UNITECH LTD. & ANR. Vs. UNION OF INDIA & ANR.

Income-tax Act, 1961

Tags Income Tax

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 430 of 2007, Judgment Date: Nov 04, 2015

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 430 OF 2007

UNITECH LTD. & ANR. .. APPELLANT(S)

VERSUS

UNION OF INDIA & ANR. ..RESPONDENT(S)

1 JUDGMENT

S. A. BOBDE, J.

1. This appeal is preferred by the appellants, who suffered an order of
compulsory pre-emptive purchase under Chapter XXC of the Income Tax Act,
1961 (hereinafter referred to as ‘the Act’) passed by the Appropriate
Authority under Section 269UD of the Act.

2. Vidarbha Engineering Industries - Appellant No. 2 (hereinafter
referred to as ‘Vidarbha Engineering’) holds on lease, three plots of land
admeasuring 2595.152 sq mtrs i.e. 27934 sq ft at Dahipura and Untkhana,
Nagpur (hereinafter referred to as the ‘subject land’). This land is
comprised of three plots of land i.e. Plot Nos. 34, 35 and 36 obtained by
Vidarbha Engineering from the Nagpur Improvement Trust. Vidarbha
Engineering decided to develop the subject land and entered into an
agreement for the purpose with Unitech Ltd. (herein after referred to as
‘Unitech’). The Memorandum of Understanding between them was formalized
into a collaboration agreement dated 17.03.1994. Under this agreement the
land holder agreed to allow Unitech to develop and construct a commercial
project on the subject land admeasuring 2595.152 sq mtrs at the technical
and financial cost of the latter. The parties to the agreement agreed, upon
construction of the multi storied shopping cum commercial complex, that
Unitech will retain 78% of the total constructed area and transfer 22% to
the share of Vidarbha Engineering. Unitech agreed to create an interest
free security deposit of Rs. 10 lakhs. 50% of the deposit was made
refundable on completion of the RCC structure and the other 50% on
completion of the project. The parties were entitled to dispose of the
saleable area of their share. It was specifically agreed that this
agreement was not to be construed as a partnership between the parties. In
particular, this agreement was not to be construed as a demise or
assignment or conveyance of the subject land. It is significant to note
that the agreement does not contain any clause by which Unitech, the
developer, is to pay any consideration in terms of money to Vidarbha
Engineering, the land holder. The only consideration apparently provided is
the entitlement of Vidarbha Engineering to 22% of the constructed area in
the proposed multi storied building.

3. The appellant submitted a statement in Form 37-I under Section 269UC
of the Act annexing the agreement dated 17.3.1994. According to Shri V.A.
Mohta, the learned senior counsel, this form contains only the
nomenclatures of transferor and transferee and contemplates only the
transaction of a transfer and not an arrangement of collaboration.
Therefore, the appellants were constrained to describe themselves as
transferor and a transferee. Accordingly, they mentioned that the
consideration for the transfer of the subject property was Rs.100.40 lakhs
towards the cost of share of 22% of Vidarbha Engineering, which was to be
constructed by Unitech – builder at its own cost. This submission was made
as a preface to the contention that in fact and in law, Vidarbha
Engineering has not transferred the property held by it to Unitech, but
that it has only allowed Unitech to make a construction on the land.
Indeed, we have considered this submission notwithstanding the self
description of the parties as transferor and transferee since it involves
the true construction of a document which is always a substantial question
of law. We find much substance in the contention. In the first place,
Vidarbha Engineering itself is a lessee holding the land on lease of 30
years from Nagpur Improvement Trust. It has no authority to transfer the
land. Secondly, no clause in the agreement purports to transfer the
subject land to Unitech. On the other hand, clause 4.6 specifically
provides that nothing in the agreement shall be construed to be a demise,
assignment or a conveyance. The agreement thus creates a licence in favour
of Unitech under which the latter may enter upon the land and at its own
cost build on it and thereupon handover 22% of the built up area to the
share of Vidarbha Engineering as consideration and retain 78% of the built
up area. By the statement in Form 37-I the consideration has been valued
by the parties at Rs. 1,00,40,000/-.

