ORDER
G. Santhanam, Accountant Member
1. These are appeals by the co-owners of some godowns at Rajahmundry and as identical issues are raised in these appeals, a common order is passed for the sake of convenience.
2. The appellants in their individual capacity or in the status of an HUF are co-owners of some godowns, bearing No. 340/2B at Rajahmundry. There are four godowns at Hukumpeta Panchayat, Rajahmundry. The District Valuation Officer in his report stated that it is not possible to separate these godowns assessee-wise. The godowns were constructed as per specifications provided by Food Corporation of India (FCI) pursuant to an agreement for construction of godowns entered into between some of the assessees and the representative of FCI, Hyderabad, and upon construction these godowns were leased out to FCI under a lease agreement dated 31-12-1977 for a period of five years. There are two lease agreements, one between Shri Naraindas Mulchand and FCI and another between Mrs. Neelu Naraindas and Shri Ramchand Mulchand of the one part and FCI of the other part. The terms of the lease agreements are identical and the lease is for a period of five years at a rent of 47 paise per sq. ft. per month. Clause 3 of the agreement provided that the lessee will have the option to extend the lease for a further period of one year on same terms and conditions. The open space adjoining the godowns did not carry rent and Clause 4 of the agreement provided that the lessor shall, during the term of the tenancy, keep the godowns fit in all respects for storage of foodgrains and there are various other conditions in the lease agreement for providing facilities such as access to godown, tidy maintenance of the godowns, provision of electricity fittings for the godowns and near about the place and for providing necessary facilities to the watch and ward staff employed by the lessee. Further, municipal or local taxes relating to the lands of the godowns will have to be paid by the lesser, etc. The construction of the godowns was started in 1977 and completed in November 1977. The first valuation dates for the purposes of wealth-tax fell on 31-8-1978. The names of the co-owners and their shares in cost of construction as well as the value declared for wealth-tax purposes together with their respective shares are as follows :
Name of the co-owner Share in cost
as per asses see
Rs.
Shri Naraindas Mulchand (HUF) 7,21,359
Shri Naraindas Mulchand (individual) 7,21,358
Smt. Neelu Naraindas 7,63,340
Shri Ramchand Mulchand (HUF) 3,81,670
Shri Ramchand Mulchand (individual) 3,81,670
29,69,397
Shri Naraindas Mulchand : Godown
N.M. (individual) 1/2
N.M. (HUF) 1/2
Smt. Neelu Naraindas and Shri Ramchand Mulchand : Godown
Smt. Neelu Naraindas 1/2
R.M. (HUF) 1/4
R.M. (individual) 1/4
Cost of construction 29,69,397
Cost of land 1,25,528
Interest capitalised 98,952
31,93,877
The WTO referred the matter to the District Valuation Officer who determined the value of all these four godowns at Rs. 71.11 lakhs for the valuation dates 30-10-1978, 21-10-1979 and 7-11-1980. The WTO adopted the valuation as given by the District Valuation Officer. The assessees carried the matter in appeal to the AAC who dismissed the appeals.
3. Before us, Shri D.M. Harish, the learned Counsel for the assessees, submitted that the godowns were constructed according to specifications given by FCI. The lease was only for a period of five years with the option for the lessee to extend it by another year. If the FCI abandons the project, or switches over to some other person, or changes its venue of operations, the assessees would be left high and dry and there would be no prospect of receiving the same rent. Therefore, the rent capitalisation method assuming a maintainable rent for 48 years as adopted by the District Valuation Officer is unrealistic besides being arbitrary. He also submitted that the expected rate of return at 9 per cent–which is the return available on gilt-edged securities–on the basis of which the capitalisation factor was fixed at 1.0.65, is unreal especially when the prospective investor has got more profitable avenues of investment which are equally safe such as in the case of deposits with nationalised banks and Unit Trust of India, etc. He further submitted that the godowns were of recent construction and the first valuation date being very close to the date of completion of construction, the value as declared by the assessees on the basis of land and building method should be adopted. It was his plea that when the lease agreement itself is for a limited period of five years with an option to extend it by another year, the District Valuation Officer should not have computed the maintainable rent for a period of 48 years. It was his submission that when the land and building method is also an approved method for purposes of ascertaining the market value, in view of the fact that the completion of construction was very near to the valuation date, the cost of construction itself should be accepted as revealing the market value of the property as on the valuation date. In this context, he invited our attention to the decision of the Tribunal, Hyderabad Bench ‘B’, in WT Appeal No. 531 (Hyd.) of 1983, in which it was observed:
… the rent capitalisation method is only one of the methods and the value thrown up by any particular method has to be tested with values resulting from other valuation methods. In view of the very proximate date when the construction was completed and the investment including the market value of the land having been less than Rs. 10 lakhs, it cannot be said that merely because capitalisation of rent in the abstract yielded a value of about Rs. 20 lakhs, that value alone should be adopted when a similar investment could have been required for about half the value, the market value could not represent capitalised yield method.
