Income tax---

----Purchase of immovable property by Central Government---Under valuation of property---Determination of under valuation by appropriate Authority should be based upon firm foundations of fact and should not be arbitrary---Petitioner's property situated opposite to a school on main road-- No neighbours in immediate vicinity and place deserted in evenings---Sale of its property by petitioner---Appropriate Authority alleging that comparable property of less extent on dead end cross road fairly close to petitioner's property sold for higher value---Appropriate Authority issuing notice for pre emptive purchase of property on grounds that difference between apparent consideration as worked out by petitioner and market value as determined by appropriate Authority on basis of note of executive engineer exceeded 15 percent.---Person looking for a house to live in is likely to prefer a house which is situate a little interior than on main road opposite to school where there are no neighbours---Addition of 15 percent. to apparent consideration as ascertained from sale of comparable property not based on objective criteria---Order of appropriate Authority directing pre-emotive purchase of property set aside---Indian Income Tax Act, 1961, Chap. XX-C.

The provisions of the Income Tax Act, 1961, providing for pre emptive purchase is a power conferred on the authorities to be exercised only in cases where there has been under-valuation. Though the expression "market value" has not been defined in the relevant section or elsewhere in the Act, the "market value" has to be determined on the basis of objective criteria and cannot be left to the whims and fancies of the officer or authority, though in the ultimate analysis the market value remains an estimate. That estimate must be based upon reasonable foundations of fact. It is for this reason that the appropriate authority takes care to find out comparable instances of sale so that the rate at which comparable properties had been sold, can be the basis for determining the market value of the property which they are required to estimate.

The property belonging to the petitioner to the extent of 4 grounds and 1,555 sq. ft. was sold by her to the purchaser for a consideration of Rs.67,50,000. A show-cause notice was issued to the petitioner on the basis of the note prepared by the executive engineer of the appropriate authority to the effect that a property comparable in value measuring one ground and 1,350 sq. ft. at a location very near the property of the petitioner had been sold for Rs.29,75,000 which worked out to a rate of Rs.16.12 lakhs per ground and the consideration as set out in the agreement between the petitioner and the purchaser worked out to a figure which was muchless. than the same and, therefore, there was under-valuation with the intention to avoid payment of tax. In the show-cause notice, it was stated that the comparable property was located on a dead end cross road of about 30 feet width on II Avenue, taking off from Casa Major Road, fairly close to the petitioner's property which was right on Casa Major Road itself. The width of Casa Major Road is 40 feet. The appropriate authority contended that because of the petitioner's property being on the main road, the valve of that property was higher by 15 percent. over and above that of the property situated on II Avenue, Casa Major Road, on a dead end cross road. On a writ petition challenging the order of the appropriate authority for pre-emotive purchase of the property:

Held, that the reasons given by the executive engineer of the appropriate authority which reasons had been adopted by the appropriate authority, viz., that the other property was situated in a cross road in a dead end were not factors, of which it could be said with certainty that a purchaser would offer a lesser price than for a property situated on the main road situated opposite to a school and which might not be ideal for use as a residence. A person looking for a house to live in is more likely to prefer a house which is situate a little in the interior than on the main road opposite to a school where there are no neighbours. The choice of the figure of 15 percent. as addition, therefore, could not be said to be a reliable, rational and objective addition. It was more in the nature of the opinion of the executive engineer as to what he thought should be the addition. Such opinion on the part of the executive engineer being blindly adopted by the appropriate authority was not a safe basis, on which to hold that a transaction which was otherwise bona fide, was to be regarded as an instance of deliberate under-valuation with a view to avoid payment of tax. Therefore, the order of the appropriate authority directing pre-emptive purchase of the property of the petitioner could not be sustained.

Gautam (C.B.) v. Union of India (1993) 199 ITR 530 (SC) ref:

V. Ramachandran for A.R. Karunakaran for Petitioner.

S.V. Subramanian for Respondents Nos. l and 2.

R. Thiagarajan for Respondent No.3.

JUDGMENT

The property of the petitioner has been sought to be pre-emptively purchased by the Revenue on the ground that the market value stated in the agreement with the purchaser is not the market value and that the difference between the apparent consideration as worked out by and the market value as determined by the appropriate authority exceeds 15 percent.

Form No.37-I statement was furnished on October 13, 1992. The consideration for the transfer as set out therein is Rs.67,50,000. The extent of the property is 4 grounds and 1,555 sq. ft.

A show-cause notice was issued to the petitioner alleging that a property comparable in value measuring I ground 1,350 sq. ft. at a location very near the property of the petitioner had been sold for Rs.29,75,000 which worked out to . a rate of Rs.16.12 lakhs per ground and the consideration as set out in the agreement between the petitioner and the purchaser worked out to a figure which was much less than the same and, therefore, there was under-valuation presumably with the intention to avoid payment of income-tax.

