Chandrasekhara Menon, J.:— This appeal in a land acquisition matter by the State highlights the question as to how a building should be valued.

2. The facts giving rise to the appeal are as follows:— L.A.R 13/73 before the Principal Sub Judge, Alleppey was a reference for enhancement of compensation in respect of 3.28 Ares of land with improvements therein in Sy. No. 213/13-2-1 in Aroor Village, Shertallai Taluk. The acquisition was for the purpose of widening the National Highway passing through the place.

3. The Land Acquisition Officer valued the land at the rate of Rs. 1700/- per Are and the total value of land has thus come to Rs. 5576/-. The value of trees there was fixed at Rs. 94/- The officer valued the building and other structures at Rs. 12692.30 Together with solatium of 15% and the shifting charges the total value would come to Rs. 21302.10 The owner claimed compensation for the land at Rs. 1250 per cent. He claimed the value of the building at Rs. 70,000/- and the value of trees at Rs. 1500/-. According to the land owner in the building in the property there were 4 rooms fetching rent at R. 20/-, 25/- 17/- and 13/-; the total rental would come to Rs. 75/- per month. On the remaining area another building was constructed in 1968 for the conduct of a lodging and hotel. It contains a large ball, a kitchen with chimney, two big store rooms, 7 rooms for lodgers bath room latrine, urinal and such conveniences. The whole building was electrified and the ceiling was of hard-board. The ball and kitchen constituting the hotel area will fetch a rental of Rs. 225/- it is also alleged that the lodging fetched a rental of Rs. 350/- per month.

4. Before the lower court the claimant was examined as Pw. 1. The court below after consideration of the evidence in the case held that though there is no evidence let in to substantiate the enhanced value claimed for the land, in respect of the building on the basis of the rental the value of the hotel portion of the same can be fixed at Rs. 24,000/- and the value of the shop-rooms portion at Rs. 11880/-. The total valuation of the building was therefore fixed at Rs. 35880/-, which could be taken as valuation of the building and the land. In the result the court passed a decree holding that the respondent-plaintiff is entitled to enhancement of Rs. 17617.70 with 15% solatium. The respondent was also held entitled to interest at 4% from date of dispossession viz., 15-1-72. The parties were directed to give and receive costs in proportion to their respective success and failure.

5. In this appeal filed by the State the contentions are, that the evidence for the income produced by the claimant is only casual and there was no documentary proof with regard to the income of the building. It is contended that enhancement in regard to the value of building had been given by the court below arbitrarily.

6. Though the court below does not positively state, it is more or less clear from the judgment that the court below had proceeded to value the building with the land in which it stands at 16 times the income from the building. It is no doubt true that as regards the income, which in this case is the receipt of rent, there is no documentary evidence let in. But we are not prepared to hold that in arriving at the actual rental of the building it could be said that the court below has committed any mistake warranting interference by this court. However, the main question that was strongly put before us by Sri. V.O John, learned counsel for the State was that in this case the court below has grossly erred in fixing the valuation of the building on the basis of the alleged income from the building According to him the proper mode of valuation should have been the fixation of the land value on the basis of recent (with reference to the date of notification) sale deeds of neighbouring and similar properties and fixation of the building value separately on the basis of costs of construction of the building minus any depreciation in charge on account of its age. He pointed out that in the Award the fixation has been made on the basis of the P.W.D valuation Ex. B2 would indicate that the present value has been found on the basis of P.W.D valuation at Rs. 12659/-.

7. The compensation payable to the owner of the land is the market value which is determined by reference to the price which a seller might reasonably except to obtain from a willing purchaser, but as this may not be possible to ascertain with any amount of precision, the authority charged with the duty to award compensation is bound to make an estimate judged by an objective standard. It is on that basis that it had been held that the potential value of the property should be taken into account. This is because a willing purchaser in fixing the price will take into account the condition of the property not only at the time when it is being purchased, but its potentialities. No doubt the rent which an owner was actually receiving at the relevant point of time or the rent which the neighbouring lands of similar nature are fetching can be taken into account and the value can be fixed by capitalising such rent at certain multiple which should be determined according to the economic factors, like prevailing rate of interest. In many cases this court has held that in the present circumstances 16 times the annual net income would be a reasonable method in fixing the value. However, it has to be noted that this is not a conclusive method.

