IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE S.SIRI JAGAN TUESDAY, THE 12TH JANUARY 2010 / 22TH POUSHA 1931 OP.No. 6808 of 1999(I) ------------------------------- PETITIONER(S): ------------------------ 1. M/S. NEW INDIA CHEMICAL ENTERPRISES, REPRESENTED BY SRI.G. GOPINATHAN PILLAI, PARTNER, 50/221A, MANIMALA ROAD, EDAPPALLY, COCHIN-682 026. 2. M/S. NICE CHEMICALS PVT. LTD., REPRESENTED BY SRI. G. GOPINATHAN PILLAI, DIRECTOR, 50/221A, MANIMALA ROAD, EDAPPALLY, COHIN-682 024. BY ADV. DR.K.B.MUHAMED KUTTY, SENIOR ADVOCATE, MR.RAJESH NAIR RESPONDENT(S): ------------------------- 1. APPROPRIATE AUTHORITY, INCOME TAX DEPARTMENT, IV TH FLOOR, 'A' WING, KENDRIYA SADAN, KORAMANGALA, BANGALORE-560 034. 2. UNION OF INDIA, REPRESENTED BY SECRETARY TO REVENUE DEPARTMENT, MINISTRY OF FINANCE, NORTH BLOCK, NEW DELHI-40001. R1 BY MR.P.K.RAVINDRANATHA MENON, SENIOR ADVOCATE, ADV. MR.GEORGE K. GEORGE . THIS ORIGINAL PETITION HAVING BEEN FINALLY HEARD ON 30/11/2009, THE COURT ON 12/01/2010 DELIVERED THE FOLLOWING: O.P. NO. 6808/1999-I APPENDIX PETITIONER'S EXHIBITS: EXT.P1: COPY OF THE S.S. REGISTRATION CERTIFICATE OF THE TRANSFEROR. EXT.P2: COPY OF THE STATEMENT SHOWING VALUE OF LAND BUILDINGS AND DEPRECIATION. EXT.P3: COPY OF THE AGREEMENT FOR SALE. EXT.P4: COPY OF THE LETTER BY UNION BANK TO THE PETITIONER. EXT.P5: COPY OF THE VALUATION REPORT BY APPROVED VALUER. EXT.P6: COPY OF THE FIRE POLICY. EXT.P7: COPY OF THE FORM 37-I. EXT.P8: COPY OF THE MEMO ISSUED BY THE FIRST RESPONDENT. EXT.P9: COPY OF THE REPLY BY THE PETITIONER TO FIRST RESPONDENT. EXT.P10: COPY OF THE SHOW CAUSE NOTICE ISSUED BY RESPONDENTS TO PETITIONER. EXT.P11: COPY OF THE REPLY BY PETITIONERS TO R1. EXT.P12: COPY OF THE ORDER PASSED U/S.269 UD (a) BY R1. EXT.P13: COPY OF THE LEASE AGREEMENT BETWEEN THE PETITIONERS. EXT.P14: COPY OF THE VALUATION REPORT BY APPROVED VALUER. EXT.P15 & 16: NIL EXT.P17: COPY OF THE SALE DEED NO.4545 OF 1998 DATED 10/12/1998. EXT.P17A: COPY OF THE ENGLISH TRANSLATION OF EXT.P17. EXT.P18: COPY OF THE SLAE DEED NO.219/1998 DATED 19/01/1998. EXT.P18A: COPY OF THE ENGLISH TRANSLATION OF EXT.P18. EXT.P19: COPY OF THE DEED NO.3509 OF 1998 DATED 24/09/1998. EXT.P19A: COPY OF THE ENGLISH TRANSLATION OF EXT.P19. EXT.P20: COPY OF THE SALE DEED NO.3788/99 DATED 19/02/1999. EXT.P21: COPY OF THE SALE DEED NO.708/99 DATED 19/02/1999. EXT.P22: COPY OF THE NOTIFICATION UNDER SECTION 28 OF KERALA STAMP ACT. RESPONDENT'S EXHIBITS: NIL //TRUE COPY// P.A. TO JUDGE rs. S.SIRI JAGAN, J. ================== O.P.No. 6808 of 1999 ================== Dated this the 12th day of January, 2010 J U D G M E N T This original petition is filed by two petitioners jointly. The first petitioner is a partnership firm and the 2nd petitioner is a private limited company. M/s.P.Sahadeva Menon, V.Govindankutty, G.Gopinathan Pillai, K.M.Ramakrishna Pillai and M.A.George are the partners of the firm. They are also the only shareholders of the 2nd petitioner company. The 1st petitioner firm purchased 69.222 cents of land comprised of 43.926 cents in Sy.No.59/6A1 and 25.296 cents in Sy.No.60/1A1 of Edappally North Village by sale deed nos.3987 dated 4.5.1979 and 5188 dated 11.11.1993 respectively, for a total sale consideration of Rs.2,55,407/-. The firm started a small scale industrial unit, engaged in the business of manufacturing laboratory chemicals, reagents etc. In the land bought by them they constructed factory buildings in 1980, 1988 and 1995 for the purpose of their business. 2. The firm entered into an agreement with the company for sale of the said land and buildings for a total sale consideration of Rs.60 lakhs, of which Rs.50 lakhs were to be paid by D.D. or pay order drawn on any bank and the balance Rs.10 lakhs were to be credited to the account of each of the five partners in equal shares. o.p.6808/99 2 Ext.P3 is that agreement dated 3.10.1998. The firm had credit facilities from M/s.Union Bank of India, Edappally Branch, for repayment of amounts due on which the said land and buildings were mortgaged as security. By Ext.P5 valuation dated 16.6.1994, the Bank had valued the 69.322 cents of land at Rs.15,59,745/- at the rate of Rs.22,500/- per cent and the buildings at Rs.11,05,635/- aggregating to Rs.26,65,380/-. At the instance of the Bank, the buildings were insured with the National Insurance Company Ltd. for a sum of Rs.25,00,000, as evidenced by Ext.P6 policy of insurance dated 16.10.1998. 