Commissioner of Income Tax vs R.G. Mundkur

K. Shivashankar Bhat, J.—These two references are under the provisions of the Wealth-tax Act, 1957 (''the Act'') at the instance of the revenue. The respondent (''assessee'') was a member of the Government Servant''s Co-operative Housing Society Ltd., New Delhi. The said society was allotted land by the Delhi Development Authority under a lease-cum-sale basis. The assessee was allotted 1040 sq. yds. of land by the said society for which the assessee paid Rs. 32,640 in the year 1970. As per the lease agreement, the assessee was to hold the land for a minimum period of 10 years and construct a building on the plot allotted to him. Under the lease agreement the assessee cannot sell or transfer the plot to a person who is not a member of the society. The assessee also shall not sell the plot except with the previous consent in writing of the society. In case permission is granted by the society for the sale, it is entitled to impose conditions as it thinks fit, and it is entitled to recover a portion of the unearned increase in the value, the amount to be recovered being 50 percent of the unearned increase. The assessee filed original return declaring the value of the plot at Rs. 32,641. But revised return was filed declaring the value at Rs. 2,08,000. The WTO took the value of the plot at Rs. 250 per sq. yd. on the basis of the value adopted in the earlier year. He allowed deduction of 50 percent which will be appropriated by the Delhi Development Authority if the plot is sold. Thus it determined the value of the plot at Rs. 1,46,320. The assessee appealed to the AAC. The AAC held that as per the lease agreement there is restriction on the sale of the property. The property was originally allotted in June 1970 and even after completion of 10 years the assessee has not constructed any building. He referred to a letter dated 8-9-1978 produced by the assessee from the society rejecting the application for transfer or sale of the plot as the building has not been completed. Hence, such an application will not be entertained till a period of three years has elapsed after the completion of the building. He also held that in view of the restrictive clauses provided in the sub- lease agreement, the WTO cannot value the property at the market value. There is no comparable sale of property in this area as the entire land was allotted to cooperative societies on lease-cum-sale basis. He held that reasonable appreciation in investment should be at the rate of 10 percent every year. On that basis, he determined the market value of the property as on 31-3-1975 at Rs. 52,565 and directed the WTO to take the value of the property at Rs. 52,565. The revenue as well as the assessee appealed to the Tribunal. The Tribunal held that the assessee had paid only Rs. 32,640 and the restrictive clause in the agreement was a clog against alienation. Whenever permission is granted by the society 50 percent of the unearned increase will be recovered by the society. Consequently, the Tribunal directed the WTO to take the value of the plot at Rs. 32,640 as against the value of Rs. 1,46,320 determined by the WTO. Consequently, a reference was sought and the following question is referred:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing the Wealth-tax Officer to take the value of the plot at Rs. 32,640 as against the value of Rs. 1,46,320 determined by the Wealth-tax Officer.

Mr. Chander Kumar, the learned counsel for the petitioner contended that the restrictive clause will have to be ignored for the purpose of valuation; u/s 7 of the Act the value will have to be the fair market value if sold in the open market. Therefore, it is necessary to imagine the availability of a free market and arrive at the market value. The existence of the market value when imagined necessarily involves ignoring the restriction about the alienation and marketability of the property. The learned counsel referred to a few decisions. The decision in Commissioner of Wealth-tax, Bombay City II Vs. Purshottam N. Amersey and Another, is a decision of the Bombay High Court; here the life interest of the assessee was involved under a deed of settlement. The contention of the assessee was that the assessee had no right of alienation and the property was incapable of being sold in the market in view of the restrictions. The definition of the assets under the Act was extremely comprehensive read with the definition of the net wealth. The Act imposes the charges of wealth-tax upon the net wealth. For this purpose the assets are to be valued. Section 7 cannot be read so as to nullify the charging section. Therefore, for the purpose of valuation it should be assumed that there is an open market and the property can be sold in such a market and on that basis the value should be found out. In other words a hypothetical sale will have to be contemplated to arrive at the value. Even if the value is insignificant the said value will have to be included in the net wealth; the interest of the assessee will have to be valued as part of his net wealth.