8. As the Supreme Court has pointed out in Special Land Acquisition Officer, Bangalore v. Adinarayan (AIR. 1959 SC. 429) and subsequently reiterated in Tribeni Devi v. Collector, Ranchi ((1972) 1 SCC 480 : AIR. 1972 SC 1417), the methods of valuation to be adopted in ascertaining the market value of the land on the date of notification under S. 4(1) of the Land Acquisition Act, 1894 (corresponding to S. 3 of the Kerala Land Acquisition Act) are: (i) opinion of experts, (ii) the price paid within a reasonable time in bonafide transaction of purchase of the lands acquired or the lands adjacent to the lands acquired and possessing similar advantages; (iii) a number of years' purchase of the actual or immediately prospective profits of the lands acquired. As the said decision points out, these methods, however, do not preclude the court from taking any other special circumstances into consideration, the requirement being always to arrive as near as possible at an estimate of the market value. In arriving at a reasonably correct market value, it may be necessary to take even two or all of those methods into account inasmuch as the exact valuation is not always possible as no two lands may be the same either in respect of the situation or the extent or the potentiality nor is it possible in all cases to have reliable material from which that valuation can be accurately determined.

9. It was strongly argued before us by Sri. Parameswaran, learned counsel for the respondent that in case of a property as in the present case, the proper method of computation of land value would be taking atleast 16 times the annual income. If that be so, according to the learned counsel, in this case the court below has not erred in favour of the respondent. It could even be said that a rather underestimate has been made by that court. In contending like that he placed strong reliance on the decision of the Supreme Court in State Of Kerala v. P.P.Hassan Koya (1968-3 SCR. 459). It has been said there that in determining compensation payable in respect of land with buildings compensation cannot be determined by ascertaining the value of the land and the break up value of the building separately. The land and the building constitute one unit and the value of the entire unit must be determined with all its advantages and its potentialities. Justice Shah speaking for the Court pointed out therein that it is often difficult to secure reliable evidence of instances of sale of similar lands with buildings proximate in time to the date of the notification under S. 4 Therefore, the method which is generally resorted to 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.

10. It is true that in the particular case where the court was concerned with the case of an acquisition of a unit of land measuring 3911 square feet together with a building standing thereon used for business purposes the court took the view that when the property sold is land with building and when it is difficult to secure reliable evidence of instances of sale of similar lands with buildings proximate in time to the date of notification under S. 4 of the Land Acquisition Act (Central Act 1 of 1894) that in determining the value of such land with building especially when the building is used for business purposes, the method of capitalisation of return actually received could be resorted to. But as Justice Shah was careful to point out there also the objective standard before the court should be what is the value which a willing vendor might reasonably expect to receive from a willing purchaser which is in respect of a building would depend upon the nature of the construction, its age, situation, the amenities available, its special advantages and a host of other circustaoces. As pointed out in (1972) 1 SCC 480 : AIR. 1972 SC. 1417 (cited supra) capitalisation is no conclusive method and also the different methods of valuation do not preclude the court from taking any other special cricumstances into consideration. As stressed therein the requirement in taking into cosideration any special circumstances would be always to arrive as near as possible at an estimate of the market value.

11. In the matter of fixation of value of a building on the basis of rent and captialising the same, it might be noted that the continuity of the rent is an important factor. This is the most difficult part of a valuation of this discription Importance of the localities change, sometimes rapidly and a set of circumstances may arise which can over-night change which may drastically bring down the rent of buildings in the locality. John A. Parks, a chartered surveyor and formerly chief valuer of Calcutta Improvement Trust in his book “Principles and Practice of Valuations (Land and Houses)” point out to an interesting case (at page 24-4th Edn.):

“The Calcutta Improvement Trust Tribunal was hearing evidence regarding the valuation of a Katra in the heart of a business locality. The expert for the referring claimant argued that rents from a Karta were almost equivalent to guilt-edged securities. The expert on behalf of the government argued that this was a speculative concern and should be valued as such. The case was compromised, but the sequel same shortly afterwards. A katra situated within 100 yards had for several years been yielding a gross rent of Rs. 15,000 per month. As soon as Japan came into the war, the majority of the tenants fled, and within two months the gross rent had dropped to Rs. 4000 per month Other shops in the locality continued in business and their vacancies were, in proportion, considesably less. This is not an isolated case, and well illustrates how wrong the expert was, who tried to convince a court that properties of this description were good security.”