4. It was contended by Shri Mohta, the learned senior advocate, that
since the agreement does not purport to transfer any land by Vidarbha
Engineering to Unitech, Chapter XXC of the Act itself has no application
and no pre-emptive purchase could have been ordered by the competent
authority. Shri Mohta points out that the provisions of Chapter XXC
providing for pre-emptive purchase by the Central Government only deal with
transfer by way of sale, exchange or lease or admitting as a member by
transfer of shares in a cooperative society or by way of an agreement or
arrangement which has the effect of transferring or enabling the enjoyment
of the said property and that none of this can cover a collaboration
agreement of the kind entered into by the appellants; vide sub-clause (ii)
of clause (f) of sub section (2) of Section 269UA of the Act[1].

5. It may appear at first blush that the collaboration agreement
involves an exchange of property in the sense that the land holder
transfers his property to the developer and the developer transfers 22% of
the constructed area to the land holder but on a closer look this
impression is quickly dispelled. Exchange is defined vide Section 118 of
the Transfer of Property Act, 1882 as a mutual transfer of the ownership of
one thing for the ownership of another[2]. But it is not possible to
construe the license created by Vidarbha Engineering in favour of Unitech
as a transfer or acquisition of 22% share of the constructed building as a
transfer in exchange. As observed earlier Vidarbha Engineering is not an
owner but only a lessee of the land. As such, it cannot convey a title
which it does not possess itself. In fact, no clause in the agreement
purports to effect a transfer. Also in consideration of the licence
Unitech has agreed that the Vidarbha Engineering will have a share of 22%
in the constructed area. Thus it appears that what is contemplated is that
upon construction Unitech will retain 78% and the share of Vidarbha
Engineering will be 22% of the built up area vide clause 4.6 of the
agreement[3]. Thus the transaction cannot be construed as a sale, lease or
a licence. At this juncture it would be important to construe this
transaction in terms of clause (d) of sub-section (2) of Section 269UA of
the Act, the provision which defines immovable property[4]. In terms of
Section 269UA(2)(d) of the Act ‘Immovable property’ consists of :-

(a) not only land or building vide sub-clause (i) but also

(b) any rights in or with respect to any land or building including a
building which is to be constructed.

‘Transfer’ of such rights in or with respect to any land or building is
defined in clause (f) of sub-section (2) of Section 269UA of the Act as the
doing of anything which has the effect of transferring, or enabling the
enjoyment of, such property. Thus the question whether the collaboration
agreement constitutes transfer of property must be answered with reference
to clauses (d) and (f) which defines immovable property and transfer. It
is clear from the agreement that the transfer of rights of Vidarbha
Engineering in its land does not amount to any sale, exchange or lease of
such land, since, only possessory rights have been granted to Unitech to
construct the building on the land. Nor is there any clause in the
agreement expressly transferring 22% of the building to Vidarbha after it
is constructed by Unitech. Clause 4.6 only mentions that as a
consideration for Unitech agreeing to develop the property it shall retain
78% and the share of Vidarbha Engineering will be 22%. In fact the
Parliament has defined “transfer”, deliberately wide enough to include
within its scope such agreements or arrangements which have the effect of
transferring all the important rights in land for future considerations
such as part acquisition of shares in buildings to be constructed, vide sub-
clause (ii) of clause (f) of sub-section (2) of Section 269UA. There is no
doubt that the collaboration agreement can be construed as an agreement and
in any case an arrangement which has the effect of transferring and in any
case enabling the enjoyment, of such property. Undoubtedly, the
collaboration agreement enables Unitech to enjoy the property of Vidarbha
Engineering for the purpose of construction. There is also no doubt that an
agreement is an arrangement. It must therefore be held that the
collaboration agreement effectuates a transfer of the subject land from
Vidarbha Engineering to Unitech within the meaning of the term in Section
269UA of the Act. It appears to be the intention of the Parliament to
cover all such transactions by which valuable rights in property are in
fact transferred by one party to another for consideration, under the word
“transfer”, for fulfilling the purpose of pre-emptive purchase i.e.
prevention of tax evasion. A Judgment of the Patna High Court in Ashis
Mukerji v. Union of India and Ors[5] cited before us takes the view that a
development agreement is covered by the definition of transfer in Section
269UA. We note the same with approval.

