Case: Commissioner of Income Tax Vs. Roche Products Limited

ORAL JUDGMENTKapadia, J.The respondent-company purchased the property in question situate at Plot No.18 of "Gamadia Estate" admeasuring 2820.40 sq yards with building standing thereon situate at 24/26 Pt.Madan Mohan Malviya Road, Bombay. This was by an indenture dated 9th February 1984, entered into between M/s. Anglo-French Drug Company (Eastern) Limited (herein after refereed to, for the sake of brevity, as "the Vendors") on the one hand and the respondent-company on the other hand. The said indenture was registered with the Sub-Registrar of Bombay on 18th April 1984 and section 37-C form was also filed by the parties to the said indenture. Thereafter, the competent authority initiated proceedings by issue of a notice under section 269D(1) of the Income Tax Act, 1961 (as it then stood). This notice was issued on April 12, 1985. The reasons given for initiation of the proceedings were that the building had ground plus three upper floors, each of which had an area of 13910 square feet. That, the fourth floor admeasured 2524 square feet and the building had a frontage of 108 square feet falling on Tardeo Road. That, the building was an RCC structure having RCC beams and columns and slabs and all essential amenities including lift, storage tank etc. were duly provided. Further, leave and licence agreement was entered into between the aforestated vendors on the one hand and the respondent herein on 12th June 1963 under which either party to the leave and licence agreement could determine the licence at any time by giving twelve calendar months notice. According to the reasons given, the licencee itself had purchased the premises and hence the present market value of the property was determinable by land and building method. According to the said reasons, the possession of the licencee under the above agreement was a notional vacant possession. Pursuant to the notice issued by the competent authority on April 12, 1985. The parties were heard. The respondent herein contended before competent authority that it was protected tenant by virtue of the amendment to the Bombay Rent Act, 1973. That, the respondent was in exclusive possession of the property and in the circumstance capitalization of the rental income was the only proper method of valuation and applying that method, which was the correct method, it was submitted that the price paid by the purchaser in the sum of Rs.50,00,000/- under the indenture dated 9th February 1984 was far in excess of the present market value arrived at on the basis of capitalization of rental income. According to the respondents, the present market value was Rs.14.44 lakhs on the basis of the rent capitalization method. According to the department, the correct method to be applied for ascertaining the present market value was land and building method. According to the department, land and building method indicated the present market value of Rs.87 lakhs. According to the department, the present market value was Rs.87 lakhs and on that basis, it was contended before the competent authority, that it was under valuation of the property and hence the proceedings were rightly initiated.3.By order dated 26 November 1986, the competent authority came to the conclusion that the fair market value of the property was Rs.87.15 lakhs where as the apparent consideration under the indenture was Rs.50 lakhs and, therefore, the apparent consideration not only fell short of 15% of the fair market value, but also fell short of more than 25% of the fair market value. The competent authority applied the land and building method. The competent authority rejected the plea of tenancy on the ground that M/s. F. Hoffman Law Roche Company Limited, Switzerland was managing the affairs of the vendor-company and also of the respondents. That Voltas Limited was the minority share holder in both the companies. That, the Managing Director of the vendor-company was also the Director in the respondent-company. That, the Managing Director of the respondent was the Chairman of the vendor-company. That, two of the Directors were common in both the above companies. That, M/s.F.Hoffman Law Roche Company Limited, Switzerland had transferred 40% of the share holding in favour of the financial institutions and employees. That, M/s. F.Hoffman Law Roche Company Limited was managing the affairs of the vendor-company. That, M/s. P.R. Dave & Associated, the valuers of the respondent had filed a valuation report which itself shows that the lowest valuation of Rs.87.14 lakhs represented fair market value on the basis of land and building method. That, the said valuer had applied five different methods of valuation in which the lowest valuation was Rs.14.44 lakhs arrived at by land capitalization method taking the property as fully tenanted whereas the other lowest valuation was of Rs.87.14 lakhs on land and building method. The competent authority came to the conclusion that there was no merit in the contention of the respondent that the property was tenanted, particularly in view of the fact that both the above companies were controlled and managed by M/s. F.Hoffman Law Roche Company Limited, Switzerland and as both the companies were owned by M/s F.Hoffman Law Roache Company Limited, Switzerland, the real owner of the property was the said Swiss company, The competent authority also came to the conclusion that under the above circumstances, the owner was claiming the tenancy against itself. The competent authority also found that the vendor-company had no interest of its own other than the interest of M/s.F. Hoffman Law Roche Company Limited. The competent authority found that the interest of the vendor - company stood merged with the interest of the respondent-company as the principal share holder. This finding is given on the basis of the share holding pattern of the companies referred to herein above. In the circumstances, the competent authority came to the conclusion that valuation based on rent capitalization method was not correct. On the above facts and circumstance of the case, the competent authority found that there was undervaluation as