ADAIR DUTTA AND CO. INDIA PVT. LTD. v.

THE APPROPRIATE AUTHORITY, INCOME TAX

DEPARTMENT

SEPTEMBER 25, 1996

[KULDIP SINGH AND KT. THOMAS, JJ.]

!11come Tax Act, 1961:

Chapter XX-C, ss. 269 UD and 269 UE (!)-Purchase by Central C Govemment of immovable property agreed to be sold-Vesting of prope1ty in Central Govemment free from encumbrances-Held, in case agreement stipulates the prope1ty to be sold free from all encumbrances or ce1tai11 encwnbrances, then the vesting in Central Govemment would be free from such encumbrances.

Tamil Nadu B11ildings (Lease and Rent Control) Act, 1960: B11ilding belongi11g to Central Govemment-Whether exc/11ded from the pwview of the Act-Matter remitted back to High Cowt for decisio11.

The appellant-company was tenant in a building situate in the city E of Madras. The owner of the building entered into an agreement to sell the building. The appropriate authority under Chapter XX-C of the Income Tax, 1961, on coming to know of the agreement, ordered the Central Government to purchase the said building for the same consideration as shown in the agreement, in accordance with S.269 UD (1) of the Act. The appellant was informed that the building stood vested in the Central F Government by virtue of s.269 UE (1) of the Act free from all encumbrances, and it was required to surrender possession of the building.

The appellant filed a writ petition before the High Court on the grounds that in view of the decision in the case of C.B. Gautam* whereby G the expression "free from all encumbrances" in sub-section (1) of s. 269-UE had been struck down, only the right of the erstwhile owner of the building vested with the Central Government without affecting the leasehold right of the appellant; and that the appellant's right in the building was protected . by the Tamil Na du Buildings (Lease and Rent Control) Act,

1960. The High Court dismissed the writ petition holding that the agree H 775

A ment provided for a sale free from all encumbrances; and that the provisions of the T.N. Act did not afford any protection to the appellant.

Aggrieved, the Company filed the present appeal.

It was contended for the appellant that though the T.N.Act excluded

B government building from its purview, such exclusion was confined to buildings owned by the State Government and not to those owned by Central Government.

Disposing of the appeal, this Court

c HELD : 1. In C.B. Gautam* though the Constitution Bench has struck down the words "free from all encumbrances" in sub section (1) of s.269-UE of the Income Tax Act, 1961, it approved the distinction that in case the agreement for sale contains the stipulation to the effect that the property would be sold free from all encumbrances or certain encumbran ces then the vesting in the Central Government would be free from such D encumbrances. In the instant ease, the agreement for sale executed by the erstwhile owner, regarding the property in question, contained a stipula tion that the property would be sold free of all encumbrances. (780-A]

*C.B. Gautam v. Union of India & Ors., (1983) 1 SCC 78, explained and followed.

E 2.1. The Constitution Bench in C.B. Gautam considered whether the vesting in central Government would affect monthly tenancies, and held that such tenancies would continue even on an order for purchase by Central Government being made under s.269 UD (1), but such tenants

F would lose the protection given to tena.nts under the rent protection laws because such laws are not made applicable to properties owned by the Central Government and their tenancies could be terminated by the Central Government. (781-C-D]

C.B. Gautam v. Union of India & Ors., (1983) 1SCC78, referred to.

G Tata Consulting Engineers &Anr. v. Union of India & Ors., (1994) 206 ITR 237, disapproved.

2.2. However, in C.B. Gautam the situation where monthly tenancy is protected by a rent control legislation was not before the Court. The H question regarding application of T.N. Act to buildings owned by the

.....

ADAIR DUIT AND CO. v. APPROPRIATEAUTIIORITY (THOMAS, J.] 777

Central Government must be considered afresh by the High Court and, A therefore, the matter is remitted to the High Court for disposal of the writ petition accordingly. (781-H; 782-A-B]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1109 of 1995.

From the Judgment and Order dated 20.1.94 of the Madras High Court in W.P. No. 9946 of 1989.

J aydeep Gupta, Ujjwal Banerjee, Rajesh Srivastava and H.K. Puri for the Appellant.

B.B. Ahuja and S. Rajappa and S.N. Terdol for the Respondent.