In the show-cause notice, it was stated that the comparable property is located on a dead end cross road of about 30' width, called II Avenue, taking off from Casa Major Road, fairly close to the petitioners' property which was right on Casa Major Road itself. The width of Casa Major Road is 40'. It was alleged that because of the petitioner's property being on the main Road, the Value of that property was higher by 15 percent. over and above that of the property situated on II Avenue, Casa Major Road, on a dead end cross road. The manner in which the figure of 15 percent., was chosen was not set out in the notice. The petitioner as also the intending purchaser replied to the show-cause notice disputing the claim that the property had been undervalued with an intention to evade tax and that the value of the property on the Casa Major Road could not be estimated at a figure of 15 percent. over and above the value of the property in the cross road.

The support for the assertion in the show-cause notice -that 15 percent. addition to the value as ascertained from the sale of the comparable property was warranted is the note prepared by the executive engineer of the appropriate authority before the show-cause notice was issued. This is what he has noted in that report:

"As the location of the property in the instant case is on the main Casa Major Road as against the location of the case under comparison on a cross road, which is also dead end road, off Casa Major Road, the fair market rate of the land in the instant case can be considered to be at least 15 percent. more."

It is only by the addition of 15 percent., that the appropriate, authority could possibly claim that there had been under-valuation. If the rate at which the property sold on the II Cross Road had been adopted, there would have been no basis whatever for alleging any under-valuation. The owner as also the purchaser had in their replies pointed out that the property in question is situated opposite to a school, that there are no neighbours in the immediate vicinity, that the place will be deserted in the evenings and that the location cannot, therefore, be regarded as being very much more valuable than the residential property situated in the cross road.

The provision in the Income-tax Act providing for pre-emptive purchase is a power conferred on the authorities to be exercised only in cases where there has been undervaluation. Though the expression "market value" has not been defined in the relevant section or elsewhere in the Act, the "market value" has to be determined on a rational basis of objective criteria and cannot be left to the whims and fancies of the officer or authority though in the ultimate analysis the market value remains on estimate. That estimate must be based upon a reasonable foundation, of fact. It is for this reason that the appropriate authority takes care to Mind out comparable instances of sale so that the rate at which comparable properties had been sold can be the basis for determining the market value of the property which they are required to estimate.

The Supreme Court in C.B. Gautam v. Union of India (1993) 199 ITR 530, has laid down that the exercise of power 'of pre-emptive purchase casts shadow on the integrity of the parties to the transaction inasmuch as there is an imputation of dishonesty to the extent of not stating truthfully the real value of the property when they entered into the agreement. It was, therefore, held by the Court that the person likely to be affected by the order is entitled to notice and hearing. The hearing so given is to be completed in a very short span of time. Neither the authority nor the person affected has the time required to find out all transactions which can be regarded as comparable, and adduce evidence to establish that the transaction was between willing buyer and willing purchaser acting at arm's length that such a transaction will provide the proper basis for determining the market value.

It is, therefore, all the more necessary that when an - appropriate authority holds that the property has been undervalued, its determination should be based upon firm foundations of fact and does not give room for arbitrariness. The authority is not required under the terms of the Act to direct purchase of each and every property in respect of which declarations are filed before it. It is not constituted as a buying agent for the Government. It is only required to ensure that parties to the transactions transact honestly and do not avoid payment of tax by deliberately undervaluing the property.

Any factor in the exercise carried out by the appropriate authority which is liable to be regarded as arbitrary must, therefore, be excluded. It is one thing for the authority to adopt as the basis for comparison the value at which another property in the vicinity has been sold, and it is a different matter altogether for the authority to make an addition to that value on the basis of factors considered by it to warrant such addition. Any addition to a recorded value must be fully justifiable. If there is room for doubt as to the correctness of the addition, the benefit must go to the owner of the property and the prospective purchaser rather than the Revenue.

In the instant case, had the authority merely adopted the rate at which the property in cross road had been sold, there would have been no case for asserting that there was undervaluation. It is only by reason of the addition of 15 percent., to the value of the other property that undervaluation has been arrived at. No reasons are forthcoming as to why the figure of 15 percent. has been adopted. Had that figure been 5 percent. or 10 percent., the value still would not have been in excess of 15 percent., over the market value as ascertained from the transaction concerning the property situated nearby.

The reasons given by the executive engineer which reasons have been adopted by the appropriate authority, viz., that the other property was situated in a cross road in a dead end are not factors of which it can be said with certainty that a purchaser will offer a lesser price than for a property situated on a main road situated opposite to a school and which may not be ideal for use as a residence. A person looking for a house to live in is more likely to prefer a house which is situate a little in the interior than on the main road opposite to a school where there are no neighbours. The choice of the figure of 15 percent., as addition, therefore, cannot be said to be a reliable rational and objective addition. It is more in the nature of the opinion of the engineer as to what he thinks should be the addition. Such opinion on the part of the engineer being blindly adopted by the appropriate authority is not a safe basis on which to hold that a transaction which is otherwise bona fide, is to be regarded as an instance of deliberate undervaluation with a view to avoid payment of income-tax.

The impugned order directing pre-emptive purchase, therefore, cannot be sustained and the same is set side. In the circumstances, there will be no order as to costs.

M.B.A./4046/FC Order accordingly.