stated herein above and accordingly, directed acquisition of the property.4.Being aggrieved by the said decision of the competent authority, respondent- company preferred Income Tax Acquisition Application No.13 (Bombay) of 1986 before the Income Tax Appellant Tribunal. By judgment and order dated 12th February 1987, the tribunal allowed the appeal and set aside the order of the competent authority. The tribunal found that the entire building was given on licence to the respondent-company under leave and licence agreement dated June 12, 1963. It came into force with effect from April 1, 1961. The tribunal found that with effect from February 1, 1973, the Bombay Rent Act 1947 stood amended and the effect of the said amendment was that licencees in occupation of the premises on the appointed date i.e.1st February 1973 became protected tenants and as a result, the respondent-company, as purchaser, became the tenant with effect from 1st February 1973. The Tribunal found that at the time of the indenture dated 9th February 1984, the premises was fetching rent of Rs.17,200/- per month. The tribunal found that the property being tenanted, the landlord had no power to evict the tenant except without due process of law and in the circumstances, any hypothetical purchaser would pay the seller price not exceeding the price are arrived at by rent capitalization method. The tribunal also found that 32% of the share holding in the vendor-company was owned by financial institution. The tribunal found that although the above companies are connected, the property was fully tenanted and the tenancy was protected by the Bombay Rent Act and in such a case, the only correct method of valuation would be rent capitalization method. According to the tribunal, even the report submitted by the departmental valuation officer indicates that the property was valued by rent capitalization method. The tribunal found that even the departmental valuer in his report, valued the property at Rs.13.54 lakhs by taking the rate of capitalization at 9.5% i.e. multiple of 10.53. The tribunal found that the competent authority had failed to apply its mind to the report of the departmental valuation officer. In the circumstances, the tribunal came to the conclusion that tenancy could not have been ignored by the competent authority. Accordingly, the tribunal allowed the application. Being aggrieved by the decision of the tribunal, the department has preferred this First Appeal.5.Dr.Chandrachud, learned Additional Solicitor General appearing on behalf of the appellants contended that the transferor and transfer companies were interconnected as indicated by the pattern of the share holding referred to hereinabove. He pointed out that apart from the share holding, the Managing Director of the vendor-company was a Director of the respondent-company. That, the above mentioned Swiss company - M/s. F. Hoffman Law Roche Company Limited was managing the affairs of the transfer or and transferee companies. That Voltas Limited was the minority share holder in both the companies. That, the Managing Director of the vendor-company was the Director in the purchaser-company. That, the Managing Director Mr.J.W. Tanner of Roche Products Limited was the Chairman of the vendor-company. That, the above mentioned Swiss company had transferred 40% of the share holding in the financial institutions and there employees only on 9th February 1984 and yet, the Swiss company was managing the affairs of the vendor-company. Learned counsel for the department further submitted that the valuers report, as submitted by M/s P.R. Dave & Associates, being the respondents valuers, have given five different methods of valuation in which the lowest valuation is Rs. 14.44 lakhs which is based on rent capitalization method which is not the correct method to be applied as, in this case, looking to the interconnection of the two companies and since the licence itself had purchased the premises there was a notional vacant possession and, therefore, the rent capitalization method was not the correct method to be applied. Learned counsel for the department submitted that the claim of the purchaser to tenancy was also not tenable. He acordingly submitted that the other lowest valuation method to be adopted in the present case was the land and building method and applying that method, the present market value was Rs.87.14 lakhs which was the fair market value and, therefore, the competent authority was right in coming to the conclusion that there was understatement of consideration, particularly when the sale was executed for total consideration of Rs.50 lakhs. On the other hand, Mr.Dastoor, learned counsel appearing on behalf of the respondent-company contended that tenancy cannot be over looked in the present case. He contended that the building in its entirety was let out on leave and licence basis to the respondent way back in June 1963. That, the licence came into force with effect from April 1, 1961. He further pointed out that it is not in dispute that the Bombay Rent Act was amended and the respondent - licence became a protected tenant with effect from 1st February 1973 by deeming Provisions of the Rent Act, more particularly section 15-A. It was pointed out that at the time of the sale, the premises were fetching rent of Rs.17,200/- per month at the time of sale in 1984 and, therefore, rent capitalization method was the correct method for arriving at the fair market value and applying that method, it cannot be said by any stretch of imagination that there was undervaluation of the property. He contended that the competent authority erred in coming to the conclusion that Rs.50 lakhs represented understatement of consideration. Accordingly, he contended that the tribunal was right in setting aside the order of the competent authority.6.We do not find any merit in this appeal preferred by the department. On the facts and circumstances of the present case, the position which emerges is that on June 12, 1963, a leave and licence agreement was entered into between the vendor-company on one hand and the respondent-company on the other hand. The leave and licence agreement did not