( 1 ) THE Income-tax Appellate Tribunal, Bangalore Bench has stated a case and referred under 3. 256 (1) of the Income-tax Act, 1961 (here in after referred to as the 'act'), the following questions for the, opinion of this Court; (i) Whether on the facts and in the circumstances of the case, the. Tribunal was justified in law for the purposes of computation of capital: gains for tor the assessment year 1963-64 in estimating the fair market value as on 1-1-1954 of the property of the assesses sold in the-relevant year by capitalising the net, annual rental value thereof at 10 years' purchase? (i) Whether there was any material before the Tribunal for determining 10 as the number-with which to multiply the net annual rental of the, property of the assesses to arrive, at its. market value as on 1-1-1954 the assessee is an individual. For the assessment year 1963-64 he filed a return on 9-12-1963. He died on 7-1-1965 and on 18-3-1968 his legal representative filed a revised return wherein he claimed a capital loss of Rs. 89,968. ( 2 ) DURING the accounting year, the assessee had sold 26 shops in what is called, 'raja Market' in Bangalore City, for. 3 consideration of Rs. 2,90,501 in the revised return the assessee estimated the fair market-value of the shops as on 1-1-1954 at Rs. 3,80,469 and claimed a loss of Rs. 89,968. . The Income-tax Officer went into the history of the case leading to the construction of Raja Market. The assessee had constructed 121 shops which were completed 'during the previous three years ending. 31-3-1954. On the basis of the assessee's estimate made in his income-tax assessment proceedings for the years relating to'the construction of the buildings, the Income- tax Officer declined to accept the value of the aforesaid 26 shops at rs. 3,80,469 The Income-tax Officer valued the site at Rs. 94,797 and the cost of construction at Rs. 64,210. He estimated the fair value of the 26 shops at Rs. 1,59,007 as on 1-1-1954 The consideration received for the, sale of shops being Rs. 2,90,501, the Income-tax Officer determined the capital gains at Rs. 1,31,494 which was added on to the income of the assessee. ( 3 ) THE assessee being aggrieved by the assessment order made by the income-tax Officer, took up the matter in appeal before the -. 1,59,007 as on 1-1-1954 The consideration received for the, sale of shops being Rs. 2,90,501, the Income-tax Officer determined the capital gains at Rs. 1,31,494 which was added on to the income of the assessee. ( 3 ) THE assessee being aggrieved by the assessment order made by the income-tax Officer, took up the matter in appeal before the -. Appellate Asst Commr: who was of the opinion that the proper method of valuation in a case like the present one where the premises were let out to tenants, would be the rental method, of valuation. He came tq the, conclusion that it will be reasonable to capitalise the net rent at 9-5 times and on that basis worked out the market-value of the properties as on 1-1-1954 at Rs. 1,85,250 and the capital gains at Rs. 1,05,251. ( 4 ) THE assessee preferrred a second appeal before the Income-tax appellate Tribunal, Bangalore, Bench. The Tribunal agreed with the Appellate asst Commr that the proper method of valuation is the capitalisation of the' net, rental and. for that purpose what has to be determined is the net rent and the rate of return which an investor of the class of property in question would expect. After stating the principles correctly the, Tribunal came to the conclusion that it would, be reasonable under the circumstances to capitalise the net rental by 10 years' purchase value. The various factors which the Tribunal to took into account in arriving at this multiple of 10 are; (i) The cost incurred by the assessee. The, buldings were completed by 31-3-1954 and these, had been estimated by capitalising the, ne,t rentals by 9-1 years' purchase, (ii) The assessee has in the assessment years 1952-53, 1953-54 and 1964-55 himself chosen to estimate the cost of construction by capitalising the net rentals by 10 years purchase, i. e, he has taken the yeild on the capital investment in the construction at 10 per cent. (iii) The fact that the property is used as business premises and the rents may fluctuate depending upon the, trends of the/marke There, can be, periods of slump and boom. (iv) The sales of the sites near about the places where the, property is situated. (v) The, possible, apiprecia,tion in the market-value from the, commencement and the completion of the construction of the buildings. Atter holding that the, net rentaj was Rs. (iv) The sales of the sites near about the places where the, property is situated. (v) The, possible, apiprecia,tion in the market-value from the, commencement and the completion of the construction of the buildings. Atter holding that the, net rentaj was Rs. 19,500 per annum and that it is reasonable, to employ the multiple of 10 for the purpose of capitalisation, the Tribunal directs the Income-tax Officer to work out the capital gains on the said basis though two separate questions have been referred by the Tribunal, the, answer to the first question will conclude, the second question as Well. The second question, in