SHOW CAUSE NOTICE

6. Upon the submission of the statement under Section 269UA of the Act,
the Appropriate Authority issued a show cause notice dated 8.7.1994 stating
that the consideration for the transaction appears to be too low and
appears to be understated by more than 15%, having regard to the sale
instance of a land in Hanuman Nagar, an adjoining locality. The show cause
notice contains the following table:

7. It is obvious from the table that the authority took the price the
consideration for the land to be Rs. 1,00,40,000/- (rupees one crore forty
thousand) which is the consideration stated by the appellant in the
statement as a consideration for the transfer of subject property i.e. plot
nos. 34, 35 and 36 admeasuring 2595.152 sq. mtrs. = 27,934 sq ft. It is
however, difficult to imagine how or why the authority has considered the
consideration to be for 56,473 sq ft (of available FSI). This has obviously
resulted in showing a lower price of Rs.184/- per sq ft of FSI and
enabling the authority to draw a prima facie conclusion that the
consideration is understated by more than 15% in comparison to the sale
instance for which the price appears to be Rs. 283/- per sq ft of FSI. If
the authority had to take into account the consideration of Rs.
1,00,40,000/- for 27,934 sq ft to a piece of land as stated by the
appellants the rate would have been Rs. 359.41 per sq ft. and the rate of
the sale instance would have been Rs. 246.14 per sq ft. The authorities
thus committed a serious error in taking the consideration quoted by the
appellants for the entire subject land i.e. 27,934 sq ft as consideration
for the transfer of the available FSI i.e. 56,473 sq ft. thus showing an
unwarranted undervaluation.

8. Moreover, as rightly contended by Shri Mohta the authorities have
treated the consideration for subject land, which is an industrial plot, as
understated by more than 15% on the basis of a sale instance of a land
which is in a residential locality. More importantly, it is obvious that
the area of the sale instance is of a much smaller plot i.e. 736 sq mtrs
whereas the subject land which is said to have been undervalued is 2,024 sq
mtrs. It is well known that the price of a small residential plot would
be more than a large industrial plot. The show cause notice which has
subsequently been confirmed is vitiated by a gross non-application of mind.

9. In reply to the show cause notice the appellants raised several
objections to the alleged undervaluation including the existence of
encumbrances and the aspects mentioned hereinabove. In particular, the
appellants pointed out a sale instance of a comparable case approved by the
authorities where the FSI cost on the basis of apparent consideration comes
to Rs. 90/- per sq ft. This was in respect of a property in the very same
locality in which the subject land is located.

ORDER UNDER SECTION 269UD OF THE INCOME TAX ACT

10. The appropriate authority considered the objections filed by the
appellants and rejected them by an order dated 29.07.1994 passed under
section 269UD of the Income Tax Act. The authority rejected all the
objections taken by the appellants. The authority validated the sale
instance relied on in the show cause notice without giving any finding on
the specific objections raised. It rejected the sale instance relied on by
the appellants of a property in the same locality on the ground that that
property does not have road on the three sides like the property under
consideration; there is a nallah carrying waste water near that property
and it has a frontage of only 12.5 mtrs. It took into account the
consideration of Rs. 1,00,40,000/- and deducted from it an amount of Rs.
24,09,600/- being discount calculated at the rate of 8% per annum since the
consideration had been deferred for a period of three years. It therefore
determined the consideration for purchase of the subject property at Rs.
76,30,400/-.

11. The authority fell into a gross and an obvious error while conducting
this entire exercise of holding that the consideration for the subject
property was understated in holding that Vidarbha Engineering has
transferred property to the extent of 78% to Unitech. There is no warrant
for this finding since Vidarbha Engineering was never to be the owner of
the entire built up area. It only had a share of 22% in it. Unitech,
which had built from its own funds, was to retain 78% share in the built up
area. And in any case the appellants had never stated that the
consideration for Rs. 1,00,40,000/- was in respect of the built up area but
on the other hand had clearly stated that it was for transfer of the
subject land. Thus, there was no evidence on record nor is any referred to
in the order for coming to the conclusion that Vidarbha Engineering had
transferred 78% of the built up area to Unitech and retained 22%. The
order of appropriate authority thus suffers from a gross perversity.