3. At that time, Chapter XXC of the Income Tax Act, 1961 was in force (which was later repealed), S.269UC of which stipulated that no transfer of immovable property of such value exceeding five lakhs rupees as may be prescribed should be effected, except after entering into an agreement for transfer between the transferor or and transferee at least four months before the intended date of transfer, reduced into writing in the form of statement in Form 37I prescribed under Rule 48L of the Income Tax Rules, which had to be furnished to the appropriate authority under the Act. Under Section 269UD, after receipt of the said statement, the appropriate authority may make an order for purchase by the Central Government of such immovable property at an amount equal to the apparent consideration fixed in the o.p.6808/99 3 statement. But no such order shall be made after the expiration of three months from the end of the month, in which the statement under Section 269UC is received by the appropriate authority. 4. For the sale of the abovesaid property, the petitioners filed Ext.P7 statement in Form 37I dated 3.10.1998 before the appropriate authority, which was received by the appropriate authority, on 8.10.1998. On receipt of the same, by Ext.P8 communication dated 28.10.1998, the appropriate authority directed the petitioners to produce copies of the encumbrance certificate, khata certificate, parent deed and tax receipt in respect of the property. The petitioners complied with the same by Ext.P9 letter dated 4.11.1998. The appropriate authority gave a notice for inspection of the property to be conducted on 21.11.1998, which was first postponed to 8.2.1999 and later to 12.2.1999. After the inspection, on 12.2.1998 itself, Ext.P10 show cause notice was issued to the petitioners directing the petitioners to show cause why an order for pre-emptive purchase of the property under Section 269UD(1) of the Income Tax Act, 1961, should not be passed, since the appropriate authority is satisfied that the apparent consideration shown in the agreement for sale is below the market price by over 15% and therefore a presumption is to be drawn that such undervaluation has been made to evade tax. The petitioners filed Ext.P11 reply to the show cause notice denying o.p.6808/99 4 undervaluation or attempt to evade tax. However, by Ext.P12 order, the appropriate authority ordered pre-emptive purchase of the said property. Ext.P12 order is under challenge in this writ petition. 5. The petitioners challenge Ext.P12 on several grounds. Firstly, they contend that since the statement in Form 37I was received on 8.10.1998 and Ext.P12 order was passed only on 26.2.1999, the order was passed beyond the period of limitation prescribed in Section 269UD. According to the petitioners, although the proviso to the Section stipulates that the limitation period has to be reckoned with reference to the date of receipt of the rectified statement by the appropriate authority, the direction to produce documents which are not relevant for consideration of the statement cannot be regarded as notification of a defect, especially since the statement was never returned as defective. Secondly, it is contended that the order is violative of the principles of natural justice in so far as for deciding the market value of the property, the appropriate authority has relied on a document without disclosing the details thereof to the petitioners, but simply referring to a file number. Thirdly they would contend that there was neither undervaluation of the property nor attempt to evade tax since the value shown in the statement was the actual consideration for the sale agreed between them and as revealed by Exts.P5 and P6, the same is not below the o.p.6808/99 5 market value. It is contended that the evidence produced by the petitioners to prove valuation was ignored by the appropriate authority, and a document details of which were not disclosed to the petitioners was relied upon. Lastly, it is contended that since the sale is by five individuals, the valuation should be taken separately in respect of each partner and not collectively, in which case, there would not, in any event, be any cause of action to invoke the provisions of Chapter XXC of the Income Tax Act, which have been invoked. The petitioners rely on the following decisions: 1. C.B.Gautam v. Union of India (1993) 199 ITR 530 (SC) 2. Shriniketan Members Association v. Appropriate Authority (1996) 219 ITR 359 (Guj). 3. Commr. of Income Tax v. Shivkami Co. (P) Ltd. (1986) 159 ITR 71 (SC). 4. Ketki Land Holdings Pvt. Ltd. v. Appropriate Authority (1997) 227 ITR 825 (Guj). 5. Musthafa Ummer v. Appropriate Authority (2001) 248 ITR 436 (Ker.). 6. DLF Universal Ltd. v. Appropriate Authority (2000) 243 ITR 730 (SC). 7. C.V.Mulk v. Commissioner of Agrl. Income Tax, Kerala (1979) 120 ITR 670 (Ker.). 8. Lovelock and Lewes v. Commr. of Income Tax (1994) 208 ITR (Cal.) 9. Diwan Brothers v. Central Bank of India & others- AIR 1976 SC 1503. 