He also relied on the following decisions :
Special Land Acquisition Officer v. P. Veerabhadarappa [1985] 154 ITR 190 (SC), Smt. S. Neelaveni v. CWT [1980] 125 ITR 665 (Kar.) and K. Bhoomiamma v. CED [1978] 115 ITR 703 (Kar.).
4. Without prejudice to the foregoing submissions, Shri Harish submitted that when the Income-tax Act, 1961 (‘the 1961 Act’) itself allowed collection charged up to 6 per cent, the authorities below took only 3 per cent of the receipts which is inadequate. The District Valuation Officer had only taken into account the panchayat taxes which is only 1 per cent of the rent and he had not considered the fact that the godowns are situated very near the municipal limits. Rajahmundry is a growing town and the municipal limits will be extended in the near future and, therefore, the municipal tax which is 25 per cent of the rent should be taken into account while computing net rent received. In addition, he submitted that in arriving at the annual value, the District Valuation Officer had not allowed even one-sixth of the rent towards repairs and maintenance, and as per the terms of the lease agreement, repairs and maintenance are the responsibility of the assessees. As storage of foodgrains is involved, the godowns have to be kept in constant repair. There is also another aspect to the problem, viz., there are many co-owners and a proper discount, say between 10 per cent and 15 per cent, should have been given in ascertaining the fractional interest in reality. This is an important factor in the context of a hypothetical sale.
5. Shri C.V. Padmanabhan, the learned senior departmental representative, submitted that the cost of construction has no relevance for ascertaining the fair market value. For highly developed commercial properties which are let out, rent capitalisation method is the only reasonable method that has to be adopted. As the value of land and buildings would appreciate in future, and as investment in land and buildings is always looked upon as a safer investment, the rate of return should be the same as is available on gilt-edged securities which are the safer mode of investment. Therefore, the capitalisation rate adopted by the District Valuation Officer was quite proper. He relied on the following decisions :
CWT v. V.C. Ramchandran [1966] 60 ITR 103 (Mys.) and CED v. Radha Devi Jalan [1968] 67 ITR 761 (Cal.).
He also submitted that as the co-owners are members of the joint family, no discount need be given for the undivided interest. As the godowns were constructed solely propelled by profit motive for getting high rents, these properties are commercial assets and, therefore, the land and building method of valuation would not be a barometer for the market value of such properties.
6. We have heard rival submissions and perused the materials on record. The market value of the four godowns for the purposes of wealth-tax as on 30-6-1978 in the case of Shri Naraindas Mulchand (individual) and as on 31-10-1978 in the case of other appellants, is in dispute before us. The District Valuation Officer has determined the market value of the godowns at Rs. 71.11 lakhs. The case of the appellants is that the construction of the godowns was completed by about November 1977 and, therefore, the cost of construction which was at current market price reflected the true market value. Alternatively, the valuation of the godowns by land and building method reflected the true market value. They also object to the valuation of property on rental method and also to the computation of the maintainable rent by the District Valuation Officer, in that he had :
(a) adopted 9 per cent rate of interest as a reasonable return on investment ;
(b) overlooked the effect of fractional interest in the properties as the properties are under co-ownership ;
(c) given only meagre allowance of 3 per cent towards collection charges ; and
(d) allowed only negligible amounts towards repairs and maintenance of these properties by overlooking the fact that the 1961 Act itself allows one-sixth of the annual letting value as being for repairs.
