Controller Of Estate Duty, West Bengal v. Radha Devi Jalan.

The Judgment of the Court was delivered by

Banerjee, J.:— This is a reference under section 64(3) of the Estate Duty Act, 1953.

2. The question of law referred to this court is:

“Did the Tribunal, on the facts and in the circumstances of the case, adopt the proper basis for assessment of the principal value of premises No. 226/1, Lower Cirqular Road, Calcutta?”

3. The circumstances under which the above quoted question comes up for consideration are hereinafter stated in brief: Premises No. 226/1, Lower Circular Road, Calcutta, belonged to one Kamala Prasad Jain, who died on December 21, 1959, leaving a will by which he appointed his wife, Sm. Radha Devi Jalan, as the executrix. In making the return under the Estate Duty Act, the executrix, as the accountable person, showed the value of the said premises at Rs. 1,35,000. This was apparently done on the basis of the annual value of the premises, under the Calcutta Municipal Act, which was Rs. 13,608. The Assistant Controller of Estate Duty was of the opinion that the annual value was too low and should not be utilised for the purpose of valuing the premises. He formed this opinion on the basis of local inspection of the premises from outside. In the report of local inspection, he expressed the following view:

“…It appeared to be a first class building in an aristocratic locality and in a very good state. It is a two-storeyed house of first-class materials with an attractive lawn in its front.”

4. It is not disputed that the premises is in the occupation of an old tenant of the name of M.L Khaitan, paying a monthly rent of Rs. 1,600 therefor. It is also not disputed that the premises is covered by a mortgage to Messrs. Bata Shoe Company Ltd.

5. The Assistant Controller of Estate Duty at first adopted the “land and building method” of valuation for the purpose of evaluating the property. The calculation made by the Assistant Controller, on that basis, is herein-below set out;

Rs. Rs. “Land: 32 cottahs at the rate of Rs. 11,000 per cottah on average 3,52,000 Structure from a rough estimate (in the absence of exact particulars): the building stands on about half a Bigha (10 cottahs), i.e, 7,200 sq. ft., say, 7,000 sq. ft. Cost at the rate of Rs. 20 (for ground floor) and Rs. 15 (for first floor), i.e, Rs. 35 per sq. ft. 2,45,000 The building is in a very good state of maintenance. Hence, depreciation of only 10 per cent, is allowable 24,500 2,20,500 5,72,500

6. Considering, however, the fact that the house was under a mortgage to Messrs. Bata Shoe Co. Ltd., the Assistant Controller took the value of the property in the round figure of Rs. 5,00,000. The Assistant Controller then proceeded to value the property on rental basis. In that context, he observed as follows:

Rs. “Annual Municipal value Rs. 13,603 is clearly too low to be taken as an indication of the value of the building Rent received annually Rs. 19,200, i e., Rs. 1,600 per month is also too low for a house of this size and quality. Fair rent of the house can be taken at Rs. 3,000 per month if, not more, judging by the prevalent rates in these areas. Hence, fair rent estimated at Rte ?6,000 per annum. 36,000 Less: 25 per cent expenses…. 9,500 27,500 20 times which works out at… Rs. 5,50,000.”

7. From the aforesaid figure, he de: ted the outstanding liability under the mortage of the property to Bata Shoe Co. Ltd and arrived at the valuation of Rs. 5,00,000 for the premises. According to the calculations by the Assistant Controller, the principal value of the property, whether estimated on the land and building method or under the rental value method, yielded the same result.