stipulate any particular period. The respondent-company was the licence in possession of the property on 1st February 1973 when the Rent Act was amended. On that date, respondent-company became the protected tenant. The competent authority erred in ignoring the provisions of the Bombay Rent Act as amended with effect from 1st February 1973. The sale in question took place on 9th February 1984. Under the above circumstances, the competent authority erred in coming to the conclusion that since the licence had purchased the premises, the rent capitalization method was not applicable. The tribunal, in the present case, has come to the conclusion that in view of the provisions of the Bombay Rent Act as amended with effect from 1st February 1973, the competent authority could not have ignored the tenancy. The tribunal also found that even the departmental valuation officers report valued the property by rent capitalization method which was the only correct method applicable in the facts and circumstances of this case. The tribunal found that this report has been totally overlooked by the competent authority. Even the departmental valuation officer valued the property at Rs.13.54 lakhs by taking the rate of capitalization at 9.5%. The tribunal also found that although the companies are interconnected to some extent, and although there are common Directors and share holders, 32% of the shares in the vendor-company are owned by financial institutions and, therefore, there was nothing to doubt the genuineness and the bonafide of the transaction and the purchaser paid a fair price which was in fact above the value arrived at by rent capitalization method. In fact, the vendor-company passed a specific resolution requiring 75% majority before the sale could be effected and, therefore, there was no understatement of consideration. On the facts and circumstances of this case, the tribunal was right in coming to the conclusion that the competent authority had not applied its mind to the departmental valuation officers report applying the rent capitalization method and, therefore, no case acquisition was made out. Similarly, the competent authority has failed to consider that 32% of the share holding in the vendor-company was owned by financial institutions and that the whole transaction was supported by a special resolution of the vendor -company requiring 75% majority effecting the sale. Similarly, the competent authority failed to consider the effect to the amendment to the Bombay Rent Act with effect from 1st February 1973. In the circumstances, we are satisfied that there was no case for acquisition of the properties. Applying the rent capitalization method,the fair market value was Rs.14.44 lakhs where as the consideration involved in the sale was Rs.50 lakhs and, therefore, there was no understatement of consideration as held by the competent authority. In view of the above, we do not see any infirmity in the decision of the tribunal.

Decision reasoning: 0[ds]6.We do not find any merit in this appeal preferred by the department. On the facts and circumstances of the present case, the position which emerges is that on June 12, 1963, a leave and licence agreement was entered into between theon one hand and theon the other hand. The leave and licence agreement did not stipulate any particular period. Thewas the licence in possession of the property on 1st February 1973 when the Rent Act was amended. On that date,became the protected tenant. The competent authority erred in ignoring the provisions of the Bombay Rent Act as amended with effect from 1st February 1973. The sale in question took place on 9th February 1984. Under the above circumstances, the competent authority erred in coming to the conclusion that since the licence had purchased the premises, the rent capitalization method was not applicable. The tribunal, in the present case, has come to the conclusion that in view of the provisions of the Bombay Rent Act as amended with effect from 1st February 1973, the competent authority could not have ignored the tenancy. The tribunal also found that even the departmental valuation officers report valued the property by rent capitalization method which was the only correct method applicable in the facts and circumstances of this case. The tribunal found that this report has been totally overlooked by the competent authority. Even the departmental valuation officer valued the property at Rs.13.54 lakhs by taking the rate of capitalization at 9.5%. The tribunal also found that although the companies are interconnected to some extent, and although there are common Directors and share holders, 32% of the shares in theare owned by financial institutions and, therefore, there was nothing to doubt the genuineness and the bonafide of the transaction and the purchaser paid a fair price which was in fact above the value arrived at by rent capitalization method. In fact, thepassed a specific resolution requiring 75% majority before the sale could be effected and, therefore, there was no understatement of consideration. On the facts and circumstances of this case, the tribunal was right in coming to the conclusion that the competent authority had not applied its mind to the departmental valuation officers report applying the rent capitalization method and, therefore, no case acquisition was made out. Similarly, the competent authority has failed to consider that 32% of the share holding in thewas owned by financial institutions and that the whole transaction was supported by a special resolution of the vendorcompany requiring 75% majority effecting the sale. Similarly, the competent authority failed to consider the effect to the amendment to the Bombay Rent Act with effect from 1st February 1973. In the circumstances, we are satisfied that there was no case for acquisition of the properties. Applying the rent capitalization method,the fair market value was Rs.14.44 lakhs where as the consideration involved in the sale was Rs.50 lakhs and, therefore, there was no understatement of consideration as held by the competent authority. In view of the above, we do not see any infirmity in the decision of the tribunal.