our opinion, was therefore, unnecessary. The substance of bath questions is whether there was material for the tribunal to a dopt the, multiple of 10 for arriving at the fair market value of the buildings as on 1-1-1954. ( 5 ) THERE, is no dispute, as to, the amount of consideration for which the shops were sold by the assessee. The dispute is as to, the fair market-value of the said shops as on 1-1-1954. The market-value, of assets like shops and buildings as required to be determined under the Act for purposes of computation of capital gains valuation is also required to be made under the wealth Tax Act, Estate Duty Act and the Land Acquisition Act. Valuation under all these Acts is the fair market-value; of the property. In K. C. Cooper v. Union of India, AIR. 1970 SC. 564 Shah, J ,as he then was) spea,- king for the Court sajd :"the method of determining the value, of property by the application of an appropriate multiplier to the net annual income or profits is a, satisfactory method -of valuation of lands with buildings, only if the lajnd is fully developed, i. e,. , if has been put to full use, legally permssitale, and economically justifiable, and the] income out of the property is the, normal commercial and not a, controlled return depreciated on account of special circumstances. If the property is not fully developed, op the return is not commercial the method may yield a misleading result. , if has been put to full use, legally permssitale, and economically justifiable, and the] income out of the property is the, normal commercial and not a, controlled return depreciated on account of special circumstances. If the property is not fully developed, op the return is not commercial the method may yield a misleading result. "he further said that apiong the, important methods of determination of compensation under the Land Acquisition Act, capitalisation of net annual profit out o!f the, property at a, rate, equal in normal cases tq the return from gilt-edged security is one, of the well known methods of valuation; in State of Kerala v. , P. P. Hassan Koya, AIR. 1968 SC. 1201 at 1203, the same learned- Judge, has said : when the property sold is land with building it is often difficult to secure; reliable, evidence of instances of sale of similar land - with buildings proximate in time to the; date of the, notification under s. 4. Therefore the method which is generally resorted in determining the- value of the land with buildings especially those, used for business purposes is the method of capitalization of return actually received or which might reasonably be received from the land and the buildings. ( 6 ) IT cannnot be laid down as a general rule applicable to all situations and circumstances that a multiple approximately equal to the return from gilt-edged securities prevailing at the relevant time forms an adequate basis for finding- out the market value of the land c. A. Gulanikar in his commentary on Two Acts-Gift and Wealth Tax, (2nd Edn. 1971-Part 11-page 49) while dealing with the basis-of valuation has stated thus" Basis of Valuation Income method of valuation is ideally suited to this type of property for the rent realised is not generally relate either to the. cost of construction or the fair rental incoms. This is in case of new shops or establishmets nqt subject tq rent control. Security qf shops and business premises will generally vary between 6 to 9 per cent,and the, years purchase between. 12 and 16 years. In some; case, it may go below 6 per cent and in many instances, justify a higher tjian 8 per cent. This is in case of new shops or establishmets nqt subject tq rent control. Security qf shops and business premises will generally vary between 6 to 9 per cent,and the, years purchase between. 12 and 16 years. In some; case, it may go below 6 per cent and in many instances, justify a higher tjian 8 per cent. "according tq the learned Author, the following are the important factor to be-taken into consideration : (i) type of premises; (ii) continuity qf rent which is invariably fixeds to fortunes Off trade and'commerce; (iii) the amqunt of rent; current rent must be treated with great caution. . , parks on Principles arid Practice, of Valuations, (4th Edn. pp. 15-16) has stated as tq how the multiple figure shquld ba determined for the purpose fo capitalisation qf the income-Parks says: when a person buys a property he does it for two purposes :- 1. To obtain an annual income, and 2. To obtain security for his capital. ( 7 ) IF a property. produces a, net return of Rs. 1,000 p. a,, and a purchaser/ desires 6 per cent return on his capital he, will Day Rs. 1,000 X 100/6=rs. 1,000 x 16. 