Supreme Court Upholds Pre-emptive Purchase of Land Under Income Tax Act: Krishna Kumar Rawat vs. Union of India (29 July 2019)

Date of the Judgment: 29 July 2019
Citation: 2019 INSC 760
Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.
Can the government compulsorily purchase a property if it believes the sale price is significantly undervalued? The Supreme Court of India addressed this question in a case involving the pre-emptive purchase of land by the Income Tax Department. The Court examined whether the authorities were justified in their assessment and upheld the pre-emptive purchase order. This judgment, authored by Justice Abhay Manohar Sapre, with Justice Dinesh Maheshwari concurring, clarifies the scope of the Income Tax Act, 1961 in such matters.

Case Background

The case revolves around a land dispute in village Durgapur, Jaipur, involving approximately 7945 square meters of land, two godowns, and other structures. The land was initially co-owned by Smt. Mithilesh Kumari and Smt. Krishna Kumari Roongta. Subsequently, it became the property of M/s Rajasthan Industrial Company, a partnership firm, which was later dissolved. As per the dissolution deed dated 31.03.1986, Smt. Mithilesh Kumari received two godowns and a 1/4th undivided share in the land.

On 11.11.1993, Krishna Kumar Rawat and others (the appellants) entered into an agreement with Smt. Mithilesh Kumari to purchase the land for Rs. 99,84,500. The appellants paid Rs. 40,00,000 as advance and claimed to have been given possession of the godowns and symbolic possession of the land.

The appellants then informed the Income Tax Department about the purchase as required under Section 269UC of the Income Tax Act, 1961. The Income Tax Department’s valuation officer inspected the land and submitted a report. Consequently, the appropriate authority issued a show cause notice to the appellants on 08.03.1994, stating that the apparent sale consideration was undervalued.

Timeline

Course of Proceedings

The appellants challenged the pre-emptive purchase order in the High Court of Rajasthan. A Single Judge dismissed their writ petition on 14.09.1994, upholding the order of the appropriate authority. The appellants then filed an appeal before the Division Bench, which was also dismissed on 31.05.2007. The vendor’s appeal was partly allowed, directing a refund to the prospective buyers with 6% interest from the FDR created by the department, with the remaining amount going to the vendor. The appellants’ review petition was dismissed on 24.07.2007. The Supreme Court heard appeals from both the prospective buyers and the Union of India.

Legal Framework

The core legal issue revolves around Chapter XX-C of the Income Tax Act, 1961, specifically Section 269UD(1), which allows the government to pre-emptively purchase immovable property if the apparent consideration is less than its fair market value. The Supreme Court in the case of C.B. Gautam vs. Union of India and Others (1993) 1 SCC 78, had upheld the constitutional validity of Chapter XX-C. Section 269UD(1) of the Income Tax Act, 1961 states:

“269UD. Order by appropriate authority for purchase by Central Government of immovable property.—(1) Where the appropriate authority, after it has given an opportunity to the parties to be heard, is satisfied that— (a) the immovable property of fair market value exceeds the amount of apparent consideration therefor by more than fifteen per cent of such apparent consideration; (b) the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of facilitating the reduction or evasion of the liability of the transferor to pay tax under this Act, it may, by order in writing, exercise the option to purchase such immovable property.”

Section 269UG(4) of the Income Tax Act, 1961, deals with the investment of consideration amounts deposited with the appropriate authority:

“(4) Where any amount of consideration has been deposited with the appropriate authority under this section, the appropriate authority may, either of its own motion or on an application made by or on behalf of any person interested or claiming to the interested in such amount, order the same to be invested in such Government or other securities as it may think proper, and may direct the interest or other proceeds of any such investment to be accumulated and paid in such manner as will, in its opinion, give the parties interested therein the same benefits therefrom as they might have had from the immovable property in respect whereof such amount has been deposited or as near thereto as may be.”

Arguments

Appellants’ Submissions:

• The appellants argued that the comparison of their land with a small developed plot in Triveni Nagar was not justified.
• They contended that a 40% deduction should be allowed for amenities like parks, roads, and utilities.
• They submitted that the market rate of the area as of 01.04.1991 was much lower than what was determined by the department.
• They argued that the sub-division of the land would require JDA approval, leaving 30-40% of the land for civic amenities.
• They argued that the show cause notice did not mention the two godowns and they were not served with the valuation report of the two godowns, which is a violation of natural justice.

Respondents’ Submissions:

• The respondents (Union of India) contended that the appropriate authority’s order was legal and proper.
• They argued that the value of the land was correctly determined based on its location, potential, and existing structures.
• They submitted that the comparison with the Triveni Nagar plot was valid after accounting for development and time adjustments.
• They asserted that no deduction for amenities was required as the land was already developed with godowns used for commercial purposes.

The innovativeness of the argument by the appellants was on the point that the show cause notice did not mention the two godowns and they were not served with the valuation report of the two godowns, which is a violation of natural justice.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the High Court (Single Judge, Division Bench, and Review Bench) was justified in dismissing the appellants’ writ petition, intra-court appeal, and review petition, and thereby justified in upholding the pre-emptive order dated 30.03.1994 passed by the appropriate authority.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• C.B. Gautam vs. Union of India and Others (1993) 1 SCC 78 – Supreme Court: Upheld the constitutional validity of Chapter XX-C of the Income Tax Act, 1961.
• Sahib Singh Kalha & Ors. vs. Amritsar Improvement Trust & Ors., (1982) 1 SCC 419 – Supreme Court: Cited by the appellants regarding valuation principles.
• Lal Chand vs. Union of India & Anr., (2009) 15 SCC 769 – Supreme Court: Cited by the appellants regarding valuation principles.
• Executive Engineer, Karnataka Housing Board vs. Land Acquisition Officer, Gadag & Ors., (2011) 2 SCC 246 – Supreme Court: Cited by the appellants regarding valuation principles.

