-A of the Act was quasi-criminal proceeding, as has been held in CIT v. Smt. Vimlaben Bhagwandas Patel [1979] 118 ITR 134 (Guj.)and CIT v. Amrit Sports Industries [1984] 145 ITR 231 (Punj. & Har.). The learned Counsel then referred to the four conditions, which should be fulfilled before initiating acquisition proceedings by the IAC under Section 269C and pointed out that except for one of the conditions, none of the other three conditions was fulfilled in the present case and that, therefore, the IAC could not have had formed a reasonable belief to justify the initiation of the acquisition proceedings. The learned Counsel argued that the expression 'reason to believe' did not mean a purely subjective satisfaction on the part of the IAC, but it meant the reason must be held in good faith and that the reason must have a rational connection with or relevant bearing to the formation of the belief. But, in the present case, there was no material on record for the formation of such belief. The learned Counsel pointed out that what was available with the IAC was only the report of the District Valuation Officer, dated 27-1-1983, valuing this property at Rs. 19.5 lakhs. The learned Counsel contended that the District Valuation Officer had based his valuation on two instances of sales, which were not really comparable with the present case. The learned Counsel further argued that the Departmental Valuation Officer had ignored the several factors, which adversely affected the value of the property in question, viz., (i) there should be no valuation for the common passage owned by the society, (ii) the Valuation Officer himself had mentioned in his report that a rebate of Rs. 1 lakh should be allowed towards minimum repairs and renovation required in the flats, but that such rebate was not given by the Valuation Officer while computing the value, (iii) there should be a reduction of Rs. 5 per sq. ft. for the old lift, (iv) there was no direct access from the building 'Asha Mahal' to the main road as the access road has to pass through another private property belonging to another co-operative housing society, (v) absence of sale transactions in the month of July 1982, (vi) the peculiar circumstances under which the transferor was put to the necessity of selling the property had been ignored, i.e., (a) strained relationship between the transferor and her husband, who had gone to the Court, and (b) the close relationship between the transferor and the chairman and the managing director of the transferee-company, who are father and brother of the transferor, (vii) the purchase of another flat by the transferor on 2-4-1983 in Olympus Apartments, Altamount Road, Bombay-26, for Rs. 18 lakhs. Here, the learned Counsel pointed out that the transferor had acquired a new property for her own residence on 2-4-1983 at the rate of Rs. 900 per sq. ft. He submitted that there was no intention on the part of the transferor to evade the tax on the transfer of her two flats to the company, as the transferor was entitled to the exemption under Section 54 of the Act, (viii) as regards transferee-company, the learned Counsel referred us to the fact that there was a huge loss incurred by the said company amounting to Rs. 67,72,685. In this connection, he referred to the statement of computation of income at page 47 of the paper book, which showed that the total loss to be carried forward for the assessment year 1983-84 amounted to Rs. 68,16,585 and that the above loss did not include Rs. 1,57,31,350 representing investment allowance at 25 per cent on additions of machinery of Rs. 6,21,25,398 and that this investment allowance was also to be carried forward in the subsequent years and adjusted against future profits. The learned Counsel, therefore, argued that factually there was no justification to presume any intention to evade tax on the part of the transferee-company, as there would be no liability to tax on the part of the company either for this year or for later years, in view of the huge losses referred to above, and (ix) factually, there was no justification or material to presume any understatement of consideration in the present case, particularly considering the close relationship between the parties if we ignore the veil of incorporation. In support of this, Shri Mehta relied on the purchase and sale of these two flats from 27-6-1962 to 26-7-1982 as set out in page 1 of the appellants' paper book. The learned Counsel also placed before us a working, according to which the consideration of Rs. 12 lakhs specified in the deed was quite fair and reasonable and that at any rate it was within the limit of 15 per cent as specified in Section 269C. The learned Counsel argued that if all these above factors, which had been pointed out to the IAC even before initiation of proceedings on behalf of the appellants, had been considered properly and from the correct perspective, the IAC could not have formed an honest belief to hold that there was understatement of consideration with the intention to evade tax by the two appellants in the present case. In this connection, the learned counsel relied on an unreported decision of the Bombay High Court in the case of Unique Associates Co-op. Hsg. Society Ltd. v. Union of India [1984] 16 Taxman 127 and contended that in this case, the decision of the Supreme Court, in the case of K.P. Varghese v. ITO [1981] 131 1TR 597, was followed to interpret the provisions of Section 269C and that on the authority of this judgment, the notice issued by the IAC initiating proceedings under Section 269C should be held to be invalid, as the conditions precedent for the issuance of the said notice were not fulfilled in the present case. The learned counsel further argued that even on merits, there was no justification for holding that there was understatement of consideration by the two appellants with the intention to evade their respective tax liabilities as specified in Section 269C(1) and (2). The learned counsel argued that the nine factors, which he had enumerated to challenge the validity of the notice issued by the IAC, would equally hold good to reach the conclusion that there was no material on which it could be held that the fair market value of the property was Rs. 19.5 lakhs as held by the IAC and not Rs. 12 lakhs as specified in the deed of transfer. The learned Counsel pointed out that the IAC was not justified in relying on certain materials specified in exhibits A, B and C which have been made annexures to the order of the acquisition since these materials were never put to the appellants, who had no opportunity to either examine the same or state their objections. He, therefore, argued that to the extent the IAC relied on these materials in his order of the acquisition was bad in law. He further argued that the comparable transaction of sales specified in exhibit A were all entered into long after the transaction in the present case and further might not have the adverse factors which affected the value of the property in question. He, therefore, submitted that none of these transactions should be compared with the present case. The learned Counsel also argued that the Commissioner had not applied his mind before granting approval to the acquisition of the property but had mechanically approved the same. The learned Counsel further submitted that he was not pressing the additional ground of the appeal filed by him on 13-6-1984 on the basis that there was no transfer in law of the property in question as the society has not transferred the flats to Wallace Flour Mills Co. Ltd. The learned Counsel, therefore, argued that the order of acquisition passed by the IAC was unsustainable both in law and on facts and, therefore, should be cancelled.

