The Judgment of the Court was delivered by

Ramanujam, J.:— The following common question of law has been referred to this court by the Income-tax Appellate Tribunal, Madras Bench, for its opinion:

“Whether, on the facts and in the circumstances of the case, and having regard to the provisions of section 7 of the Wealth-tax Act, the Appellate Tribunal was right in holding that the surplus lands belonging to the assessees under the Tamil, Nadu Land Reforms (Fixation of Ceiling on Land) Act, 1961, should be valued only on the basis of the compensation receivable under the said Tamil Nadu Act?”

2. These references relate to the wealth-tax assessments made on various assessees determining the wealth as on April 13, 1971, the valuation date, at various figures. The dispute between the Revenue and the assessees relate to the determination of their farm wealth. During the assessment years, the assessees owned agricultural lands as detailed below:

Assessee Retained lands Surpuls lands Total acres Wet lands Dry lands Wet lands Dry lands Wet lards Dry lards K.S Ranganatha Mudaliar 14-82 28-19 102-89 —— 117.71 28.19 K.S Bakthavatsala Mudaliar 28-40 15-00 114-80 —— 143-20 15-00 K.S Rajagopala Mudaliar 20-74 23-00 48-90 0-42 69-64 23-42 K.S Srinivasan, Minor 21-67 3-93 59-59 —— 81-26 3-93 K.S Vasudava Mudaliar 22-82 4-35 105-38 27-45 128-20 31-80

3. The WTO valued all the lands within the holding of each of the assessees at the rate of Rs. 3,000 per acre for wet lands and at the rate of Rs. 1,000 per acre for dry lands on the ground that under the W.T Act the assets will have to be valued at the prices which the lands will fetch if sold in the open market, irrespective of the fact whether the holding of each of the assessees is or is not in excess of the ceiling fixed under the Tamil Nadu Land Reforms (Fixation of Ceiling on Land) Act, 1961 (hereinafter referred to as the “Ceiling Act”). Before the WTO, the assessees had contended that in relation to the lands which they are holding in excess of the ceiling area, the valuation should be based on the compensation that they will get from the Government in relation to those lands. However, this contention was negatived by the WTO. Aggrieved by the valuation adopted by the WTO, the assessees filed appeals before the AAC who, however, agreed with the contention of the assessees and fixed the value of the lands rendered surplus by the Ceiling Act at Rs. 1,650 per acre for wet lands and at Rs. 900 per acre for dry lands as per the rate of compensation given by the Government. For the rest of the lands, namely, the lands retained by the assessee within their ceiling area, the AAC confirmed the value adopted by the WTO at Rs. 3,000 per acre for wet lands and at Rs. 1,000 per acre for dry lands.

4. The Revenue took the matters in appeal to the Income-tax Appellate Tribunal contending that in view of s. 7 of the WI. Act, 1957, which required the value of an asset to be estimated to be the price which, in the opinion of the WTO, it would fetch if sold in the open market on the valuation date, the WTO has no other alternative except to adopt the said basis for valuation of all the lands, that the land ceiling restrictions should not be taken into consideration, and that the compensation that would be awarded by the Government for taking over the excess lands cannot enter into in the valuation of the lands as per s. 7. The Tribunal having considered the rival submissions, held that, in determining the value of farm wealth as per s. 7 of the W.T Act, as the restrictions brought about by the Ceiling Act in so far as the excess lands over and above the ceiling area of each of the assessees are concerned will have a depressing effect on the marketability of the lands, the open market in such a case has to be judged from the point of view of such buyers who are not hit by the said Ceiling Act and who alone will be able to purchase large areas of land as in this case and that, therefore, the market value in the case of retained lands cannot be equated to the market value of the lands in excess of the ceiling. In this view, the Tribunal upheld the orders of the AAC.

5. Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference to this court on the question set out above.

