D.R. Khanna, J.
1. These appeals by the Commissioner of Income-tax, Delhi, are directed against the order dated June 17, 1977, of the Income-tax Appellate Tribunal whereby the acquisition of property bearing No. C-42, Connaught Circus, New Delhi, under Chap. XX-A of the I.T. Act, 1961, effected by the Competent Authority was quashed :
2. The background of the facts is that this property was sold for a consideration of Rs. 2,20,000 by its owner, Avtar Singh, to M/s. New India Construction Co. on December 22, 1974. The sale deed was registered on February 12, 1975. This property was constituted of the first floor with a covered area of 7,200 square feet. The transferee was, however, given the right to effect construction above the first floor. It was also made the co-lessee of the 400 square yards of perpetual lease land below over which the property stood. It was to pay Rs. 300 as ground rent for the same out of the total ground rent of Rs. 1,327.30 payable for the land. The floor was at that time in possession of three tenants on a total rent of Rs. 328. They were using the same for residential purpose. However, eviction proceedings against them were pending and the transferee was given the right to pursue them for its benefit.
3. After this sale, the transferee succeeded in obtaining vacant possession from the tenants in October, 1975. This was stated to be under settlement with them in terms of which each one of them was paid Rs. 35,000 by the transferee. The transferee further spent an amount of Rs. 75,000 for getting the residential purpose of the property converted into commercial nature from the Land & Development Office and New Delhi Municipal Committee. The application in this regard was moved on March 9, 1976. and was accepted on March 27, 1976. A sum of Rs. 17,600 had also been spent earlier by the transferee on the stamp paper and registration charges while getting the sale deed executed in its favor.
4. That apart, the transferee also incurred expenditure of Rs. 2,75,000 towards renovation and conversion of the property into commercial premises.
5. Thereafter, it is stated that the entire property so purchased and renovated was sold by the transferee in May, 1976, to 20 different parties for a total consideration of Rs. 9,16,980. The profits so enjoyed were got assessed to income-tax as the transferee was itself a dealer in real estate.
6. In the meanwhile, the Competent Authority on coming to know of the first sale effected on December 22, 1974, by Avtar Singh in favor of M/s. New India Construction Co. made preliminary enquiries and called for the report of the Valuation Officer. The Valuation Officer inspected the property and after considering the relevant facts determined its fair value at Rs. 11,41,900. The Competent Authority then came to the conclusion that the fair market value of the property far exceeded the apparent consideration shown in the sale deed and felt that there were sufficient reasons to believe that the property had been transferred for an apparent consideration which was far less than its fair value and that the consideration for such transfer as agreed to between the parties had not been truly stated in the sale deed with the object of :
'(a) facilitating reduction or evasion of the liabilities of the transferor to pay tax under the Income-tax Act, 1961, in respect of any income arising from the transfer; or
(b) facilitating the concealment of any income or any moneys or other assets which have not been or which ought to be disclosed by the transferee for the purpose of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, or the Wealth-tax Act, 1957.'
7. In these circumstances, proceedings under s. 269D of the I. T. Act, 1961, were commenced by the publication of a statutory notice in the Official Gazette of November 8, 1975. Similar notices were also served subsequently on the transferor as well as the transferee. Other formalities required for initiation of proceedings were also completed.
8. Both the transferor and the transferee appeared in the proceedings and strongly contested the propriety of their commencement. According to them, the apparent consideration mentioned in the sale deed, was indeed the fair value of the property at the time of the sale. The property, it was stated, was in the possession of three old tenants from about 40 years who were using the same for residential purposes and were paying very nominal rent. Rent Control enactment prevailed in the area which considerably restricted the grounds on which the tenants could be ejected. The value of the property when considered in the context of rent realised, the capitalisation of the annual rental value came to about Rs. 40,000 only. Before effecting thesale, the transferor had got the value of the property assessed from its valuers, M/s. B. M. Sharma and Associates, who after considering both the yield method and the land and building method determined the value at Rs. 2,20,000. It was as such that it was agreed to be sold for Rs. 2,20,000. A great risk was said to have been taken by the transferee in purchasing the property at that value also, as it could as well be that the tenants were not evicted and the permission to convert the user of the property from residential to commercial denied.
9. The Competent Authority, however, did not accept these contentions and instead relied upon the value computed by the departmental valuer on the basis of developmental method. That valuation had been arrived at by the valuer as under :
'Valuation on developmental method :
Covered area of offices excluding toilet blocks & open terraces-4,780 sq. ft.
Maintainable rent expected is Rs. 3 per sq. ft. of covered area.