5. Shri Jaitley, the learned standing counsel for the revenue, submitted that the first and foremost question for our consideration was the initiation of proceedings under Section 269C and to see whether the conditions of that section had been complied with in the present case.. The learned Counsel submitted that we should go by the plain words in that section and then consider the nature of the proceedings whether they were administrative or quasi-judicial and thirdly, to see whether the reasons recorded for taking action were in order. Shri Jaitley argued that up to the initiation of acquisition proceedings under Section 269D, the nature of the proceedings before the IAC was purely administrative and did not involve exercise of any judicial power. In support of this, Shri Jaitley relied on Rai Bahadur G.V.Swaika Estate (P.) Ltd. v. M.N. Tewari [1980] 126 ITR 310 (Cal.), Jawahar Lal v. Competent Authority (IAC) [1982] 137 ITR 605 (Delhi) and Devichand Pannaji & Co. v. CIT [1982] 138 ITR 789 (Kar.). The learned Counsel further relied on the decision of the Supreme Court in S.Narayanappa v. CIT [1967] 63 ITR 219, wherein it was held that the reasons recorded by the ITO for initiating action under Section 34 of the Indian Income-tax Act, 1922 ('the 1922 Act'), corresponding to Section 147 of the 1961 Act, need not be communicated to the assessee.

Shri Jaitley then referred us to the note which was attached to the notice issued by the IAC for initiation of acquisition proceedings and submitted that this contained sufficient reasons recorded by the IAC as required by law. In this connection, Shri Jaitley referred us to the fact that the notice was issued by the IAC on 26-2-1983 nearly one month after the report of the District Valuation Officer dated 27-1-1983 and at that time, the IAC had before him four other transactions of sale which are specified as item Nos. 6/6, 7/112, 9/34 and 10/120. According to Shri Jaitley when these four transactions which had taken place in the months of August, October and November 1982 and are proximate to the transaction of sale under consideration in the present appeals, the IAC had formed an honest belief that there was understatement of consideration by the parties to the transactions in the present case. He argued that this conclusion or belief of the IAC could not be called in question as they were sufficient to form an honest belief on the part of the IAC. He further submitted that there was sufficient nexus between the materials referred to above and the formation of belief by the IAC. He, therefore, argued that the notice issued by the IAC under Section 269D(1) was perfectly valid and could not be called in question. In support of his submissions Shri Jaitley relied on the decision of the Calcutta High Court in Smt. Bani Roy Chowdhury v. Competent Authority, (IAC) [1978] 112 ITR 111, wherein it was held that conveyance of a nearby plot would be a material fact in the context of formation of belief. He also relied on the decisions in U.S. Awasthi v. IAC [1977] 107 ITR 796 at 810 (All.) and Tube Mill (India) (P.) Ltd. v. IAC [1980] 122 ITR 72 at 88 (Cal.), wherein it has been held that the Valuation Officer's report could be made use of in the initiation of proceedings. Shri Jaitley contended that at the stage of initiation of proceedings, the department need not have foolproof evidence regarding Section 269C(1)(a) or (b), because it was the preliminary stage. He also argued that the revenue was not relying on Section 269C(2) for initiating action or' for formation of belief. In fact the learned Counsel for the revenue argued that no material was pointed out by the appellants in support of their contentions. Shri Jaitley argued that Section 269B(3) of the Act, read with Section 269C(2), provided for a rule of evidence in the form of rebuttable presumption only. He pointed out that the notice issued by the IAC at page 30 of the paper book was the statutory form and there was no reference to Section 269C(2) in the said notice. He, therefore, submitted that the notice issued by the IAC was not liable to any challenge and that the same has to be upheld as validly issued.