8. Aggrieved by the order, the accountable person preferred an appeal before the Appellate Controller of Estate Duty, who partly allowed the appeal with the following observation:

“In determining the market value of the property the Assistant Controller considered both the rental aspect as well as the cost of land and cost of construction of the building aspect. Actual rent in this case is Rs. 1,600 per month or Rs. 19,200 per year. The question is whether this is a maintainable net rental income. Here, we have to examine whether this rent of Rs. 1,600 would be maintained in future having regard to the condition of the property, the locality and facilities available at present. I am of the opinion that the actual rent is indeed a privileged rent, because the tenant has been occupying the house for a number of years. Moreover, the house is mortgaged to Messrs. Bata Shoe Company Limited, of which the tenant is a director. In this locality properties of the same type would fetch Rs. 3,000 per month. I would, however, estimate the fair maintainable rental income of the property at Rs. 30,000 per year. Deducting therefrom Rs. 7,500 as outgoings, the net rental income would come to Rs. 22,500. Multiplying this by 20 times, the value of the property would come to Rs. 4,50,000. But I would determine the value of the property at Rs. 4,00,000 having regards to the fact that the house is tenanted and is also mortgaged. If, alterna tively, we proceed on the cost and building method, the same value would come.”

9. In the view taken, the Appellate Controller allowed the appeal to this extent that he reduced the principal value of the property by Rs. 1,00,000.

10. Dissatisfied with the order of the Appellate Controller, the accountable person preferred a second appeal before the Appellate Tribunal. The Tribunal allowed the appeal on grounds which will appear from the extraction from their judgment quoted below:

“There is nothing to show that the rent was not a fair rent for the house when the tenancy was created. It would not only be unrealistic but also contrary to law to compute the value of the house on the basis of the rent it could have fetched if it had been let out to some other tenant on the date of death. While the consideration might be relevant for the assessment of the bona fide annual value of a property under section 9(1) of the Income-tax Act, it is irrelevant for the purpose of estimating the principal value of the property under section 36(1). In this particular case, therefore, the valuation of the property would be the amount which a person would pay for it on the date of the death of the last holder, viz., December 31, 1959, if he were to purchase it subject to the mortgage of Messrs. Bata Shoe Company Limited and subject to the tenancy of the managing director of the said company. The intending buyer must take into consideration the fact that the tenancy is an old one and the prospect of enhancing the rent by all legal means was remote and that his eviction was remoter still. On the basis of the realities, a fair method of estimating valuation of the property would be the rental basis. Taking the actual rent of Rs. 1,600 per mensem as the basis, 33 ⅓% as the outgoing and 17 as the years purchased, which gives a rent security of nearly 6 per cent on the outlay, the value of the house is estimated at Rs. 2,20,000 in round figures for the purpose of payment of estate duty.”

11. Thus, the appeal succeeded in part and instead of a valuation of Rs. 1,35,000, as contended for by the accountable person, the principle value of the property was determined by the Appellate Tribunal at Rs. 2,20,000.

12. The Controller of Estate Duty became aggrieved by the order made by the Tribunal and obtained a reference to this court on the question of law set out at the beginning of this judgment.

13. Mr. B.L Pal, learned counsel for the revenue, did not dispute the proposition that, in estimating the principal value of any property, under section 36(1) of the Estate Duty Act, the Controller may proceed-on opinion basis but that opinion must be objectively formed. His contention was that was the duty of the Controller to find out the price obtainable in the open market and an opinion thus formed must bind the assessee. In order to appreciate the scope of this, argument, it is necessary for us to refer to the language of section 36(1) which reads as follows:

“The principal value of any property shall be estimated to be the price which, in the opinion of the Qontreller, it would fetch if sold in the open market at the time of the deceased's death.”

14. According to Mr. Pal, the duty of the Controller was to determine the price that a willing purchaser would pay to a willing seller for the property, having due regard to its existing condition and its potential possibilities, laid out in its most advantageous manner. In making this submission, he drew considerable inspiration from certain observations by Shelat J., in Raghubans Narain Singh v. Uttar Pradesh Government A.I.R 1967 S.C 465., made in the context of determination of compensation under the Land Acquisition Act, 1894. He next contended that the expression “open market” meant a hypothetical market in which everybody had a right to make an offer for purchase of the property, as contrasted to a “limited market”, in which a few were given the liberty to make bids or a “black-market” which was a term euphemistically used to commercial transactions entered into between parties in defiance of law. In making this last submission, Mr. Pal particularly relied on the judgment of the Supreme Court in Corporation of Calcutta v. Sm. Padma Devi A.I.R 1962 S.C 151.. Using the above propositions as his springboard, Mr. Pal further argued that the Tribunal was in error in sticking to the contractual rental of several years antiquity and in failing to find out the value that the property would fetch if sold in the open market at the time of the death of the deceased.

