Important Case Laws on principles of valuation of Real Estate

Study Material
For 50+ Hours
Training Programme of
IBBI Valuation Examination

Case Laws

RVO ESTATE
MANAGERS & APPRAISERS FOUNDATION
www.iesmarvo.net

1
 Important Case Laws on principles of valuation of Real Estate

1 – R.C. Cooper Vs. Union of India, (1970) AIR SC 564

Background

In 1970, the Supreme Court, in its judgement on Rustom Cavasjee Cooper v. Union Of India, popularly
known as the Bank Nationalization case, held that the Constitution guarantees the right
to compensation, that is, the equivalent money of the property compulsorily acquired. The Court
also held that a law which seeks to acquire or requisition property for public purposes must satisfy the
requirement of Article 19(1)(f). The 25th Constitutional Amendment sought to overcome the restrictions
imposed on the government by this ruling.

Valuation Related Extract of the judgment

The object underlying the principles of valuation is to award, the owner the equivalent of his property
with its existing advantages and its potentialities. Where there is an established market for the property
acquired the problem of valuation presents little difficulty. Where there is no established market for the
property acquired, the object of the principle of valuation must be to pay to the owner for what he has
lost, including the benefit of advantages present as well as future, without taking into account the
urgency of the acquisition, the disinclination of the owner to part with the property and the benefit which
the acquirer is likely to obtain by the acquisition.

Compensation to be determined under the Act was for acquisition of the undertaking and when an
undertaking is acquired as a unit the principles for determination of compensation must be relevant and
appropriate to the acquisition of the entire undertaking. But the Act instead of providing for valuing the
entire undertaking as a unit provided for determining the value, reduced by the liabilities, of only some
of the components which constituted the undertaking and also provided different methods of
determining compensation in respect of each such component. This method is prima facie not a
method relevant to the determination of compensation for acquisition of the
undertaking, for, the aggregate value of the component-, is not necessarily the value of the entirety of a
unit of property acquired, especially, when the property is a going concern with an organised business.
On this ground alone acquisition of the undertaking was liable to be declared invalid for it impaired the
constitutional guarantee for payment of compensation for acquisition of property by law.
The undertaking of a Banking Company taken once as a going concern would ordinarily include the
good-will and the value of the unexpired long-term leases in the prevailing conditions in the urban
areas. But good-will of the banks was not one of the items in the assets in the schedule.

2
 Important Case Laws on principles of valuation of Real Estate

Thus, the value determined by excluding important components of the undertaking such as the good-
will and the value of the unexpired period of cases would not be compensation for the undertaking. The
view of this Court in Vajravelu Mudaliar that exclusion of potential value amounted to giving inadequate
compensation and was not fraud on power had no application ' when valuation of an undertaking
was sought to be made by breaking it up -into several heads of assets, and important heads were
excluded and others valued by the application of irrelevant principles.

Making a provision 'for payment of capitalised annual rental at twelve time the amount of rent
cannot reasonably be regarded as payment of compensation having regard to the conditions prevailing
in the money market. Again, the annual rent was reduced by several outgoings and the balance was
capitalised. The vice of items (v) & (vi) of cl. (1) of Explanation 2 was that they provided
for deduction of a capital charge out of the annual rental which according to no rational system of
valuing property by capitalisation of the rental method was admissible. The method provided by the Act
permitted the annual interest on the amount of the encumbrance to be deducted before capitalisation
and the capitalised value was again reduced by the amount of the encumbrance because, the
encumbrance included not only those mortgages or capital charges in
respect of which the amount had fallen due but also the liability under the mortgage or capital charge
whether the period stipulated under the deed creating the encumbrance had expired or not.
In effect a single debt was, in determining the compensation, debited twice, first, in computing the value
of assets and, again, in computing the liabilities. By the Act, the corresponding new banks took over
vacant possession of the lands and buildings belonging to the named banks. The Act instead of taking
into account the value of the premises as vacant premises adopted a method which could not
be regarded as relevant. Under cl. 3 of Explanation 2 the value of the open land was to be the market
value whereas the value of the land with buildings to be taken into account was the value determined
by the method of capitalisation of annual rent or market value whichever was less. The Act, therefore,
did not specify a relevant principle for determination of compensation for lands and
buildings.