7. The valuation of properties especially the land and buildings–in this case the godowns–poses a complex problem. For purposes of wealth-tax, we have to ascertain the market value of the properties as on the valuation date. Section 7(1) of the Wealth-tax Act, 1957 (‘the Act’) which prescribes the method of ascertaining the market value reads as follows :
(1) Subject to any rules made in this behalf, the value of any asset, other than cash, for the purposes of this Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer, it would fetch if sold in the open market on the valuation date.
From this it would be clear that the market value of a property would represent the price which a willing buyer is prepared to pay to a willing seller in a hypothetical market. Therefore, we reject the argument of Shri Harish that the cost of construction should be taken as the market value of the properties in spite of proximate dates. However, this is not to deny that cost of construction also may be one of the several factors influencing the market value.
8. Undoubtedly, the godowns are commercial assets and they were leased out to FCI for a period of five years with an option to extend the same by another year. Godowns fetch high rents. Therefore, valuation by land and building method may not be revealing the market value of the properties concerned.
9. This takes us to the rental value method. In fact, this method was adopted by the District Valuation Officer. But, he has taken the return on investment at 9 per cent. This is considered by the assessees to be too low. The Supreme Court in P. Veerabhadrappa’s case (supra) observed that it would be unrealistic to adhere to the traditional view of capitalised value being linked to gilt-edged securities when investment in fixed deposits with 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. Though these observations of the Supreme Court are in relation to land acquisition proceedings, they are equally valid for purposes of valuation. The District Valuation Officer had taken the rate of interest obtaining on gilt-edged securities. But, with the nationalisation of banks and with the launching of Unit Trust of India, prospective investors have better and safer modes of investment. Therefore, the return on gilt-edged securities need not necessarily be the decisive factor in adopting a proper multiplier for capitalisation of the rent. Their Lordships of the Gujarat High Court in CIT v. Smt. Vimlaben Bhagwandas Pate! [1979] 118 ITR 134, extracted a passage from Lean and Goodall in the book Aspects of Land Economics (1966) as follows:
With exceptions the level of yields in the real property market tends to follow the level of yields in the investment market and the relative yields in the real property market often follow the yields of their closest substitutes in the investment market.
It is noticed from the said judgment that Lawrence and Rees in their book Modern Methods of valuation of land, houses and building and Relph Turkey in his book The Economics of Real Property endorsed the same view. Their Lordships observed as follows :
…. A purchaser of a property has to rely on the borrowing from housing finance agencies or banks or Life Insurance Corporation. The lending rate of such institutions vary from 10 to as much as 14 or 15 percent. The return on gilt-edged securities like 3 per cent conversion loan or other Government securities works out between 5 to 6.44 per cent. The prime money rates for advances by banks are between 14 to 15 per cent. The net average yields of preference dividend is between 12 to 13 per cent as indicated in the report of the Reserve Bank of India. The rate of capitalisation should, therefore, be not unreal and must have regard to the commercial rate of return after taking into consideration the various constraints and insecurities in the property market. …
Their Lordships also noticed that Section 11(1) of the Urban Land (Ceiling and Regulations) Act, 1976, prescribed payment of amount of compensation for vacant land acquired under Section 10(3) of the said Act, by the State Government to an interested person in the ‘income bearing’ land at the rate equal to eight and one-third times the net average annual income actually derived from such land during the period of five consecutive years immediately preceding the date of publication of the notification under Section 10(1). In other words, the necessity of compensating the interest of an ‘income bearing’ land by an amount of eight and one-third times the net average annual income so as to provide a return of 12 per cent per annum is recognised and incorporated as the relevant principle in a statute enacted for purposes of acquiring excess land and compensating them by the Union Government. Therefore, their Lordships concluded :
. . . In our opinion, therefore, the just, reasonable and appropriate rate of capitalisation would be eight and one-third times the net average annual income which would give the yield of 12 per cent per annum on the investment of capital in property….
10. Roshan Nanavati, author of Theory and Practice of Valuation, 1968 edn., p. 83, suggested rate of interest for guidance from 7½ per cent to 8 per cent. But that was in the year 1968 when the Government securities themselves fetched 4½ per cent to 5½ per cent. We are concerned with a much later assessment year, and there are more attractive and equally safe securities in addition to and apart from gilt-edged securities that complete with each other to hypnotise the prospective investor. Therefore, we are inclined to take the view that the rate of return assumed by the District Valuation Officer on the basis of gilt-edged securities at 9 per cent is certainly a less attractive proposition so far as the modern investor is concerned. 12 per cent rate of interest would be a modest expectation of return on investment for any prospective investor, faced with equally safe and attractive venues of investment such as ‘Unit Trust of India’ and deposits with nationalised banks, not to speak of investment in blue chips of limited companies. The capitalisation rate is, therefore, fixed at eight and one-third times the rental value.
