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TMI Blog1984 (1) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ultiplier to be applied in determining the capitalized value of the lands acquired and that depends on the rate of return on investments in 1971 and 1972. In these appeals, the judgments were rendered by the High Court on appeals being preferred by the Special Land Acquisition Officer, Davangere, against the appellate judgments and decrees of the District judge, Chitradurga, and of the Civil judge, Davangere, on various references made under s. 18 of the Act. The facts giving rise to these appeals are more or less similar, and the essential facts may be shortly stated. Due to the construction of D. B. Kere Pick-up Project, several thousand acres of agricultural land in two villages in the State of Karnataka videlicet Budihar village in Harihar taluq and Siraganahally village in Davangere taluq got submerged and were accordingly acquired by the State Government pursuant to different notifications issued under s. 4(1) of the Act published on diverse dates in the years 1971 and 1972 followed by the usual notifications under s. 6. In response to notices issued under s. 9(2) of the Act, the respondents appeared before the Special Land Acquisition Officer, Davangere, and claimed comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws our attention to the unreported decision of the High Court in Special Land Acquisition Officer, Davangere v. B. Basavarajappa (Misc. First Appeals Nos. 881-4 of 1976 decided on 21-11-1977), laying down that the proper multiple for computation of the capitalized value should be 12 1/2 having regard to the rate of return at the relevant time, i.e., on the (late of the notification under s. 4(1) of the Act. The contention must, in our opinion, prevail. In Basavarajappa's case, a Division Bench of the High Court while dealing with the determination of compensation payable for similar agricultural lands in the neighbourhood of the same two villages acquired at or about the same time adopted the multiple of 12 1/2 times the net annual profits for purposes of determining the capitalized value thereof. In coming to that conclusion, the High Court observed: "The rate of return from Government Security, which is gilt-edged security, was around 6% in the year 1971-72. A person investing his capital in irrigated land would expect a return of about 2% more than what he obtains from Government securities. That means, a return of 8% would be the normal return expected by an agriculturist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les in the market. In the case of land, its value can also be measured by a consideration of the prices that have been obtained in the past for lands of similar quality and in similar positions, and that is what must be meant in general by the " market value " in s. 23. The function of the court in awarding compensation under the Act is to ascertain the market value of the land at the date of the notification under s. 4(1) of the Act and the methods of valuation may be : (1) opinion of experts, (2) the prices paid within a reasonable time in bona fide transactions of purchase or sale of the lands acquired or of the lands adjacent to those acquired and possessing similar advantages, and (3) number of years' purchase of the actual or immediately prospective profits from the lands acquired. Normally, the method of capitalizing the actual or immediately prospective profits or the rent of a number of years' purchase should not be resorted to if there is evidence of comparable sales or other evidence for computation of the market value. It can be resorted to only when no other method is available. It is axiomatic that the best evidence to prove what a willing purchaser would pay for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. In certain circumstances, however, the court has no other alternative but to fall back on the capitalized value. Alfred D. Jahr in " Law of Eminent Domain " (1953 edn.), after a general discussion regarding the valuation of property, sums up at (pp. 100-101 It is evident, therefore, from the foregoing definitions as well as from numerous other definitions which may be cited, that the fair market value of the property taken by eminent domain is the price that the property will bring when offered for sale by one desiring, but not obliged, to sell ; and purchased by one desiring to purchase but under no necessity of buying It is the price which a piece of property will bring in the market when offered for sale and purchased by another, taking into consideration all the elements of the availability of the property, its use, potential or prospective, and all other elements which combine to give a piece of property a market value. " The learned author then deals with the fixation of market value on the basis of rental income at pp. 226-229 and states: " It is far sounder practice to avoid the use of rental value capitalization, if better evidence of market value is available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 public as well as in the private sector, investment of capital in such industries, if not any more secure, have come into the law merchant and such other alternative available securities have attracted persons who are inclined to invest, rather than in gilt-edged securities alone, apart from making fixed deposits in scheduled banks. This accounts for the variation of the proper multiple to be adopted. The line of inquiry in such cases must, therefore, be: What was the prevailing rate of interest on long-term deposits with scheduled banks or in the public or private sector ? At the turn of the century, it was not uncommon for the courts to adopt a rule of 20 years' purchase for arriving at the capitalized value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1972 was uniformly 51%. 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% payable annually but subject to income-tax. In Oriental Gas Co. Ltd. v. State of West Bengal [1979] 1 SCR 617, this court held for the acquisition of an industrial undertaking in the State of West Bengal that if 12 1/2% of the capital invested was the annual return, the adoption of a multiplier of " eight " could not be unreasonable in the year 1962. The contention based on the traditional view expressed by Shah J. in Cooper's case [1970] 3 SCR 530; 40 Comp Cas 325 (SC), that the multiplier must be related to the rate of interest on gilt-edged securities was repelled by Chinnappa Reddy J. It was stated that the observations of Shah J. in Cooper's case [1970] 3 SCR 530; 40 Comp Cas 325 (SC), that " capitalization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and added (p. 1196): " A return of 10% per annum on such safe investments is almost assured. Today nobody thinks of investing on land which would yield net income of just 5% to 6% per annum. A higher return of the order of 10% is usually anticipated. Even in the years 1962 and 1963, an investor in agricultural land expected annual net return of at least 8%. It means that if the land yielded a net annual income of Rs. 8, a willing buyer of land would have paid for it Rs. 100, i.e., a little more than 12 times the annual net income." There are certain general considerations which investors of all types take more or less into account: yield and appreciation possibilities, the ability readily to dispose of the investment (marketability) and safety. Investments differ with respect to assurance of income and safety of principal. In the investment market, the quality of investment is evidenced by the yield or return that is produced in relation to market price higher the quality, the lower the yield. Investors must take into account various types of risks associated with different investment mediums and, therefore, adopt a type of investment that is appropriate to their resources an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fertilizer, labour charges, etc., would vary from year to year. If the overall cost goes up, the income from agricultural produce would be comparatively less. The fluctuations in price of agricultural produce introduce a great deal of uncertainty in regard to the income that can be expected from the sale of the produce. If the yield of the crop in other producing countries is large, or the market prices prevailing in such countries are low, the prices of such agricultural produce in India would go down. In view of these considerations, an investor would expect a much higher rate of return so that the risk factor is properly discounted. In the premises, when the rate of return on investment was 8.25% in the years 1971 and 1972, a person investing his capital in agricultural lands would ordinarily expect 2% to 3% more than what he could obtain from gilt-edged securities or other forms of safe investment and, therefore, the proper multiplier to be applied for the purpose of capitalization could not, in any event, exceed " ten ". In the present case, the State Government, however, contends that the proper multiple to be applied should be 12 1/2 in computation of the capitalized value ..... X X X X Extracts X X X X X X X X Extracts X X X X
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