Valuation of property covered under Ceiling Act for Wealth Tax cannot be higher than maximum compensation

Supreme Court held In the case of SRI S.N. Wadiyar (Dead) through LR V. Commissioner of Wealth Tax that a property which is going to be taken over by the Government at a compensation of Rs. 2 Lakhs 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. Hypothetical presumptions of 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.

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.

Facts of the Case

The valuation of the property which is the subject matter of wealth tax is the urban land appurtenant to Bangalore Palace. The total extent of the property is 554 acres or 1837365.36 sq. mtr. It comprises of residential units, non-residential units and land appurtenant thereto, roads and masonary structures along the contour and the vacant land. There were disputes with regard to the wealth tax assessments pertaining to the Assessment Years 1967-1968 to 1976-1977. The assessee applied to Settlement Commission to get the dispute settled with regard to valuation of Property and lands appurtenant thereto.

While this application was still pending, the Urban Land (Ceiling and Regulation) Act, 1976 came into force w.e.f. 17.02.1976.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 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.

In the proceedings under the Ceiling Act, the Competent Authority passed an order dated 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 is 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.

Contention of the Assessee

 The learned counsel for the petitioner submitted 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. It was argued by learned senior counsel that once it is accepted that the property is covered by the Ceiling Act and it would depress the value of the property, then the value could not be more than Rs.2 lakhs which was the maximum compensation payable under the Ceiling Act.

It was also argued that provisions of the Ceiling Act did not impose only ‘restrictions’ but there was categorical ‘prohibition’ from selling the land. This land, therefore, had to be treated as not saleable on the ‘valuation date’ and, therefore, as on that date, the price it could fetch would not be more than Rs.2 lakhs. Learned senior counsel also referred extensively to the orders passed by the Commissioner (Appeals) under the Act giving detailed reasons while accepting the valuation of the property at Rs.2 lakhs and submitted that there was no reason to take a contrary view by the High Court.

Contention of the Revenue

Learned counsel for the Revenue, on the other hand, emphasized the reasons which have been given by the High Court in support of its opinion and submitted that no case was made out to interfere with the said proceedings.

Held by CIT (A)

 The appeals filed for the Assessment Years, namely, 1980-1981, 1982-1983 and 1983-1984 were disposed off by the Commissioner of Income Tax (Appeals) by a common order dated 09.01.1990 in which he made slight modifications to value adopted for Assessment Years 1981-1982 and confirmed the valuation of Wealth Tax Officer for Assessment Years 1982-1983 and 1983-1984. However, in respect of appeals relating to Assessment Years 1977-1978 to 1980-1981, 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/-.

 Held by ITAT

The issue before the ITAT 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 Income Tax Appellate Tribunal, Bangalore passed the order dated 02.11.1993 directing 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. 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 given these facts and circumstances 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.

Held by High Court

 The reference was answered by the High Court 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 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 asses

The High Court 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.

Held by Supreme Court

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. 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. It is so held by this Court in Ahmed G.H. Ariff v. Commissioner of Wealth Tax (76 ITR 471) & Commissioner of Wealth Tax v. Prince Muffkham Jah Bahadur Chamlijan (247 ITR 351).

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.

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 combined effect of the provisions of Ceiling Act, 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.

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.

Accordingly, appeal of the assessee allowed.