Conclusion

Property means the highest right a man can have to anything, it includes ownership, estates
and interest in corporeal things and also rights such as trademarks, copy rights, patents, etc. Court
has included all types of property viz tangible or intangible.

3
Important Case Laws on principles of valuation of Real Estate

4
 Important Case Laws on principles of valuation of Real Estate

2. Sorab D. Talati Vs. Joseph Michem, Appeal No. 101 0f 1949 in R.A. Application No. 805 of 1948
Background

In the year 1947, when the Rent Control Act of 1947 was enacted for the first time, methodology
of working out Standard Rent was not given in the act and hence in this case, Court evolved
valuation principles for fixing Standard Rent. In this case Court approved of investment theory of
estimation of rent and for the first time decided that comparison of yield on investment in land and
building should be made with returns on investment on Gift Edged Security which is to be adopted as
basis for fair return.

Valuation Related Extract of the judgment

Court stated that “On a consideration of all the prevailing circumstances and the fact that the prevalent
return on Gilt Edged Security is slightly over 3%, we think that a net return of 4.50% on the value of
land and 5.50% on the cost of buildings cannot be considered in any sense unreasonably large or
excessive for a landlord to expect in respect of his investment in an immovable property”. In
this case Court allowed 1-1/2% higher return on land value and 2-1/2% higher return than yield
on Government Security as fair return on building cost while fixing Standard Rent of the premises.

Conclusion

The court approved of investment theory to fix standard rent of the rent controlled premises. Return or
yield from Gilt Edged Security is the basis for determining the fair return to the landlord for
his investments in land & amp; buildings. Rent Control Acts of other States of India had different
provisions for Standard Rent. However all these other acts also provided for investments theory as
basis of rent fixation. View of linking yield in real estate with yield on Govt. Security was changed by
Supreme Court as late as in 1983 in case of Union of India V/s. Smt. Shantidevi (A.I.R. 1983 S.C.
1190). In said case, S.C. approved of comparison of the yield in real estate investments with the other
forms of investment also in addition to yield on Govt. Securities.

5
 Important Case Laws on principles of valuation of Real Estate

3. CWT Vs. P.N. Sikand (1977) 107 ITR 922 (SC)

Background

The Wealth Tax Officer did not accept the estimate of the valuation and taking the annual rental value
of Rs. 1,32,000/- fetched by the property as the basis, computed the net annual rent at Rs. 82,956/-
and arrived at the figure of Rs. 8,29,560/- as the value of the property by applying the multiple of ten to
the net annual rental value of Rs. 82,956/-. The claim of the assessee to deduct from the value of the
property 50 per cent of the unearned increase in the value of the land was rejected on the ground that
this claim was based "merely on hypothetical presumptions & quot;.

Valuation Related Extract of the judgment

Held that in determining the value of the lease- hold 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 per cent of the unearned increase in the value of
the land on the basis of the hypothetical sale on the valuation date.
The burden or limitation attaching to the leasehold interest must be taken into account in arriving at the
value of the leasehold interest and it cannot be value ignoring the burden or limitation The covenant in
clause (13) is clearly a covenant running with the land and it would bind whosoever is the holder of
the leasehold interest for the time being. It is a 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. 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 estimated 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.

6
 Important Case Laws on principles of valuation of Real Estate

Conclusion
In determining the values of the leasehold interest of the assessee in the land for the purpose of wealth
tax assessment, the price would have to be reduced by 50% of the unearned increase in the value of
the land (which is diverted to the lessor).

7
 Important Case Laws on principles of valuation of Real Estate

4. Wenger & Co. Vs. DVO (1978) 115 ITR 648 Delhi HC
Background
The District Valuation Officer, respondent No. 1, issued a notice dated June 11, 1974, under
Section 16A(4) of the W.T. Act to Shri B. M. Tandon, petitioner No, 2, indicating that while he proposed
to accept the existing annual letting value for the portions in the occupation of the tenants, he proposed
to estimate the fair market value of the portions in the occupation of petitioner No. 1 at
Rs. 27,96,000 as on March 31, 1972.

