Pre-emptive purchase under Chapter XX-C fails where encumbrances depress value and the auction transaction is bona fide.

Chapter XX-C of the Income-tax Act is intended to curb substantial understatement of consideration in immovable property transactions, but the presumption of tax evasion arises only where fair market value exceeds the apparent consideration by the prescribed margin and remains rebuttable. In valuing immovable property, material encumbrances such as long-standing tenancy rights must be factored in because they can materially depress market value; an unadjusted land-and-building valuation is not a correct measure in that setting. A public auction conducted with statutory sanction, absence of competing bids, and surrounding circumstances supporting bona fides may negate any inference of tax evasion, so pre-emptive purchase proceedings are not attracted.

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Issues: Whether the notice and proceeding for pre-emptive purchase under Chapter XX-C of the Income-tax Act, 1961 could be sustained when the property was sold through a public auction after statutory sanction, the property was heavily encumbered by long-standing tenancies, and the transaction appeared bona fide rather than a device to evade tax.

Analysis: Chapter XX-C is aimed at arresting significant understatement of consideration in immovable property transactions so as to prevent tax evasion. The jurisdiction under Article 226 is limited to examining perversity or illegality in the valuation process and does not permit the Court to sit in appeal over valuation as such. However, the statutory presumption of attempted tax evasion arises only when the fair market value exceeds the apparent consideration by the prescribed margin, and that presumption is rebuttable. In a case where the property is subject to substantial and unevictable tenancy rights, the encumbrance materially depresses market value and the proper valuation must reflect that burden. A valuation that ignores such encumbrances and proceeds on an ordinary land-and-building approach, despite the property being offered in a public auction sanctioned under the Bombay Public Trusts Act, cannot be accepted as a correct determination of market value. The absence of competing bids and the surrounding circumstances also supported the genuineness of the transaction and negatived any inference of an attempt to evade tax.

Conclusion: The pre-emptive purchase provision was not attracted, since the transaction was bona fide and there was no material to sustain a finding of tax evasion.

Final Conclusion: The appellate court affirmed the quashing of the notice and proceeding under Chapter XX-C and upheld the dismissal of the Revenue's challenge.

Ratio Decidendi: Pre-emptive purchase under Chapter XX-C can be invoked only where the undervaluation indicates an attempt to evade tax; in valuing encumbered immovable property, material tenancy and other encumbrances must be taken into account, and a bona fide public sale cannot be brought within the provision merely because the apparent consideration is lower than an unadjusted market estimate.

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