By TIOL News Service

NEW DELHI, SEPT 22, 2015: THE issue before the Bench is - Whether the compensation amount fixed under the Urban Ceiling Act for the excess vacant land can be expected to have depressing effect on the estimated market value of the asset for the purpose of wealth tax assessment. YES is the verdict.

Facts of the case

The assessee was assessed to wealth tax under the Act. The valuation of the property was as per the urban land appurtenant to Bangalore Palace. The total extent of the property was 554 acres or 1837365.36 sq. mtr. It comprised of residential units, non-residential units and land appurtenant thereto, roads and masonary structures along the contour and the vacant land. The vacant land measured 11,66,377.34 sq. mtr. The Property was the private property of late Sri Jaychamarajendra Wodeyar, the former ruler of the princely state of Mysore. He died on 23.09.1974. There were disputes with regard to the wealth tax assessments pertaining to the Assessment Years 1967-1968 to 1976-1977. After the death of Sri Wodeyar, his son Sri Srikantadatta Wodeyar, the assessee applied to Settlement Commission to get the dispute settled with regard to valuation of Property and lands appurtenant thereto for Assessment Years 1967-1968 to 1976-1977. While this application was still pending, the Urban Land (Ceiling and Regulation) Act, 1976 came into force w.e.f. 17.02.1976. It was adopted by the State of Karnataka. The property area was within the Bangalore Urban Agglomeration, hence fell within the purview of the Act. The assessee filed statement as required under Section 6(1) of the Ceiling Act on 10.09.1976. On 16.09.1976, he filed an application under Section 20 of the Act for exemption of his lands under the Ceiling Act to the State Government.

The application of the assessee before the Settlement Commission for the Assessment Years 1967-1968 to 1976-1977 was disposed of on 29.09.1988, laying down norms for valuation of the property. The Wealth Tax Officer adopted the value as per Settlement Commission for Assessment Years 1976-1977, 1977-1978 and 1978-1979 at Rs.13.18 crores (for both land and buildings). For the Assessment Year 1979-1980, since there was no report of the Valuation Officer, the Commissioner of Appeals worked out the value of the Property at Rs.19.96 crores for the Assessment Year 1979-1980, which was adopted by Wealth Tax Officer for Assessment Year 1980-1981 as well. For the Assessment Years 1981-1982, 1982-1983 and 1983-1984, the Wealth Tax Officer fixed the value of land and building at Rs.18.78 crores, Rs.29.85 crores and Rs.29.85 crores respectively. For Assessment Year 1984-1985, the Wealth Tax Officer took the value at Rs.31.22 crores on the basis of the order passed by the Commissioner (Appeals) for earlier years.

On the other hand, in the proceedings under the Ceiling Act, the Competent Authority passed an order on 27.07.1989 determining vacant land in excess of the ceiling limits, and ordered action be taken to acquire excess land under the Karnataka Town & Country Planning Act, 1961. In accordance with Section 30 of the Ceiling Act, the declaration dated back to 17.02.1976 on which date the Ceiling Act was promulgated in Karnataka. The Bangalore Development Authority prepared a master plan and the planning report for development of District No.1 in which the property area was included. As per this proposal no part of the vacant area could be commercially exploited nor colonised for residential purposes. The vacant land area was also not transferable under the Act. Any sale was null and void. As per Section 11(6) of the Urban Land Ceiling Act, the maximum compensation that could be received by the assessee was Rs 2 lakhs.

Before any Notification could be issued under Section 10(1) of the Ceiling Act, the assessee questioned the aforesaid order passed by the Competent Authority under Sections 8 and 9 of the Ceiling Act before the Karnataka Appellate Tribunal.

Simultaneously, the orders of the Wealth Tax Officer passed under the Act fixing the value of the land for different Assessment Years for the purpose of Act was also challenged by the assessee before the Commissioner (Appeals). In these appeals, the contention of the assessee was that the value of the property was covered by the Ceiling Act for which maximum compensation that could be received by the assessee was only Rs.2 lakhs. The Commissioner (Appeals) passed the orders dated 31.07.1990 accepting that the urban land appurtenant to Property be valued at Rs.2,00,000/-. Similar orders came to be passed by the Commissioner of Income Tax (Appeals) for the Assessment Years 1984-1985 and 1985-1986 also. Against these orders of Commissioner (Appeals) dated 09.06.1990, 31.07.1990 and 14.08.1990, both the assessee as well as the Revenue/Department went up in appeals before the Income Tax Appellate Tribunal.

The issue before the Income Tax Appellate Tribunal was only with regard to valuation of vacant land attached to the Property, since the assessee had accepted the valuation in regard to residential and non-residential structures within the said property area and appurtenant land thereto. The ITAT directed the vacant land be valued at Rs.2 lakhs for each year from Assessment Years 1977-1978 to 1985-1986. Its reasoning was that the Competent Authority under the Ceiling Act had passed an order determining that the vacant land was in excess of the ceiling limit, and had ordered that action be taken to acquire the excess land under the Karnataka Town and Country Planning Act, 1901. And under the Land Ceiling Act, an embargo was placed on the assessee to sell the subject land and exercise full rights. The assessee was only eligible to maximum compensation of Rs.2 lakhs under the Ceiling Act. Hence the subject land could only be valued at Rs.2 lakhs for wealth tax purposes on the valuation date for the Assessment Years 1977-1978 to 1985-1986.