Rs. Rs.Rent per month 4,780 x 3 = 14,340Rent per year 14,340 x12 =1,72,080Allow outgoing @ 25% including ground rent = 43,000________Net A.L.V. 1,29,060________Capitalising @ 8% in perpetuity = 1,29,860 x 12.5 16,13,250Deduct the cost of construction of renovationas verbally stated by the representative 2,75,000_________13,38,250Less the amount paid to the tenants ascompensation for vacating the property 1,05,000_________12,33,250 Deferring by one year Rs. 12,33,250 X 0.92593= Rs. 11,41,903. Say Rs. 11,41,900 against Rs. 2,20,000 stated in the registered deed.'
10. It was noted by the Competent Authority that the propriety was situated in a most central commercial locality where the values of the property were very high. Such property had great potential expectancy in future and the circumstances also showed that the ejectment proceedings against the tenants were pending and were likely to fructify soon. The transferor's valuer, it was observed, had not taken into account the future potentialities of the property. As regards the conversion into non-residential purpose, such like conversions, it was noted, were generally granted on payment of nominal amounts as was in fact later done in the present case.
11. With the department valuer's report available the Competent Authority felt that the fair market value of the property exceeded the apparent consideration by more than 15% and, thereforee, acquisition proceedings were justified. It was further found that when this difference between the fair market value and the apparent consideration was more than 25%, it had to be taken as conclusive proof that the consideration for such transfer as agreed to between the parties had not been truly stated in the instrument of transfer and it was to be presumed, unless the contrary was proved, that the consideration for such transfer as agreed to between the parties had not been truly stated in the instrument of transfer with the objects as referred to in clause (a) or clause (b) of sub-s. (1) of s. 269C of the Act. Reliance was placed upon sub-s. (2) of s. 269C for drawing presumptions and the shifting of the onus on the transferor and the transferee and the conclusive proof that the consideration had not been truly stated in the sale deed. The transferor and the transferee were held to have failed to lead any evidence to rebut the presumption so created.
12. In the ultimate analysis the Competent Authority after obtaining the prior approval of the CIT as provided for in s. 269F(vi) of the Act directed the acquisition of the property.
13. In appeal, however, the Income-tax Appellate Tribunal quashed the acquisition after observing that a building with vacant possession and a building with tenants are two different things altogether, so far as market value is concerned. In the case of a building with tenants, specially in an area where rent control statutes prevail, the prospects of getting a good price for the building were held to be far from bright. On the other hand, a building with vacant possession offers immediate and attractive options either as capital investment or as business venture. The market value of the two types of buildings was held to be not comparable. The essential point in the present case noticed was that the transferee had taken a risk in buying the property which was in the possession of old tenant. There was no certainty that the transferee would succeed in getting them ejected or even getting the conversion of the user allowed by the New Delhi Municipal Committee. The estimate of the value of this property at Rs. 11,41,903 as computed by the departmental valuer, it was observed, might reflect correctly the future potential market value of the building but the same could not be said to be the fair market value of the property as on December 22, 1974, the date of transfer. The Competent Authority was noted to have not brought on record any comparable material to indicate that the sale of a property in a similar area and location with tenants un occupation had fetched more than Rs. 2,20,000.
14. It is in these circumstances that the revenue feeling aggrieved has moved the present appeal. In so far as the observations of the Tribunal that the future potential value of the property could not be taken into account, we are unable to sustain the same. The Judicial Committee had in this regard in the case of Vyricherla Narayana Gajapathiraju v. Revenue Divisional Officer, , observed that the uses to which the land may be reasonably capable of being put in future is certainly a consideration which any buyer would take into consideration while effecting its purchase. The same, thereforee, cannot be ignored in the determination of the market value. The emphasis of course has to be on the reasonable capacity to which the land or property may be put to use in future. The same, however, cannot be stretched to development prospects of a property as to envisage that the existing property (unless dilapidated) may be demolished and in its place a new building constructed. The Allahabad High Court has thus in the case of Bhartiya Udyog v. Competent Authority : 120ITR128(All) , observed that the fact that the purchaser does not intend to use the property and intends to demolish it and use it for other purposes it irrelevant.
15. In the present case, so far as the prospects of converting residential user to commercial user by payment of some penalty, the same could not be said as entirely beyond the expectations and designs of the transferee. It is now almost as a general rule that these conversions are permitted and there was nothing to assume that the transferee would not have succeeded in this direction. Rather within some days of the moving of the application in March, 1976, the conversion was allowed. This potential user of the property in future, thereforee, could not be ignored in the determination of its market value.