12. In Abdulrahimankunju v. State (1954 KLT. 798) a Division Bench of the Travancore-Cochin High Court (Govinda Pillai and T.K Joseph JJ.) held that it is not safe to adopt valuation on a rental basis in respect of a building as in such a case no assessment is possible with regard to the value of the materials used and the period for which the building is likely to exist in a good condition. It was also pointed out therein that with unburned bricks and bamboo rafters, a thatched building can be constructed to fetch a decent rent; but to value such a building for the purpose of awarding compensation on the basis of rental value would be unsafe and improper. Relying on Harichand v. Secretary of State (AIR 1939 PC 235) and Secretary of State v. Narain Khanna (AIR 1942 PC 35) the court said that to arrive at the present value of the building, the proper course would be to find out the cost of constructing a building of this type at the time of the acquisition and then deduct from it the depreciation value on account of the age of the building and also the amount required for repairs to keep the building in a fit condition. The natural way to look at the matter would be to find out the approximate number of years and deduct the quotient as depreciation for each year. In the case of first class buildings no depreciation is to be deducted for 5 years and then 5/6th per cent has to be deducted for every subsequent year. Due allowance has to be made for maintenance and repairs. In the case of second class buildings 5/6th per cent depreciation has to be deducted for each year.”

13. Justice Isaac stated in Rarukutty v. Special Tahsildar & Acquisition Officer, Kozhikode (1973 KLT 573 FB) at pages 578-579-paras 8 & 9:

“We shall now indicate bow unrealistic it would be to apply a uniform rule of capitalising the income for determining the market value of a land with buildings. Suppose A constructs a non-residential building costing rupees three lakhs on a land costing rupees one lakh in a commercial area in a city. He may be getting perhaps 15 per cent return on the investment. Suppose B constructs a residential building on a land, both costing the same amounts, within a Panchayat area. B may not get even 1 percent return on his investment. The market value of A's land and building would be far more than they cost him, but in the case of D it would be much less than his investment. At the same time, no reasonable purchaser would pay a value for A's property on the basis of capitalisation of income, since such a value may have no proportion to A's investment. It is also equally clear that any willing purchaser would be prepared to pay for D's property a much higher value than the value that would be arrived at by capitalisation of income. So the true market value would not be the one arrived at on the basis of income, nor the total cost of the property to its owner Both are relevant considerations; and the court has to decided what a willing vendor might reasonably expect to get for the property concerned from a willing purchaser.

Let us take the case of two buildings having the same size and facilities, both situate side by side in the same extent of land in a commercial locality Both of them may fetch the same rent, though one may be new and the other may be a very old one nearing reconstruction. Obviously their market values would be different. The market value of the land with the old building cannot be determined on the basis of its income; and at the same time it may have a higher value than the value of the land and the old structure, since any ordinary purchaser would pay a higher amount in consideration of the income that the property is bringing, though only for a few years more. It is also not unusual that buildings of the same kind built at the same period and situate in the same extent of land in the same locality and having the same facilities fetch different rents. In one case, the landowner might have been lucky to get a tenant for very high rent, while in the other case be might have been obliged to lease it for a low rent. The rent that the building is fetching has got some amount of relevancy in fixing the market value; but certainly that would not be the basis, since in the above illustration, both the properties may have more or less the same market value.”

14. The same learned Judge in that case (1973 KLT. 573 at p. 579) quotes from Alfred D. Jahr's “Law of Eminent Domain” at pages 226 to 229 - 1953 Edn:

“It is far sounder practice to avoid the use of rental value capitalization, if better evidence of market value is available. In any event, the courts are inclined to give a greater weight to sales of similar properties in the market than to evidence of leasehold rentals.”

15. In the light of the above discussion we feel that in the facts and circumstances the method of valuation adopted in this case of valuing the building on the alleged rental income was not proper. The proper method in this case as far as the building is concerned is to find out the cost of constructing the building at the present time, then allowing for depreciation on account of age by necessary deduction and also giving allowance for the amount required for repairs to keep the building in a good condition. As was laid down by the Privy Council in Harichand v. Secretary of State (44 C.W.N 5) this method is, what is commonly known as ‘contractor's method’: The subject to be valued being a building apart from the site, the principle of fixing value by ascertaining the cost of reproducing the building at the present time and then allowing for depreciation in consideration of the age of the building and for the costs of such repairs as might be required, apart from depreciation, is quite a well-known and recognised method of valuing buildings for the purpose of compensation.” We think that in the interests of justice it is necessary to remand the case back to the court below for the purpose of fixing the value of the building alone in accordance with law and in the light of what we have stated above. The case is remanded for that purpose. Apart from the value of the building, the claimant would be entitled to the land value which is fixed at Rs. 1700/- per Are (the total value of the land comes to Rs. 5576). He will also be entitled to value of the trees fixed at Rs. 94/-.

16. The matter will, therefore, go back to the court below. The appellant-State would be entitled to refund of the court fee paid. In the court below parties will be allowed to adduce any further oral and documentary evidence, if they feel it necessary. The case should be disposed of within 3 months from the date of receipt of records by the court below. Parties will appear in the court below on 1-41-1978. Send back the records forthwith.