6. On the merits of the case, Shri Jaitley referred to Clause 1 of the agreement dated 26-7-1982 at page 1 of the paper book and pointed out that there was no reference to the relationship of the parties, namely, the transferor and the transferee, and that, therefore, Section 269C of the Act did not apply to the facts of the present case. Shri Jaitley then referred to page 35 of the appellants' paper book, which showed that the book profits of the company amounted to Rs. 49,87,332 for the year ended 31-3-1982 and that there were substantial profits for the earlier years also. He next pointed out that the property purchased by the transferor was after sufficient time lag on 2-4-1983. Advertising to the approved valuer's report produced by the appellants at pages 8 to 15 of the paper book, the learned standing counsel submitted that there was no basis for the value of Rs. 550 per sq. ft. adopted by the appellants' approved valuer. He also argued that the correct area of the property was 1,950 sq. ft. even according to the appellants' valuer and that on that account, there can be no reduction. He also submitted that the fact that the property was standing on the leasehold land, is of no consequence when we take note of the nominal lease rent that was being paid. The learned standing counsel turned to the Valuation Officer's report and submitted that the Valuation Officer had taken note of the adverse factors pleaded by the appellants, such as the inaccessability of the building from the main road and also taken note of the fact that in the two comparable cases relied on by him the properties stood on freehold land. Shri Jaitley then referred to page 39 of the paper book, which contains a public notice dated 16-7-1982 given by Shri Dilip G. Gondalia, the husband of the transferor, and pointed out that there was nothing in the said notice which would indicate that the sale by the transferor was a distress sale. The learned Counsel then argued that no prejudice was caused to the appellants by the non-supply of the exhibits A, B and C, which have been annexed to the order of acquisition by the IAC and that on that account, the order could not be held to be invalid in law. The learned standing counsel, therefore, submitted that the acquisition of the property was based on valid and sound reasons, which were supported by the materials brought on record by the IAC and that the same should be upheld.7. Shri Mehta, the learned Counsel for the appellants, in his reply submitted that the decisions relied on by the learned standing counsel for the revenue were inapplicable to the facts of the present case, particularly in the light of the latest decision of the Bombay High Court in Unique Associates Co-op. Hsg. Society Ltd.'s case (supra) relied on by him. He argued that in the light of the said decision, the appellants were entitled to succeed in their appeals.

8. We have carefully examined the rival contentions urged on both sides in the light of the materials placed, before us by the learned Counsel for the appellants.

9. In Smt. Vimlaben Bhagwandas Patel's case (supra), their Lordships of the Gujarat High Court held that the power of acquisition under Section 269C is penal in nature and the proceedings are quasi-criminal. Their Lordships also held that the Legislature has adopted a known and recognised phraseology for describing the condition precedent for initiating acquisition proceedings under Section 269C, that the competent authority must have reason to believe that the fair market value of the property of more than Rs. 25,000 exceeds the apparent consideration stated in the instrument of transfer and the parties have agreed to make the untrue statement with the ulterior motive of tax evasion or concealment of income, that the satisfaction of the competent authority for initiation of acquisition proceedings is a subjective satisfaction of the objective facts stated above and that the reasons for the formation of the belief must have a rational and direct connection with the material coming to the notice of the competent authority, though the question of sufficiency or adequacy of the material is not open to judicial review. Their Lordships then summarised the conditions precedent for the exercise of jurisdiction to initiate acquisition proceedings as follows : (i) transfer of immovable property worth more than Rs. 25,000 in value ; (ii) fair market value of the property exceeding the apparent consideration by 15 per cent; (iii) ulterior motive of tax evasion or concealment of income for such untrue statement of apparent consideration in the instrument of transfer of such property ; (iv) recording of reasons by the competent authority ; and (v) publication of notice to that effect in the Official Gazette. This decision has been followed by the Hon'ble Bombay High Court in the case of Unique Associates Co-op. Hsg. Society Ltd. (supra).

10. We may further point out that in this decision of the Bombay High Court in the case of Unique Associates Co-op. Hsg. Society Ltd. (supra), his Lordship has further held that the observations of the Supreme Court in the case of K.P. Varghese (supra) will have to be applied while construing the provisions of Section 269C. This would be clear from the discussion in paragraph No. 9 at pages 20 to 33 of the copy of the judgment, which has been filed before us. In fact in the concluding portion of paragraph No. 9 of his judgment, his Lordship has observed as follows : ...Indeed, the powers to be exercised under Section 269C are circumscribed by various conditions which are set out in the section itself. In my judgment, the submission of Shri Dastur that the competent authority had no jurisdiction to initiate the proceedings because there was no material whatsoever to come to the conclusion that the consideration stated in the instrument of transfer was not true consideration and such statement was made with the object of facilitating the reduction or evasion of the tax, deserves acceptance. The powers under Section 269C could be exercised provided the requisite conditions for exercise or the powers are satisfied. In my judgment, in absence of any material whatsoever available to the competent authority, it was impossible for any reasonable or prudent man to reach the conclusion that the consideration stated in the instrument of transfer was untrue and that was done with the object of facilitating the reduction or evasion of tax.

We shall now examine the facts of the present case in the light of the said principles laid down by the Bombay High Court and the Gujarat High Court.

11. The facts of the case that emerge from the materials placed before us are the following. On 26-7-1982, Mrs. Bina D. Gondalia sold her two flats bearing Nos. 19 and 20 in 'Asha Mahal' to Wallace Flour Mills Co.