Valuation Related Extract of the judgment

It is one of the settled principles of valuation that market value has to be ascertained by considering
sales of similar properties in the same neighbourhood or similar environment. If there are no such
instances of sales available then capitalisation of rent or making some sort of comparative
evaluation of sales of other properties is an acceptable mode of valuation. A certain amount of
guesswork would be there if no exactly similar instance of sale is available. ln that case an estimate has
to be made which need not necessarily be a mathematical calculation. As we find it, the basic material
relied upon by respondent No. 1 is the sale price of a similar building in Connaught Place for
Rs. 8 lakhs. The calculation arrived at has been cross-checked by him by referring to transactions of
ownership of commercial flats in Connaught Place Extension Area and the resolutions of a conference
of 200 valuers in India held at Bombay in June, 1972. The estimated rental method adopted by
respondent No. 1 was not his innovation but an accepted method.

Conclusion
Combination of methods (Owner occupied – sale comparison & tenanted portion –
capitalization method) – adopted by DVO and his approach is not only acceptable but also in
accordance with the principles of evaluation.

8
 Important Case Laws on principles of valuation of Real Estate

5 Jawajee Nagnathan Vs. Revenue Divisional Officer (1994) SCC (4) 595 (SC)
Background
The appellant is the owner of 18 gunthas of land, i.e., 2178 sq. yards, situated in Ward No. 5, Block No.
7 in Adilabad Municipality of A.P., which was proposed for acquisition under notification issued under
Section (1) of the Land Acquisition Act and published on April 17, 1975, for a public purpose.
The question, therefore, is whether the Basic Valuation Register is evidence to determine the market
value.
Valuation Related Extract of the judgment

The High Court held that the post notification sale deeds were not admissible as none of the persons
connected with them were examined to establish the genuineness of the sales or of similarity of the
lands acquired and those covered in the sale transactions. It also rejected the agreements of sales
finding them to be those fabricated to inflate the market value. We cannot find fault with the approach
made by the High Court in the facts and circumstances of the case. The sales claimed to be
comparable were rightly not acted upon.
This Court in Special Land Acquisition Officer v. T. Adhinarayan Setty2 in paragraph 9 held that the
function of the Court in awarding compensation under the Act is to ascertain the market value of the
land at the date of the notification under Section 4(1). The methods of valuation may be (1) opinion of
experts (2) the price paid within a reasonable time in bona fide transactions of purchase of the lands
acquired or the lands adjacent to the lands acquired and possessing similar advantages; and (3) a
number of years purchase of the actual or immediately prospective profits of the lands acquired. Same
was the view in Tribeni Devi v. Collector of Ranchi3. It was reiterated in catena of decisions, vide,
Periyar and Pareekanni Rubbers Ltd. v. State of Kerala4. Therefore, it is settled law that in determining
the market value, the Court has to take into account either one or the other three methods to determine
market value of the lands appropriate on the facts of a given case to determine the market value.
Generally the second method of valuation is accepted as the best. The
question, therefore, is whether the Basic Valuation Register would form foundation to determine the
market value.

Conclusion

9
 Important Case Laws on principles of valuation of Real Estate

We hold that the basic value of registration has no statutory base. It cannot form any basis to determine
the market value of the acquired lands under Section 23 of the Act. The burden of proof is always on
the claimant to prove, in each case the prevailing market value as on the date of notification published
in the State Gazette under Section 4(1) of the Act with reference to the sale deeds of the same lands or
neighbor 's lands possessed of same or similar advantages and features executed between
willing vendor and willing vendee or other relevant evidence in the reference court.

6 Chimanlal Hargovinddas Vs. SLAO, Pune AIR 1988 SC 1652

Background

The appellant not being satisfied with the compensation offered by the Land Acquisition officer
in respect of his land placed under acquisition under the Land Acquisition Act, applied for a reference to
a civil court, for determining the market value of the land for awarding compensation to the appellant.