In our opinion, the Tribunal should have first of all considered whether the interest of the assessee amounted to his ''net wealth'' within the meaning of section 3 read along with the definition and that would entail a finding from the Tribunal whether or not the interest was an asset. If it was an asset it would be his net wealth. Once it is held that the interest of the assessee was his asset, the Tribunal cold not have come to the conclusion on the basis of section 7(1) that it was not his asset, which is virtually what the Tribunal has done. It was, therefore, rightly argued by Mr. Joshi on behalf of the Commissioner that the only question that arose upon the findings of the Tribunal was one of valuation and the Tribunal could not have come to the conclusion that ''the value of the said interest is nil'' as it has done in the concluding portion of paragraph 8 of its order.

[Emphasis supplied] (p. 190)

The Bench again observed that:

...The error which the Tribunal committed in that respect was to have regard to the actual position in the actual market whereas upon the statute what they should have considered is, assuming a hypothetical market, what would be the price if the interest was sold."

[Emphasis supplied] (p. 193)

Ultimately the Bench held that the interest of the assessee in the property had to be valued.

This question was referred with approval, by the Supreme Court in Ahmed G.H. Ariff and Others Vs. Commissioner of Wealth Tax, Calcutta, The appellants before the Supreme Court were the beneficiaries under a deed of wakf. They were assessed to wealth-tax on the basis that they had a share in the wakf estate. It was held by the Tribunal that the right of the beneficiaries to receive a share of the rents and profits of the wakf property was property or an interest in property and, therefore, it was not limited in enjoyment to a period of 6 years and therefore, it was an asset. The High Court upheld this finding of the Tribunal. The Supreme Court noticed that the moment a wakf is created all rights of property pass out of the wakf and vest in the almighty and, therefore, the mutavalli has no right in the said property and he is not the trustee in the technical sense. It is in this connection the aforesaid decision of the Bombay High Court in Purshottam N. Amersey''s case {supra) was referred by the Supreme Court and concurred with the view expressed therein about the concept of assets and of net wealth under the provisions of the Act. The Supreme Court held as follows:

...There is no reason or justification to give any restricted meaning to the word ''asset'' as defined by section 2(e) of the Act when the language employed shows that it was intended to include property of every description. On a proper construction of the relevant clauses in the wakf deed we are not satisfied that the aliquot share of the income provided for the beneficiaries was meant merely for their maintenance and support. But even on the assumption that it was so intended or to preserve the validity of the deeds it should be so construed, the right to the share of the income would certainly be an asset within the meaning of section 2 (e) and would be liable to be included in the net wealth of the assessee." (p. 1696)

The Supreme Court also approved the decision of the Bombay High Court regarding the effect to be given to the words ''if sold in the open market''; the Supreme Court held that this docs 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 such a market and on that basis the value has to be found out. It is a hypothetical case which is contemplated and the tax officer must assume that there is an open market in which the asset can be sold. The very decision of the Bombay High Court directly came up for consideration before the Supreme Court in Purshottam N. Amarsay and Another Vs. The Commissioner of Wealth Tax, Bombay, ; once again the decision of the Bombay High Court was affirmed.

Almost a similar question arose in Commissioner of Wealth Tax, New Delhi Vs. P.N. Sikand, The site in question was allotted on lease on behalf of the President of India. There was a bar against alienation by the allottee without prior permission being obtained from the lessor. In case the permission is to be granted and the property sold, the lessor was entitled to deduct SO percent of the unearned increase for itself. The question before the Supreme Court was the mode of valuing this asset. After referring to the material provisions of the Act it was held that:

...What is, therefore, necessary for the purpose of determining the net wealth of the assessee is, first to compute the aggregate value of all assets belonging to the assessee in accordance with the provisions of the Act and then to deduct from it the aggregate value of all the debts, and the resultant which is obtained would be the net wealth assessable to tax. Section 7, sub-section (1), lays down the mode of determination of the value of an asset for the purposes of the Act and it says that, subject to any rules made in this behalf, the value of any asset other than cash ''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''. Now, plainly, one of the assets belonging to the assessee in the present case was the leasehold interest in the land together with the building upon it and for the purpose of computing the net wealth of the assessee, it was necessary to determine the value of this asset. The question which must, therefore, be asked in terms of section 7(1) is: what would be the price which this asset would fetch if sold in the open market on the valuation date? This question cannot be satisfactorily answered, unless we first determine what is the nature of this asset: what is the interest in property, qualitative as well as quantitative, which this asset represents?