The Judgment of the Court was delivered by

THOMAS, J. Whether a bona fide statutory tenant has the right to continue in possession even after an order of purchase was made under D Section 269 UD(l) in Chapter XX-C of the Income Tax Act, (for short 'the Act'), is the question sought to be raised in this appeal. According to the appellant the answer to the said question must be in the affirmative.

A brief sketch of the facts : E

The appellant - a Private Limited Company - is tenant on the ground floor of a building situate on the Mount Road (now called Anna Salai), Madras. On 30.3.1989, owner of the building entered into an agreement with another person for sale of the building, for a sum of Rs.26 lacs. The Appropriate Authority, constituted under Chapter XX-C of the Act, on F coming to know of the aforesaid agreement initiated proceedings, in exercise of its powers under the said Chapter for purchase of the building. He ordered the building to be purchased by the Central Government for the same consideration as shown in the agreement in accordance with Section 26.9 UD(l) of the Act. Appropriate Authority then issued a communication G to the appellant informing it that the building stood vested in the Central Government by virtue of Section 269-UE(l) of the Act free from all encumbrances with effect from 22.6.1989. The appellant was requested to surrender possession of the building. A writ petition was filed before the High Court of Madras Challenging the said communication had the subsequent request. A Division Bench of the Madras High Court dismissed H

A the writ petition. This appeal by special leave has been filed against the judgment of the Division Bench .

• . '

The two sub-sections of Section 269-UE of Chapter XX-C of the Act which are relevant for this appeal are quoted below :

"269-UE. Vesting of property in Central Government. -(1) Where an order under sub-section (1) of Section 269-UD is made by the appropriate authority in respect of an immovable property referred to in sub-clause (i) of clause (d) of Section 269-UA, such property shall, on the date such order, vest in the central Government free from all encumbrances.

(2) The transfer or any other person who may be in possession of the immovable property in respect of which an order under subsection (1) of Section 269-UD in made, shall surrender or deliver possession thereof to the appropriate authority or any other person D duly authorised by the appropriate authority in this behalf within fifteen days of the service of such order on him."

The contention of the appellant before the Madras High Court was twofold. First is that as the constitution Bench of this Court in C.B Gautam v.

Union of India & Ors., (1983) 1 SCC 78, has struck down the expression E "free from all encumbrances" in sub-section (1) of Section 269-UE, what was vested with the Central Government is only the right of the erstwhile owner of the building without affecting, the leasehold right of the appellant.

Second is that appellant's right in the building has been protected by the Tamil Nadu (Lease and Rent Control) Act, 1960 (for short 'the T.N. Act') .

F and as such his statutory right' cannot be by-passed through the vesting process.

Division Bench of Madras High Court repelled both contentions.

Learned JiJdges pointed out that the transferor has stipulated in the agreement for sale dated 30.3.1989 (which led to the action taken by the G Appropriate Authority) that the transfer of the premises shall be free from all encumbrances and then held : "when the agreement in this case provides for a sale free of all encumbrances, the property agreed to be sold would also vest in the Central Government free of such encumbrances. Only in a case where the agreement does not provide that he sale would be free from · H all encumbrances, the encumbrance holder of leases in possession may not

ADAIR DU1T AND CO. v. APPROPRIATE AUTHORITY [1HOMAS, J.] 779

be obliged to deliver possession of the property". Regarding the second A contention the High Court pointed out that even otherwisethe provisions of the T.N. Act do not afford any protection to the tenants of the buildings owned by Central Government.

The Constitution Bench of this Court has struck do'Yfl the words "free from all encumbrances" in sub-section (1) of Sectiort.269-UE of the Act. The material portion of the judgment is extracted below : B

"In view of the express provision in section 269-UE that the property purchased would vest in the Central Government 'free from all encumbrances' it is not possible to read down the section C as submitted by learned Attorney General. In the result, the expression 'free from all encumbrances' in sub-section (1) of Section 269-UE is struck down and subsection (1) of Section 269- UE must be read without the expression 'free from all encumbrances' with the result the property in question would vest in the Central D Government subject to such encumbrances and leasehold interests as are subsisting thereon except for such of them as are agreed to be discharged by the vendor before he sale is completed."

However, the Bench approved the distinction that in case the agreement for sale contains the stipulation to the effect that the property would E be sold free from all encumbrances or certain encumbrances then the vesting in the Central Government would be free from such encumbrances.

