Tenanted property valuation must use rental capitalisation, not vacant-possession methods, for acquisition proceedings to be valid.

For initiation of acquisition under section 269C(1) of the Income-tax Act, the authority must have a reason to believe that the apparent consideration is below fair market value by the prescribed margin and that the understatement was made with the required object. Where the property is tenanted and protected by the Bombay Rent Act, the fair market value of the reversionary interest cannot be assessed on a vacant-possession or land-and-building basis; the proper approach is capitalisation of rental income. On that footing, a valuation based on the wrong method cannot by itself found the jurisdictional belief needed to start acquisition proceedings, and such notices were treated as unsustainable.

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Issues: Whether initiation of acquisition proceedings under section 269C(1) of the Income-tax Act, 1961 was valid when the property was a tenanted property protected by the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 and the valuation relied upon was based on the land-and-building method instead of capitalisation of rental income.

Analysis: The statutory preconditions for action under section 269C(1) require, inter alia, a reason to believe that the apparent consideration is less than the fair market value by more than the prescribed margin and that the agreed consideration was not truly stated with the requisite object. The property in question was held to be premises within the Bombay Rent Act and the tenant's rights were protected under section 12(1). In that situation, the fair market value of the reversionary interest could not properly be determined on a vacant-possession or land-and-building basis. A valuation proceeding on that footing could not supply a sound foundation for the necessary belief, especially where the tenant's interest remained protected and the proper method was capitalisation of the rental yield.

Conclusion: The impugned notices and the attempted acquisition proceedings were not sustainable, and the challenge succeeded in favour of the assessee.

Ratio Decidendi: Where an immovable property is tenanted and the tenant's statutory protection subsists, valuation for the purpose of section 269C must proceed on the rental-yield basis, and a contrary valuation cannot, by itself, establish the jurisdictional reason to believe required to initiate acquisition proceedings.

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