11. Another grievance of the assessees is that the District Valuation Officer had only taken the actual expenditure on repairs and maintenance which would invariably be low in view of the recent construction of the godowns. When the maintainable rent is estimated for 48 years, it stands to reason that a reasonable allowance must be made for repairs and maintenance. In fact, as per the terms of the lease, the lessor has to maintain the properties in constant repair on account of the fact that the godowns are utilised by FCI for storage of essential grains. The 1961 Act allowed one-sixth of the annual value for repairs and that may be taken as a valid allowance for repairs.
12. Shri Harish submitted that the District Valuation Officer had allowed only 3 per cent towards collection charges and more should be allowed on this account. We are unable to uphold his contention. There are only four godowns fetching high income and the District Valuation Officer has allowed 3 per cent of the rent as collection charges. No evidence has been produced before us to show that the actual expenditure on collection of rent is much more than what has been allowed. Therefore, we reject his contention.
13. Another contention of Shri Harish is that proper discount should be allowed for fractional interest. In his Treatise on Valuation of Property Vol. 2, p. 707, the learned author Bonbright recommends a 10 per cent discount where there is a twin division and a 15 per cent discount in the case of triple division. Shri Harish relies on this recommendation. Shri Padmanabhan, for the department, contends that after all, the co-owners are members of the HUF and, therefore, there could not be any discount for fractional interest in reality. In our view, when there are co-owners, be they two or more, and when the property itself cannot be itemised assessee-wise as found by the District Valuation Officer, there is substance in the claim of Shri Harish that there should be an appropriate discount for fractional interest in reality. As, however, the co-owners are members of the joint family, such discount need not be on the high side. In our view, a 5 per cent discount on the capitalised value of the properties would take care of fractional interest in reality.
14. Having held that there are at least two known methods of valuation for properties of this kind, it should be our endeavour to ascertain the market value as on the valuation date. Shri Harish submits that if two interpretations are possible, the one which is favourable to the taxpayer should be adopted and on a parity of reasoning, he argues, that if two different methods of valuation are possible, the revenue should accept the valuation that is more favourable to the assessee. He is supported in this view of the matter by the decision of the Punjab and Haryana High Court in Jaswant Rai v. CWT [1977] 107 ITR 477. With great respect to the Punjab and Haryana High Court, we are inclined to follow the view of the Karnataka High Court in V.C. Ramachandran v. CWT [1980] 126 ITR 157, in that this principle of interpretation of statutes cannot be imported and applied to the valuation of property for wealth-tax purposes in a given case which is a question of fact. In the case cited supra, the Karnataka High Court held that the two well-known methods of ascertaining the market value of a building which have come into existence are : (a) the rental value method, and (6) the land and building method. Sometimes, an average of the two valuations is also adopted depending upon the facts and circumstances of the given case. Hyderabad Bench ‘B’ of the Tribunal in WT Appeal No. 531 (Hyd.) of 1983 has in fact approved of the averaging of the values arrived at by these different methods. As it is, in the case before us, there will be a great disparity of valuation of the godowns by adopting these two methods independently. Therefore, an average of the values is considered to be reasonable on account of the fact that the lease can at best be only for a period of six years and the assessees have to depend entirely on FCI which holds a monopoly of godowns and, therefore, the assessee may have no any chance of getting higher rents in future. Even if higher rents are realised in future beyond the six year term, the same would be more than offset by the fall in money values caused by inflation. Therefore, we set aside the orders of the AAC and direct the WTO to take the average of the values by giving effect to our findings in paragraphs 10, 11 and 13 above.
15. The cases relied on by Shri Padmanabhan–CWT v. V.C. Ramachandran [1966] 60 ITR 103 (Mys.) and Radha Devi Jalan’s case (supra) dealt with properties which fall within the purview of the provisions of the Rent Control Act which is not the case before us.
16. In the result, the appeals are partly allowed.