In a latest recent judgment, Supreme Court has ruled that for the purposes of Wealth Tax Act, the market value of the vacant land belonging to the assessee should be taken at the price which is the maximum compensation payable to the assessee under the Urban Land Ceiling Act, 1962.

Case Details:
Civil Appeal No. 6873-6881/2005 with five other Civil Appeals
Sri S.N. Wadiyar (dead) through LR (Appellant) vs Commissioner of Welath Tax (Respondent)
Date of Order : 21-09-2015
Coram: Justice A. K. Sikri and Justice Rohinton Fali Nariman

Case Laws Referred:
Ahmed G.H. Ariff v. Commissioner of Wealth Tax 76 ITR 471 SC
Commissioner of Wealth Tax v. Prince Muffkham Jah Bahadur Chamlijan 247 ITR 351

Facts of the Case(s):
Sri Jaychamarajendra Wodeyar, the former ruler of the princely state of Mysore had an  urban land appurtenant to Bangalore Palace ('Property')which comprised of residential units, non-residential units and land appurtenant thereto, roads and masonary structures along the contour and the vacant land. Later, the Urban Land (Ceiling and Regulation) Act, 1976 ('Ceiling Act') came into force w.e.f. 17.02.1976. and adopted by the State of Karnataka. The Property in question, namely, the Bangalore Palace came within the purview of the Ceiling Act. The competent authority under the Ceiling Act passed an order dt 27-07-1989 determining vacant land in excess of the ceiling limits, and ordered action be taken to acquire excess land. Under the Ceiling Act, the vacant land area was and the maximum compensation that could be received by the assessee was Rs.2 lakhs.

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 matter reached Income Tax Appellate Tribunal, Bangalore and it was held that since the assessee was only eligible to maximum compensation of Rs.2 lakhs under the Ceiling Act. Hence the 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.

The Commissioner of Wealth Tax sought reference before the Karnataka High Court which was answered by the High Court vide against the assessee 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.

Contentions of the Assessee:
It was argued 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.

Observation of the Supreme Court:
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 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, as stated above, 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 the question formulated is answered in the aforesaid manner

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