Income Tax Appellate Tribunal - Delhi
Motilal Chhadami Lal Jain (Huf) vs Wealth-Tax Officer on 21 April, 1988
Equivalent citations: [1988]25ITD532(DELHI)
ORDER
U.S. Dhusia, Judicial Member
1. As both these appeals filed by the assessee for assessment years 1975-76 & 1976-77 raise common issues and contentions for consideration, they were heard together and are disposed of by this common order.
2. We first take up the appeal filed for assessment year 1975-76. One of the issues raised in this appeal relates to the valuation of a property known as Hirangaon Factory. Hirangaon Factory comprised of two parts-Hirangaon quarters and factory. The appellant who is a joint Hindu family returned the composite value of the two-the quarters and the factory at Rs. 4,27,029. The ITO felt this value to be low and, therefore, referred the valuation to the Valuation Officer and adopting the valuation made by the Valuation Officer determined the value at Rs. 26 lakhs. The CWT(A) scaled down the valuation to Rs. 11,23,750. Hirangaon quarters were evaluated at Rs. 1,39,920 by the assessee by capitalising the annual rental income of Rs. 13,992 at ten times thereof. The value of the quarters returned was adopted by the WTO. But the assessee impugned the valuation and sought the application of Wealth-tax Rule 1-BB in evaluating quarter which was to bring the valuation to Rs. 1,01,885. The value of the factory was returned at Rs. 2,87,109. Following the valuation made by the Valuation Officer the WTO determined the value at Rs. 9,78,000. The assessee felt aggrieved and impugned this valuation also before the CWT(A). It was submitted on behalf of the appellant that the valuation made by the Valuation Officer on land & building method was not to be preferred when the factory was given on rent to M/s. Jain Glass Works Pvt. Ltd. w.e.f. 3-5-1960 under a lease agreement on an annual rent of Rs. 21,000 subject to a charge of Rs. 10,000 in favour of Shri Chhadami Lal Jain Degree College, Firozabad. The maintainable rent of Rs. 11,000 was to be multiplied by 100/9 to determine the value of the factory premises. Taking into account the rental of Rs. 21,000 p.a. and the charge of Rs. 10,000 in favour of Shri Chhadami Lal Jain Degree College, Firozabad, the assessee claimed that the value earlier shown at Rs, 2,87,109 should be substituted by the value of Rs. 1,01,885 shown in the revised return. The Valuation Officer when called upon by the CWT(A) to comment upon the letter dated 23-3-1982 addressed by the assessee bringing out his two pleas impugned the valuation made on the basis of rental income. According to him the tenant who occupied the premises was a private Ltd. company where the directors were members of the family whose members were partners in the assessee-firm. Therefore, he contended that the annual rent of Rs. 21,000 was not fair rent and therefore could not be depended upon to give the fair market value of the factory. It was pointed out by him that the prevalent rate was 21p. per sq. ft. in the market but under the lease agreement it had been @ 11p. per sq. ft. Looked at in this background Rs. 21,000 p.a. could not be considered as fair rent. The assessee countered this fact by pointing out that the quality of the factory building was poor and, therefore, Revenue was not justified in impugning the rental of Rs. 21,000 p.a. as unfair. It was also pointed out that the value of the two properties had been settled by the ITAT 'A' Bench Delhi in WTA Nos. 1207 to 1223/Del./83 for assessment years 1957-58 to 1973-74. The Appellate Tribunal settled that the value of the two properties must be arrived at by capitalising the rental. Valuation of the quarters was directed to be taken at Rs. 2,35,000 for the said years. So far as valuation of the factory is concerned, the Tribunal held that its fair market value be arrived at by capitalising the net rental income at 12 times in respect of assessment years 1968-69 to 1973-74. CWT(A) in disposing of the appeal for assessment years 1975-76 and 1976-77 determined the value of the quarters at Rs. 1,45,750. After deducting l/6th for repairs from the rent of Rs. 13,992 he arrived at a sum of Rs. 11,610. Applying the multiple of 100/10 under WT Rule 1-BB he arrived at the value of Rs. 1,45,750. So far as the valuation of the factory was concerned, he took the net maintainable rent under the lease agreement at Rs. 21,000 p.a. Relying on Clause (c) of Article 2 of the Agreement of lease made on 3-5-1960 between the appellant and M/s. Jain Glass Works Pvt. Ltd. he held that the rent was to include the commission @ 1 per cent of the total turnover paid by the lessee to M/s. Jain Glass Works Pvt. Ltd. also. Clause (c) of the lease agreement provided that the lessee agreed to pay the lessor 1 per cent of the total turnover of the company for each of the financial years calculated every three months or by mutual adjustment. According to the WTO as well as the CWT(A) this commission payment was also a constituent of the rental income. He, therefore, worked out the average of the payments received by the assessee in three assessment years 1974-75 to 1976-77, Rs. 57,802 for assessment year 1974-75, Rs. 74,242, for assessment year 1975-76, Rs. 57,029 for assessment year 1976-77. He totalled these sums and arrived at the average of these sums at Rs. 60,500. He caused this sum of Rs. 60,500 to be added as a constituent of the rent to Rs. 2.1,000 annual rental determined under the lease agreement, he arrived at the rental of Rs. 81,500. Proceeding on the basis of this rental income he arrived at the value of Rs. 9,78,000 for assessment year 1975-76. For assessment year 1976-77 he arrived at the same rental valuation. His valuation of the factory building for the two years was, therefore, made at Rs. 9,78,000 for each of the two years. The assessee felt aggrieved and impugned these valuations in appeal filed before the Appellate Tribunal.
