1977 (2) TMI 41 - AT - Income Tax

Issues Involved:
1. Validity of initiation of proceedings under Section 269C of the IT Act.
2. Nature of the transaction: sale vs. exchange.
3. Validity of the sale by the firm vs. individual partners.
4. Presumption of under-valuation and its legal implications.
5. Material sufficiency for the belief of under-valuation.
6. Object of the transaction: tax evasion or genuine business arrangement.
7. Competent Authority's reliance on valuation reports.
8. Estoppel concerning the valuation of the property.

Issue-Wise Detailed Analysis:

1. Validity of initiation of proceedings under Section 269C of the IT Act:
The initiation of proceedings was challenged on the grounds that the Competent Authority could not have any reasons to believe that there was a gross understatement of the property's value. The tribunal held that the Competent Authority did not act capriciously or on mere suspicions. The Inspector's detailed report provided sufficient material for the Competent Authority to form a prima facie case for initiating proceedings. The tribunal emphasized that at the initiation stage, the material need not be conclusive but should be sufficient to form a bona fide belief.

2. Nature of the transaction: sale vs. exchange:
The transaction was scrutinized to determine whether it was a sale or an exchange. The tribunal applied the juristic principles from CIT, Gujarat II vs. B.M. Kharwar, concluding that the deed dated 30th May 1973 was one of sale and not an exchange. The document explicitly mentioned a sale for Rs. 2,90,000, and the consideration was paid through the allotment of shares, which constituted a sale rather than an exchange.

3. Validity of the sale by the firm vs. individual partners:
The argument that the sale was effected by individual partners rather than the firm was rejected. The tribunal held that the property belonged to the firm, and the firm M/s. Chebrolu Hanumaiah, Guntur, transferred the property to M/s. Chebrolu Hanumaiah and Bros. Pvt. Ltd., Guntur. The recitals in the deed of sale supported this conclusion, and the transfer was validly effected by the firm.

4. Presumption of under-valuation and its legal implications:
The tribunal discussed the legal presumptions under Section 269C(2) of the Act. It was noted that where the fair market value exceeds the apparent consideration by more than 25 percent, it is conclusive proof that the consideration has not been truly stated. However, the tribunal, citing judicial dicta, held that this presumption is rebuttable, and the parties can show that the consideration was truly stated in the instrument of transfer.

5. Material sufficiency for the belief of under-valuation:
The tribunal found that the Competent Authority had adequate material to form the belief that there was an under-statement of consideration. The Inspector's report assessed the property's value at Rs. 4,54,000, which was significantly higher than the stated consideration of Rs. 2,90,000. This provided a sufficient basis for the Competent Authority to initiate proceedings.

6. Object of the transaction: tax evasion or genuine business arrangement:
The tribunal examined whether the transaction was aimed at tax evasion. It was concluded that the transfer was a bona fide business arrangement. The partners of the firm became shareholders and directors in the private limited company, and the consideration was paid in the form of shares. There was no material to suggest that the transaction was intended to evade tax liability.

7. Competent Authority's reliance on valuation reports:
The tribunal addressed the argument that the Competent Authority should not rely on the valuation report of the expert from the Valuation Cell over the initial report. It was held that the expert valuer's report carries greater weight and sanctity, and the Competent Authority was justified in relying on it.

8. Estoppel concerning the valuation of the property:
The tribunal rejected the argument of estoppel. It was held that the Competent Authority is not estopped from holding a different valuation based on the expert valuer's report. The initial tentative opinion of the Taxing Officer does not preclude the Competent Authority from considering the expert's valuation.

Conclusion:
The tribunal concluded that the Competent Authority validly initiated the acquisition proceedings and that the transfer was a bona fide sale by the firm to the company. However, the tribunal found no evidence of tax evasion or under-statement of consideration with the object of evading tax liability. Consequently, the order of acquisition was held to be invalid in law, and the appeals were allowed.

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