The asset consists of leasehold interest of the assessee in the land together with the building constructed upon it. The building, of course, belongs to the assessee having been constructed by him and the determination of its value should not present any difficulty, because there are recognised methods of valuation of buildings. The difficulty, however, arises in regard to valuation of the leasehold interest in the land. The leasehold interest is held by the assessee under a lease deed executed by the President of India and, apart from clause (13), which we have reproduced above, it is an ordinary lease deed of the usual kind. Clause (13) of the lease deed provides that the assessee shall not be entitled to assign the leasehold interest in the land without obtaining the prior approval in writing of the lessor and 50 percent of the unearned increase in the value of the land at the time of the assignment shall be claimable by the lessor, and, moreover, if the lessor so desires, he shall have pre-emptive right to purchase the property after deducting 50 percent of the unearned increase in the value of the land. Does this covenant merely impose a personal obligation on the lessee which arises on assignment of the leasehold interest or is it a covenant running with the land? That is a question which has a direct bearing on the valuation of the leasehold interest " (p. 927)

Thereafter the Supreme Court found the covenant referred therein as a covenant running with land and it would bind whosoever is the holder of the leasehold interest for the time being. The Supreme Court held:

...It is constituent part of the rights and liabilities and advantages and disadvantages which go to make up the leasehold interest and it is an incident which is in the nature of burden on the leasehold interest. Plainly and indisputably it has the effect of depressing the value which the leasehold interest would fetch if it were free from this burden or disadvantage. Therefore, when the leasehold interest in the land has to be valued, this burden or disadvantage attaching to the leasehold interest must be duly discounted in estimating the price which the leasehold interest would fetch. To value the leasehold interest on the basis that this burden or disadvantage were to be ignored would be to value an asset different in content and quality from that actually owned by the assessee" (p. 928)

The Supreme Court also referred to a decision of the judicial committee to state:

...''it is a necessary, point of enquiry how far these restrictions affect the value'' and the property cannot be valued as if it were ''unrestricted in any way''. The burden or limitation attaching to the leasehold interest in the present case must, therefore, be taken into account in arriving at the value of the leasehold interest and it cannot be valued ignoring the burden or limitation." (p. 928)

It was also found by the Supreme Court that the lessor himself had certain rights which could be valued because the lessor had the right to 50 percent of the unearned increase on assignment of the leasehold interest. This value will necessarily has to be deducted from the value of the property to arrive at the value of the lessee''s interest. No doubt there will have to be a hypothetical sale from which the realisable value of the assessee''s asset will have to be determined. In the said case that value was found to be the one arrived at after deducting 50 percent of the unearned increase in the value of the land. Ultimately the answer to the question before the Supreme Court was:

...it must be held that in determining the value of the leasehold interest of the assessee in the land for the purpose of assessment to wealth-tax, the price which the leasehold interest would fetch in the open market were it not encumbered or affected by the burden or restriction contained in clause (13) of the lease deed, would have to be reduced by 50 percent of the unearned increase in the value of the land on the basis of the hypothetical sale on the valuation date " (p. 932)

From the aforesaid decisions it is clear that the restriction against alienation will have to be ignored for the purpose of the hypothetical sale contemplated by section 7. Once the imaginary market is reached, the market value will have to be estimated with reference to the interest of the assessee in the asset because it is that interest which constitutes his asset. In the instant case the entire market value of the site in question cannot be included as the value of the assessee''s interest because that interest is not absolute nor it is confined to the original value. There are certain restrictions imposed on it at the time of allotment of the site on lease. The restriction against alienation as such is to be ignored but while computing the value the possibility of a reduced price because of those restrictions will have to be considered. One important consideration is that 50 percent of the unearned increase in the value will have to be deducted from the hypothetical market value. Therefore, the answer to the question will have to be in the negative and in favour of the revenue. Reference is answered accordingly.