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TMI Blog1988 (5) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... . agreed to take the said premises on lease for a period of 75 years. By deed of lease dated August 31, 1981, the petitioners granted lease of the said premises to Messrs. Susam Properties Pvt. Ltd. for a period of 75 years with an option for the lessee to renew the said lease for a period of another 20 years. The said deed of lease provides for rent of Rs. 2,000 per month during the period from May 1, 1981, to April 30, 1984, and Rs. 6,000 per month from May 1, 1984, to April 30, 2056. The said lease deed further provides that the lessee shall construct a building on the premises and thereafter allot vacant possession of a flat to the petitioners on the first floor of the said premises proposed to be constructed covering an area of 2,000 square feet. In accordance with the terms and conditions of the said deed of lease, the said Susam Properties Pvt. Ltd. demolished the existing structure and has started construction of a new building thereat. According to the petitioner, superstructure of the said building has not been completed even in 1987 when the application was made or thereafter. The petitioners disclosed the value of the said premises in its return of wealth. The Wealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be erected thereon by the lessee at the expiration of the term hereby created ... (cl. 7, page 6, of lease deed No. 1-7388 for the year 1981). (iii) Right to receive vacant possession of a flat on the first floor duly constructed and finished covering a covered area 2,000 sq.. ft. (cl. 3, page 5, of lease deed) From the above, it is clear that fair market value of the lessor's interest on the above valuation dates comprises of the following: (i) capitalised value of rent received and receivable for unexpired period of lease. (ii) reversionary value. (iii) value of right to receive vacant possession of flat on a future date which is clearly defined in the lease deed." The assessee has argued that actual rental income fixed should be the basis for valuation of the property and the question of separate valuation of the land does not arise. In support, he has quoted the following judicial pronouncements: (1) CIT v. Smt. Ashima Sinha [1979] 116 ITR 26 (Cal). (2) CED v. Radha Devi Jalan [1968] 67 ITR 761 (Cal). (3) Corporation of Calcutta v. East India Commercial Co. Pvt. Ltd., AIR 1982 Cal 479. In the case of CIT v. Smt. Ashima Sinha [1979] 116 ITR 26 (Cal), th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the rent payable by them enhanced except in accordance with the provision s of the Rent Control Act, the only appropriate method of valuation is to capitalise the annual rent by certain number of years' purchase. The method of valuing the land and the building separately and adding up the values would be improper in such cases, because that would ignore the impact of the Rent Control Act on the value of the land and the building." In this connection, it may be mentioned that, for all the assessment years except assessment year 1981-82, rents shown in the lease deeds are considered and capitalised for the unexpired period of lease. To those capitalised values, reversionary values are added (reasons for adding reversionary value are discussed earlier). During the assessment year 1981-82, the property was not tenanted but was under illegal occupation of the former lessee for which the asses see filed recovery suit in the city civil court. Therefore, during the assessment year 1981-82, the property was not tenanted and the illegal occupier was not under the protection of the West Bengal Premises Tenancy Act, 1956. Obviously, the above case law cannot be applied in our case for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive a flat at future date is an asset within the meaning of section 2(e) of the Wealth tax Act and has to be valued accordingly. In the case of Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97, the Hon'ble Supreme Court opined that the right to receive compensation, even though the date of payment was deferred, was property and constituted an "asset" for the purpose of the Wealth-tax Act. The principle enunciated in the above case is equally applicable in our case. Comments on Registered Valuer's report: The registered valuer has valued the lessor's interest in the property as on April 1, 1977, at Rs. 14,000 by capitalising the net lease rent at 8% for perpetuity. His valuation is not acceptable for the following reasons : (i) He has failed to take into account the lease conditions. As per the lease condition, the lessee was to vacate the premises on expiration of lease term and, therefore, rent is receivable for unexpired period of lease and not in perpetuity. Capitalisation for perpetuity is, therefore, basically wrong. (ii) He has failed to take into account reversionary value. As per the lease condition, the lessee was to give vacant possession on expiration of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing reasons: (1) Value of reversionary interest in the property has not been included. (2) Value of the right to receive a flat measuring 2,000 sq. ft. has not been added. (3) As on May 1, 1984, the value of the property increased considerably with reference to value of the property on the date of the lease agreement (August 31, 1981) when lease rent was fixed and, therefore, lease rent was very much secured. During 1981, the average yield from the Government securities was 6.79%, and therefore, the rate of return for secured lease rent should not be more than 7%. Rate of capitalisation of 