6. According to the learned counsel for the Revenue, the WTO while valuing the lands has to proceed only on the basis of s. 7 of the W.T Act without reference to the provisions of the Ceiling Act, that he is not bound to accept the compensation fixed by the Government for the excess lands as the basis for fixing the value of the lands under the W.T Act and that, in this case, both the AAC and the Tribunal had erred in valuing the excess lands at the compensatory value fixed by the State Government. It is contended that, on behalf of the Revenue, relying on the decisions of the Supreme Court in Ahmed G.H Ariff v. CWT, [1970] 76 ITR 471 and Purushottam N. Amarsey v. CWT, [1973] 88 ITR 417, that when the statute uses the words “if sold in open market” in s. 7(1) of the W.T Act, it does not contemplate actual sale or actual state of the market but only enjoins that it should be assumed that there is an open market and the property can be sold in such a market, that it is on that hypothetical basis the value has to be found out, and that, as such, the restrictions on the sale of surplus lands have all to be ignored and a hypothetical market has to be assumed. According to the Revenue, even though the assessees are prohibited from selling the excess lands under the provisions of the Ceiling Act, the WTO is entitled to proceed on the basis that the lands are saleable in the open market and determine the price which they will fetch in such a market. Reliance is also placed in support of that submission on the decision of this court in Rathinasabapathy Chettiar v. CWT, [1974] 93 ITR 555, to which one of us was a party. In that case, the question arose as to the valuation of the shares in a private company. The articles of association had imposed certain restrictions both on the transferability as well as the price of the shares. It was contended on behalf of the assessee that in view of the restrictions contained in the articles of association of the company on the transfer as well as on the price for which they could be sold, the shares could be valued only at their face value and that the shares are not at all saleable in the market, while the Revenue contended that the restrictions on the transfer of shares and on the price for which they could be sold are all to be ignored and that it should be assumed that the shares are freely available for sale in the open market without any such restrictions in view of the wording of s. 7(1) of the W.T Act. This court took the view that the restrictions contained in the articles of association on the transfer and on the price for which the shares could be transferred has to be ignored and the transferability in the open market has to be assumed for the purpose of valuation, but that the market value of the shares have to be depreciated to a certain extent having regard to the said restrictions contained in the articles of association. It is no doubt true that the said decision supports the case of the Revenue, to this extent, that even if there is a prohibition under the Ceiling Act against the transfer of lands, still the said lands should be taken to have a hypothetical market and the price they will fetch in the market will have to be taken into account as per the provisions of s. 7 of the W.T Act. But even as per that decision, the further question is whether the restrictions contained in the Ceiling Act will have to be taken note of for giving due allowance in the price of the lands in view of the depressing effect those restrictions will have on the market price.

7. It cannot be disputed that the restrictions and prohibitions will have the effect of depressing the value which the lands would fetch if they were free from the said restrictions and prohibitions. Though we have to assume a market for the lands, in determining the market value of the lands, the restrictions and prohibitions contained in the Ceiling Act have to be taken note of and the value of the lands with all these restrictions and prohibitions should have to be determined. If we ignore the restrictions and prohibitions contained in the Ceiling Act in valuing the excess lands, then that would be valuing an asset differently in content and quality from that actually owned by the assessees. We are, therefore, of the view that all the lands have to be valued only after taking note of the restrictions and prohibitions which will have the effect of depressing the value, which the lands would fetch if sold free from any restrictions and prohibitions.

8. This view of ours finds support from the decision of the Supreme Court in CWT v. Sikand, [1977] 107 ITR 922. In that case, the question arose as to how the assessee's leasehold interest in a plot of land has to be valued. Clause 13 of the lease deed had provided that if the lessee transfers his leasehold interest, the lessor will be entitled to claim and recover a portion of the unearned increase, that is, the difference between the premium already paid and current market value of the land at the time of the transfer. The Supreme Court held that the said covenant ran with the land and it would bind whosoever was the holder of the leasehold interest for the time being and that the said covenant which is in the nature of a burden on the leasehold interest had the effect of depressing the value which the leasehold interest would fetch if it was free from the burden or the disadvantage attached to the leasehold interest and that when the leasehold interest for the land had to be valued, the burden or disadvantage attached to the leasehold interest has to be duly discounted in determining the price which, the leasehold interest would fetch. The Supreme Court in the course of its decision has referred to the decision of the Judicial Committee in Corrie v. MacDermott, [1914] AC 1056 (PC), with approval. In that case, the question arose as to how certain land granted by the Government of Queensland to the trustees of the Acclimatisation Society of Queensland to be used only for the purpose of the society should be valued on resumption, by the Government. Under the grant, the trustees had no general power of sale but they were by statute authorised to sell any part of the land to the local authority and to the National Agricultural and Industrial Association. It was held by the Judicial Committee that in view of this restriction on the nature of the interest of the trustees in the land, the trustees were not entitled, upon resumption of the land by the Government, to be paid unrestricted freehold value of the land but only the value of the land to the trustees under the conditions upon which they held it. The Judicial Committee pointed out that, if the owner holds the property subject to restrictions, it is a necessary point of enquiry how far these restrictions affect the value and the property cannot be valued as if it were “unrestricted in any way”. In Khorshed Shapoor Chenai v. Asst. CED, [1980] 122 ITR 21 (SC), which was a case arising under the E.D Act, the Supreme Court held where the assessee's land has been acquired under the Land Acquisition Act, the assessing authority will have to estimate the value of the property acquired having regard to its peculiar nature, its marketability and the surrounding circumstances including the risk or hazard of litigation looming large at the relevant date.