6. The respondents oppose the contentions of the petitioners. o.p.6808/99 6 According to them, production of the documents called for, being mandatory for a statement to be a valid statement under Rule 48L, until that defect has been cured, the statement continues to be defective and by virtue of S.269UC(4), the statement shall be deemed never to have been furnished. The defect having been cured only on 8.11.1998 by producing the encumbrance certificate, the order passed on 26.2.1999 is within the three months stipulated in Section 269UD. Regarding non-supply of documents, they would contend that the document relied upon was referred to in the show cause notice itself and since the petitioners never requested for details of the same, there is no violation of the principles of natural justice. Regarding undervaluation and attempt to evade tax, they would contend that the documents produced by the petitioners do not disprove the documents relied upon and therefore there is clear undervaluation and undervaluation is a strong circumstance which leads to the conclusion of attempt to evade tax. According to them, the fact that the partners of the first petitioner firm are the only shareholders of the 2nd petitioner company does not lead to any inference in favour of the petitioners, since the two are separate legal entities and there is a sale from one entity to the other, in which there is undervaluation resulting in attempt to evade tax. Regarding the last contention of the petitioners, the answer of the respondents is that the sale is by the o.p.6808/99 7 firm to the company and the petitioners themselves admitted the same as a sale coming within the purview of Chapter XXC, by filing a statement in Form 37I submitting the sale to the jurisdiction of the appropriate authority under Chapter XXC. They also rely on the very same Supreme Court decision in C.B.Gautam's case (supra) relied on by the petitioners in support of their contentions. 7. I have considered the rival contentions in the light of the decisions cited before me, in detail. 8. At the outset I must note that the provisions of Chapter XXC of the Income Tax Act, are so harsh that they are often described as authoritarian and even draconian. The Parliament themselves repealed the same subsequently. It is settled law that fiscal statutes should be strictly interpreted giving every benefit of doubt to the assessee. [see Diwan Brother's case (supra)]. It is all the more so in this case, since the legislation in question is unusually harsh on the assessee to the extent of being totally one sided. So I am inclined to take a very strict view while considering the case of the revenue and am inclined to give every benefit of doubt to the petitioners. 9. But, I am not inclined to accept the case of the petitioners that Ext.P12 order has been issued after the period of limitation prescribed in Section 269UD. For deciding this question what is relevant is the first three provisos to Section 269UD(1), which read as o.p.6808/99 8 follows: “Provided that no such order shall be made in respect of any immovable property after the expiration of a period of two months from the end of the month in which the statement referred to in Section 269UC in respect of such property is received by the appropriate authority: Provided further that where the statement referred to in Section 269UC in respect of any immovable property is received by the appropriate authority on or after the first day of June 1993, the provisions of the first proviso shall have effect as if the words “two months” the words “three months” have been substantiated. Provided also that the period of limitation referred to in the second proviso shall be reckoned where any defect as referred to in sub-section (4) of Section 269UC has been intimated, with reference to the date of receipt of the rectified statement by the appropriate authority.” Section 269UC reads thus: “269UC (1) Notwithstanding anything contained in the Transfer of Property Act, 1882 (4 of 1882), or in any other law for the time being in force, no transfer of any immovable property in such area and of such value exceeding five lakh rupees, as may be prescribed shall be effected except after an agreement for transfer is entered into between the person who intends transferring the immovable property (hereinafter referred to as the transferor) and the person to whom it is proposed to be transferred (hereinafter referred to as the transferee) in accordance with the provisions of sub-section (2) at least four months before the intended date of transfer. (2) The agreement referred to in sub-section (1) shall be reduced to writing in the form of a statement by each of the parties to such transfer or by any of the parties to such transfer acting on behalf of himself and on behalf of the other parties. (3) Every statement referred to in sub-section (2) shall,- (i) be in the prescribed form; (ii) set forth such particulars as may