8% taken by the registered valuer is too high. (5) There is only one lessee and he might have been paying rent by cheque and, therefore, in practice, the assessee may not be incurring any expenditure towards collection. Therefore, in that case, allowing 6% (maxi mum permissible) for collection charges which amounts to Rs. 4,320 p. a. is contrary to the facts and circumstances of the case and is too high. This shall not be more than 1 % of the gross rent. (Sd.) P. K. Majumdar Valuation Officer, Unit I. T. Income-tax Department, Calcutta-16." From the details of the method adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'as between a willing buyer and a willing seller' raises the problem of valuation. The value of any object of wealth is simply a capitalization of the services or income which actual or potential owners of the property expect to derive from it, i.e., earning power as a basis of valuation. The rule of number of years' purchase is not a theoretical or legal rule, but depends upon economic factors such as the prevailing rate of return which a prudent investor in the class of properties in question would expect. The most important of such economic factors is the prevailing rate of interest at the relevant time, i.e., on the date of the notification under section 4(1) of the Act. It is first necessary to ascertain the gross income from the acquired property. The next step should be to ascertain the net income. Having ascertained the net annual income, it must be capitalized by computing the number of years purchase. During the Imperial days, investment in gilt-edged securities was looked upon as the only safe form of investment. But after the attainment of independence, the country has taken long strides in the growth of commerce and trade. Due to growth of industries both in the publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith nationalised banks, National Savings Certificates, Unit Trusts and other forms of Government securities and even in the share market in the shape of blue chips command a much greater return. More secure the capital and regular the return, the lesser the rate of interest. Most secured kinds of investments are Government securities or deposits with scheduled banks or Unit Trusts or National Savings Certificates. The rate of interest on Government of India bonds for a period of 30 years in 1972 yielded 5.75% per annum. As per the Government of Karnataka publication called 'Finance Accounts of 1972-73', the rate of interest on the Mysore State Development loans issued in the years 1967, 1968, 1969, 1970, 1971 and 1972 was uniformly 53/4%. The rate of interest on fixed deposits with the State Bank of India for a period ranging from three years up to five years yielded 7 % while the rate on fixed deposits above five years was 7.25 %. The rate of dividend payable on Unit Trusts in 1972 was 8.25% per annum. National Savings Certificates, seven years, 2nd issue yielded tax-free interest at 6% on maturity, seven years, 3rd issue 6% tax-free payable annually and seven years, 4th issue 7.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modity and its effective value is its controlled value and not an imaginary commercial value. If the State chooses to impose statutory control in respect of terms and conditions for tenancies in properties and such control is statutorily enforced, then during the subsistence of such control, such properties would necessarily have a value which is controlled. The State cannot then turn round and say that for other purposes, the properties would have a notional commercial value. To hold otherwise would be to ignore the realities. We have failed to understand either the principles or the logic of the (reversionary) method of valuation as applied by the Valuation Officer of the Department in the instant case. After following the 'yield or rental' method and having arrived at a figure, the Valuation Officer had added to it the value of an imaginary reversion in future. We invited Mr. Pal to cite any authority which has approved or even indicated this method but he was unable to do so. It is stated in Parks' Valuation (at page 38) that when property is valued on rental basis the result is the value of the land and building taken together which cannot afterwards be apportioned. In the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue. Even if such right is an asset, the value of such asset is not capable of being quantified. During the previous year for the assessment year 1984-85, the said premises was not in the occupation of the lessee and the same was in the occupation of the said tenant, Basil, since deceased, against whom an ejectment proceeding was pending. The value of such right to get a flat cannot be included in determining the fair market value of the said premises. The value of the flat can only be included when such flat is handed over to the lessor. In the premises, the valuation as made by the Valuation Officer cannot be sustained. The order passed by the Commissioner of Wealth-tax under section 25(2) of the Wealth-tax Act, 1957, is also erroneous in so far as he directed the Wealth-tax Officer to reconsider the question whether the assessee's right to get a flat in the property to be constructed is a valuable asset or not. As I have held, even if it is an asset for the purpose of inclusion in the wealth, its value is not capable of being quantified in terms of money unless, in fact, such flat is obtained by the assessee. In the result, this application succeeds. The report of the Valua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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