3. He made out two principal pleas in this connection. On the one hand he controverted that the commission payment could not be considered a constituent of the rental. It was argued by him that the commission payment would be varying from year to year. If commission payment was to be treated as a part of the rent, then the rental value will be fluctuating year to year. Valuation will go up and down only because of the changes in the amounts of commission received by the assessee from year to year. It was, therefore, submitted that CWT(A) was not correctly advised in the matter to adopt commission payment as a constituent of the rent. On the other hand, departmental representative made out that on a perusal of the lease agreement it would follow invariably that commission payment received @ 1 per cent of the total turnover was a constituent of the rent. Payment of commission could, therefore, be looked at as a constituent of rental income. The assessee further contended that in determining the rental income notice must be taken of the annual charge credited in favour of Chhadami Lal Jain Degree College, Firozabad. It was contended by the learned counsel for the assessee that this liability was created as the very purpose of lease agreement. Rental income was to be reduced at source on account of payment made to the aforesaid college.
4. We have looked into the facts of the case and taken into account the submissions made on behalf of both partners. On a perusal of the lease agreement it does not appear possible that we shall be justified in rejecting the plea of the assessee that commission payment should not be considered as a part of the rent receivable under the lease agreement. Nothing was stopping the two parties, the lessee and the lessor from elucidating that annual rent will not only include Rs. 21,000 but also the commission payment @ 1 per cent of the total sales turnover. A reading of Article 2 demonstrates beyond doubt the two payments which the lessee was required to make under the agreement which was terminable at will of the lessor. Payment of commission which was provided in Sub-clause (c) would be a variable sum there being a different turnover each year. Commission payment of that year would be different from those in the preceding and subsequent years. Such a payment that depends upon the turnover of a year and is a varying product, does not fall in with the concept of rent as is commonly understood. Rent as we know is a fixed sum payable during a period for the use and occupation of a premises. It does not vary during that time. Therefore, a proper appreciation of the lease agreement would not lead us to find that the payment of 1 per cent of commission could be linked to the rent payable under the lease agreement. 1 per cent commission could be also a consideration for the lessor to agree to give on lease the factory premises to the lessee. Besides, as provided in Article (1) furnaces and other facilities for manufacturing glass as were available to former tenant Jain Glass Works were continued to be enjoyed by the lessee. The commission payment could be treated as a consideration for either or both but we may consider in whatever way we like this amount of commission could not be considered as a part of the rental income for purposes of arriving at the value of the property. If we hold that the commission payment was to be treated as a part of rent for purposes of arriving at the value of the property it would lead to very preposterous results. In a year when the commission payment is more, the value of the property would go up, while in the subsequent year if the commission payment is less, value of the property would slump. Such an approach possibly cannot find support in law or from facts regarding the determination of fair market value. Therefore, value of the property should not be linked to the varying turnover which is obtained year after year by the lessee. If the lessee failed to do any business in a particular year, could it not imply that there would be no commission payment and in such a case valuation of the factory building will go down steeply. Therefore, we have to interpret the lease agreement in an intelligent and intelligible way. No specific term has been provided for the duration of the lease. The lessor at his will can terminate the lease and enter upon the premises. Therefore commission payment could be regarded a consideration for continuing the lease and allowing the lessor to carry on his business. In any case as we have observed commission payment could not be linked to rent and be considered as a part of it. There is another consideration emerging from the scaling down of rent from Rs. 62,000 p.a. which was paid by M/s. Jain Glass Works to Rs. 21,000 p.a. which is paid by the lessee from the year 1962 under the present lease agreement. But the scaling down of rent may be either because as brought out on record the property is old and being poor in construction, has suffered deterioration or for taking out the open land on the north side of the factory which was used by the former tenant Jain Glass Works but which was put outside the ambit of the present lease agreement. A consideration of these facts will not lead to a finding that the payment of commission could be considered a part of the rent which has been separately provided for in Article 2 of the lease agreement. Therefore, we are to hold that the finding of CWT(A) considering the commission as a part of the rent payable was not correct in law and maintainable on facts. The Appellate Tribunal which decided the appeal for assessment years 1962-63 to 1973-74 in WTA Nos. 1207 to 1223/Del/75-76 dated 12-5-1978 had taken into account only the rent payable for the purpose of arriving at the value of the factory building and had ignored the provision regarding commission payment. The Tribunal had observed :
The Revenue authorities have not considered the valuation of the property on the basis of net annual rental income. We are of the view that having regard to the interest on fixed deposit it would be fair to determine the annual value of the property at 15 times of the net annual rental income in the asst. years 1962-63 to 1967-68 and at 12 times for the remaining years....
Following the same we would hold, bearing in mind the fact of appreciation, that factory building be valued at 15 times the annual rental income exclusive of commission payment.
5. So far as this plea of the assessee for deduction of the sum of Rs. 10.000 payable under the lease agreement to Shri Chhadami Lal Jain Trust Degree College, Firozabad is concerned, we are unable to find any support for the contention of the assessee. In our consideration Rs. 10,000 payable to Shri Chhadami Lal Jain Degree College, Firozabad was not a case of diversion of income but of application of income only. It will have the effect of reducing the rental value of the factory. If an employee who receives a fixed amount of salary agreed upon with the employer that the latter should pay away 50 per cent of his salary directly to his spouse or anyone else would not reduce the income derived from salary assessable in the hands of the employee. It was for this reason the Government had provided for exclusion of a part of the salary voluntarily surrendered by the Government employees in the wake of the Chinese aggression. At that time Legislature stepped in to ensure that the surrendered amount did not form a part of assessable income and was saved from being taxed. But that is not the case here. Here the lessor had voluntarily agreed that a part of the rental income be passed on to the aforesaid Degree College without providing for the transfer of the corpus. Therefore, in our consideration the plea of the assessee for reducing the assessable income from the property derived from rent has to be rejected as a proposition which was not tenable in law. Accordingly we vaoate the finding of the lower authorities regarding the determination of value of the factory and direct that the WTO will work out the value of the factory building in the light of our observation made above, on the basis of rental income only disregarding the commission payment and also the plea of the asses-see for excluding the amount settled upon the aforesaid Degree College.