be prescribed; and (iii) be verified in the prescribed manner, and shall be furnished to the appropriate authority in such manner and within such time as may be prescribed, by each of the parties to such transaction or by any of the parties to such transaction acting on behalf of himself and on behalf of the other parties. o.p.6808/99 9 (4) Where it is found that the statement referred to in sub- section (2) is defective, the appropriate authority may intimate the defect to the parties concerned and give them an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the appropriate authority may, in its discretion, allow and if the defect is not rectified within the said period of fifteen days, or as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Chapter, the statement shall be deemed never to have been furnished.” The statement under Section 269UC is to be filed in Form 37I as prescribed in Rule 48L(1) of the Income Tax Rules, which reads thus: “48L. Statement to be furnished under section 269UC(3) (1) The statement required to be furnished to the appropriate authority under sub-section (3) of section 269UC shall be in Form No.37-I and shall be signed and verified in the manner indicated therein by each of the parties to the transfer referred to in sub-section (1) of that section or by any of the parties to such transfer acting on behalf of himself and on behalf of the other parties.” Column 6 of Form 37I reads thus: “6. Is the property proposed to be transferred encumbered in any manner ? If so, please give details if it is by way of: (a) lease (b) mortgage (including equitable mortgage of any form) (c) charge (d) tenancy (e) any other (please specify) Please furnish a copy of the deed, agreement or any other document executed in respect of the encumbrance. Also furnish uptodate encumbrance certificate issued by the competent Sub-Registrar.” Going by the Section, Rule and the Form, for a statement under the Section to be a valid statement, the same should be accompanied by o.p.6808/99 10 upto date encumbrance certificate issued by the competent sub registrar in respect of the property to which is relates. Admittedly, the statement in Form 37I submitted by the petitioners was not accompanied by an encumbrance certificate, which defect was intimated and the document was called for by Ext.P8. The petitioners produced the encumbrance certificate only on 8.11.1998. Therefore, the statement continued to be defective in terms of the third proviso till that date. Therefore, in terms of sub section 4 of Section 269UC, that statement must be deemed never to have been filed till 8.11.1998. As such, the period of limitation would start only from 1.12.1998 and not 8.10.1998 as contended by the petitioners. Ext.P12 order was passed on 26.2.1998, which is within the three months prescribed in the second proviso to Section 269UD(1). As such, the order was passed within the period of limitation prescribed by the statute. Therefore, I have no hesitation to reject the first contention of the petitioners regarding limitation. 10. The second contention of the petitioners is regarding violation of principles of natural justice, on the ground that the details of the document relied upon by the appropriate authority in support of his valuation of the property has not been disclosed to the petitioners. I find considerable merit in this contention. In Ext.P10 show cause notice, the said document is referred to thus: o.p.6808/99 11 “Further, this can also be compared to the sale instance in File No.AA/CHN/5(2)/98-99 for the sale of property situated at Sy.No.148/1A, 148/113 of Edappally South Village wherein the land rate received is Rs.1,53,462/- per cent”. I am of opinion that in view of the harsh nature of the legislation while taking action under that legislation, the appropriate authority had a duty to disclose the details of all materials to be collected and relied upon by him in support of his case, in the show cause notice itself. In this case except a file number, two sy. Nos. and value per cent, the details of the document, the nature of the land, the extent of the land sold etc. which are very relevant for deciding market value of the land have not been disclosed to the petitioners, without which the petitioners could not have effectively controverted the same. In Ext.P12 order of the appropriate authority the question of valuation has been considered thus: “b) The next argument is in respect of sale of land and the building. The land and its natural fixtures like trees were to be valued at Rs.40 lakhs and the building and other fixtures at Rs.20 lakhs. There are two items of property. It was argued that in respect of each item such as land and building separately, a conclusion will have to be arrived at whether the required percentage of 