Valuation Related Extract of the judgment

10
 Important Case Laws on principles of valuation of Real Estate

There was therefore no warrant for ascertaining the present value of Rs.7,000 as if Rs.7,000 would be
fetched after 12 years. Now the parcel of land admeasuring 13 acres 7 gunthas comprised in Survey
No. 85 which was situated very much in the interior was valued by the Trial Court at Rs. 10,866 per
acre (less 20% to account for roads etc.). This parcel of land was valued at Rs.7,000 per acre by the
High Court. The High Court had valued the land with the best situation on the Ganeshkhand Road at
Rs.20,000 per acre. As against this the appellant's land was valued at mere Rs.7,000 per acre
which reflected an unloading by Rs.13,000 per acre which works out at 65%. This pushing down was
made to account for its situation in the interior on the premise that development would take about 12
years to reach the land under acquisition. If the appellant's land just adjoined the land valued at
Rs.20,000 per acre it would have been valued at the same figure of Rs.20,000. It has been valued at
Rs.7,000 per acre precisely because it is so situated that development would
reach the appellant's land after 12 years as estimated by the High Court. But after 12 years it
would become land adjoining to developed area and not land which could be treated as in the interior.
Therefore, if present value was to be ascertained it should be ascertained on the basis of present value
of land which would fetch Rs.20,000 per acre after 12 years and not present value of land which would
fetch Rs.7.000 per acre after 12 years. In fact present value of Rs.20,000 payable at the end of 12
years at 8% would work out at Rs.6942 (.3971 x 20,000 = 6942)1. The High Court was
therefore right in valuing the land in interior at Rs.7,000 per acre but wrong in directing that present
value of Rs.7,000 payable after 12 years should be ascertained. The last ground is thus well founded.

The following factors must be etched on the mental screen:

(1) A reference under section 18 of the Land Acquisition Act is not an appeal against the award and the
Court cannot take into account the material relied upon by the Land Acquisition officer in his Award
unless the same material is produced and proved before the Court.

(2) So also the Award of the Land Acquisition officer is not to be treated as a judgment of the trial Court
open or exposed to challenge before the Court hearing the Reference. It is merely an offer made by the
Land Acquisition officer and the material utilised by him for making his valuation cannot be utilised by
the Court unless produced and proved before it. It is not the function of the Court to suit in appeal
against the Award, approve or disapprove its reasoning, or correct its error or affirm, modify or reverse
the conclusion reached by the Land Acquisition officer, as if it were an appellate court.

11
 Important Case Laws on principles of valuation of Real Estate

(3) The Court has to treat the reference as an original proceeding before it and determine the market
value afresh on the basis of the material produced before it.

(4) The claimant is in the position of a plaintiff who has to show that the price offered for his land in the
award is inadequate on the basis of the materials produced in the Court. Of course the materials placed
and proved by the other side can also be taken into account for this purpose.
(5) The market value of land under acquisition has to be determined as on the crucial date of
publication of the notification under sec. 4 of the Land Acquisition Act (dates of Notifications under
secs. 6 and 9 are irrelevant).

(6) The determination has to be made standing on the date line of valuation (date of publication
of notification under sec. 4) as if the valuer is a hypothetical purchaser willing to purchase land from the
open market and is prepared to pay a reasonable price as on that day. It has also to be assumed that
the vendor is willing to sell the land at a reasonable price.

(7) In doing so by the instances method, the Court has to correlate the market value reflected in
the most comparable instance which provides the index of market value.

(8) only genuine instances have to be taken into account. (Sometimes instances are rigged up
in anticipation of Acquisition of land).

(9) Even post notification instances can be taken into account (1) if they are very proximate, (2)
genuine and (3) the acquisition itself has not motivated the purchaser to pay a higher price on account
of the resultant improvement in development prospects.

(10) The most comparable instances out of the genuine instances have to be identified on the following
considerations:

(i) proximity from time angle,

(ii) proximity from situation angle.