Against the order of the Tribunal, the Commissioner of Wealth Tax sought reference before the Karnataka High Court in respect of Assessment Years, namely, 1977-1978 to 1985-1986 arising out of the consolidated order of the Tribunal in WTA Nos.315 to 317 and 485 to 490/1990 dated 02.11.1993. The question that was raised for adjudication before the High Court was whether the Tribunal was right in holding that the value of the vacant land, appurtenant to the Property, should be taken at Rs.2 lakhs for the purpose of wealth tax assessment.

When the ITAT reference was pending adjudication by the High Court, the appeal which was filed by the assessee before the Karnataka Appellate Tribunal against the order dated 27.07.1989 passed by the Competent Authority under the Ceiling Act was dismissed and the assessee took up the matter further before the High Court in the form of a writ petition. In this writ petition, the assessee also challenged the constitutional validity of the provisions of the Ceiling Act and made an interim prayer to the effect that pending disposal of the writ petition notification under Section 10(1) of the Ceiling Act be not issued. Fact of the matter was that such a Notification was not issued by the Government. When this writ petition was still pending, the Ceiling Act was repealed by Legislature with the enactment of the Urban Land (Ceiling and Regulation) Repeal Act, 1999 (Act 15 of 1999).

Having heard the parties, the Apex Court held that,

++ there is no dispute with regard to valuation in respect of residential and non-residential structures within the said Property and appurtenant land thereto. The assessee has paid the wealth tax accepting the valuation. The dispute of valuation has arisen only with regard to valuation of the vacant land attached to the Property which had come within the mischief of the Ceiling Act;

++ the reference was answered by the High Court vide impugned order dated 13.06.2005 holding that although the prohibition and restriction contained in the Ceiling Act had the effect of decreasing the value of the Property still the value of the land cannot be the maximum compensation that is payable under the provisions of the Ceiling Act. Thus, the question referred has been answered against the assessee;

++ the HC accepted the position that the Property in question which is within the Bangalore urban agglomeration was covered by the Ceiling Act and the provisions of the said Act applied to this Property. It also noted that by virtue of Section 4 of the Repeal Act, all legal proceedings pending under the Ceiling Act immediately before the commencement of the Repeal Act stood abated except those proceedings which are relatable to the land possession whereof has been taken over by the State Government or any person authorized by the State Government or by the Competent Authority. Since, in the instant case, admittedly possession had not been taken, which remained with the assessee for want of notification under Section 10, the proceedings abated and the said vacant land remained with the assessee. Thereafter, the High Court took note of certain relevant provisions of the Act and we may also capture the position contained in those provisions;

++ Section 3 of the Act is the charging Section, whereas Section 7 of the Act is the machinery provision which provides for procedure for determining the value of assets that are subject to wealth tax. The High Court observed that as per Section 7 of the Act, the value of the asset shall be estimated to the price, which in the opinion of the Wealth Tax Officer, the asset would fetch if sold in the open market on the valuation date. The words "price it would fetch if sold in the open market" do not contemplate actual sale or the actual state of the market, but only enjoins that it should be assumed that there is an open market and the property can be sold in the open market and, on that basis, the value has to be found out. The Court noted that though the rules, namely, Wealth Tax Rules, 1957 were framed, they did not provide for valuation of urban land and, therefore, the asset must be valued in the ordinary way by determining what it would fetch if it were sold in the assumed market and what willing purchaser would pay for it. The Court also accepted that in view of Ceiling Act coming into force, the restrictions and prohibitions contained in the Ceiling Act would have the effect of depressing the value which the lands would fetch if they were free from the said restrictions and prohibitions. Thus, the willing purchaser would definitely take these factors into account, which could affect the price of such an asset. Therefore, the Wealth Tax Officer cannot ignore such restricted provisions contained in the Ceiling Act and it is for him to find out what price the asset would fetch if it is sold in the open market on the valuation date, keeping in view, certain restrictions in the Ceiling Act which will have depressing effect on the value of the asset;

++ the High Court went on to observe that it would not mean that the valuation has to be the compensation which the assessee would be getting inasmuch as the valuation as per Section 7 has to be the price which the property would fetch if sold in the open market. Significantly, the High Court also noted the effect of Ceiling Act in the context of the present case and the legal proceedings which had been initiated pursuant thereto whereby orders passed by the Competent Authority under Sections 8 and 9 were challenged and no Notification under Section 10 had been issued;

++ it also categorically accepted that after coming into force of the Ceiling Act, since the vacant land was covered by the said Act, it was not open to the assessee to sell the land in the open market, and whenever there is any restriction on the transfer of any land, it is common knowledge that the value of the property or the land, as the case may be, would normally be reduced. However, it did not accept that since it is not open to the assessee to sell the land, therefore, the value of the land could not be more than what the Government was to offer to the assessee under the provisions of the Ceiling Act;