6. Now we move to the consideration of another issue raised in this appeal regarding the inclusion of Rs. 1 lakh representing the value of actionable claim. The assessee had returned the value of such actionable claim at nil. The WTO following the past history assessed the value at Rs. 1 lakh. CWT(A) following the valuation made by the Appellate Tribunal in appeal for assessment year 1973-74 determined the value at Rs. 1 lakh. The assessee has felt aggrieved and has brought the issue in appeal before the Appellate Tribunal.
7. Pointing out the bad financial state of the vendee M/s. Veer Industries Ltd., the appellant has claimed that the value of the actionable claim was to be determined at nil. There being no prospect of any realisation there could be no value. The vendees have gone into liquidation. Their properties had been sold away by auction. The appellant-HUF had been obliged to realy to the financial liquidators of the said company the amount originally received from the vendee. On these facts he claimed that the value of the actionable claim should be determined at nil as returned by him.
8. Having heard both sides we are of the view that the plea of the assessee cannot be accepted as not maintainable on facts and in law. The Appellate Tribunal in the aforesaid wealth-tax appeals has considered all these facts which had been urged by the assessee and had then arrived at the finding that the value of the actionable claim should be determined at Rs. 1 lakh in the years under consideration. Therefore, unless the complexion of facts changes we are not left any freedom in the matter but to follow the finding of the Appellate Tribunal made in the earlier assessment year 1973-74. Consequently we uphold the finding of the CWT(A) and dismiss the appeal of assessee on this issue.
9. Another issue raised in this appeal relates to the valuation of Jainnagar property at Rs. 76,000. His plea was that the property had been transferred to a trust as per trust-deed dated 14-11-1947. This plea had not been accepted by the WTO and he included the value of the Jainnagar property in the assessment of the appellant. CWT(A) in disposing of the appeal filed by the assessee against this finding relied on the order passed by the Appellate Tribunal 'A' Bench, Delhi made for the earlier year where it directed that the value of the said property be capitalised at 12 times of the net rental income. Following the same decision CWT (A) held that the value of the Jainnagar property was to be included in the total wealth of the appellant. The appellant has felt aggrieved and has brought the issue in appeal before us.
10. As no other plea has been made out by the appellant, we are to follow the Appellate Tribunal's decision given by the Appellate Tribunal in disposing of the appeal for the earlier year. Accordingly we uphold the finding of the CWT(A) and reject the plea of the assessee on this issue. Appeal of the assessee on this issue fails.
11. Another issue raised in this appeal relates to a claim for granting exemption to the extent of Its. 1 lakh under Section 5(1)(iv) of the WT Act. WTO 6n the ground that the value of the SOP included in the net wealth of the appellant 'could not berated more than Rs. 50,000', declined to grant any exemption. CWT(A), however, when the matter came up in appeal before him, allowed exemption to the extent of Rs. 50,000 being the value of Mussoorie Kothi. The assessee has impugned this finding also. We have considered the respective finding of the authorities below and we have to confess that we are not able to make out the basis of the order of the CWT(A) in this respect. It is apparent, he has not considered the amendment made in Clause (iv) of Section 5 of the Wealth-tax Act which was brought into force w.e.f. 1-4-1971. Under the amended provision the assessee gets entitled to claim exemption in respect of a house or a part of houses belonging to the assessee whether it was let out or self-occupied. Therefore, there was no basis for denying the benefit of this provision to the assessee in respect of Jainnagar property, where the self-occupied portion was valued by the WTO at Rs. 50,000. We vacate the finding of the authorities below and direct that the assessee should be allowed the benefit of exemption in respect of the entire property of Jainnagar as provided in the provision contained in Section 5(1)(iv) of the Wealth-tax Act.
12. In the result, appeal for assessment year 1975-76 is partly allowed.
13. Now we take up the consideration of appeal for assessment year 1976-77. As per grounds of appeal from 1 to 9, it raises the issue regarding valuation of Hirangaon factory, whose value was returned by the assessee at Rs. 1,01,885. But the WTO relying on the valuation made by the Valuation Officer valued it at Rs. 26,00,000. The CWT(A), however, following the reasoning which he had adopted for the preceding year, valued the property at Rs. 9,78,000.
14. We have already dealt with the issue of valuation of this property in the appeal for the preceding year. Following that we hold that the valuation of the factory building be made on the basis of rental income of Rs. 21,000 p.a. We have upheld that the valuation will be on the basis of 15 times the annual rental value in the preceding year. We repeat the same order for this year also. In the result, assessee's appeal on this issue is partly allowed. No reduction is to be allowed on account of the amount settled upon the aforesaid degree college as held for the preceding year.
15. As far as ground No. 10, regarding the value of actionable claim is concerned, following our orders on the similar issue for the preceding year we uphold the finding of the CWT(A) and dismiss the appeal of the assessee on this issue.
16. Regarding the valuation of Jainnagar property, we give the same order as we have given on this issue in the preceding year. Rejecting the plea of the assessee we uphold the inclusion of the value of this property in the net wealth of the assessee.
17. The next issue raised in this appeal is regarding the relief sought under Section 5(1)(iv) of the Wealth-tax Act. Following our finding for the preceding year on the similar issue we allow the appeal of the assessee on this issue.
18. In the result, both the appeals filed by the assessee are partly allowed.
K.C. Srivastava, Accountant Member
1. I have perused the order of the learned Judicial Member but I find that it is not possible to agree on the first point considered by him regarding the valuation of property known as Hirangaon Factory.