12
 Important Case Laws on principles of valuation of Real Estate

(11) Having identified the instances which provide the index of market value the price reflected therein
may be taken as the norm and the market value of the land under acquisition may be deduced by
making suitable adjustments for the plus and minus factors vis-a-vis land under acquisition by placing
the two in juxtaposition.

(12) A balance-sheet of plus and minus factors may be drawn for this purpose and the relevant factors
may be evaluated in terms of price variation as a prudent purchaser would do.

(13) The market value of the land under acquisition has there after to be deduced by loading the price
reflected in the instance taken as norm for plus factors and unloading it for minus factors
(14)The exercise indicated in clauses (11) to (13) has to be undertaken in a common sense manner as
a prudent man of the world of business would do. We may illustrate some such illustrative
(not exhaustive) factors:
Plus factors Minus factors
1. smallness of size. 1. largeness of area.
2. proximity to a road. 2. situation in the interior at a distances from the Road.

3. frontage on a road. 3. narrow strip of land with very small frontage compared to death.

4. nearness to developed area. 4. lower level requiring the depressed portion to be filled up.

5. regular shape. 5. remoteness from developed locality.

6. level vis-a-vis land 6. some special disadvantageous factor which

under acquistion. would deter a purchaser.

7. special value for an owner of an adjoining property to whom it may have some
very special advantage.

(15) The evaluation of these factors of course depends on the facts of each case. There cannot be any
hard and fast or rigid rule. Common sense is the best and most reliable guide. For instance, take the
factor regarding the size. A building plot of land say 500 to 1000 sq. yds cannot be compared with a
large tract or block of land of say l000 sq. yds or more. Firstly while a smaller plot is within the reach of
many, a large block of land will have to be developed by preparing a lay out, carving out roads,

13
 Important Case Laws on principles of valuation of Real Estate

leaving open space, plotting out smaller plots, waiting for purchasers (meanwhile the invested money
will be blocked up) and the hazards of an entrepreneur. The factor can be discounted by making a
deduction by way of an allowance at an appropriate rate ranging approx. between 20% to

50% to account for land required to be set apart for carving out lands and plotting out small plots.
The discounting will to some extent also depend on whether it is a rural area or urban area,
whether building activity is picking up, and whether waiting period during which the capital of
the entrepreneur would be looked up, will be longer or shorter and the attendant hazards.

(16) Every case must be dealt with on its own facts pattern bearing in mind all these factors as
a prudent purchaser of land in which position the Judge must place himself.

(17) These are general guidelines to be applied with understanding informed with common sense.

Conclusion
The court cannot take into account the award passed by the SLAO unless it is produced and
proved before the court. The market value is to be determined as on date of publication of the
notification under sec 4 of LAA. Plus factors and minus factors are to be considered while determining
the market value.

14
 Important Case Laws on principles of valuation of Real Estate

7. CED Vs. Radhadevi Jalan (1968) 67 ITR 761 (Cal)

Background
The dispute in this appeal is with regard to the valuation of properties viz., 10/157,
Girmajipet, 16/743/32 Grain Market Godown and 16/763/7, near water tank. The accountable person
has declared the value of the said properties at Rs. 23, 070, Rs. 58, 080 and Rs. 32, 595 whereas
the Asstt. Controller valued the same at Rs. 70, 000, Rs. 1, 13, 000 and Rs. 99, 000 respectively.
The accountable person valued the said properties on rental basis. The Asstt. Controller referred
the valuation to the Valuation Cell which valued the properties at the above figures which the Asstt.
CED adopted. The Valuation Officer valued the properties following the land and building method. He
did not accept the rental menthol adopted by the accountable person. On appeal, the
Appellate Controller held that the properties have been fully developed and the rental income from
these properties have been accepted by the IT Department and therefore, the proper menthol of
valuation is only rent capitalisation method. He directed the Asstt. Controller to adopt the rent
capitalisation method at 15 times the net rental to ascertain the market value of these properties.
Against the same the Revenue has preferred this appeal.