6=rs, 16,666. maximum for the property. If he pays more, he will npt have 36 parcent return on his capital If he pays less he will obtain 3 greater return than 6. The multiplier, of the net rent to obtain capital value, is known as the year's purchase. The security of the rent which a property produces is reflected in the years purchase. For valuation purposes, therefore, security and year's purchase are the same. Security in the form of percentage yield of capital is found by Rent/capital x 100 and year's purchase is found by dividing capital by rent. Year's purchase of a, security is a very arbitrary figure. One person may be satisfied with a 4 percent return on his capital whilst another person may want a 7 per cent return. For the purpose of Valuation the Valuer is mainly concerned with market value and the percentage he Applies must be the equivalent to wha a reasonable and prudent business man would expect. One person may be satisfied with a 4 percent return on his capital whilst another person may want a 7 per cent return. For the purpose of Valuation the Valuer is mainly concerned with market value and the percentage he Applies must be the equivalent to wha a reasonable and prudent business man would expect. ( 8 ) INTEREST may be termed, the payment made for the use in producrtion of capital - a valuer is mainly concerned with land and buildings, therefore, interest is the; payment made, for the use of land and buildings, and it takes the form of rent. People will pay rent for a building because they received something in return. It may be a place from, which he will transact his business, or it may be for a, place to live in with his family. He knows that if he, did not give, the owner some, reward for his capital-these facilities would not be available to him. Interest or rent is not merely a payment for the use, of capital, but it is a payment for the temporary control of capital, in general If a person invests in a highly speculative, concern such as new gold mining shares, he will expect a high rate/of interest on the capital invested, because he knows that there is no safeguard that the capital will not depreciate, or, that the, interest paid will be maintained. Whereas, if he invested his money in Government securities, he knows that his money is as safe as it possibly can be, maintained. His money haying all the safeguards that can be expected he will be satisfied with a, moderate return on his capital. It is, therefore that Government Securities form a datum line from which all other forms of investments are compared the return which an investor will expect from property will depend on the characteristics of the income as compared to that of the ideal security. It is, therefore that Government Securities form a datum line from which all other forms of investments are compared the return which an investor will expect from property will depend on the characteristics of the income as compared to that of the ideal security. He will consider if the income, is secure; if there is the possibility of it being maintained for a, considerable, period; if the income is liable to fluctuate owing to the, vagaries of trade; if the, income is liable to increase or be, augmented by any means; if the costs of collection are In a reasonable, proportion to the amount collected; if the income can be collected easily and this will depend on the, class of tenants likely to Occupy the, premises; if he, wishes to realise his capital at any time is there a, reasonable chance of selling the property without making a, loss. Haying considered all these factors he will then consider what return would be reasonable and that figure will represent the security Of the incoma from which the, year's purchase can be, easily calculated. ( 9 ) EVERY case will have, to be, considered on its merits, all the advantages and disadvantages must be. carefully considered, and no person, can lay down hard and fast rule which will govern every type of property. All that can be given are figures which will guide and. help a value to arrive at a correct result, but much depends of that diligence, and integrity of the value when doing his work. . . . The important factors that must be considered while estimating ,the number of year's purchase value, according to Parks are:1. Location of the premises; 2. Type of premises; 3. The continuity of the rent; 4. The amount of rent. The continuity of the rent is one of the most important factors to be considered. The estimate for deduction is to be made; from the gross rent can mostly be made from actual figures and data available but estimating the years purchase can only be done by the expert who has studied the class of property. The security of rents yielded by properties in a commercial area is inferior to that of rants of houses in a, residential area. Fortunes of trade and commerce fluctuate greatly summing up the earlier discussion, this is what Parks has said at page 22" To summarise, generally. The security of rents yielded by properties in a commercial area is inferior to that of rants of houses in a, residential area. Fortunes of trade and commerce fluctuate greatly summing up the earlier discussion, this is what Parks has said at page 22" To summarise, generally. Residential house, property according to the circumstances and particulars of each case, will vary from a 5 to 7 per cent security and the year's purchase will vary between 13 and 20. " ( 10 ) ON the question of valuation pf shops and business premises, this is what the same Author has said :" The results of many hundreds of valuations I have made on the rental basis, confirm the, proposition that the higher the, value the less the year's purchase. Experience has shown that if 6 percent is fair for a property worth Rs. 50,000, 6 percent would be, fair for a property worth 1 to 1. 