Court Quashes Property Purchase Order Due to Lack of Fair Market Value Determination

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Case Name:

Inter Equipments (India) Pvt. Ltd. & Anr. Vs Appropriate Authority & Ors. (High Court of Bombay)

Writ Petition No. 509 of 1993

Date: 7th April 2008

Key Takeaways:

• The court emphasized the necessity of determining the fair market value before concluding undervaluation.
• The decision highlights the importance of transparency and adherence to the principles of natural justice in administrative decisions.
• The case reinforces the precedent that significant undervaluation must be established to justify property acquisition under Chapter XX-C of the Income Tax Act.

Issue

Did the Appropriate Authority err in ordering the purchase of the property without determining its fair market value and without providing necessary sale instance details?

Facts

• The petitioners agreed to purchase a flat in Maker Tower “B”, Mumbai, for Rs.34,00,000.
• The Appropriate Authority sought to purchase the property under Section 269UD(1) (of Income Tax Act, 1961), claiming undervaluation.
• The petitioners argued that the fair market value was not determined, and relevant sale instances were not disclosed.

Arguments

• Petitioners: Argued that the order was invalid as the fair market value was not determined, and sale instances were not disclosed, violating natural justice.
• Respondents (Revenue): Supported the order, stating that the practice of determining fair market value was not established at the time.

Key Legal Precedents

• C.B. Gautam vs Union of India (1992) 108 CTR (SC) 304: Established that significant undervaluation (15% or more) must be shown to justify property acquisition.
• Vimal Agarwal vs Appropriate Authority (1994) 121 CTR (Bom) 99: Reinforced the need for fair market value determination.

Judgement

The court quashed the order under Section 269UD(1) (of Income Tax Act, 1961), citing the failure to determine the fair market value and the lack of transparency in providing sale instance details. The decision was based on the principles of natural justice and the precedents set by C.B. Gautam and Vimal Agarwal cases.

FAQs

Q1: Why was the order quashed?

A1: The order was quashed because the fair market value was not determined, and the sale instances were not disclosed, violating natural justice principles.

Q2: What is the significance of determining fair market value?

A2: Determining fair market value is crucial to establish whether there is significant undervaluation, which is necessary for property acquisition under the Income Tax Act.

Q3: How does this case impact future property acquisition cases?

A3: This case reinforces the need for transparency and fair market value determination, setting a precedent for future cases involving property acquisition under tax laws.

1. In this petition, the challenge is with regard to the order dated 18th February, 1993 was passed by the Appropriate Authority under Section 269UD(1) (of Income Tax Act, 1961) (‘the Act’ for short) whereby the flat no.232 on the 23rd floor of Maker Tower “B”, Cuffe Parade, Mumbai-400005('property in question' for short) is sought to be purchased by the Appropriate Authority under Chapter XX-C of the Act. The facts relevant for the purpose of the present petition are that by an agreement dated 29th September, 1986 the petitioners had agreed to purchase from the respondent No. 5 the flat no.232 on the 23rdfloor of Maker Tower “B”, Cuffe Parade, Mumbai-400005(“the said act”) for an aggregate consideration of Rs.34,00,000/-. The payment was to be made in two installments- (i) Rs.9 lakhs on or before 31-12-1986.(ii) Rs.25 lakhs on or before 30-6-1987.

2. On the 29th September, 1986, petitioner paid a sum of Rs.9 lakhs and was put in possession of the flat and the balance of Rs.25 lakhs was paid before 30th June,1987.

3. An application is made in form No. 37 EE by the petitioner in respect of the transfer of the said flat. Respondent No.5 and the petitioner filed an application in form No. 37-I (Respondent 1 to 3) with the Appropriate Authority as a matter of abundant precaution.

4. On 23rd December, 1986, the Appropriate Authority passed an impugned order under section 269UD(1) (of Income Tax Act, 1961), directing the purchase of the flat by Union of India (Respondent 4) without giving any opportunity of hearing to the petitioners.

5. Aggrieved by the said order, the petitioners in January 1987, filed a Writ Petition bearing No. 233 of 1987 challenging the validity of the order passed u/s269UD(1) (of Income Tax Act, 1961), in this Court.

6. On 17th December, 1992, this Court quashed the said order dated 23rd December, 1986 remanding the matter back to the appropriate authority to decide the issue afresh in the light of the judgment of the Apex court in the case of C.B Gautam v. Union of India reported 199 I.T.R 530. Thereafter by a show cause notice dated 30/12/1992 the petitioners were called upon to show cause as to why the property in question agreed to be purchased by the petitioners should not be purchased under 269UD (1) of the Act. In the said show cause notice the Appropriate Authority referred to 3 sale instances.

7. The Appropriate Authority had determined the per sq. ft. rate for the transfer of the said flat at Rs.1906/- after reducing from the consideration of Rs. 34lakhs a sum of Rs. 25,000/-.