IMPUGNED JUDGMENT OF THE HIGH COURT

12. By the writ petition before the High Court, the appellants raised
several contentions. They maintained that the impugned order did not
contain any finding that the consideration for the transaction was
undervalued by the parties in order to evade taxes, which is the mischief
sought to be prevented. Shri Mohta, the learned senior advocate,
maintained that it was necessary for the authority to come to the
conclusion that there is an attempt to or in fact an evasion of taxes
before directing compulsory purchase. The learned senior counsel referred
to a decision of the Bombay High Court in Amarjit Thapar v. S.K. Laul &
Ors. [2008] 298 ITR 336. The Bombay High Court observed as follows:

“The order of the Appropriate Authority is invalid and void ab initio as
there is no positive finding that there was an attempt to evade tax. The
Apex Court in the case of C.B.Gautam v. Union of India (1993) 1 SCC 78,
held that the very historical setting in which the provisions of this
Chapter were enacted indicates that it was intended to be resorted to only
in cases where there is an attempt to evade tax by significant
undervaluation of immovable property agreed to be sold. In the case of
Nirmal Laxminarayan Grover (supra), this Court held that recourse to
compulsory purchase of the immovable property; under Chapter XX-C of the
Act should be taken only in clear cases of gross undervaluation from which
the interference must clearly flow that it is done for evasion of taxes.
In view of the judgment of the Supreme Court in C.B.Gautam (supra), unless
the difference in the apparent effective consideration and the market value
is more than 15%, the Appropriate Authority cannot assume jurisdiction
under section 269-UD of the Act. The same does not mean that the mere fact
that such difference is more than 15% will, automatically, lead to the
conclusion that there has been undervaluation of property with the motive
of evading tax. In Vimal Agarwal case (supra), this Court has reiterated
that right of pre-emptive purchase under section 269UD is not a right of
pre-emption simpliciter but is a right which can be exercised only in the
cases where there is significant undervaluation in agreement of sale with a
view to evade tax. The onus of establishing that undervaluation is with a
view to evade tax is on the Revenue. No such finding is to be found in the
impugned order”.
It is not possible to agree with this view in its entirety. Undoubtedly
one of the objects of the provision is to prevent evasion of taxes by
showing an undervaluation which is more than 15% of the true value of the
property and which in turn carries an implication that some portion of the
value is not shown in the agreement or the deed but passes by way of
unaccounted money. But it is not possible to say that it must be alleged
in the show cause notice or a finding must be rendered in the order that
there is evasion of taxes as a sine qua non for its validity. Nor is it
possible to hold that the onus of establishing undervaluation with a view
to evade tax is on the revenue. The true position seems to be that a
significant undervaluation, greater than 15% below the fair market value
raises a rebuttable presumption that there is an attempt to evade taxes.
In C.B. Gautam’s case[6] this Court observed that an allegation of such
undervaluation of more than 15% raises a rebuttable presumption of evasion
of taxes which renders an opportunity to show cause necessary. Therefore,
such an opportunity must be read into the provisions of Chapter XXC. This
Court observed in C.B. Gautam’s case (supra), as follows:

“As we have already pointed out the provisions of Chapter XX-C can be
resorted to only where there is a significant undervaluation of property to
the extent of 15 per cent or more in the agreement of sale, as evidenced by
the apparent consideration being the lower than the fair market value by 15
per cent or more. We have further pointed out that although a presumption
of an attempt to evade tax may be raised by the appropriate authority
concerned in case of the aforesaid circumstances being established, but
such a presumption is rebuttable and this would necessarily imply that the
parties concerned must have an opportunity to show cause as to why such a
presumption should not be drawn. Moreover, in a given transaction of an
agreement to sell there might be several bona fide considerations which
might induce a seller to sell his immovable property at less than what
might be considered to be the fair market value. For example: he might be
in immediate need of money and unable to wait till a buyer is found who is
willing to pay the fair market value for the property. There might be some
dispute as to the title of the immovable property as a result of which it
might have to be sold at a price lower than the fair market value or a
subsisting lease in favour of the intending purchaser. There might
similarly be other genuine reasons which might have led the seller to agree
to sell the property to a particular purchaser at less than the market
value even in cases where the purchaser might not be his relative. Unless
an intending purchaser or intending seller is given an opportunity to show
cause against the proposed order for compulsory purchase, he would not be
in a position to rebut the presumption of tax evasion and to give an
interpretation to the provisions which would lead to such a result would be
utterly unwarranted. The very fact that an imputation of tax evasion arises
where an order for compulsory purchase is made and such an imputation casts
a slur on the parties to the agreement to sell lead to the conclusion that
before such an imputation can be made against the parties concerned, they
must be given an opportunity to show cause that the undervaluation in the
agreement for sale was not with a view to evade tax. Although Chapter XX-C
does not contain any express provision for the affected parties being given
an opportunity to be heard before an order for purchase is made under
Section 269-UD, not to read the requirement of such an opportunity would be
to give too literal and strict an interpretation to the provisions of
Chapter XX-C and in the words of Judge Learned Hand of the United States of
America “to make a fortress out of the dictionary”. Again, there is no
express provision in Chapter XX-C barring the giving of a show-cause notice
or reasonable opportunity to show cause nor is there anything in the
language of Chapter XX-C which could lead to such an implication. The
observance of principles of natural justice is the pragmatic requirement of
fair play in action. In our view, therefore, the requirement of an
opportunity to show cause being given before an order for purchase by the
Central Government is made by an appropriate authority under Section 269-UD
must be read into the provisions of Chapter XX-C”.