15
 Important Case Laws on principles of valuation of Real Estate

Valuation Related Extract of the judgment

In out opinion, there is considerable misconception of legal position involved in the argument of Mr. Pal.
The contractual rent of Rs. 1,600 per month was payable by the tenant in respect of a building, which at
the material time was governed by the West Bengal Premises Tenancy Act, 1956 Under the
operation of the varios rent restrictions Acts, which have been operating in this State for now well over
quarter of a century, landlords have lost the right of letting out their houses at any rent they choose and
of evicting tenants on such grounds as appeal to them. Contractual relationship between landlords and
tenants have given way to statutory relationship imported by successive rent
restriction Acts and the position now is that houses may be let out only at fair rents and at no more.
If premises can no longer be let out at such rent as the landlord may expect or aspire, then however
costly the premises may otherwise be, their value have to be determined on the basis of the limitations
imposed by the statute.
Lastly, in case of buildings, which are in possession of tenants and the tenants cannot either be evicted
or the rent payable by them enhanced, except in accordance with the provisions of the Rent Control
Act, the only appropriate method of valuation is to capitalise the annual rent by certain number of years
purchase. The method of valuing the land and the building separately and adding up the values would
be improper in such cases, because that would ignore the impact of the Rent Control Act on the value
of the land and the building.

Conclusion
Rented properties must be valued by rental method.
 In case of building which are in possession of tenant and the tenants cannot either be evicted or the
rent payable by them cannot be enhanced, except in accordance with the provisions of the rent act, the
only appropriate method of valuation is to capitalise the annual rent by certain number of year’s
purchase.
 The method of valuing the land and the building separately and adding up the value would
be improper in such cases, because that would ignore the impact of the Rent Control Act on the value
of the land the building.

16
Important Case Laws on principles of valuation of Real Estate

17
 Important Case Laws on principles of valuation of Real Estate

8. CIT Vs. Ashima Sinha (1979) 116 ITR 26 (Cal)

Background
By his communication in writing dated the 13th June, 1974, the IAC, Acquisition Range-I, Calcutta,
a competent authority within the meaning of Section 269B of the I.T. Act, 1961, made a reference to the
Assistant Valuation Officer, Unit No. III, under Section 269L(1) requiring the latter to determine the fair
market value of the said property and make a report.

Valuation Related Extract of the judgment

We have failed to understand either the principles or the logic of the & quot; reversionary& quot;
method of valuation as applied by the Valuation Officer of the department in the instant case. After
following the & quot;yield or rental " method and having arrived at a figure the Valuation Officer
has added to it the value of an imaginary reversion in future. We invited Mr. Pal to cite any authority
which has approved or even indicated this method but he was unable to do so. It is stated in
Parks' Valuation (at p. 38) that when a property is valued on rental basis the result is the value of
the land and building taken together which cannot afterwards be apportioned. In the method adopted by
the Valuation Officer the value of the land is taken twice, being included in the amount arrived at by the
& quot;yield or rental" method and again under the " reversionary " method. This is an
entirely novel approach but in our view erroneous.

Conclusion

18
 Important Case Laws on principles of valuation of Real Estate

The court approved of Tribunal’s decision to allow 10% deduction in value to account for sale
of undivided share in the property. The court has held that “In the method adopted by the valuation
officer, the value of land is taken
twice viz, i) the amount included in the yield method and ii) again under the reversionary method. This
is a novel approach but in our view is erroneous”.
Note : The calcutta high court has virtually held that there is no such thing as ‘Reversionary value’ and
the concept of reversionary value is erroneous. It is well known that the courts have to consider only the
evidence duly proved and the arguments submitted before them in the court. It seems that the
advocates submitting arguments on behalf of the valuation officer have not properly understood the
logical reasoning behind the reversionery value and therefore failed in producing proper evidence and
properly presenting the concept of reversionary value before the High court. The High court has
therefore misled in delivering such absolutely incorrect and erroneous judgment. It needs to be
cautioned at this stage, that the judgments of the courts should always be read in the context of the
evidence duly proved and arguments submitted before the court and should never be followed blindly. –
(Courtesy : Book “Basics in Real Estate valuation”- Mr. H.T. Hardikar – Page 234)