15% is fulfilled. Since the value of the building only has been evaluated and the value of the land and the trees have not been evaluated, it was argued that the land and natural fixtures cannot be a subject matter of a pre-emptive purchase. The contention of the Transferor cannot be acceded to. As per the agreement executed on 3.10.1998, the apparent consideration is Rs.60,00,000/- and the depreciated value of the building, according to the Valuation report of the Executive Engineer (Valuation) I.T. Department, Trivandrum, has been worked out at Rs.60,11,730/- and as such, the land value has been determined at Rs.Nil. It is illogical to say that the buildings and its ancillary structures can be transferred without the land on which it stand and also the land cannot be transferred without the buildings put on it. Therefore, building as well as land only o.p.6808/99 12 can be transferred together and not the land and building separately. Therefore, the argument of the Transferor cannot be accepted. Since the agreement itself is a composite agreement, according to which, the transfer of land and buildings for a consideration of Rs.60,00,000/- the same cannot be viewed separately. c) In respect of difference of 15% between the fair market value and the apparent consideration, it was the transferor's contention that there was no attempt to evade tax. The transferor being M/s.New India Chemical Enterprises - partnership firm - consisting of 5 partners and the transferees being M/s.Nice Chemicals Pvt. Ltd. - a limited company comprising of the 5 Directors (who are also partners of the firm). There are no other share-holders. It was argued that only for the purpose of financial transaction and other banking practices it was decided to convert the Partnership Firm into a Limited Company. It was, further submitted that the bona-fide intention of the transfer of the property to a Limited Company was to fulfill the financial obligations and not to evade tax. A reference was invited to clause III A 2 of the Memorandum of Association of the transfer to justify that the intended transfer is “to take over as going concern the partnership firm...... carrying on the business of manufacturing, producing, .... with all the assets and liabilities”. In this connection Section 47(xiii) of the Act was relied upon. It may be stated here that the Memorandum of Understanding was not produced before us. Section 47(xiii) of the Act will also not be of any help to the transferor to bail it out from this situation. Section 47(xiii) comes into force only from 1-4-99 and it cannot be applied retrospectively. The Limited Company came into existence in the year 1989 and this transaction is taking place after a decade and as such, it cannot take the shelter claiming succession from the Partnership firm to a Limited Company. Further, the business assets of the firm have already been transferred to the Limited company, according to the party somewhere in 1996 and the present transaction is only for the transfer of fixed assets. Therefore, it can clearly be seen that there is no case to claim that the firm is succeeded by a Limited Company. As per the Agreement dated 3-10-98 the apparent consideration is Rs.60,00,00/- and the depreciated value of the building works out to Rs.60,11,730/-. Accordingly the land value works out to NIL. According to the lease agreement dated 1-10-96 the transferee who is the lessee has to pay a sum of Rs.60,000/- per month as lease rent. The rent capitilisation value works out to Rs.76,50,000/-. Further this can also be compared to the sale instance in File No.AA/CHN/5(2)8/98-99 for the sale of property situated at Sy.No.148/1A, 148/1B of the Eddappally south village, wherein the land rate received is Rs.1,53,462/- per Cent. Considering the land rate received in the comparable sale instance o.p.6808/99 13 cited above, we are of the view that the fair market value of the subject property at Sy.No.59/6a/1&60/1A/1 cannot be less than Rs.1,50,000/- per Cent.” As is clear from the same, none of the documents, relied on by the petitioners have been discussed. Instead a valuation has been made by adopting a rent capitalisation method based on a rent deed between the petitioners themselves and comparing the same with a document details of which have not been stated even in the final order. It is significant to note that the respondents have not cared to disclose those details even to this Court in these proceedings. I am of opinion that non-disclosure of the details of the sole document relied upon by the appropriate authority for the purpose of arriving at the market value of the property amounts to violation of principles of natural justice. The burden to show that the apparent consideration is less than the market value is clearly on the