8. The Appropriate Authority has referred to 3 sale instances. One flat in the same building sold at a rate of Rs.2100 per sq.ft. Another flat referred to was in the adjacent building in Maker Towers “B” sold at a rate of Rs. 2535 per sq. ft. Four other flats in Maker Tower which were referred, were sold at a rate of Rs. 2311 per sq. ft.

9. On 27/9/1986, the Appropriate Authority has issued a no objection certificate for the flat No.131 in the very same building purchased by Palanpur Traders Ltd, Respondent No.5 herein, from System Communications at the same rate of Rs. 2000/- per sq. ft. the said flat(flat no.131) had an area of 3000sq.ft., better located and commanded a better view. Therefore, the difference in price between Rs.2000/- and Rs.1906/- is less than 15%.

10. The petitioners by their reply letter dated 22/1/1993 objected to the purchase of the property under Section 269UD(1) (of Income Tax Act, 1961) on various grounds set out therein. In the said reply, the petitioners inter alia stated that even on the basis of sale instances set out in the impugned show cause, it cannot be said that there is undervaluation by 15% of the fair market value. By the said reply, the petitioners had called upon the respondents to furnish all particulars and details of the sale instances referred to in the show cause notice. However, the Appropriate Authority had not furnished the same.

11. Mr. Pardiwala for the Petitioners and Mr.Aniket Nair for Respondent No.5 Palanpur Traders Ltd. Submitted that the impugned order dated 23rd December, 1986 suffers from serious infirmities and is liable to be quashed and set aside, because, firstly, the appropriate authority has not determined the fair market value of the property in question so as to arrive at a conclusion that there is any undervaluation to the extent of 15% of the fair market value. Secondly, it is contended that the impugned order passed without furnishing particulars and details relating to the sale instances set out in the show cause notice, which is in breach of the principles of natural justice. Thirdly, it is contended that even if the average sale prices of the sale instances set out in the show cause notice are taken as the fair market value, there is no undervaluation to the extent of 15% as enunciated by the Apex Court in the case of C.B. Gautam. For all the aforesaid reasons, Mr.Pardiwala, the learned Counsel for the petitioners submitted that the impugned order is liable to be quashed and set aside. It is an admitted position that the Appropriate authority in their impugned order have not determined its fair market value before passing the said order.

12. Mr. Ashokan, learned counsel appearing on behalf of the respondents, the revenue, on the other hand supported the order of the Appropriate Authority. He fairly stated that prior to the decision of this court in the case of Vimal Agarwal v. Appropriate Authority reported in 210 I.T.R 16, there was no practice of determining the fair market value in respect of property purchased u/s 269UD(1) (of Income Tax Act, 1961). In these circumstances, on the basis of sale instances referred by the Appropriate Authority, the Appropriate authority was justified in passing the impugned order. Mr.Asokan also fairly admitted that the Appropriate Authority did not furnish details and particulars of the sale instances referred to by the Appropriate Authority, though demanded by the Petitioners.

13. We have carefully considered the rival submissions. The Apex Court in the case of C.B. Gautam (supra) has held that the provisions of Chapter XX-C can be resorted to only when there is a significant undervaluation to the extent of 15% of the fair market value with a view to evade tax. This Court, in Vimal Agarwal's case, has further held that without determining the fair market value, it is not only difficult but impossible to say that the apparent consideration is lower than the fair market value by 15%. In the present case, admittedly, the fair market value of the property in question is not determined and, therefore, purchase of the property in question on the footing that there is undervaluation to the extent of 15% of the fair market value has to be held to be without any basis, whatsoever.

14. Moreover, before passing the impugned order, the appropriate authority has neither given the documents nor furnished details and particulars relating to the sale instances referred to in the show cause notice though demanded by the Petitioners. The Appropriate Authority, in the impugned order has not referred to the sale instance pointed out by the petitioners in their reply to the show cause notice which was in the same building and sale also took place in the same month. In these circumstances, the grievance of the petitioners that the impugned order suffers from serious infirmities deserves acceptance.

15. Apart from the above, in respect of the sale instances referred to in the show cause notice, the petitioners had specifically sought inspection of the documents and details and particulars thereof, but the same was not given. Failure to furnish relevant particulars and details of the sale instances by the revenue clearly constitutes a breach of the principles of natural justice, as those sale instances were strongly relied upon by the Appropriate Authority.

16. For all the aforesaid reasons, we are of the opinion, that the impugned order cannot be sustained and we have no option but to quash and set aside the same which was passed u/s 269UD(1) (of Income Tax Act, 1961).

17. Accordingly, the petition is allowed. Rule is made absolute in terms of prayer clauses (a)(b), however with no order as to costs.

(J.P.DEVADHAR,J.) (DR.S.RADHAKRISHNAN,J.)