2. We are concerned with two years' appeals for 1975-76 and 1976-77. The Wealth-tax Officer referred to the report of the Valuation Officer to whom the matter had been referred as against the value shown in respect of Hirangaon Factory as well as Hirangaon quarters at Rs. 4,27,029 the value was adopted at Rs. 26 lakhs as per Valuation Officer's report. The assessee had shown the value of the factory at Rs. 2,87,109 as shown by him in the assessment year 1974-75. When the matter came in appeal before the CIT (Appeals) it was pointed out that the Valuation Officer had adopted the value of the factory property on land and building method. It was submitted before him that the adoption of this method was not correct. It was further pointed out that Rule 1-BB was applicable and by applying the above rule and taking the maintainable rent at Rs. 11,000 the value should in fact be at Rs. 1,01,885 which was much below the value shown by the assessee in the return. The Valuation Officer had submitted before the CIT (Appeals) that in the present case land and building method was to be adopted as the rent as shown by the assessee at Rs. 21,000 per annum was not a fair market rent as it worked out to only 11 paise per sq. ft. per year as against the market rate of 21 paise per sq. ft, per month. He had also pointed out that the covered area in the property was 1,88.022 sq. ft. The Valuation Officer had also stated that the property had been given on rent to a company in which the members of the assessee-family were interested and in fact it was a family concern. According to him, it was a collusive rent and could not be taken as basis for valuing the property. Justification has also been given about the rates adopted in respect of the land and fixing the valuation at different rates for the four portions in which the Valuation Officer had divided the land.
3. The CIT (Appeals) considered the contention of the Valuation Officer as well as the assessee and proceeded to decide whether for the purpose of valuing the property land and building method was to be taken into consideration or the value was to be determined by adopting the rental method. The attention of the learned CIT (Appeals) was drawn to the order of the Income-tax Appellate Tribunal, Delhi Bench "A" in WTA Nos. 1207 to 1223/ Del./1975-76, for the assessment years 1957-58 to 1973-74. The Tribunal had held that the value of the factory building should be determined by capitalising the net rental income at 12 times in respect of the assessment years 1968-69 to 1973-74. The Department had also submitted before the CIT (Appeals) that the property had been given to M/s. General Glass Works Pvt. Ltd. not for a consideration of Rs. 21,000 per annum but the total consideration in this year would work out to Rs. 95,242 on the basis of the agreement between the parties. In this connection, it was pointed out that besides the annual rent the lessee had to pay 1 per cent of the sale turnover as the commission to the lessor. It was, therefore, contended that in case the property was to be valued on yield basis, the basis for this year should be taken at Rs. 95,242.
4. The CIT (Appeals) considered the history of the case and found that the factory building had been given on an annual rent of Rs. 62,000 to a firm M/s. Jain Glass Works, Firozabad which was a partnership between the members of the HUF. In 1960 M/s. Jain Glass Works Pvt. Ltd. took over the business of the firm as a going concern and the HUF entered into the agreement with the company on 3rd May, 1960. Clause 2 of the agreement reads as under :
2. In considerations of using the abovereferred premises the 'Lessee' hereby agrees to pay the 'Lessor' as follows :
(a) to pay an annual rent of Rs. 21,000 (Rupees Twenty-one thousand) only for the period the 'Lessee' continues to have its factory in the premises of the 'Lessor' ;
(b) to pay all rates and taxes and such other expenses which become due and payable during the course of the occupation of the said premises to any Government or otherwise ;
(c) to pay 1 per cent of the total sales turnover of the company for each of the financial years calculated every three months or by mutual adjustment";
(d) to maintain and keep the buildings, factory premises and bhatties in working conditions and to give possession of the same in the same working conditions at any time when the 'Lessee' intends to leave the premises and give possession to the 'Lessor' ;
(e) that any minor additions made by the 'Lessee' during the period of the occupation of the premises will not be removed or dismantled without the prior permission of the 'Lessor' ;
(f) that no major alterations shall be made by the Lessee without the prior permission of the Lessor.
The CIT (Appeals) further noted that in the assessment year 1962-63 the Income-tax Officer had made enquiries about the reason for the fall in rental of the property. In a letter dated 20-2-1963 the assessee explained the reason as under :
3. A copy of the agreement between joint family and Jain Glass Works (P.) Ltd. is filed herewith. Rent receivable is Rs. 11,000 per year to the joint family and Rs. 10,000 per year direct to the C.L. Jain Degree College. Further the HUP is entitled to 1 per cent of the turnover of the company.
Rs. 10,000 is payable direct to the C.L. Jain Degree College. In any case there is a overriding title of Rs. 10,000 per year in favour of the C.L. Jain Degree College which is a charge on the immovable property of the joint family.
If the joint family is taken to be entitled to Rs. 10,000 per year then a charge of Rs. 10,000 per year is deductible under the head of Property, from the property Income of the joint family.
Firm Jain Glass Works took the Building of Jain Glass Works with furnaces etc. on a rent of Rs. 62,000 per year. The agreement is already on the records and accepted as such.
The rent even now is Rs. 11,000 plus Rs. 10,000 plus 1 per cent of sales.
The income from rent has not decreased but there are chances of its increase in case the turnover of the Jain Glass Works (P.) Ltd., goes up. The decrease is only temporary.
