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Bhartiya Udyog Vs. Competent Authority, Inspecting Assistant Commissioner of Income-tax, Acquisition Range and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberCivil Miscellaneous Writ Petition No. 299 (Tax) of 1975
Judge
Reported in(1979)12CTR(All)354; [1979]120ITR128(All)
ActsIncome Tax Act, 1961 - Sections 269A and 269C
AppellantBhartiya Udyog
RespondentCompetent Authority, Inspecting Assistant Commissioner of Income-tax, Acquisition Range and ors.
Appellant AdvocateS.C. Khare and ;R.K. Gulati, Advs.
Respondent AdvocateAshok Gupta, Adv.
Excerpt:
..............act, 1961. the competent authority referred the matter to its official valuer to determine the fair market value of the property. according to the first report, which was given in april, 1974, the value was determined at rs. 74,000.2. subsequently, the competent authority received complaints that the property has been purchased by the petitioner on a gross under-valuation. on that basis, the competent authority referred the question of valuation to the official valuer again. the official valuer filed a fresh report indicating that the fair market value of the property was rs. 3,06,300. he applied in this report, what is called as the 'development method' of working out the fair market value. the petitioner on receipt of the notice under section 269d of the i.t. act, 1961, filed.....
Judgment:

Satish Chandra, C.J.

1. After obtaining the permission of the District Magistrate, Kanpur, the petitioner on 24th December, 1973, purchased House No. 77/6 Coolie Bazar, Kanpur, from its erstwhile owners for a consideration of Rs. 75,000 by a registered deed of sale. In due course the petitioner sent information of this purchase to the Competent Authority under the I.T. Act, 1961. The Competent Authority referred the matter to its official valuer to determine the fair market value of the property. According to the first report, which was given in April, 1974, the value was determined at Rs. 74,000.

2. Subsequently, the Competent Authority received complaints that the property has been purchased by the petitioner on a gross under-valuation. On that basis, the Competent Authority referred the question of valuation to the official valuer again. The official valuer filed a fresh report indicating that the fair market value of the property was Rs. 3,06,300. He applied in this report, what is called as the 'development method' of working out the fair market value. The petitioner on receipt of the notice under Section 269D of the I.T. Act, 1961, filed objections to the proceedings. During thependency of the proceedings they came to this court with a prayer that the proceedings were without jurisdiction and be quashed.

3. Learned counsel for the petitioner has submitted that the second report of the official valuer was entirely irrelevant to the determination of the fair market value of the land on the date of its sale. He has argued that the method of valuation by the official valuer is not permissible in law. In the first report, the same valuer had stated that the land had shops as well as residential portion on it which were in a dilapidated condition. They had only a scrap value which was about Rs. 10,000. The site of the building was about 443 sq. yds. and the same was valued at Rs. 150 per sq. yd. which was the rate specified by the Nagar Mahapalika for commercial areas. On that basis, the value of the land was determined at Rs. 66,450 and adding the value of the construction on it, he arrived at the fair market value of Rs. 74,000.

4. In the second report the valuer indicated the value of the land at Rs. 700 per sq. yd. This rate was worked out by the development method. In his report he stated that the property is located in a commercial area which is known as Coolie Bazar which is dealing in business of iron and steel and can be developed as a very good shopping complex. He determined the cost of construction of the shopping complex at Rs. 2,18,337 and he determined the expected monthly income from the shopping complex after it had been constructed at Rs. 5,919. This monthly income was capitalized at the 7% rate of interest in the property which gave the value at Rs. 6,76,471. On that basis he determined the present worth of the developed land at 7% interest to be about Rs. 700 per sq. yd. In other words, in simpler language, this report determined the fair market value of the land on the date of sale by imagining that a modern shopping complex would be constructed on it, and after construction the value would be on the basis of 7% of the expected income. The question is whether such a method of valuation is, in law, permissible to determine the fair market value.