Ltd. for Rs. 12 lakhs plus Rs. 7,252 for transfer and other fees and charges. This flat was purchased by Mrs. Bina D. Gondalia on 15-9-1978 for Rs. 3,39,900 plus Rs. 500 for shares from Alsales Ltd., which is said to be a subsidiary of Vissanji Sons & Co. Ltd. It appears that Alsales Ltd. had purchased this property six months earlier on 20-3-1978 from Wallace Flour Mills Co. Ltd. for Rs. 3,31,500 plus Rs. 500 for shares. There is no dispute that both these companies are under the same management being subsidiaries of Vissanji Sons & Co. Ltd. Wallace Flour Mills Co. Ltd. had purchased these flats on 27-6-1962 for Rs. 79,285. There is no dispute that Mrs. Bina D. Gondalia is the daughter of the chairman of Vissanji Sons & Co. Ltd. and of the Wallace Flour Mills Co. Ltd. There is also no dispute that the father and the brother of Mrs. Bina D. Gondalia are the major shareholders of Wallace Flour Mills Co. Ltd. These facts are not in dispute before us.

12. There is also no dispute that there were no transactions of sales of flats in Bombay in the month of July 1982. This is accepted by the IAC in Paragraph No. 9.2 (3)(a) of his order. Also there is no dispute that the appellants had placed before the IAC the valuation report from an approved valuer in respect of the property in question, according to which the value of this property amounted to Rs. 10,72,500 as on 26-7-1982. This report is referred to in the letter written by the chartered accountants of the appellants to the IAC on 21-2-1983. In fact, this letter contains various objections of the appellants to the valuation report of the District Valuation Officer, which was before the IAC. In this letter, it is pointed out that the building is more than 20 years old and that the flats in the old buildings are valued on the basis of carpet area and not on the built up area as has been shown by the District Valuation Officer. Thereafter, the other factors mentioned by the assessee's learned counsel which adversely affected the value of the property in question, as set out by us above, have been discussed in this letter. In paragraph No. 6 of this letter, the appellants have brought out points of distinction between the two instances of sales relied on by the District Valuation Officer to show as to how they are not really comparable with the case of the present appellants. In paragraph No. 7 of this letter, they have referred to four other instances of sales to show that the value stated in the deed in the present case is true, fair and reasonable. Paragraph No. 8 of this letter refers to the close relationship of the parties to this transaction.

13. In their letter dated 22-2-1983, G.M. Kapadia & Co., chartered accountants of the appellants, have stated their further objections to show as to how the provisions of Section 269C(1)(a) and (b) are inapplicable to the facts of the present case. This letter is at pages 27 and 28 of the appellants' paper book. In paragraph Nos. 2 and 3 of this letter, it has been stated as follows on behalf of the two appellants : The transferor is an individual residing in the flat from 1978. The transferor is to purchase a new flat for the purposes of own residence and the entire capital gain will be invested by the transferor in the purchase for new flat and, therefore, there will be no capital gain taxable under Section 54 of the Income-tax Act.

In fact the transferor will invest more than the capital gain in the new flat. The transferee-company has disclosed all the assets and is a regular income-tax assessee for the last 60 years or may be more.

The income of the transferee-company prior to investment allowance and depreciation allowance for the three previous years is as follows :Year ended Prior to invest- Prior to invest- ment allowance ment allowance31-3-1980 32,66,811 55,26,11231-3-1981 21,90,563 45,94,17131-3-1982 49,87,332 1,05,85,490 The income and wealth of the transferor, Mrs. Bina D. Gondalia, for the last three years is as follows :1980-81 1,21,020 14,50,7771981-82 1,83,120 15,21,4001982-83 1,52,740 13,63,200 The property in question is valued for the purposes of wealth-tax at Rs. 3,39,900 as provided under Section 7(4) of the Wealth-tax Act, 1957, and the valuations per Rule 1BB would be much lower ; therefore, the question of any avoidance or evasion of wealth-tax also does notarise. Further, as stated in our letter, the property in question has been transferred to a family company and the shares of the said company are entirely owned by the father and brother of the transferor. Therefore, the provisions of Section 269C of Chapter XX-A are not applicable to the above case and no proceedings can be initiated and if initiated, they would be null, void and bad in, law.

3. Without prejudice to the contentions raised above, the flats in question were sold on 26th July, 1982 when in the entire Bombay city no transactions of flats took place because of the new law regarding acquisition of flats. The situation was similar to that of urban lands in 1976 when the Urban Land Ceiling and Regulations Act, 1976 was introduced. At that time prices of land were very much lower than the value of land that prevailed prior to the introduction of the new law in respect of ownership flats and the value of flats had considerably fallen in July and this is evidenced by no transactions taking place in July 1982 and right up to October 1982. In the circumstances prevailing in July 1982, the value declared by our clients is very fair and reasonable.

14. Thereafter, on 26-2-1983, the IAC issued a notice under Section 269D(1), which was received by the appellants on 29-8-1983 to which they replied through the letters of their auditors dated 8-9-1983 at pages 34 to 37 of the paper book.