The following passage in the judgment makes the position clear :

"As we have stated earlier where an agreement for sale provides that the property is intended to be sold free of all encumbrances or leasehold rights, the order for purchase of such property under Section 269-UD(l) in the said Chapter would result in the said property vesting in the Central Government free of such encumbrances or leasehold interests. In such a case the holders of the encumbrances and leasehold interests would have to obtain their compensation from the amount awarded as the purchase price to the owner of the property. This appears to be a fair construction because in such a case the apparent consideration can be expected to include the value of such leasehold interests or

encumbrances ........ " H

A It was not disputed before us. that the agreement for sale executed by the erstwhile owner, regarding the property in question, contained a stipulation that the property would be sold free ·· cif all encumbrances.

However, learned counsel tried to get support for this contention from a decision of the Karnataka High Court in Tata Consulting Engineers and B Another v. Union of India and Others, (1994) 206 ITR 237, wherein it has been observed that "the Supreme Court did not specifically consider a case where ignoring or suppressing the fact that the premises were in the occupation of a monthly tenant who had not agreed to vacate, the agreement of sale, without referring to such tenancy, provided for dt<livery of vacant possession at the time of sale. Chapter XX-C also does not provide C for a case where the agreement of sale contained an incorrect information regarding possession, that is agreeing to deliver vacant possession even though vacant possession could not be delivered having regard to the fact that the premises were in the occupation of a bona fide tenant". The Karnataka High Court concluded that "on the facts and circums.tances set D out above, in so far as the tenant is concerned, the term of the sale agreement.providing for delivery of vacant possession should be read down as only providing for delivery of vacant possession of the remaining portions of the premises."

The said view of the learned single judge of the Karnataka High Court is not in consonance with the reasoning of this Court in C.B. Gautam (supra). The position has been clearly stated by this Court in the judgment as follows:

"The holders of the encumbrances and leasehold interests which would be destroyed in this manner can be said to be persons interested as contemplated in clause (e) of subsection (2) of Section 269-UA. In this connection, we may refer to sub-section

(5) of Section 269-UE which declares that nothing in the said section which deals with the vesting of property in the Central Government shall operate to discharge the transferor or any other person (not being the Central Government) from liability in respect of any encumbrances on the property and notwithstanding anything contained in any other law for the time being in force, such liability may be enforced against the transferor or such other person. This provision makes it amply clear that in the case we have just referred to the encumbrance holder or the holder of the

ADAIR DUTf AND CO. v. APPROPRIATEAUIBORITY [THOMAS, J.J 781

leasehold rights could claim the fair value of his encumbrance or A the leasehold interest out of the amount paid on account of the purchase price to the owner of the immovable property acquired by the Central Government under Section 269-UD."

In this context we may point out that the Constitution Bench in C.B.

Gautam (supra) considered whether such vesting in the Central Government would affect monthly tenancies. The following observation has been made regarding that aspect :

"As far as monthly tenancies are concerned, they do not pose any difficulty because monthly tenants are also lessees in law although C their right is a very limited one. If the agreement to sell does provide for vacant possession or the determination of monthly tenancies such tenancies would continue even on an order for purchase by the Central Government being made by the appropriate authority concerned under Section 269-UD(l); but such tenants would lose the protection given to tenants under the rent D protection laws because such laws are not made applicable to properties owned by the Central Govemment with the result that their

ten, ancies could be terminated by the Central Govemment."

(emphasis supplied)

Learned counsel for the appellant, however, contended that the T.N.

Act" applies even to buildings owned by the Central Government and hence the aforesaid observation cannot apply to the tenancy rights protected by .the said Act. We agreed that the Constitution Bench has not considered the situation were the monthly tenancy is protected by a rent control legislation. No doubt, learned judges have stated in the impugned judgment that "in relation to such statutory tenancy rights there is no protection as such available, as the rent control laws are inapplicable to properties owned by the Central Governmnt and such tenancies could be terminated by the Government".

The aforesaid finding in the impunged judgment is also challenged in this appeal. Learned counsel contended that though the T.N. Act excludes government buildings from its purview such exclusion is confined

to buildings owned by the State Government because of the definition contained in the T.N. Act for the word "government" as meaning "State H

A Government".

We think that the question regarding application of T.N. Act to buildings owned by the Central Government must be considered afresh by the High Court in view of the aforesaid contention. We, therefore, set aside. the. judgment under challenge and remit tliis case to the High Court for B disposal of thse writ petition afresh in. the light of the observations made ·

above.

G.N.

Appeal disposed of.