The CIT (Appeals) took the above facts into consideration and also noted the fact that up to the assessment year 1961-62 the rental value of the property was Rs. 62,000 per annum and it had been so adopted by the Tribunal. The CIT (Appeals) held that the basis of valuation of the property had been fixed by the Appellate Tribunal and it has to be assessed on yield method and not on land and building method. He pointed out that the Valuation Officer was not correct in not adopting the yield method on the ground that the lease rent was Rs. 21,000. He pointed out that all the considerations given in the agreement had to be taken into consideration for ascertaining the yield from the property. As the Tribunal had in the year 1973-74 adopted a multiplier of 12 times in ascertaining the value of this property, the CIT (Appeals) held that the same multiplier was to be adopted in the years under consideration. He further" held that the yield from the property should be ascertained by adding the amount of Rs. 21,000 to the average of commission received by the assessee for three years. This, according to him, was a fair indication of the annual yield from the property. He found that the average of the commissions earned by the assessee in the assessment years 1974-75 to 1976-77 works out to Rs. 60,500. On this basis he found that the total yield from the property came to Rs. 21,000 plus Rs. 60,500=Rs. 81,500. He further held that under the agreement between the parties the maintenance expenses and other outgoings or the liability of the lessee were in fact met by him. The municipal taxes were also to be met by him. He, therefore, adopted the value of the property at 12 times of this amount of Rs. 81,500 and determined the value at Rs. 9,78,000. In the assessment year 1976-77 the same value was repeated by the learned CWT (Appeals). In the earlier year when the matter came before the Tribunal for the assessment years up to 1973-74, the Tribunal had decided as to which method was to be adopted for valuing this property and they had held that it had to be worked out on the yield basis. This direction of the Tribunal has been respectfully followed by the CWT (Appeals) in the years under consideration. There is no challenge to the method of valuation as the Department is not in appeal. The dispute before the Tribunal, however, is as to what should be the yield from the property to be taken for the purpose of determining the value. According to the submission made by the Wealth-tax Officer, made before the CWT (Appeals), the base should have been Rs. 95,242. However, the CWT (Appeals) determined the net yield at Rs. 81,500, by adopting the commission income on an average of three years. Though in the ground taken by the assessee, the assessee had contended that the maintainable rent of the factory should be taken at Rs. 11,000, the submission made before the Tribunal was that at the most it could be taken at Rs. 21,000 per annum as that was the rent fixed between the parties in 1960 and there has been no revision in those terms. According to the learned counsel for the assessee, the amount of commission on the turnover could not be taken as a part of maintainable rent as that was according to him, not the consideration for letting out the property. It was also contended that the rent of Rs. 21,000 was reasonable and no enhancement was required to be made in relation thereto by taking into consideration the amount of commission otherwise separately received by the HUF. It was further contended before us that the commission was a variable factor depending on the sales in a particular year and that could not be taken as the basis of determining the maintainable rent which should be a steady figure. It was pointed out that by adopting commission as a part of rental the value differed from year to year depending on the net rental plus commission received. It was submitted that this could not be a correct or proper basis for determining the yield on the basis of which the property was to be valued. It was also pointed out that while giving directions in earlier years' appeals the Tribunal had directed the adoption of a multiple of rental and they have not mentioned anything about the commission.
5. The Departmental Representative had relied on the order of the CWT (Appeals) and had submitted that the nature of the payment received by the assessee could not be determined by the name and the return from the property should be considered as a whole though it may be under various names. It had also been pointed out that in the earlier years the Tribunal had not at all considered the question of quantum of yield as it was not before them and none of the parties had raised this aspect before them. It was pointed out that up to the assessment year 1961-62 the rental of the property was Rs. 62,000 and it could not be reduced to Rs. 21,000 without any reason.
6. I have considered the submissions made before the Bench and have closely perused the consolidated order of the Tribunal passed in respect of earlier assessment years. The relevant observations of the Tribunal are reproduced below :-
17. The learned representative of the department, on the other hand, has urged that this property was valued at Rs. 6,20,000 by the Tribunal for the assessment years 1957-58 to 1961-62 and there is no reason for reducing the value of this property. It is also submitted by him that there has been increase in the values of the properties generally. He has, therefore, supported the orders of the revenue authorities. This property had been valued by the Tribunal for the assessment years 1957-58 to 1961-62 at Rs. 6,20,000 on cost of land and building method. It is now well established that the let out property should be valued on the basis of net annual rental income as a purchaser is only to look to the profits he will receive on the purchase of the property. The property in question has been let out since long. We, therefore, find ourselves unable to follow the order of the Tribunal for the assessment years 1957-58 to 1961-62 in which the Tribunal had valued the property on the basis of cost of land and building. The Revenue authorities have not considered the valuation of the property on the basis of net annual rental income. We are of the view that having regard to the interest on Fixed Deposit it would be fair to determine the value of the property in question at 15 times of the net annual rental income in the assessment years 1962-63 to 1967-68 and at 12 times for the remaining: years under consideration on the basis of net annual rental income as determined in the Income-tax assessments. We, therefore, direct the WTO to modify the assessments accordingly.
Thus, while determining the basis of valuation as the yield basis the Tribunal had not gone into the question of the quantum of yield though they determined the multiple to be applied to the net rental income. As this issue has arisen before us it has to be decided having regard to the facts of the case.
7. It is an admitted position that the factory building was let out at an annual rental of Rs. 62,000 to the firm which was the predecessor of the company, which is now the lessee. On the formation of a company a fresh agreement was written and it was decided that in place of a rental of Rs. 62,000 the consideration should be enumerated in the agreement under various heads. The consideration was the amount of Rs. 21,000 plus the incurring of various expenses by the lessee plus payment of 1 per cent of the turnover to be paid in each quarter. Thus, the HUF while maintaining the source of income by giving this property on rent wanted to increase their yield by providing for the payment of 1 per cent of turnover as a part of the consideration. The assessee himself had interpreted the change in the terms and in their letter dated 20-2-1963 the Income-tax Officer had been told in so many words :
The rent even now is Rs. 11,000 plus Rs. 10,000 plus 1 per cent tax of sales.
The assessee has further explained 'The income from rent is not decreased but there are chances of its increase in case the turnover of the General Glass Works Pvt. Ltd., Firozabad went up'.
8. Even otherwise the maintainable rent of a property can be received in various forms. In a case where the consideration of using the premises is fixed only at a percentage of turnover it would not mean that there was no rental. The word 'rental' for the purpose of valuation only means the net yield from the letting out of the property for use by another person. The rationale behind the valuation of rental method is that the consideration received in one year should be capitalised over a number of years considering the market trends of interest and other factors. The purchaser in the market at the time of purchasing a property has to consider as to what would be the net yield in his hands if he invests the sale consideration in the property. The purchaser is bound to take into consideration all the receipts that he is going to get whether it is by way of the annual lease money or any proportion of turnover or profit. Thus, according to me, the net yield from the property has to be worked out after taking into consideration the commission received over a number of years. The objection raised by the assessee is that the commission was a variable factor. It can be said that one has to determine the yield potential of the building or property and fix it at reasonable figure and on that basis the value can be worked out. Where actual rental is not fixed properly or the annual yield is received in various forms or under various heads all these factors must be considered for determining the net yield. Thus, I do not agree that for determining the value of the property the consideration should be taken at only Rs. 21,000 per annum.
