1988 (5) TMI 9 - HC - Wealth-tax

Summary

Issues Involved:
1. Method of valuation adopted by the Valuation Officer under section 16A(5) of the Wealth-tax Act, 1957.
2. Inclusion of reversionary value in the valuation.
3. Inclusion of the right to receive a flat in the valuation.
4. Rate of capitalisation for determining the fair market value.
5. Validity of the Commissioner of Wealth-tax's order under section 25(2) of the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Method of Valuation Adopted by the Valuation Officer:
The petitioners challenged the valuation of their property by the Valuation Officer, who determined the fair market value of the property for the assessment years 1977-78 to 1984-85. The Valuation Officer's method included three factors: capitalised value of rent, reversionary value, and the right to receive a flat in the future. The final valuation ranged from Rs. 9,46,400 on March 31, 1977, to Rs. 17,04,400 on March 31, 1984.

2. Inclusion of Reversionary Value in the Valuation:
The Valuation Officer included the reversionary value, which is the value of the property reverting to the lessor after the lease term. The petitioners argued that this inclusion was contrary to established legal principles. The court referred to previous judgments, notably CIT v. Ashima Sinha [1979] 116 ITR 26 (Cal) and CED v. Radha Devi Jalan [1968] 67 ITR 761 (Cal), which held that the reversionary value should not be included in the valuation of tenanted properties. The court concluded that the Valuation Officer misdirected himself by including the reversionary value, which is not sustainable in law.

3. Inclusion of the Right to Receive a Flat in the Valuation:
The Valuation Officer included the value of the right to receive a flat in the future, as stipulated in the lease agreement. The petitioners contended that this right was speculative and not an asset capable of being quantified. The court agreed, noting that several contingencies could prevent the realization of this right, making its valuation speculative and uncertain. The court held that such a right could not be included in the valuation unless the flat was actually obtained by the lessor.

4. Rate of Capitalisation for Determining the Fair Market Value:
The Valuation Officer used a capitalisation rate of 7%, which the petitioners argued was too low. They suggested a rate of at least 12%, referencing a Supreme Court judgment in Special Land Acquisition Officer v. P. Veerabhadarappa [1985] 154 ITR 190, which emphasized that the rate of capitalisation should reflect the prevailing rate of return on investments at the relevant time. The court accepted the petitioners' contention, stating that the rate of capitalisation should be at least 12%, with a multiplying factor not exceeding 8 1/2.

5. Validity of the Commissioner of Wealth-tax's Order:
The Commissioner of Wealth-tax had directed the Wealth-tax Officer to reconsider the valuation, including the right to receive a flat as an asset. The court found this order erroneous, as the value of such a right could not be quantified unless the flat was actually obtained. Consequently, the court set aside the Commissioner's order to the extent it directed reconsideration of the right to receive a flat.

Conclusion:
The court quashed the Valuation Officer's report dated September 3, 1987, and set aside the Commissioner's order dated February 17, 1987, under section 25(2) of the Wealth-tax Act, 1957. The respondents were directed to proceed in accordance with the law, considering the court's observations in determining the property's value. All parties were instructed to act on a signed copy of the operative part of the judgment and order.