13. The High Court has failed to render a finding on the relevance of
comparable sale instances, particularly, why a sale instance in an
adjoining locality has been considered to be valid instead of a sale
instance in the same locality. The other aspects of the impugned order of
the appropriate authority in the earlier part of judgment seems to have
been missed.

14. In the result, we find that the appeal deserves to be allowed and is
hereby allowed. The impugned order dated 20.02.2004 passed by the High
Court of Bombay at Nagpur is set aside. Consequently, order dated
29.07.1994 passed by the appropriate authority under Section 269UD (1) of
the Act is also set aside. There will be no order as to costs.

……………….…..........…..J.
[MADAN B. LOKUR]

.......................………J.

[S.A. BOBDE]
NEW DELHI,
NOVEMBER 4, 2015
-----------------------
[1] Section 269UA. Definition – In this Chapter, unless the context
otherwise requires, -
xxxxxxx
(f) “transfer”,-
(i) in relation to any immoveable property referred to in sub-clause
(i) of clause (d), means transfer of such property by way of sale or
exchange or lease for a term of not less than twelve years, and includes
allowing the possession of such property to be taken or retained in part
performance of a contract of the nature referred to in Section 53A of the
Transfer of Property Act, 1882 (4 of 1882):
Explanation- For the purpose of this sub-clause, a lease which
provides for the extension of the term thereof by a further term or terms
shall be deemed to be a lease for a term of not less than twelve years, if
the aggregate of the term for which such lease is to be granted and the
further term or terms for which it can be so extended is not less than
twelve years;
(ii) In relation to any immoveable property of the nature referred to
in sub-clause (ii) of clause (d), means the doing of anything (whether by
way of admitting as a member of or by way of transfer of shares in a
cooperative society or company or other association of persons or by way of
any agreement or arrangement or in any other manner whatsoever) which has
the effect of transferring or enabling the enjoyment of, such property.

[2] Section 118 “Exchange” defined.-When two persons mutually transfer
the ownership of one thing for the ownership of another, neither thing or
both things being money only, the transaction is called “exchange”.
A transfer of property in completion of an exchange can be made only
in manner provided for the transfer of such property by sale.
[3] clause 4.6 : As a consideration for the SECOND PARTY agreeing to
develop the said project land in phases and in the manner specified herein,
the SECOND PARTY shall be entitled to retain 78% of the total constructed
area of the multi-storeyed shopping-cum-commercial project and the FIRST
PARTY’s share will be 22% of the same. This constructed area shall include
the area in the basement, if there will be any.
[4] Section 269UA (2)(d) “immovable property” means-
any land or any building or part of a building, and includes, where
any land or any building or part of a building is to be transferred
together with any machinery, plant, furniture, fittings or other things,
such machinery, plant, furniture, fitting or other things also.
Explanation.- For the purposes of this sub-clause, “land, building,
part of a building, machinery, plant, furniture, fittings and other things”
include any rights therein.
any rights in or with respect to any land or any building or a part
of a building (whether or not including any machinery, plant, furniture,
fittings or other things therein) which has been constructed or which is to
be constructed, accruing or arising from any transaction (whether by way of
becoming a member of, or acquiring shares in , a co-operative society,
company or other association of persons or by way of any agreement or any
arrangement of whatever nature), not being a transaction by way of sale,
exchange or lease of such land, building or part of a building;

[5] [1996] 222 ITR 168
[6] (1993) 1 SCC 78

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