19
 Important Case Laws on principles of valuation of Real Estate

9. CIT Vs. Anupkumar Kapoor & others (1980) 125 ITR 684 (Cal)
Background
By a letter dated the 3rd August, 1974, the IAC Acquisition, Range I, Calcutta, the competent authority
within the meaning of Section 269A(b) read with Section 569B of the Act, referred the matter under
Section 269L(1)(a) of the Act to the Valuation Officer, Unit-III, to determine the fair market value of the
said property and to submit a report.
Valuation Related Extract of the judgment

We are unable to accept the contentions of Mr. B. L Pal that the said property was not fully developed
or was not fully tenanted. It is undisputed that the total land area of the property is 1 bigha 5 cottahs 3
chittaks and 4 sq. ft. According to the Valuation Officer of the revenue the land which was lying vacant
was 115 ft. x 45 ft. corresponding approximately to 7 cottahs 3 chittaks.
There is no evidence to show whether this vacant land was one contiguous plot or divided into several
plots unconnected with each other. On a simple arithmetical calculation the developed or built up area
of the said property covered by the main building and the out-houses was approximately 18 cottahs.
Under the prevailing building regulations of the Corporation of Calcutta in the area where the said
property is situated 50% of the total land has to be left open in constructing a building. Thus, at least,
over 12 cottahs of land had to be left open but the land left open being approximately 7 cottahs 3
chittaks was less than the requirement under the said building regulations. In our view, there is,
therefore, no scope for development of the said property either immediate or in the near future, so long
as the existing building and outhouses remained and so long as the tenants did not vacate, who are, no
doubt, protected under the rent control legislations. Tenancies in Calcutta are statutorily controlled by
the rent control legislations and its impact on the valuation of tenanted properties cannot be ignored. In
our view, it would be unreasonable if not absurd to value such property on the basis of a notional
market value in disregard of such control. Whether the transferees purchased the said property with an
idea of construction of a multistoreyed building therein in future or for some other purpose was wholly
immaterial in determining the market value of the said property on the date of its purchase by the
transferees
Conclusion

The valuation officer under the method adopted by him, has taken the value of the land twice,once in
arriving at the figure by the’yield or rental’ method and again in applying the ‘reversionary’ method. This
is in our view was wholly wrong.

20
 Important Case Laws on principles of valuation of Real Estate

In this case Calcutta court rejected concept of reversionery value of land. The above case was fully
tenanted property and obviously therefore land reversion was not possible and hence its value could
not be added.

10 CIT Vs. Smt. Vimlaben Bhagwandas Patel (1979)118 ITR 134(Guj)

Background
Appeal filed in Gujarat High Court against Order of the IAC of Income-tax, Acquisition Range-
II, Ahmedabad, passed on January 16, 1975, acquiring two industrial sheds of type-A bearing block
Nos.1/3 and 1/4 situate in the industrial estate set up by the Baroda Industrial evelopment
Corporation (hereinafter referred to as BIDCO" for the sake of convenience) under s. 269F(6) of
the aforesaid Act as the fair market value of the respective sheds exceeded the apparent consideration
in the respective instruments of transfer of February 5, 1973, and had not been truly stated with
the ulterior object of tax evasion and/or facilitating concealment of income or assets.

Valuation Related Extract of the judgment

In our opinion, therefore, the just, reasonable and appropriate rate of capitalisation would be eight and
one-third times the net average annual income which would give the yield of 12% per annum on the
investment of capital in property. The net average annual income may be worked out in the course of
application of the rental method of valuation by determining the net average annual income after
allowing the proper deductions or outgoings from gross income on account of insurance, taxes, repairs
and management or by adopting rough method as provided in cls.(3) and (4) of Sch. II of the Urban
Land Ceiling Act by taking 60% of the average annual gross income of the last five years immediately
proceeding the initiation of the proceedings and ignoring 40% thereof which should be deducted in lieu
of the outgoings.

Conclusion

The rate of capitalisation should be not unreal and must have regard to the commercial rate of return
after taking into consideration the various constraints and insecurities in the property market.

21