15. In our opinion, there is considerable misconception of legal position involved in the argument of Mr. Pal. The contractual rent of Rs. 1,600 per month was payable by the tenant in respect of a building, which at the material time was governed by the West Bengal Premises Tenancv Act. 1956. Under the operation of the various rent restrictions Acts, which have been operating in this State for now well over quarter of a century, landlordshave lost the right of letting out their houses at any rent they choose and of evicting tenants on such grounds as appeal to them. Contractual relationship between landlords and tenants have given way to statutory relationship imported by successive rent restriction Acts and the position now is that houses may be let out only at ‘fair rents’ and at no more. If premises can no longer be let out at such rent as the landlord may expect or aspire, then however costly the premises may otherwise be, their value have to be deter mined on the basis of the limitations imposed by the statute. This consideration weighed with the Supreme Court in Corporation of Calcutta v. Padma Debi in determining the annual value of a premises under section 127(a) of the Calcutta Municipal Act, 1923. What happened in that case was that the respondents were the owners of.premises No. 296, Bowbazar Street, Calcutta. The Corporation of Calcutta fixed the annual value of the said premises at a sum of Rs. 14,093 and directed the same to take effectfrom the second quarter of 1950-51: In fixing the annual value, the Corporation proceeded on the basis of Rs. 1,450 as the monthly rental value of the premises. On June 20, 1950, notice of the assessment, based on the said annual valuation, was served on the respondents. Respondent No. 1 filed an objection to the said assessment, under section 139 of the Act. Meanwhile, under the West Bengal Premises Rent Control (Temporary Provisions) Act, 1950, the standard rent of the said premises was fixed by the Rent Controller at Rs. 350 per month, with effect from April, 1951, and at Rs. 632-8-0 per month with effect from August, 1951. One of the objections raised by respondent No. 1 was that the Corporation had no power to fix the annual valuation at a figure higher than the standard rent. This objection was disallowed by the Corporation. Being aggrieved by the said order, respondent No. 1 filed an appeal before the Court of Small Causes, Calcutta, which allowed the appeal and fixed the annual valuation, for the purpose of assessment at Rs. 6,831. This was on the basis of the standard rent of Rs. 632-8-0 per month. The Corporation of Calcutta questioned the correctness of the said judgment by preferring an appeal to the High Court at Calcutta. The High Court, by a majority, agreed with the Small Causes Judge dismissing the appeal. Thus, the matter went before the Supreme Court. In dismissing the appeal, the Supreme Court observed:

