Chapter XXC pre-emptive purchase requires disclosed valuation material, a tax-evasion finding, and fair hearing before compulsory acquisition.

Under Chapter XXC of the Income-tax Act, compulsory pre-emptive purchase can be sustained only on a reasoned finding that the apparent consideration is significantly understated with a view to evade tax, and not on undervaluation alone. A show-cause notice must disclose the valuation basis, comparable instances, and other materials relied upon so the affected parties have a real opportunity to rebut the case; delayed disclosure does not cure the defect where effective response is impaired. Purchase orders that ignore relevant contractual and valuation material, or proceed mechanically without the statutory tax-evasion finding, are arbitrary and invalid. Interest on unpaid consideration is not automatic and depends on the facts and equity of the transaction.

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Issues: (i) Whether the show-cause notices and proceedings for pre-emptive purchase under Chapter XXC were vitiated for want of disclosure of the basis and materials relied upon, thereby denying a reasonable opportunity of hearing; (ii) Whether the impugned purchase orders were unsustainable for failing to apply the statutory test of attempted tax evasion and for relying on irrelevant or ignoring relevant materials; (iii) Whether the vendor was entitled to interest on the unpaid balance consideration.

Issue (i): Whether the show-cause notices and proceedings for pre-emptive purchase under Chapter XXC were vitiated for want of disclosure of the basis and materials relied upon, thereby denying a reasonable opportunity of hearing.

Analysis: The statutory scheme under Chapter XXC, though not expressly providing for a hearing, required a real and effective opportunity to the intending purchaser and seller. A notice that merely states that the apparent consideration is more than 15 per cent below market value, without disclosing the reasons, materials, valuation basis, or comparable instances relied upon, does not enable the affected parties to meet the case against them or rebut the presumption of undervaluation. The later supply of some documents at a belated stage did not cure the defect, particularly where crucial materials such as comparable agreements and valuation computations were withheld or supplied too late for an effective response.

Conclusion: The notices and the proceedings founded on them were violative of natural justice and unsustainable.

Issue (ii): Whether the impugned purchase orders were unsustainable for failing to apply the statutory test of attempted tax evasion and for relying on irrelevant or ignoring relevant materials.

Analysis: The power of compulsory purchase under section 269UD(1) is not attracted by undervaluation simpliciter; it can be exercised only when the undervaluation is found to be with a view to evade tax. The impugned orders did not record any finding that the alleged under-valuation was for tax evasion, and the decision-making process proceeded mechanically on the assumption that a difference of 15 per cent or more was by itself sufficient. Relevant material, including contractual terms affecting value, the purchaser's valuation report, and distinctions between the subject flats and the comparable transaction, was ignored, while extraneous or unsupported assumptions were adopted in valuation adjustments. This rendered the orders perverse and arbitrary.

Conclusion: The purchase orders were invalid and liable to be set aside.

Issue (iii): Whether the vendor was entitled to interest on the unpaid balance consideration.

Analysis: Interest in such matters is not an automatic incident of pre-emptive purchase and depends on the facts and equity of the case. Here, the vendor had contested the proceedings and contributed to the delay, and the agreement did not provide for interest on delayed completion. The circumstances did not justify shifting the burden of interest to the writ petitioners. However, reimbursement of actual maintenance and municipal expenditure incurred in relation to the flats was equitable.

Conclusion: No interest was payable, though reimbursement of proved expenditure was allowed.

Final Conclusion: The writ petitions succeeded, the pre-emptive purchase orders were quashed, the authority was directed to issue the no-objection certificate, and the parties were left to complete the transaction with reimbursement of allowable expenses to the vendor.

Ratio Decidendi: Under Chapter XXC of the Income-tax Act, compulsory purchase can be sustained only on a reasoned finding that the apparent consideration is significantly understated with a view to evade tax, and the affected parties must be given a real opportunity to rebut that case on full disclosure of the materials relied upon.

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