15. The reasons stated by the IAC for initiation of acquisition proceedings in the present case are set out in the note dated 26-2-1983 at page 33 of the appellants' paper book. According to the IAC, he was prima facie, of the opinion that the apparent consideration was much below the fair market value of the property, considering the facts that the property is situated in a posh locality and also taking into account the prevailing rate of the properties in the said locality, etc. The IAC then refers to the reference made by him to the valuation cell and the valuation of this property at Rs. 19.5 lakhs made by the District Valuation Officer, vide his report dated 27-1-1983. The IAC then proceeds to state that he had carefully gone through the valuation report of the Valuation Officer and that he was satisfied that the fair market value determined by him at Rs. 19.5 lakhs was reasonable. In paragraph No. 2 of this note, the IAC states that the counsel for the appellants who appeared before him on 21-2-1983 could not furnish any worthwhile evidence in the matter. He, therefore, initiated the acquisition proceedings in the present case.

16. The first question for our consideration is, whether there are any reasons stated by the IAC for initiation of the acquisition proceedings and whether they satisfy the tests laid down by the Courts for initiation of such acquisition proceedings. In paragraph No. 3 of the note for initiation of the acquisition proceedings at page 33 of the paper book, the IAC has stated that on the facts of the case he was satisfied : (i) that the immovable property is of a fair market value exceeding Rs. 25,000, (ii) the fair market value of such property exceeds the apparent consideration therefor by more than 15 per cent of such apparent consideration, and (iii) the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of either facilitating the reduction or evasion of the liability of the transferor to tax in respect of any income including capital gains arising on the transferor of facilitating concealment of any income or any money or other assets which have not been or which ought to be disclosed by the transferee for the purposes of the Indian Income-tax Act, 1922, the Income-tax Act, 1961 or the Wealth-tax Act, 1957.

According to the revenue, the above fulfil the conditions precedent laid down in Section 269C(1). But on a careful examination of the facts, we find ourselves unable to agree with this stand of the revenue. Apart from the first condition mentioned above, we are unable to see on what material the IAC came to the conclusion that the other two conditions precedent were fulfilled in the present case. We have already set out above the ratio of the decision of the Bombay High Court, in the case of Unique Associates Co-op. Hsg. Society Ltd. (supra). In our view, the reasons stated by the IAC do not fulfil the conditions precedent for the exercise of jurisdiction to initiate acquisition proceedings under Section 269C(1). It was pleaded on behalf of the revenue that all the facts pleaded by the appellants were within their personal knowledge and, therefore, the IAC could have no occasion to examine them at the stage of initiation of the proceedings.

Unfortunately, this argument overlooks that the appellants have placed all these facts even before initiation of the proceedings in their letters written through their chartered accountants on 21-2-1983 and 22-2-1983. We find no reference to any of these facts pleaded by the appellants in these two letters when the IAC is stated to have formed his reasonable belief. On the contrary, he seems to have rejected this by stating that the appellants' counsel could not furnish any worthwhile evidence in the matter.

17. Shri S.P. Mehta, the learned Counsel for the appellants, is justified in his submission that the IAC has acted merely on suspicion and not on any valid material when he initiated the acquisition proceedings. He pointed out that the IAC had relied on the location of the property and also the prevalent rate of prices for properties in the said locality without taking into account the various factors pointed out by the appellants, which compelled them to go in for this transaction of sale. Shri Mehta did not dispute the right of the revenue to rely on the valuation report of the District Valuation Officer in support of its action. But his plea was that the said valuation report of the District Valuation Officer was defective as it ignored the adverse factors, which depressed the market value of the property. We find considerable force in this submission of the learned Counsel for the appellants. Since both the valuers of the appellants and the department have proceeded on the basis that the total area of the two flats was 1,950 sq. ft., we would also proceed on the same basis. We do not find any warrant for excluding 185 sq. ft., which is stated to be a common passage belonging to the society. If that is so, the approved valuer of the appellants himself would have excluded the same. The valuation report of the District Valuation Officer shows that the approach to the property 'Asha Mahal', Naoroji Gamadia Road, was by a private road and that this private road also passes through another cooperative housing society. The departmental valuer further accepts that the building 'Asha Mahal' is an old building constructed on a leasehold plot of land of 1,100 sq. yards. The age of the building is stated to be 20 years at the time of the sale and that it has a future life of 40 years. The Valuation Officer has taken two instances of sale of fiats in Malabar Hill and Compala Hill areas as set out in the annexure to the report. The first property is the sale of a flat on 11-10-1982 by Surat Cotton Spg. & Wvg. Mills to Bank of America National Trust and Express Towers for Rs. 40 lakhs. This property is at Altamount Road, Cumballa Hill. The plinth area of the flat is 2,900 sq.

ft. In this sale, the rate works out to Rs. 1379.31 per sq. ft.

18. The other property sold is Flat No. B/122 (Super built up), in a building known as Twin Towers at Prabhadevi by Scal Investments Ltd. to the Unit Trust of India, for Rs. 59,79,990. This sale was effected on 29-9-1982. The plinth area of the flat is stated to be 4,711 sq. ft.