5 lakhs, and 7 to 8 percent for properties of Rs. 3 and 5 lakhs respectively, TO sum up briefly, security of shops and business premises will generally vary between 6 and 8 per cent and the years purchase between 12 and 16 and whilst the security will very rarely, if ever, go below 6 per cent it may in many instances justify a higher percentage, than 8 per sent. ( 11 ) IN Channaveerappa v. Land Acqn. Offr a case under the Land acqisition Act-this is what we have, said"what is the proper multiple to be applied for arriving at the market value of any land if the Income Method Valuation is adopted depends upon the nature of the agricultural land and the kind of crop-crops raise on it. There is no invariable, rule that in the absence of evidence of sales of similar lands and the, only evidence, let in is regarding the net income, that net income should be multiplied by 20 in order to arrived at the market-value. What multiple, should be applied depends on the evidence as to the rate of return a, purchaser of an areca garden generally expects on his investment. The multiple of 20 is applied where the rate of return expected is 5 per cent on the capital invested. " ( 12 ) IN Spl. Land Acqn. What multiple, should be applied depends on the evidence as to the rate of return a, purchaser of an areca garden generally expects on his investment. The multiple of 20 is applied where the rate of return expected is 5 per cent on the capital invested. " ( 12 ) IN Spl. Land Acqn. Offr, v. Siddalingiah the principles laid dqwn in Channaveerappb s case (3) were followed and it was reiterated by us that there is np universal rule, that when the, capitalisation of income method is followed, the average: ne,t annual income has to be multiplied by 20. The multiple, to be, adopted is a matter entirely resting on the, evidence as to what return investors in coffee estates expect on their investments the Income-tax Appellate Tribunal, while, correctly stating the principles of valuation, has failed to give its finding as to the rate of return an investor in this. class of property would expect. It, is seen from the order of the Tribunal that in the case of the very assesses the Wealth Tax Officer has valued the, assessee's properties in thq Raja, Market by adopting the multiple of 17. The Wealth Tax assessments were for the; assessment year-1957-58 and subsequent years. When the Wealth Tap: Officer had determined the fair market-value by multiplying the net annual rent by 17, no, reasons have been given by the, Tribunal hold that the multiple of 10 is justified for the year 1953-54. ( 13 ) THE Tribunal, in our judgment, has fallen Into an error when it took into consideration the estimated cost of construction of the buildings and the sale of other sites near about the place where the. property is sltuatted factors (i) to (v) which were taken into account by the Tribunal and to which we have already made reference in this, judgment, are not relevant for arriving at the number of year's purchase value. Gulanikar in his Book referred to earlier has stated that the income method of valuation is ideally suited to the valuation of commercial buildings and that the rent realised is not generally related to the costs of construction in para 14 of its order the Tribunal has rightly said that the cost of construction of the building to the assesses has. no doubt no relation to the market-value of that building, if sold in the open market having thus stated the principle correctly, the Tribunal fell into an error when it rested its decision on the estimated cost of construction given by the assesses in his Incametax Assessment proceedings. The Tribunal should have determined the rate of return, which an investor in the class of property would expect. The number of year's purchase value has to be arrived on the basis of the rate of return expected. From a perusal of the order of the Tribunal we are of the opinion that the determination of the year's, purchase value was made without arriving at the rate; of return which an investor in the class of property would expect in the year 1954 in Bangalore City. The factors taken into consideration by the Tribunal are irrelevant for the purpose of that determination. It should have also taken. into consideration the method of valuation of the very buildings in the assessment for wealth Tax for the assessment year 1957-58. The adoption of the multiple of 10 is patently arbitrary. We have already referred to what Parks has stated on this question. According to the learned a. uthor an investor would expect between 6 and 8 percent return and the year's purchase would be between 12 and 16. Same is the view taken by gulanikar. There wqs. nq material for the Tribunal to support its conclusion that it is reasonable to adopt the multiple pf 10 Our answer to question No. (i) is therefore; in the negative and in favour Of the assessee The triibunal has to re-hear he appeal and determine the rate of return which an investor in this class of property would expect in Januarv 1954. The assessee is entitled to his costs. Advocate's fee Rs. 250. --- *** --- .