“‘The word ‘reasonably’ in the section (meaning section 127(a) of the Calcutta Municipal Act) throws further light on this interpretation. The word ‘reasonably’ is not capable of precise definition. ‘Reasonable’ signifies ‘in accordance with reason’. In the ultimate analysis it is a question of fact. Whether a particular act is reasonable or not depends on the circumstances in a given situation. A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship, and such other considerations may take it out of the bounds of reasonableness. Equally, it would be incongruous to consider fixation of rent beyond the limits fixed by penal legislation as reasonable. Under the Rent Control Act, the receipt of any rent higher than the standard rent fixed under the Act is made penal for the landlord. Section 3 of the said Act says that any amount in excess of the standard rent of any premises shall be irrecoverable notwithstanding any agreement to the contrary. Section 33(a) thereof provides, inter alia, that ‘whoever owingly receives, whether directly or indirectly, any sum on account of the rent of any premises in excess of the standard rent’ will be liable to certain penalties. ‘Standard rent’ has been defined in section 2(10)(b) to mean that ‘where the rent has been fixed under section 9, the rent so fixed; or at which it would have been fixed if application were made under the said section’. A combined reading of the paid provisions leaves no room for doubt that a contract for a rent at a rate higher than the standard rent is not only not enforceable but also that the landlord would be committing an offence if he collected a rent above the rate of the standard rent. One may legitimately say under those circumstances that a landlord cannot reasonably be expected to let a building for a rent higher than the standard rent. A law of the land with its penal consequences cannot be ignored in ascertaining the reasonable expectations of a landlord in the matter of rent. In this view, the law of the land must necessarily be taken as one of the circumstances obtaining in the open market placing an upper limit on the rate of rent for which a building can reasonably be expected to let.

16. It is said that section 127(a) does not contemplate the actual rent received by a landlord but a hypothetical rent which he can reasonably be expected to receive if the building is let. So stated the proposition is unexceptionable. Hypothetical rent may be described as a rent which a landlord may reasonably be expected to get in the open market. But an open market cannot include a ‘black market’, a term euphemistically used to commercial transactions entered into between parties in defiance of law. In that situation, a statutory limitation of rent circumscribes the scope of the bargain in the market. In no circumstances the hypothetical rent can exceed that limit.”

17. The same view appears to have been expressed by the English High Court in Priestman Collieries Ltd. v. Northern District Valuation Board. In that case, their Lordships had to interpret section 10 of the Coal Industry (Nationalisation) Act, 1946, by which provision was made for the payment of compensation in respect of coal mining undertakings (“transferred interests”) transferred to the National Coal Board. Section 13 of the Act provided for valuation of transferred interests, and by sub-section (4) of that section it was provided that for that purpose the value of an undertaking “shall be taken to be the amount which it might have been expected to realize if this Act had not been passed and it had been sold on the primary vesting date in the open market by a willing seller to a willing buyer…” It was also provided by sub-section (5) of the section that on the assumed sale “…regard shall be had to all relevant circumstances including the state of things in which transferred interests subsisted at the date of their vesting in the Board.” Morris J., in delivering the judgment of the court, observed in that context:

“In the opinion of the court, the phrase ‘open market’ in section is sub-section (4), of the Act does not contemplate a purely hypothetical market which is to be regarded as exempt from any restrictions imposed by law. The section does not postulate conditions wholly divorced from reality………Any restriction or limitation imposed on him by the law or imposed on any willing buyer must be recognised and taken into account.”

18. Thus, the position in law is that if there had been no rent restriction law in operation, the Controller could make a fair and an objective estimate of the rent which the property might have fetched if a willing lessor wanted to let out the property to a willing lessee. The operation of the rent restriction Acts made all the difference. In estimating the rent at which the property was capable of being let out, the Controller was bound to take into account the restrictions imposed by the rent restriction Acts and to arrive at the figure of fair rent accordingly. This is what the Controller and the appellate authority both failed to do and thus erred. The Appellate Tribunal took into consideration this aspect of the matter and, in our opinion, very rightly.

19. Faced with the authorities to which reference has already been made, Mr. B.L Pal, learned counsel for the revenue, in his fairness, did not dispute that in arriving at the figure of fair rent of the property regard shall have to be had to the provisions of the West Bengal Premises Tenancy Act. He, therefore, reframed his line of argument and contended that the provisions of the West Bengal Premises Tenancy Act permitted increase in the contractual rent, agreed upon years ago and the Tribunal should have taken that fact into consideration.