This sale gives a rate of Rs. 1,269 per sq. ft. The valuation report of the District Valuation Officer shows that both these properties are on freehold lands. But, according to the Valuation Officer, the property of the two appellants before us though on a leasehold land should be considered as good as a freehold since the lease rent was only Rs. 620 per year. The Valuation Officer has also stated that the first instance of sale is from a building still under construction, while the second instance is from a building recently completed. Finally, the Valuation Officer has deducted a sum of Rs. 370 per sq. ft. from the first instance and Rs. 270 from the second instance to fix up a rate of Rs. 1,000 per sq. ft. mainly on account of the old age of the building in the present case. In paragraph No. 6.5 of this report at page 21 of the paper book, the District Valuation Officer stated that he proposed to allow rebate of Rs. 1 lakh towards immediate repairs and renovation required in the flats. There was some discussion at the time of hearing that there was no such proposal by the Valuation Officer but the learned Counsel for the appellants produced before us the original report received by the appellants from the District Valuation Officer, which shows that there was such a proposal even though in the copy available in the Valuation Officer's records has omitted this paragraph No. 6.5. Apparently, the District Valuation Officer originally thought of giving this rebate, but later on changed his mind and omitted to cut out this paragraph while sending the copy of the valuation report to the appellants. In our view, nothing much turns on this.

19. It would be noticed that the Valuation Officer had taken for purposes of comparison two newly constructed buildings and then proceeded to make some allowance for the old age of the building.

Further, the buildings referred to are not in the same locality but farther away ; in point of time also, they are much later when the market for flats again revived. One thing is clear that the building in which the present flats are located is an old building which required repairs and renovation at least to the extent of Rs. 1 lakh, we are unable to appreciate as to how a leasehold land could be considered as good as a freehold land. We are, therefore, unable to agree with the revenue that the valuation report of the Valuation Officer reflects the correct position on facts.

20. It is the argument of the revenue that before initiating action under Section 269D(1), the IAC had four other instances of sale before him which were comparable with the case of the appellants. We have already referred to them while setting out the arguments of the revenue. Of the four, item No. 9/34 is the same as the first instance of sale relied on by the District Valuation Officer in his valuation report. The two other instances are also in the same building. Apart from the fact that none of these three other instances of sales is referred to anywhere in the note of the IAC while initiating the acquisition proceedings, it would be noticed that there is variation in the rates within a period of three or four months when the flats were sold in the same building. For example, item No. 6/6 which is a sale on 5-8-1982 by Surat Cotton Spg. & Wvg. Mills to her Britannic Majesty's Secretary for the UK of Great Britain and Northern Ireland, shows that the sale was at the rate of Rs. 1,551 per sq. ft. As against this, the sale instance in item No. 9/34 to Bank of America National Trust and Express Towers on 10-10-1982 works out to Rs. 1,379 per sq. ft. Again the sale of another flat in the same building on 19-11-1982 shown as item No. 10/120 gives a rate of Rs. 1,448 per sq. ft. The only other item that is relied on by the revenue is item No. 7/112. This is a sale of 6-11-1982 by Utamlal Chimanlal Kapasi to Chemicals & Auxiliaries Services (P.) Ltd. of a flat bearing flat No. 5-B and garage No. 26 and car parking space in the building 'Vaibhav', Modern Breach Candy Apts., for Rs. 18,00,250 at the rate of Rs. 1,162 per sq. ft. The area of the flat is 1,550 per sq. ft. How this instance is comparable with the case of the present appellants is not shown since, admittedly, this property is located on the main road with a better location and situation. We have nothing to show about the age of the building in that case.

21. On these facts, we are, therefore, unable to agree with the revenue that the IAC could have formed a reasonable belief which has a rational and direct connection with the materials on record to hold that the fair market value of the property in question as on the date of the sale has been understated in the present case. If we have to reject the valuation report of the approved valuer of the appellants as without basis, we are constrained to say that we have to reject the valuation report of the District Valuation Officer also as without basis since the valuation report of the District Valuation Officer has not taken note of any of the adverse factors which go to depress the market value of the property in the present case. We are also unable to agree with the revenue that the facts pleaded by the appellants were within their personal knowledge. It may be so but they have been specifically brought to the notice of the departmental authorities in the letters written by the appellants, chartered accountants, dated 21-2-1983 and 22-2-1983, which we find, have not even been considered at all by the IAC before initiating action.