9. Now the question which arises is whether the basis adopted by the CWT (Appeals) taking the net yield at Rs. 81,500 is reasonable having regard to the circumstances of the case. The property was originally let out at Rs. 62,000 and it is no doubt true that the HUF wanted to increase its income from this property. The yield in the beginning was slightly on the lower side but gradually it picked up. This was as accepted by the assessee in 1963 when he said that the chances were that the yield will increase. In my view, in determining the net yield for the purpose of valuation, one should look to the average return in the last few years immediately before the assessment in question. The expected return has reasonably to be fixed at the beginning of the year. The assessee has placed before us the details of receipt from 1968-69 onwards. The average of the commission received from 1968-69 to 1974-75 conies to Rs. 42,000 per year. In the years under consideration there has been some rising trend. We do not know whether this trend has continued in future years. In order to have a fair determination of the yield from the property, I am of the view that the return of Rs. 21,000 plus Rs. 42,000 on average basis can be taken. This would give a return of Rs. 63,000. Incidentally the rental fixed under the old agreement was Rs. 62,000 per year. It is on that basis that the property could have been valued under the old agreement. Having regard to these circumstances, I am of the view that for these two years also the basis can continue to be taken at Rs. 62,000 as the increasing trend has not become established in these years. I would, therefore, hold that the value of this property should be taken at 12 times of Rs. 62,000 and not 12 times of the basis adopted by the CWT (Appeals). On this basis the value of the property comes to Rs. 7,44,000. I direct that the value should be taken on the above basis, allowing relief to the assessee to the extent of Rs. 2,34,000 in each of the years under consideration.
10. In respect of other matters, discussed by the learned Judicial Member, I agree with his conclusions.
K.C. Srivastava, Accountant Member
1. As we have differed on a point in the above matter, we proceed to state below the point on which we have differed and refer the case to the President of the Appellate Tribunal for hearing on this point by a Third Member of the Tribunal :-
Whether on the facts of the case, while valuing Hirangaon Factory property on the rental basis the annual rental should be taken at Rs. 21,000 or at Rs. 62,000 ?
THIRD MEMBER ORDER G. Krishnamurthy, President
1. The point that was referred to me as Third Member for my opinion is :
Whether on the facts of the case, while valuing Hirangaon Factory property on the rental basis the annual rental should be taken at Rs. 21,000 or at Rs. 62,000 ?
The learned Judicial Member for the reasons given by him in his order held that the annual letting value should be taken at Rs. 21,000 per annum while the learned Accountant Member by a separate and differing order held for the elaborate reasons given in his order that the rent should be taken at Rs. 62,000 per annum. The question of determination of rent became relevant in this case as on it depended the valuation of this property in question for the purposes of wealth-tax for the assessment years 1975-76 and 1976-77.
2. The assessee is a joint family possessed of several movable and immovable properties, one of which was a factory situated at Hirangaon. For the purpose of wealth-tax value of this property was shown at Rs. 4,27,029. On a reference made to the valuation cell attached to the Income-tax Department, the Departmental Valuation Officer vide his report dated 8-3-1978 valued this property at Rs. 26 lacs. The Wealth-tax Officer adopted this value for the purpose of assessment. Aggrieved by this wide difference in the valuation of this property, the assessee brought the matter by way of appeal before the Commissioner (Appeals) and urged besides others, that the valuation adopted by the Valuation Officer was very fanciful, arbitrary and opposed to the principles of valuation. The Hirangaon factory quarters were valued at Rs. 1,39,920 by capitalizing the rental income of Rs. 13,992 at 10 times thereof and the factory building was valued at Rs. 2,87,109 as shown in the assessment year 1974-75 as against which the valuation taken was Rs. 26 lacs, which was out of all proportions and could never be said to represent the fair market value. It was pointed out that the Valuation Officer adopted the land and building method to value this property as against the well recognised and settled method of yield. By placing reliance upon the decision of the Tribunal in the case of Biju Patnaik v. WTO [1982] 1 SOT 623 (Delhi) (SB), it was submitted that the property should have been valued as per the method provided for in Rule 1BB of the Wealth-tax Rules. When the quarters of Hirangaon were let out for residential purposes and a gross rental of only Rs. 13,992 was realised and when the net maintainable rent worked out to Rs. 11,660 by applying a multiple of 100/8 the value of the property came to Rs. 1,45,750. This should have been the value adopted by the Wealth-tax Officer. The factory premises also was let out to M/s. Jain Glass Works (P.) Ltd. with effect from 3-5-1960 on an annual rent of Rs. 21,000 subject to a charge of Rs. 10,000 in favour of Chhadami Lal Jain Degree College, Ferozabad resulting in a maintainable rent of Rs. 11,000 multiplying which by the fraction of 100/9, the value of the property would come to about Rs. 1,10,000, which was far less than the value taken by the Wealth-tax Officer. The Valuation Officer, however, was of the opinion that the rent of Rs. 21,000 charged for the factory building could not be the fair market rent because it worked out to 11 paise per sq. ft. per year as against 21 paise per sq. ft. per month prevalent in that area in that year. The covered area let out was 1,88,052 sq. ft. and for such a huge area the market value offered was quite low. Even if the rental " method was to be taken the Valuation Officer pointed out that it should be with reference to the fair market rental value and not with reference to the understated rental value because in his opinion the rent of Rs. 21,000 charged was very much understated and a collusive rent.
