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TMI Blog1974 (7) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... rrive at its fair market value as on January 1, 1954 ? " The assessee is an individual. For the assessment year 1963-64 he filed a return on December 9, 1963. He died on January 7, 1965, and on March 18, 1968, his legal representative filed a revised return wherein he claimed a capital loss of Rs. 89,968. During the accounting year, the assessee had sold 26 shops in what is called " Raja Market " in Bangalore City, for consideration of Rs. 2,90,501. In the revised return the assessee estimated the fair market value of the shops as on January 1, 1954, at Rs. 3,80,469 and claimed a loss of Rs. 89,968. The Income-tax Officer went into the history of the case leading to the construction of Raja Market. The assessee had constructed 121 shops which were completed during the previous three years ending March 31, 1954. On the basis of the assessee's estimate made in his income-tax assessment proceedings for the years relating to the construction of the buildings, the Income-tax Officer declined to accept the value of the aforesaid 26 shops at Rs. 3,80,469. The Income-tax Officer valued the site at Rs. 94,797 and the cost of construction at Rs. 64,210. He estimated the fair value of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employ the multiple of 10 for the purpose of capitalisation, the Tribunal directed the Income-tax Officer to work out the capital gains on the said basis. Though two separate questions have been referred by the Tribunal the answer to the first question will conclude the second question as well. The second question, in our opinion, was, therefore, unnecessary. The substance of both questions is whether there was material for the Tribunal to adopt the multiple of 10 for arriving at the fair market value of the buildings as on January 1, 1954. There is no dispute as to the amount of consideration for which the shops were sold by the assessee. The dispute is as to the fair market value of the said shops as on January 1, 1954. The market value of assets like shops and buildings is required to be determined under the Act for purposes of computation of capital gains ; valuation is also required to be made under the Wealth-tax Act, Estate Duty Act and the Land Acquisition Act. Valuation under all these Acts is the fair market value of the property. In Rustom Cavasjee Cooper v. Union of India, Shah J. (as he then was), speaking for the court, said : " The method of determining the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following are the other important factors to be taken into consideration : (i) type of premises ; (ii) continuity of rent which is invariably fixed to fortunes of trade and commerce ; (iii) the amount of rent ; current rents must be treated with great caution. Parks on Principles and Practice of Valuations, fourth edition, pages 15-16, has stated as to how the multiple figure should be determined for the purpose of capitalization of the net income. Parks says : " When a person buys a property he does it for two purposes : 1. to obtain an annual income, and 2. to obtain security for his capital. If a property produces a net return of Rs. 1,000 per annum and a purchaser desires 6% return on his capital he will pay Rs. 1,000 X (100)/6 = Rs. 1,000 X 16.6 = Rs. 16,666 maximum for, the property. If he pays more, he will not have a 6% return on his capital. If he pays less, he will obtain a greater return than 6%. The multiplier of the net rent to obtain capital value is known as the years' purchase. The security of the rent which a property produces is reflected in the years' purchase. For valuation purposes, therefore, security and years' purchase are the same. Security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end on the class of tenants likely to occupy the premises ; if he wishes to realise his capital at any time, is there a reasonable chance of selling the property without making a loss. Having considered all these factors he will then consider what return would be reasonable and that figure will represent the security of the income from which the years' purchase can be easily calculated. Every case will have to be considered on its merits, all the advantages and disadvantages must be carefully considered, and no person can lay down hard and fast rules which will govern every type of property. All that can be given are figures which will guide and help a valuer to arrive at a correct result, but much depends on the diligence and integrity of the valuer when doing his work ........" The important factors that must be considered while estimating the number of years' purchase value, according to Parks are : 1. location of the premises ; 2. type of premises ; 3. the continuity of the rent ; 4. the amount of rent. The continuity of the rent is one of the most important factors to be considered. The estimate for deductions to be made from the gross rent can mostly be made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage net annual income has to be multiplied by 20. The multiple to be adopted is a matter entirely resting on the evidence as to what return investors in coffee estates expect on their investments. " The Income-tax Appellate Tribunal, while correctly stating the principles of valuation, has failed to give its finding as to the rate of return an investor in this class of property would expect. It is seen from the order of the Tribunal that in the case of the very assessee the Wealth-tax Officer has valued the assessee's properties in the Raja Market by adopting the multiple of 17. The wealth-tax assessments were for the assessment year 1957-58 and subsequent years. When the Wealth-tax Officer had determined the fair market value by multiplying the net annual rent by 17, no reasons have been given by the Tribunal to hold that the multiple of 10 is justified for the year 1953-54. The Tribunal, in our judgment, has fallen into an error when it took into consideration the estimated cost of construction of the buildings and the sale of other sites near about the place where the property is situated. Factors (i) to (v) which were taken into account by the Tribunal and to which we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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