22. Further, the IAC has also not considered the plea of the appellants that there was no understatement of the consideration with a view to either facilitate reduction or evasion of tax by the transferor in respect of the capital gains arising from the transfer or to facilitate concealment of any income or monies or other assets of the transferee-company. We have also quoted above from paragraph Nos. 2 and 3 of the chartered accountants' letter dated 22-2-1983, which clearly established that there could be no intention on the part of the appellants to understate consideration in the present case. The argument on behalf of the revenue is that these are matters which are within the peculiar knowledge of the parties and that it was not for the revenue to establish these things at the stage of initiating action for acquisition under Section 269D. This argument of the revenue runs counter to the decision of the Bombay High Court in the case of Unique Associates Co-op. Hsg. Society Ltd. (supra), even if we accept for the sake of argument the contention of the revenue that it need not have foolproof evidence regarding Section 269C(1)(a) or (b) at the preliminary stage. In this connection, we find ourselves unable to ignore the facts pleaded by the appellants in their letter, dated 22-2-1983. Both the parties have stated their cases clearly and in unambiguous terms in paragraph Nos. 2 and 3 of this letter. We find there is no reference to this letter at all or the contentions raised by the parties in the note recorded by the IAC before initiating action under Section 269C. The IAC has not stated that the facts mentioned by the appellants were not correct nor has the IAC referred to any material which would even remotely suggest any intention on the part of the appellants to evade the tax liability. In our view, merely paraphrasing the provisions of Section 269C(1)(a) and (b) in paragraph No. 3(iii) of the note at page 33 of the appellants' paper book cannot be considered as sufficient fulfilment of the conditions precedent laid down by Section 269C While we agree with the revenue that it is a preliminary stage and it need not have foolproof evidence, there must be some material which would at least suggest or indicate a probable intention on the part of the appellants to evade their tax liabilities under the 1961 Act or under the 1957 Act. Unfortunately, in the present case, the revenue has been unable to point out any such material to justify the initiation of action under Section 269C.23. The five conditions precedent for the exercise of jurisdiction to initiate acquisition proceedings are cumulative and even if any one of them is not fulfilled, the notice issued by the IAC under Section 269D has to be held as bad and invalid in law. In the present case, we are satisfied that the revenue has been unable to establish that the fair market value of the property exceeded apparent consideration by 15 per cent and that there was any ulterior motive of tax evasion or concealment of income for such untrue statement of apparent consideration in the instrument of transfer of the property by the appellants in the present case. Since these two conditions which are of vital importance are not fulfilled, we have to hold that the initiation of acquisition proceedings by the IAC, by his notice dated 26-2-1983, is invalid in law, unsustainable on facts and, hence, without jurisdiction.

24. Even on the merits of the case, we find ourselves unable to agree with the contentions of the revenue that it is a case where acquisition proceedings have to be taken by the department. In the order of acquisition passed by the IAC, we find that he has not recorded a finding on the issue regarding any intention on the part of the appellants to evade their tax liabilities as required by Section 269C(1)(a) and (b) and Section 269(2) of the Act. In the order also, there is no reference to any of the facts again pleaded by the appellants in their letter, dated 8-9-1983 at pages 34 to 37 of the paper book. The learned standing, counsel, however, referred to the fact that the book profits of the transferee-company, as stated at page 35 of the paper book, amounted to Rs. 49,87,332 for the year ended 31-3-1982. This argument of the revenue overlooks that we are concerned with the transaction of sale effected on 26-7-1982 which would fall for consideration in the accounting year ended 1-4-1982 to 31-3-1983 relevant for the assessment year 1983-84 and that, therefore, the reference to the figure of profit prior to the deduction of investment allowance and depreciation for the earlier years would be of no assistance to the department. In fact the learned Counsel for the appellants has placed before us the computation of income for the accounting year 1982-83 relevant for the assessment year 1983-84 in the case of Wallace Flour Mills Co. Ltd. at page 47 of the paper book, which shows that there was a net loss of Rs. 67,72,685 for this year without taking into account the investment allowance of Rs. 1,55,31,350 which the transferee-company was claiming at 25 per cent on additions of machinery of the value of Rs. 6,21,25,398. It is not the case of the revenue that the figures are incorrect. If these figures of loss are taken into account, there is no question of any concealment of income by the transferee-company for this year.

25. Similarly, in the case of transferor, the figures of her returned income and returned wealth for the three years have been mentioned at page 35 of the appellants' paper book. They show substantial income and wealth declared by the transferor for the three assessment years 1980-81, 1981-82 and 1982-83. In the letter dated 22-2-1983, it has been stated categorically on behalf of the transferor that her intention was to purchase a new flat for her own residence and that the entire capital gain from the sale of these flats would be invested in -the purchase of the new flat. In fact the transferor had purchased a flat subsequently on 4-4-1983 for a sum of Rs. 18 lakhs, the details of which have been filed before the IAC in Form No. 37EE a copy of which has also been furnished to us by the learned Counsel for the appellants. This shows that there could be no intention on the part of the transferor also to evade here tax liability for capital gains, as she would be entitled to the benefit of the exemption allowed by Section 54 in respect of the capital gains arising on the sale of property used for her residence.

26. It is not the case of the revenue before us that the two appellants are not entitled to the exemption and deductions claimed by them under the Act for the assessment year 1983-84 and that their claims for such deductions or exemptions are not true. Further, as held by the Bombay High Court, the burden of proof is on the part of the revenue to establish the actual understatement of consideration by the parties.

The appellants have pointed out the various facts and circumstances, which rule out the possibility of any such understatement of consideration in the present case. Nothing has been brought on record by the IAC, which would rebut the facts and circumstances relied on by the appellants and would establish the understatement of consideration in the sale deed as more probable and true in the present case.

27. It was argued on behalf of the revenue that the appellants are not entitled to the benefit of Section 269, since the transaction was between an individual and a company. In fact it is also not the case of the appellants that the provisions of Section 269Q are applicable to the facts of the present case. At the same time, we do not see any justification for ignoring the realities and facts of life. It cannot be denied that a company has to act through human agency. In the present case, it is not disputed that the father and brother of the transferor are the chairman and director of the Wallace Flour Mills Co.