3. In the meantime the Wealth-tax Officer informed the Commissioner (A) daring the course of hearing of the appeal that the lease rent of the Hirangaon property was not Rs. 21,000 but Rs. 95,242 because in addition to the rent of Rs. 21,000 the HUF was entitled to a commission by way of certain percentage of sales under the lease agreement and that commission also formed part of the lease consideration or rent and therefore the total of the two must be taken to be the lease rent and not the rent alone. Adopting the aggregate of lease rent and commission, the value of the property would come to much more than the value shown by the assessee. Considering this aspect and the orders of the Tribunal for the earlier years, the Commissioner (A) came to the view that in preference to the land and building method adopted by the Wealth-tax Officer, the yield method should have been adopted for the valuation of the property. He also held that the yield from the factory was not Rs. 21,000 but it should be the fixed rent of Rs. 21,000 plus commission. Since the commission was a variable figure as it depended upon the sales, he adopted the average of the past three years' commission as standard, thereby arrived at the total consideration of Rs. 81,500 as against Rs. 95,242 mentioned by the Wealth-tax Officer. He adopted a multiple of 12 times as reasonable following the order of the Tribunal for the assessment year 1975-76. On this basis, he arrived at the value of the factory at Rs. 9,78,000. For the quarters occupied by the staff, he accepted the rent as a reasonable and applying Rule 1BB of the Wealth-tax Rules, arrived at the value of that property at Rs. 1,45,750. In this way he valued the Hiran-gaon property at Rs. 11,22,750 as against the value of Rs. 26 lacs adopted by the Wealth-tax Officer.
4. Aggrieved by this valuation, the assessee preferred a further appeal before the Tribunal. The main point taken up before the Tribunal was whether on the facts and in the circumstances of the case, the commission payment, which varied from year to year, could also be taken as forming part of the lease rent for the purposes of capitalization to arrive at the market value. The argument was that since commission was a fluctuating factor depending upon the fortunes of business, that should always be left out of account in determining the fair market value of the factory premises. The argument against it was that both of them were provided under the same lease agreement, which would mean and follow that commission also was considered by the parties as part of the lease rent or part of the consideration for the letting out of the premises. When commission thus formed part of the consideration for letting out the factory premises, that amount could not be left out of account merely on the ground that it fluctuated from year to year. The learned Judicial Member was of the opinion that the payment of commission, which varies from year to year, did not fall within the concept of rent as was commonly understood. Rent, he observed, was a fixed sum payable during the period for the use and occupation of a premises and it should not vary from year to year. The payment of commission of 1 per cent therefore should not be linked with the rent payable. He also sought to draw support for his view from an order of the Tribunal, which decided the appeals for the assessment years 1962-63 to 1973-74 in the assessee's own case where the Tribunal held that the rent payable should only be capitalised at 15 times for the purposes of arriving at the market value.
5. As against this the learned Accountant Member held by tracing the history of the factory building, how it was let out on an annual rent of Us. 62,000 to the firm of Jain Glass Works, Ferozabad, which was a partnership between the members of the HUF and how later on the annual rent was reduced to Rs. 21,000 under an agreement dated 3-5-1960 together with the stipulation to pay 1 per cent of the total sales turnover as commission, that both the commission and the rent put together constituted the consideration for the letting out of the premises and therefore the entire consideration should be taken as the yield to be capitalised. The learned Accountant Member understood the order of the Tribunal for the earlier years as one determining only the basis of valuation as the yield basis and did not decide the quantum of yield although it determined the multiple to be applied to the net rental income. In other words, according to him, the order of the Tribunal for the earlier years had not determined the quantum of yield and it was left open. He then addressed himself to the question as to what should be the commission. By going to the figures supplied to the Bench, he found that the average commission worked '"out to Rs. 42,000 in the years 1968-69 to 1974-75 and that amount could be taken as representing the normal yield. To that Rs. 42,000, he added the rent of Rs. 21,000 and arrived at the figure of Rs. 63,000, which was also incidentally the rental fixed under the old agreement before it was scaled down or as the department claims split into rent and commission. He therefore fixed that it would be easy to take rental income at Rs. 62,000 and on that basis redetermined the value of the factory premises at Rs. 7,44,000 thereby affording a further relief of Rs. 2,34,000. Thus a difference arose between the Members as to what should be the annual rental from Hirangaon factory, whether it should be Rs. 21,000 or Rs. 62,000.
6. The facts that now emerge in this case are that the factory building was the only building in dispute for purpose of valuation, that the basis for the valuation of this factory building was agreed to be rental method and this factory building was in existence for quite sometime and was subject of lease for quite sometime. The lease in question was determined under the agreement of lease dated 3-5-1960 entered into between the assessee-HUF and M/s. Jain Glass Works (P.) Ltd., a company incorporated under the Indian Companies Act. This company took over the running business of the firm of M/s. Jain Glass Works, Ferozabad with its factory situated at Hirangaon. Jain Glass Works at the time of take over was paying a rent of Rs. 62,000 for building, furnace and land attached thereto excluding the staff and labour quarters to the assessee-HUF.
The lessee M/s. Jain Glass Works (P.) Ltd. had taken the same premises on lease agreement to pay to the lessor, i.e., the assessee-HUF rent as follows :-
(a) To pay an annual rent of Rs. 21,000 for the period the lessee continues to have its factory in the premises ;
(b) To pay all rates and taxes and such other expenses, which become due and payable during the course of the occupation of the said premises to any Government or otherwise ;
(c) To pay 1 per cent of the total sales turnover of the company for each of the financial years collected every three months or by mutual adjustments to maintain and keep the building, the factory premises and bhatties in working conditions and give possession of the same in working condition at any time when the lessee intends to leave the premises and give possession to the lessor ;
(d) Any minor additions made by the assessee during the period of occupation of the premises will not be removed or dismantled without the prior permission of the lessor and that no major alteration shall be made by the lessee without prior permission of the lessor.