5. It is well settled that the present use of the land is not the sole criterion for determining its fair market value. Its potentiality can be taken into consideration, but as observed by the Privy Council in Vyricherla Narayana Gajapatiraju v. Revenue Divisional Officer, , that it is the possibility of the land and not its realised possibilities that must be taken into consideration. In substance, the second report takes into consideration only the realized potentialities of the land in dispute. The land was already a building site because buildings were already standing on it. This is not a case where the land may have been put to agricultural use or may have been a waste land and so its potentialities as building site has to be valued and added to its current value. Thedevelopment method even if permissible will not be permissible at all to a site which is already being used for building purposes. In R. C. Cooper v. Union of India : [1970]3SCR530 , the Supreme Court in para. 103 laid down the important methods of determination of compensation. In clause (v) they have stated (see 40 Comp Cas p. 383):

'When the property has outgrown its utility and it is reasonably incapable of economic use, it may be valued as land plus the break-up value of the structure. But the fact that the acquirer does not intend to use the property for which it is used at the time of acquisition and desires to demolish it or use it for other purposes is irrelevant.'

6. These observations are applicable on all fours. It has been emphasised that in the present case, proceedings for demolishing the building were going on and the petitioner fully intended to rebuild after demolishing the existing structure. But, as observed by the Supreme Court, this intention is entirely irrelevant for determination of the fair market value at the date of sale, specially when the site in question was already a building site.

7. Learned counsel for the revenue invited our attention to certain passages from Parks on Valuation, 1970, 4th edn., but we do not find that there is any material which is relevant to the facts of this case.

8. Learned counsel for the revenue relied on Godhara Borough Municipality v. Godhara Electricity Co, Ltd. : [1969]73ITR44(SC) , in support of the submission that contractor's method of valuation was permissible to determine the fair market value of land.

9. In that case, the municipality could levy tax on buildings or lands, inter alia, on the capital basis. The method of determining the capital value of properties was not defined. The Supreme Court held that the capital value can well be found by adopting the contractor's method. It was observed (p. 49) '...that in 'applying the contractor's method it was possible to discern five stages. The first stage is the estimation of the cost of construction of the building'. There is a difference of view as to whether it is better to take the cost of replacing the actual building as it is or the cost of a substitute building on the same plan as the actual building but otherwise in an up to date form. The second stage is to make deductions from the cost of construction to allow for age, obsolescence and any other factor necessary to arrive at the 'effective capital value'. The third stage is to estimate the cost of the land. The fourth stage is to apply the market rate or rates at which money can be borrowed or invested to the effective capital value of the building and the land. The fifth stage is to consider whether the result of the fourth stage really represents what the hypothetical tenant would pay for the annual tenancy on the statutory terms, and to make any adjustments necessary to ensure that no higherrent is fixed as the basis of assessments than that which it is believed the owner would really be willing to pay for the occupation of the premises.'

10. The contractor's method may well be applied for finding out the capital value of a building. This case is no authority for the proposition that the contractor's method can be adopted for finding out the value of land simpliciter. In this method also the cost of the land is estimated at the third stage by some other well-known method. The contractor's method is to determine the capital value of an existing building, not of the site of that building. Further, the second valuation report does not adopt the contractor's method. It adopts a method which is not known to law for determining the market value of land. This case is not at all helpful.

11. Learned counsel stressed that in this view the proceedings themselves should be quashed. We are unable to agree. The proceedings were based not merely on the second report of the valuer, but also on other materials, viz., affidavits of the complainants, valuation reports furnished by them, the offer of purchase at Rs. 2 lakhs given by them, etc.

12. Our conclusion is that the method adopted by the valuer in his second report was totally irrelevant to the determination of the fair market value of the land on the date of the sale. It could not validly be taken into consideration. We allow this writ petition in part and issue a writ of prohibition to the respondent-Competent Authority not to take into consideration and rely on the second report of the valuer while disposing of the proceedings under Chap. XX-A of the I.T. Act, 1961.

13. Parties will bear their own costs. The interim stay order is discharged.


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