Ltd., which is the transferee-company. We have also set out the facts in paragraph No. 11 of this order, indicating the several transactions of sale in respect of this property from 1962 to 1982. It would be noticed therefrom that this property was purchased for about Rs. 79,000 in round figures by the Wallace Flour Mills Co. Ltd. in 1962 that the said company sold this property for Rs. 3,31,500, 16 years later in 1978 to another company in the same group and under the same management, namely, Alsales Ltd. and that it was from Alsales Ltd. the present transferor, Mrs. Bina D. Gondalia, has purchased this property on 15-9-1978 for a consideration of Rs. 3,39,900 plus Rs. 500 for shares. We may mention here that the plea of the appellants was that this property was valued for purposes of wealth-tax at Rs. 3,39,900, as provided under Section 7(4) of the Wealth-tax Act, 1957, and the valuation as per Rule 1BB of the Wealth-tax Rules, 1957 would be much lower. This plea of the appellants has not been controverted by the revenue anywhere. When we take into account the above facts and also the strained relationship between the transferor and her husband and the consequent anxiety of the transferor to dispose of her property to avoid any further complications as a result of the litigation between her and her husband, the value of Rs. 12 lakhs paid as consideration cannot be regarded as not representing the true consideration agreed to and paid and received by the parties. The price paid by the Wallace Flour Mills Co. Ltd. to the transferor is nearly four times the price at which the transferor had purchased this property from Alsales Ltd. just four years earlier. The revenue has not placed any material which would establish that the increase or appreciation in the value of the immovable properties in the period of four years from 1978 to 1982 has been more than four times their value in 1978 in the city of Bombay.

28. The learned Counsel for the appellants is right in his submission that the revenue has not taken into account the other adverse factors affecting the market value of this property, viz., its location in any interior portion of the road, its assessability through another private property, its age and the further complication brought about by the notice issued by the estranged husband of the transferor in the Indian Express on 16-7-1982. If all these factors along with the absence of any other transaction of sale in the month of July 1982 are considered together, it would be noticed that the case of the appellants is more probable and true and has to be accepted. In our view, the reasoning of the IAC in paragraph No. 9.2(3)(a) of his order actually goes against the revenue and not in its favour because of the peculiar facts of the present case. We agree with the learned Counsel for the appellants that the two comparable cases, relied on by the departmental valuer in his valuation report, are not truly comparable either in point of time or location or their value for the reasons discussed by us earlier in this order. We also agree with the learned Counsel for the appellants that the IAC was not justified in relying on the materials referred to in exhibits A, B and C to his order without putting them to the appellants before he made use of them against the appellants. Unless the appellants had an opportunity to meet the case put against them, it is not open to the revenue to rely on the alleged comparable sale instances mentioned in exhibit A. In fact most of the transactions of sale have taken place much later and are, therefore, not comparable with the case of the appellants. Apart from this, we are unable to see what conclusion the IAC seeks to draw from exhibits B and C to his order. Exhibit B contains certain questions put to Mr. R.R. Chari, the Commissioner, on acquisition proceedings under Chapter XX-A at Tata Auditorium on 20-7-1983. This is taken from some publication of the Bombay Chartered Accountants Society.

In affluent and posh localities of South Bombay, the rate per sq.

ft. ranges from Rs. 800 to Rs. 1,500. Even in two adjoining buildings, the rate may vary to the extent of Rs. 200 to Rs. 500.

However, the department seems to follow an imaginary price of Rs. 1,000 for whole area, which is not realistic.

It is not known what was the answer given by the Commissioner to this question nor have we been told as to what inference or conclusion follows from this question put by the chartered accountants to the Commissioner. We are also unable to appreciate how this can be taken as an evidence regarding the market value of the property in question in the present case. Similarly, Annexure C which Circular No. 42 issued by the Flat Owners Association, Bombay, giving the approximate price of flat per sq. ft. of built up area prevailing as on 1-5-1983. In this the value for Pedder Road is given as Rs. 1,000 to Rs. 1,200 per sq.

ft. Apparently, the argument of the revenue is that the value for the present property should also be in the range of Rs. 1,000 to Rs. 1,200 on the basis of this circular since the property is in the road adjoining Pedder Road. First, we must point out that the rates given are as on 1-5-1983. This circular does not purport to give the prevailing price of rates of flats in the month of July 1982. Even if it is permissible to look into this circular, it is mentioned in the first paragraph that the prices of flats in areas like Cuffe Parade, Nepean Sea Road, Tardeo, Grant Road, etc., had come down by about 10 to 20 per cent after the recent amendment to the Act which affected the transfer of flats as on 1-7-1982. This would show that this circular in a way also supports the case of the appellants that there was a fall in prices in the month of July 1982 and not an increase in prices.

29. Having regard to the totality of the facts and circumstances of the case and the evidence placed before us, we are of the view that the case of the appellants squarely falls within the ratio of the decision of the Bombay High Court in the case of Unique Associates Co-op. Hsg.

Society Ltd. (supra). We, therefore, respectfully follow the said decision of the Bombay High Court and hold that the revenue has failed to make out a case that there was any understatement of consideration with a view to evade tax liability by the transferor and the transferee within the meaning of Section 269C(1)(a) and (b). We, therefore, hold that the order of acquisition passed by the IAC under Section 269F(6), dated 24-2-1984, has to be cancelled as unsustainable both in law and on facts.


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