++ we have considered the respective submissions by giving our deep thoughts thereto with reference to the record of the case. It is clear that the valuation of the asset in question has to be in the manner provided under Section 7 of the Act. Such a valuation has to be on the valuation date which has reference to the last day of the previous year as defined under Section 3 of the Income Tax Act if an assessment was to be made under that Act for that year. In other words, it is 31st March immediately preceding the assessment year. The valuation arrived at as on that date of the asset is the valuation on which wealth tax is assessable. It is clear from the reading of Section 7 of the Act that the Assessing Officer has to keep hypothetical situation in mind, namely, if the asset in question is to be sold in the open market, what price it would fetch. Assessing Officer has to form an opinion about the estimation of such a price that is likely to be received if the property were to be sold. There is no actual sale and only a hypothetical situation of a sale is to be contemplated by the Assessing Officer;

++ thus, the Tax Officer has to form an opinion about the estimated price if the asset were to be sold in the assumed market and the estimated price would be the one which an assumed willing purchaser would pay for it. On these reckoning, the asset has to be valued in the ordinary way;

++ the High Court has accepted, and rightly so, that since the Property in question came within the mischief of the Ceiling Act it would have depressing effect insofar as the price which the assumed willing purchaser would pay for such property;

++ however, the question is as to what price the willing purchaser would offer in such a scenario?

++ in order to provide an answer to this question, we may take note of certain relevant provisions of the Ceiling Act, which, are even noticed by the High Court. Section 3 of the Ceiling Act, as is clear from its reading, is the main provision. It categorically provides that the person shall not be entitled to hold any vacant land in excess of the ceiling limit in the territories to which this Act applies, except as otherwise provided under the Act itself, from the date of commencement of the Act. Act came into force on 17.02.1976. The effect of this Section was that on and from 17.02.1976, the assessee was not entitled to hold the vacant land in question, which was in excess of the ceiling limit. Section 4 of the Act provides for the manner in which the ceiling limit of the person is to be ascertained;

++ the combined effect of the aforesaid provisions, in the context of instant appeals, is that the vacant land in excess of ceiling limit was not acquired by the State Government as notification under Section 10(1) of the Ceiling Act had not been issued. However, the process had started as the assessee had filed statement in the prescribed form as per the provisions of Section 6(1) of the Ceiling Act and the Competent Authority had also prepared a draft statement under Section 8 which was duly served upon the assessee. Fact remains that so long as the Act was operative, by virtue of Section 3 the assessee was not entitled to hold any vacant land in excess of the ceiling limit. Order was also passed to the effect that the maximum compensation payable was Rs.2 lakhs. Let us keep these factors in mind and on that basis apply the provisions of Section 7 of the Wealth Tax Act;

++ the Assessing Officer took into consideration the price which the property would have fetched on the valuation date, i.e. the market price, as if it was not under the rigors of Ceiling Act. Such estimation of the price which the asset would have fetched if sold in the open market on the valuation date(s), would clearly be wrong even on the analogy/rationale given by the High Court as it accepted that restrictions and prohibitions under the Ceiling Act would have depressing effect on the value of the asset. Therefore, the valuation as done by the Assessing Officer could not have been accepted;

++ let us proceed on the same lines as delineated/drawn by the High Court itself, namely, one has to assume that the property in question is saleable in the open market and estimate the price which the assumed willing purchaser would pay for such a property. When the asset is under the clutches of the Ceiling Act and in respect of the said asset/vacant land, the Competent Authority under the Ceiling Act had already determined the maximum compensation of Rs.2 lakhs, how much price such a property would fetch if sold in the open market? We have to keep in mind what a reasonably assumed buyer would pay for such a property if he were to buy the same. Such a property which is going to be taken over by the Government and is awaiting notification under Section 10 of the Act for this purpose, would not fetch more than Rs.2 lakhs as the assumed buyer knows that the moment this property is taken over by the Government, he will receive the compensation of Rs.2 lakhs only. We are not oblivious of those categories of buyers who may buy "disputed properties" by taking risks with the hope that legal proceedings may ultimately be decided in favour of the assessee and in such a eventuality they are going to get much higher value. However, hypothetical presumptions of such sales are to be discarded as we have to keep in mind the conduct of a reasonable person and "ordinary way" of the presumptuous sale. When such a presumed buyer is not going to offer more than Rs.2 lakhs, obvious answer is that the estimated price which such asset would fetch if sold in the open market on the valuation date(s) would not be more than Rs.2 lakhs. Having said so, one aspect needs to be pointed out, which was missed by the Commissioner (Appeals) and the Tribunal as well while deciding the case in favour of the assessee. The compensation of Rs.2 lakhs is in respect of only the "excess land" which is covered by Sections 3 and 4 of the Ceiling Act. The total vacant land for the purpose of Wealth Tax Act is not only excess land but other part of the land which would have remained with the assessee in any case. Therefore, the valuation of the excess land, which is the subject matter of Ceiling Act, would be Rs.2 lakhs. To that market value of the remaining land will have to be added for the purpose of arriving at the valuation for payment of Wealth Tax;

++ in the result, the appeals succeed and are hereby allowed.

(See 2015-TIOL-207-SC-WT)