16. The property in dispute is situated in Connaught Circus which is the most central commercial area of New Delhi. The values of properties there are fairly high. Their values came up for consideration before the Delhi High Court in the case of Wenger and Co. v. District Valuation Officer, New Delhi : 115ITR648(Delhi) . It was found that the rate of Rs. 3,200 per square yard of the land there appeared reasonable as another property bearing No. 98, Connaught Place, Constructed on 212 square yards of land was sold in August, 1973, for Rs. 8 lakhs. The value of land in that case had been computed at Rs. 3,477 per square yard. With these instances of sales in the area available, it is clear that the valuation of Rs. 300 per square yard for the land underneath the property in dispute adopted by the transferor's valuer was too low. The same could not by any stretch be treated as the market value of land there. Even if Rs. 3,000 per square yard was adopted, the value of the land would have turned out to be Rs. 12 lakhs for 400 square yards. In case, the transferee got 1/2 share in that land, the value came to Rs. 6 lakhs.
17. However, the fair market value of the property on the basis of cost of land and building method would have been relevant if it was self-occupied by the transferor and he was in a position to hand over vacant possession thereof to the transferee. Instead there were three old tenants residing in the property, and it was also subject to the rent control restriction against ejectment. In this respect, we are in agreement with the Tribunal that the value of such properties cannot be measured by the values of those properties which are self-occupied. Of course, eviction proceedings were pending against the tenants at the time of the sale. However, there was no certainty that they would essentially result in the transferee obtaining vacant possession. That transferee in fact took a big risk while effecting purchase of the property, as it could as well be that the evictions did not fructify. Even ultimately what brought success in that direction was not the favorable culmination of eviction proceedings, but the transferee obtaining possession after entering into settlements with them where-under Rs. 35,000 were paid to each of the tenants. This court in the case of Wenger and Co. : 115ITR648(Delhi) too recognised the capitalisation of the rental value for part of that property which was in the possession of the tenants. The Supreme Court had also in the case of State of Kerala v. Hassan Koya : 3SCR459 , observed that the method which is generally resorted to in determining the value of the land and building specially those used for business purpose is the method of capitalization of the return actually received or which might reasonably be received from the land and building, though it was recognised that this method could not be laid down as a general rule applicable to all situations and circumstances.
18. Now, in the present case, if the method of capitalization of the rental value by multiplying a number of years' yield was adopted, the value of the property in the year of sale was even less than Rs. 1 lakh. In this context, it could not be said that the sale consideration of Rs. 2,20,000 did not represent a fair value. From the side of the respondents in this regard reference has been made to the valuation adopted by the department's Valuation Officer of property known as Hotel Marina Building, New Delhi. It was computed at Rs. 27,54,500. It was situated on 6,400 square yards of land and was lying let out. If that valuation was taken into consideration, the value of 400 square yards of land of the property in dispute would just come to about Rs. 1,50,000. Another instance has been cited from the side of the respondents of the valuation of a Queens way property by the departmental valuer at Rs. 1,54,000 in the year 1972-73. This covered 800 square yards with 2 storeyed building on it. It was, however, lying entirely let out. These instances of valuations of the properties are much relevant for the present case as they were in similar circumstances lying let out to tenants.
19. The revenue has, however, vehemently asserted that the method of capitalisation of rental value was not even adopted by the transferor's valuer. Instead he took into account the method of computing the market value of the land and the building. He in this regard committed grave error inasmuch as the value of the land was taken at Rs. 300 per square yard while it was above Rs. 3,000. Secondly, he did not take into account the potentialities of the property for future. We in this regard find that the valuer had of course referred to the valuation of the property by this land and building method and had grossly under-valued the land and not taken into consideration the future potentialities of the property. However, where we do not agree with the revenue is whether, in the circumstances of the present case, where the entire property was lying let out, that method could provide a safe guide for determining the fair market value. In our opinion, the proper course was to have resorted to the method of capitalization of the rental value by multiplying a number of years yield. In its context the value adopted by the transferor's valuer, and that shown in the sale deed could not be treated as under-valuation which could have justified resort to acquisition proceedings. We are, thereforee, unable to interfere with the order of the Tribunal quashing the acquisition.
20. Before concluding we may also mention that the revenue has also referred to the sale of this property in May, 1976, for a total consideration of Rs. 9,16,980. This was as against the amount of Rs. 6,92,600 which the transferee had spent in acquiring and renovating this property and getting its user converted into commercial one. There was of course a profit gained of over Rs. 2,20,000 within about a period of one year. However, it cannot be ignored that at that time the transferee had succeeded in obtaining vacant possession which naturally raised the value of the property considerably. Furthermore, the sales were to 20 different parties of small portions therein. Naturally such parties would have been willing to pay better price for small portions than a single buyer effecting purchase of the entire property. Here it may be mentioned that it was not shown from the side of the revenue that those sales to different buyers were also sought to be acquired under Chap. XX-A of the I. T. Act, 1961.
21. The result, thereforee, is that we dismiss these appeals leaving the parties to bear their own costs.