THE issue before the Bench is - Whether consideration paid for transfer of an industrial plot of land can be treated as understated, on the basis of sale instance of a land which is in a residential locality. NO is the answer.
Facts of the case
The assessees are real estate investment companies. Vidarbha Engineering Industries i.e., assessee No. 2 holds on lease, three plots of land at Nagpur, which was received from the Nagpur Improvement Trust. During concerned year, Vidarbha Engineering decided to develop the subject land and entered into an agreement for the purpose with Unitech Ltd. (assessee No.1). The MOU between them was formalized into a collaboration agreement, wherein, the land holder agreed to allow Unitech to develop and construct a commercial project on the subject land 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 would retain 78% of the total constructed area and transfer 22% to the share of Vidarbha Engineering. The Unitech agreed to create an interest free security deposit of Rs. 10 lakhs, wherein, 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 neither to be construed as a partnership between the parties, nor to be construed as a demise or assignment or conveyance of the subject land. The only consideration apparently provided was the entitlement of Vidarbha Engineering to 22% of the constructed area in the proposed multi storied building.
However, the assessees suffered an order of compulsory pre-emptive purchase passed by the Appropriate Authority u/s 269UD. Upon the submission of the statement u/s 269UA, the Appropriate Authority issued a show cause notice stating that the consideration for the transaction was too low and understated by more than 15%, having regard to the sale instance of a land in an adjoining locality. In reply to the show cause notice, the assessees raised several objections to the alleged undervaluation. The appropriate authority considered those objections and rejected the sale instance relied on by the assessees of a property in the same locality on the ground that that property did not have road on the three sides like the property under consideration. 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/-. On appeal, the High Court confirmed the findings of the authority without rendering any finding that the consideration for the transaction was undervalued by the parties in order to evade taxes.
Having heard the parties, the Supreme Court held that,
++ 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. 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. 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. Thus the transaction cannot be construed as a sale, lease or a licence. 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. 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. 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;
++ it is obvious that the authority took the price the consideration for the land to be Rs. 1,00,40,000/-, which is the consideration stated by the assessee in the statement as a consideration for the transfer of subject property. It is however, difficult to imagine how or why the authority has considered the consideration to be for 56,473 sq ft. This has obviously resulted in showing a lower price 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. The authorities thus committed a serious error in taking the consideration quoted by the assessees for the entire subject land as consideration for the transfer of the available FSI, thus showing an unwarranted undervaluation. Moreover, as rightly contended by assessees counsel, 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. 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. It is not disputed that one of the objects of the provision of Section 269UD 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;
++ it is seen that in the C.B. Gautam's case, this Court has 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. It is seen that 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. In the result, the order passed by the High Court is set aside and consequently, order passed by the appropriate authority u/s 269UD (1) is also set aside