This agreement is the authority for the payment of the annual rent of Rs. 21,000 and payment of the commission at 1 per cent of the turnover. It is no doubt true that the agreement provided that the annual rent and the commission put together mentioned in the same deed would form the consideration for using the factory premises of the assessee-HUF by the lessee M/s. Jain Glass Works (P.) Ltd. It is also true that earlier to this arrangement M/s. Jain Glass Works, a partnership firm was paying a rent of Rs. 62,000 to the assessee-HUF as and by way of annual rent. That contract to pay the annual rent of Rs. 62,000 to the assessee-HUF had come to a close (a) by the termination of that agreement, (b) by the transformation in the constitution of Jain Glass Works from a firm to a company and (c) by the execution of the new lease agreement. The old arrangement is only a guide to aid to find out as to what could be the income that the factory premises could fetch. That the factory premises has a potential of yielding an income of Rs. 62,000 by way of rent could not be disputed in the face of the earlier payment of rent by the firm to the assessee-HUF. But the subsequent arrangement provided for an annual rent of only Rs. 21,000 and it also provided for the payment of commission. The dispute is whether this commission partakes the character of rent or the earlier agreement was so split up as to reduce the quantum of rent with a view to reduce the market value for the purposes of wealth-tax. The dispute in this case arose to fix the quantum of rent or the basic amount only for the purpose of fixing the market rent to arrive at eventually the market value. If a property is capable of yielding a particular amount of income and when that income formed the basis to arrive at the market value for wealth-tax purposes and if on that basis a certain market value was arrived at, that market value continues to remain valid yielding only to the fluctuations in the market forces and that market value would not depend upon how in subsequent years the rent of the property was manipulated although the rent fixed in subsequent years under a separate agreement between two distinct parties at arms length may indicate a fall or increase in the earning capacity of the premises upon which the future market value would depend. What I have in my mind is if a factory which was capable of yielding an income let us say 'X' amount and if on that basis the market value of the property was arrived at 'Y' and if on account of either the obsolete nature of the machinery or other market forces or some Government regulation or bad management, the products manufactured by the factory are not able to yield income, one would try to reduce the rental and the reduced rental would then be an indicator of the market value. Supposing the next year the rent was reduced to 'X-l', the market value of the building would be 'Y-l'. Therefore, the market value of the property would have a bearing upon the income and has a direct relation to it. It is only in that context the question in this case has to be seen whether the commission also could form part of the rental. Since the market value of this building has already been fixed in the earlier years on the basis of rental income at Rs. 62,000, that would not change the market value on the ground that in the subsequent years the rent was reduced to Rs. 21,000 unless the reduction in the rent from Rs. 62,000 to Rs. 21,000 was on account of adverse market conditions. Therefore the payment of reduced rent has to be viewed in this context and the payment of commission in a different context although both of them would be considered as consideration for letting out of the premises. The commission has a direct nexus with the turnover, which again depends upon several variable factors and also imponderables. In a rising market, the commission would be more and in a losing market, the commission would be less and in case no business was done, the commission would be nil. Such a fluctuating quantum has more an attribute of profit sharing than being considered as part of the consideration for letting out the factory premises. I therefore see the payment of commission as a part of an arrangement to derive part of the profits of Jain Glass Works (P.) Ltd. by calling; it commission rather than considering it as the aggregate of lease rent. In this view of the matter, I consider that the lease rent should be taken only at the figure of Rs. 21,000 as mentioned in the agreement unless collusion was established, which in this case as it appeared to me be only doubted but not proved. An arrangement under which the lessor agrees to receive fluctuating amount of commission cannot be said to have leased out the premises for a fixed lease rent and as I have already mentioned earlier for a property whose market value has already been fixed up in the earlier assessment years in a particular way, the determination of income in subsequent years would become relevant only for the purpose of either enhancing that market value or diminishing that market value depending upon the prosperity of the business or adversity.
7. I am therefore inclined to agree with the view expressed by the learned Judicial Member that the lease rent of this premises should be taken only at Rs. 21,000 and not at Rs. 21,000 plus the varying figure of commission because in any attempt to arrive at market value of a property certain amount of stability has to be imparted and market value should not be left to vary violently as it would happen, if commission also is taken into account. There is also another factor which weighed with me in coming to this conclusion. As I have mentioned the commission is a varying factor because it is made to depend upon the turnover, which is never stable. Even then a certain amount of stability in the commission was sought to be introduced by the Commissioner (A) by taking the average of the commission, which process found agreement with the learned Accountant Member though in favour of a reduced figure. This appeared to me that we are re-writing the agreement between the. parties. I doubt whether we have such an implied authority. If the commission formed part of the lease, then without the exercise of averaging the commission the total lease amount must be determined, each year differently and arrive at the market value of the property on that basis, which would again give a different figure. Even though it might look odd, that will be the inevitable result. This fact also weighed with me in coming to the conclusion that the lease rent agreed to between the parties was only Rs. 21,000 although it was much less than agreed in the previous years and stipulation for the payment of commission was of a different nature, which I venture to call it a device to share the profits. By this process, the fall in the rental was sought to be made up by providing the commission, which in case it goes up, the total yield would also go up without being pegged at the stipulated fixed rental of previous year. This aspect finds support from the further fact that for income-tax assessment purposes, as I was informed in the Court by the learned counsel of the assessee, the lease rent was adopted at Rs. 21,000 and not the aggregate figure of lease rent plus commission.
8. In coming to my conclusion I have also kept in view the point of difference of opinion referred to me, namely, for valuing the factory "building on "rental basis" what should be "the annual rental" Rs. 21,000 or Rs. 62,000. This shows the controversy was about fixing the rental and not income which includes commission. If the valuation of the Hirangaon factory building was to be made on the basis of annual income as distinct from annual rent, the annual "income would be rent plus commission. But if the valuation is to be made only on annual rental, it has to be only Rs. 21,000, the balance commission being distinct from rent and partook the different character, namely, profit sharing.
9. The matter will now go before the regular Bench for disposal of the appeals according to the majority opinion.