Statutes:

• Section 269UC of the Income Tax Act, 1961: Requirement for informing the Income Tax Department about property purchase.
• Section 269UD (1) of the Income Tax Act, 1961: Empowers the government to pre-emptively purchase property.
• Section 269UG (4) of the Income Tax Act, 1961: Deals with the investment of consideration amounts deposited with the appropriate authority.
• Rule 11 of the Rajasthan Urban Areas (Sub-division) Rules, 1975: Regarding the saleable area of land.

Authority Table

Judgment

The Supreme Court upheld the pre-emptive purchase order, finding that the appropriate authority had correctly assessed the value of the land and that the High Court was right in not interfering with that order. The Court also held that the High Court should not have issued directions regarding the disbursement of the FDR amount and instead should have left the matter to be decided by the appropriate authority under Section 269UG(4) of the Income Tax Act, 1961.

The Supreme Court observed that the findings of the appropriate authority were based on appreciation of evidence and were not arbitrary or illegal. The Court also noted that the findings were in conformity with the requirements of Section 269 UD of the Act and the law laid down in C.B. Gautam.

Regarding the argument that the show cause notice did not mention the two godowns, the Court stated that this objection was not raised at any stage of the proceedings, no prejudice was caused as all relevant documents were filed in the writ proceedings, and this issue was also argued on its merits.

The Court stated that the High Court should have left the matter of disbursement of the FDR amount to the appropriate authority as per Section 269UG(4) of the Act, instead of issuing directions.

“The appropriate authority then in para 8 considered the appellants’ objections to the effect that while determining the market value of suit land, deduction of 30% to 40% should have been given and, if it had been given, there would have been no difference of 15% in the value of the suit land as was required to be made out for invoking powers under Chapter XX-C by the appropriate authority for pre-emptive purchase of the suit land.”

“The appropriate authority, however, rejected this submission finding no merit therein. The appropriate authority then examined the issue in the light of Rule 11 of the Rajasthan Urban Areas (sub division) Rules, 1975 and other relevant facts and came to a conclusion that, if several other aspects such as the location of the suit land and its commercial value is taken into consideration, the market value of the suit land would be substantially enhanced and would come to Rs.1,46,58,548/- as against the apparent consideration of Rs.99,84,500/- fixed in the agreement.”

“The appropriate authority, therefore, held that in any case, value of the suit land was 15% higher than the amount of the apparent consideration fixed in the agreement.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the factual findings of the appropriate authority and the consistent upholding of these findings by the High Court at various stages. The Court emphasized that the appropriate authority’s assessment was based on a detailed examination of the land’s location, potential, and existing structures. The Court also noted that the appropriate authority had considered the appellants’ objections and provided reasoned conclusions for rejecting them. The Court stated that it could not act as a de novo appellate court and re-examine the factual issues already decided by the lower authorities and courts.

Logical Reasoning

Key Takeaways

• The government has the power to pre-emptively purchase property if the sale price is significantly undervalued.
• The appropriate authority’s valuation of property must be based on a thorough assessment of its location, potential, and existing structures.
• Courts will not act as de novo appellate bodies to re-examine factual issues already decided by lower authorities and courts.
• The appropriate authority under Section 269UG(4) of the Income Tax Act, 1961, is responsible for deciding how the amount of consideration is to be disbursed.

Directions

The Supreme Court set aside the High Court’s directions regarding the disbursement of the FDR amount and directed that the matter be decided by the appropriate authority as per Section 269UG(4) of the Income Tax Act, 1961.

Development of Law

The ratio decidendi of this case is that the pre-emptive purchase of land by the government under Section 269UD(1) of the Income Tax Act, 1961, is valid if the appropriate authority determines that the fair market value of the property exceeds the apparent consideration by more than 15%, and that the courts will not interfere with the findings of the appropriate authority if they are based on a proper assessment of the facts. This case also clarifies the role of the appropriate authority under Section 269UG(4) regarding the disbursement of the consideration amount, stating that the High Court should not have issued directions regarding the disbursement of the FDR amount and instead should have left the matter to be decided by the appropriate authority.

Conclusion

In conclusion, the Supreme Court dismissed the appeals filed by the prospective buyers, upholding the pre-emptive purchase order of the Income Tax Department. The Court emphasized the importance of the appropriate authority’s factual findings and adherence to legal procedures. The Court also clarified the role of the appropriate authority in the disbursement of the consideration amount.

Category

Parent category: Income Tax Act, 1961

Child categories:

• Section 269UC, Income Tax Act, 1961
• Section 269UD, Income Tax Act, 1961
• Section 269UG, Income Tax Act, 1961
• Pre-emptive Purchase
• Property Valuation

FAQ

Q: What is a pre-emptive purchase of property?

A: A pre-emptive purchase is when the government compulsorily buys a property if it believes the sale price is significantly lower than its actual market value, as per the Income Tax Act, 1961.

Q: What is Section 269UD of the Income Tax Act, 1961?

A: Section 269UD of the Income Tax Act, 1961, allows the government to purchase a property if it believes the sale price is more than 15% lower than the actual market value, to prevent tax evasion.

Q: What happens to the money paid by the buyer if the government pre-emptively purchases the property?

A: The money is deposited with the appropriate authority. The authority may invest the amount and disburse it as per Section 269UG(4) of the Income Tax Act, 1961.

Q: What factors are considered when valuing a property for pre-emptive purchase?

A: The appropriate authority considers various factors such as location, potential, existing structures, and comparable sales data.

Q: Can the court re-evaluate the valuation of the property?

A: The courts will not re-evaluate the valuation of the property if the appropriate authority has followed the correct procedure and their findings are based on evidence.