20. Now section 8 of the West Bengal Premises Tenancy Act, 1956, defines fair rent. Mr. Pal submitted that clause (e) of section 8(1) applied to the instant case. That clause reads as follows:

“Where the provisions of clause (a) or clause (b) or clause (c) or clause (d) do not apply, such rent as would be reasonable having regard to the situation, locality and condition of the premises and the amenities provided therein and where there are similar or nearly similar premises in the locality having regard also to the rent payable in respect of such premises:

Provided that in fixing such rent the Controller shall in no case allow an increase of more than 10 per cent, over the existing rent, if any, of such premises.”

21. Mr. Pal submitted that the Controller should have taken the fair rent of the premises at Rs. 1,600 plus Rs. 160 per month, namely, Rs. 1,760, and then capitalised the same in order to arrive at the estimated value of the property. This argument, in our opinion, is unworthy of being upheld. The Tribunal found that there was nothing to show that the rent was not a fair rent for the house, when the tenancy was created. If the original rent was not an unreasonable rent, we do not have materials which go to show that the rental merited an increase under clause (e) of section 8(1). Then again, the question referred to us merely seeks our advice on the point whether the Tribunal adopted the proper basis for assessment of the principal value of the property. The frame of the question may not be wide enough to include the further point, namely, that.eveir though the Tribunal might have adopted the proper basis, namely, the basis of controlled rent, they might have made additions on the controlled rent under clause (e) of section 8(1), in order to arrive at the principal value of the property. The original contractual rent which was fair, in our opinion, went through a statutory baptism by reason of the provisions of the rent restriction Acts and that rent cannot be disturbed, in the absence of facts which are contemplated in clause (e) of section 8(1).

22. We need now notice the last branch of the argument of Mr. Pal. He contended that, on the land and building method, the value of the property came up to Rs. 5,00,000, according to the Controller, and to Rs. 4,00,000 according to the Appellate Controller. He submitted that the Tribunal was in error in not taking into consideration that method of valuation and in depending upon the rental method of valuation wholly. We are unable to uphold this contention of Mr. Pal. In the first place, he is not strictly right in his contention that the Tribunal was oblivious of the land and building method adopted by the Assistant Controller and the Appellate Controller. In paragraph 2 of the order of the Appellate Tribunal that valuation was noticed. The Tribunal, however, was of the opinion that on the basis of the realities, the fair method of estimating the valuation of the property would be the rental basis. In this opinion the Tribunal was not inherently wrong. When a person buys a property, he does so for two purposes, (a) to obtain an annual income, (b) to obtain security for his capital. If the property was merely a vacant land, it might be developed and made to yield such income, as it was capable of, in a metropolitan area where some sort of scarcity for accomodation prevails. The property was, however, burdened with a tenanted house and the income therefrom was controlled by a statute. This control on income was bound to react on the value of the property and application of the land and building method would not have been a proper method in the instant case. Further, the land and building method as adopted by the Assistant Controller and the Appellate Controller was somewhat an off-hand method. The valuation was made on a personal inspection of the property by the Assistant Controller from outside and on his subjective opinion that it was a first class building. The Assistant Controller was not sure of the area which this structure covered but merely made a rough estimate of it. Wherefrom he got the per cottah land value and per square foot rate of construction do not appear. If the Tribunal disregarded this off-hand method of valuation, we do not find fault with the Tribunal.

23. Lastly, in case of buildings, which are in possession of tenants and the tenants cannot either be evicted or the rent payable by them enhanced, except in accordance with the provisions of the Rent Control Act, the only appropriate method of valuation is to capitalise the annual rent by certain number of years' purchase. The method of valuing the land and the building separately and adding up the values would be improper in such cases, because that would ignore the impact of the Rent Control Act on the value of the land and the building. This is the view which was expressed by the Mysore High Court in Commissioner of Wealth-tax v. V.C Rama-chandran and we respectfully agree with the; view.

24. The arguments made by Mr. Pal all fail. We, therefore, answer the question referred to us in the affirmative.

25. The accountable person is entitled to costs of this reference.

Roy, J.:— I agree.

Question answered in the affirmative.