Gross rent against the actual gross yearly rental. - Income Tax - 167/CBDT

INSTRUCTION NO 167/CBDT, Dated: April 29, 1970 Section(s) Referred: 16(3) of Wealth Tax Act Statute: Income - Tax Act, 1961 It has come to the notice of the Board that a certain valuer while capitalising the rental, took a hypothetical figure of Rs.35,412/- per annum as gross rent against the actual gross yearly rental of Rs.84,000 and after deducting 30% as outgoings he capitalised a hypothetical net yearly rental of Rs.24,788 as against the actual net rental of Rs.65,744. It seems that the valuer argued that the existing high rental was on account of temporary inflation of rents and while working out the market value by Income capitalisation approach gross rents should be taken only at 7-1/2% of the value of the property. If this argument of the valuer were to be accepted, the market value of the property would get reduced to 39%. The Board are advised that the procedure adopted by the valuer is not supported by any authorities on valuation. The position has been made very clear by Lawrence and Rees in their book" Modern Methods of Valuation of Land, Houses Buildings" as follows:- "In most cases, it will be assumed that the rental value at the time when the valuation is made and consequently the net income from the property will continue unchanged in the future. Experience peoves that this is not necessarily the case and changes in value may resultin the rent raising or falling over the period. But, in the absence of special factors definitely implying some future changes in rental value, the assumption is a reasonable one, for the possibility of changes either upwards or downwards is reflected in the rate per cent which an investment is expected to yield" --page 21. Evidently, therefore, by and large, the actual rental should be the criterion for purposes of capitalisation so long as the same compares favourably with rents received from similar properties in similar situations and the question of adopting hypothetical figure of rent, which is much lower that the actual rent, should not arise. 2. This may kindly be brought to the notice of all the Wealth-tax officers working in their charge.