1981 (3) TMI 70 - HC - Income Tax

Competent authority's belief in I.T. Act not presumed at initial stage. Invalid notices quashed.

The court held that the presumption under sub-s. (2) of s. 269C of the I.T. Act, 1961 does not apply at the stage of forming the competent authority's ... Formation of belief under sub-s. (1) of s. 269C - presumption under sub-s. (2) of s. 269C - conclusive proof under sub-s. (2)(a) of s. 269C - presumption of untrue statement under sub-s. (2)(b) of s. 269C - administrative (pre-initiation) stage versus judicial (proceedings) stage - proceedings under Chapter XX-A for acquisition of immovable property to counteract tax evasion - effect of transferor being Government or statutory body on presumption of collusionFormation of belief under sub-s. (1) of s. 269C - presumption under sub-s. (2) of s. 269C - administrative (pre-initiation) stage versus judicial (proceedings) stage - Whether the presumption in sub-s. (2) of s. 269C is available to the competent authority at the stage when he forms his belief under sub-s. (1) prior to initiating proceedings. - HELD THAT: - The Court held that sub-s. (1) of s. 269C involves a two-stage process: an initial formation of belief (a preparatory, administrative stage) and thereafter the initiation of proceedings for acquisition. The expression 'any proceedings under this Chapter' in sub-s. (2) refers to proceedings properly initiated under Chapter XX-A and not to the preparatory step of forming a belief. Consequently, the presumptions in sub-s. (2) - including the conclusive proof under cl. (a) and the evidentiary presumption under cl. (b) - apply only in proceedings after initiation, when valuation and evidence have been adduced, and not at the pre-initiation stage when the competent authority is merely forming a belief on available materials without hearing the parties. Applying the presumption at the belief-formation stage would render the subsequent objection, valuation and adjudicatory processes meaningless.The presumption under sub-s. (2) of s. 269C is not available at the stage of formation of belief under sub-s. (1) and cannot be relied upon by the competent authority prior to initiation of proceedings.Presumption of untrue statement under sub-s. (2)(b) of s. 269C - effect of transferor being Government or statutory body on presumption of collusion - Whether the presumption of an untrue statement of consideration (sub-s. (2)(b)) can reasonably be applied where the transferor is a Government or statutory body such as LIC. - HELD THAT: - The Court observed that the untrue statement of agreed consideration contemplated by sub-s. (1) necessarily implies collusion between transferor and transferee to evade tax. Where the transferor is the Government or a statutory body, the proposition of collusion is inherently implausible. To apply the presumption against such a transferor would be absurd because it would attribute intentional falsehood in the instrument to a Government or statutory entity. Thus, in transfers involving a Government/statutory transferor, the competent authority lacks justification for treating the instrument as a collusive untrue statement of consideration.The presumption under sub-s. (2)(b) cannot sensibly be applied to transfers where the transferor is the Government or a statutory body; such application is unreasonable and unsupported.Formation of belief under sub-s. (1) of s. 269C - proceedings under Chapter XX-A for acquisition of immovable property to counteract tax evasion - Whether the competent authority acted on legally sufficient material in forming his belief in the present case, in particular having regard to his treatment of the Hindusthan Building Society Ltd. as a transferor rather than a mere confirming party and to the fact that LIC was the transferor. - HELD THAT: - The Court found that the competent authority relied on every available material without discriminating material relevance to the true question of fair market value and the truth of the stated consideration. He overlooked that a confirming party is not necessarily a transferor and failed to appreciate that the property belonged to LIC. Given LIC's status as transferor and the confirming nature of the society's role, the competent authority had no proper basis to believe that the agreed consideration was untrue or that collusion had occurred. His recorded reasons therefore showed a failure to consider critical legal facts and amounted to issuing notices without jurisdiction.The competent authority lacked legally sufficient material to form the requisite belief in this case; his erroneous assumptions (treating a confirming party as transferor and overlooking LIC's role) vitiated the formation of belief.Proceedings under Chapter XX-A for acquisition of immovable property to counteract tax evasion - conclusive proof under sub-s. (2)(a) of s. 269C - Whether the notices issued under s. 269D(1) in the present case were validly issued. - HELD THAT: - Because the competent authority improperly relied on material and presumptions not available at the pre-initiation stage and because he misconceived the role of the confirming party and the status of LIC as transferor, the issuance of the notices was illegal and without jurisdiction. Application of cl. (a) or cl. (b) of sub-s. (2) at the belief-formation stage would have short-circuited the statutory objection, valuation and adjudication mechanism; in the present facts the authority's reasons were not sustainable.The impugned notices were illegally issued and without jurisdiction and were therefore quashed; the rule nisi was rightly made absolute.Final Conclusion: The High Court's order quashing the notices and making the rule nisi absolute is affirmed; the revenue's appeal is dismissed, no certificate for appeal to the Supreme Court is granted, and no order as to costs is made. Issues Involved:1. Applicability of the presumption under sub-s. (2) of s. 269C of the I.T. Act, 1961.2. Stage when the competent authority has to form his belief under sub-s. (1) of s. 269C of the Act.3. Validity of the impugned notices issued by the competent authority.Summary:1. Applicability of the presumption under sub-s. (2) of s. 269C of the I.T. Act, 1961:The principal point in this appeal is whether the presumption under sub-s. (2) of s. 269C applies at the stage when the competent authority forms his belief under sub-s. (1) of s. 269C. The court held that the presumption under sub-s. (2) of s. 269C is not applicable at the stage of forming the belief. The presumption is only applicable in any proceedings initiated under Chap. XX-A, which occurs after the competent authority has formed his belief and initiated proceedings. The court emphasized that the first stage involves administrative functions and preparation for initiating proceedings, while the second stage involves judicial proceedings.2. Stage when the competent authority has to form his belief under sub-s. (1) of s. 269C of the Act:The court clarified that sub-s. (1) of s. 269C consists of two stages: the formation of belief by the competent authority and the initiation of proceedings. The competent authority must have reason to believe in four matters before initiating proceedings: (i) the fair market value exceeds Rs. 25,000, (ii) the apparent consideration is less than the fair market value by more than 15%, (iii) the consideration has not been truly stated, and (iv) the untrue statement aims to evade taxes. The court held that the first stage, where the competent authority forms his belief, is not a proceeding under sub-s. (2) of s. 269C, and thus, the presumption under sub-s. (2) does not apply at this stage.3. Validity of the impugned notices issued by the competent authority:The court found that the competent authority issued the impugned notices without proper jurisdiction and illegally. The competent authority's belief that the consideration was not truly stated was based on erroneous assumptions, including the incorrect assumption that Hindusthan Building Society Ltd. was a transferor. The court noted that the Life Insurance Corporation of India (LIC), being a statutory body, would not engage in tax evasion, and thus, the competent authority had no justification for his belief. Consequently, the court affirmed the judgment of the learned judge, quashed the impugned notices, and made the rule nisi absolute.Conclusion:The appeal by the revenue was dismissed, and the judgment of the learned judge was affirmed. The court also denied the revenue's oral prayer for a certificate for appeal to the Supreme Court under art. 134A of the Constitution of India.