9. According to the learned counsel for the Revenue, the AAC as well as the Tribunal have fixed the value for the excess lands taking into account the compensation that would be awarded by the State Government under the provisions of Schedule III to the Act and not on the basis of the open market price after allowing a discount for the restrictions and prohibitions contained in the Ceiling Act. The value fixed by the Government for the lands can be taken as a replacement value for the asset in question which can be taken as the approximate market value of the lands as depressed in view of the restrictions and prohibitions contained in the Ceiling Act. The valuation date is April 13, 1971, and, on that date, there was prohibition against the transfer of lands and it is only such of those who are not hit by the Ceiling Act, who will come forward to purchase the lands. Thus the market is open to such restricted buyers only and not wide open to all buyers who wish to buy. Therefore, the market value of the retained lands cannot be equated to the market value of the lands in excess of the ceiling and, it is in this view, the Tribunal, while sustaining the value of the lands fixed for retained lands at Rs. 3,000 per acre for wet lands and at Rs. 1,000 per acre for dry lands fixed a different value for the excess lands at Rs. 1,650 per acre for wet lands and Rs. 900 per acre for dry lands. Thus the reason of the Tribunal is that in the case of excess lands the value cannot be fixed as in the case of lands without such strings attached. Then the Tribunal felt that the scale of compensation fixed by the Government for the taking over of the excess lands would approximate to the amount the lands will fetch in the open market with all conditions and restrictions. Apart from the reason given by the Tribunal that the value of the excess lands will approximate to the compensation to be awarded therefor by the Government, it is well-established that in some special cases compensation has been awarded under the Land Acquisition Act on the basis of the reinstatement value which is assessed on the basis of equally convenient land or premises. Therefore, having regard to the difficulty in arriving at the exact value of the excess lands which are subject to the restrictions and prohibitions on transfers, the method of reinstatement value has rightly been adopted by the Tribunal. In Harish Chandra Neogy v. Secretary of State for India, [1921] 25 CWN 875 and Province Of West Bengal… v. Raja Of Jhargram…., AIR 1955 Cal 392, it has been suggested that in special cases the reinstatement value may be awarded as compensation under s. 23 of the Land Acquisition Act. Normally, the market value of the land is the value which the land if sold in the open market by a willing seller might be expected to realise; such market value is generally ascertained on a consideration of the prices obtained by sale of adjacent lands with similar advantages. If there are no sales of comparable lands, the value must be found from some other way. One method is to take the annual income which the owner is expected to obtain from the land and to capitalise it by a number of years purchase and the capitalised value is then taken as the market value which a willing seller may reasonably expect to obtain from a willing buyer. If this also is not possible, the court can adopt the method of reinstatement value. Thus the determination of the value of the excess lands at Rs. 1,650 per acre for wet lands and Rs. 900 per acre for dry lands as against the rate of Rs. 3,000 per acre for retained wet lands and Rs. 1,000 per acre of retained dry lands appears to be correct.

10. The question is, therefore, answered in the affirmative and against the Revenue. The assessees will have their costs from the Revenue. Counsel's fee Rs. 500 (one set).