Open-market valuation of gifted tenanted property must reflect tenant occupation, with a reasonable deduction for reduced marketability.

In valuing gifted property under the open-market standard, the valuation must reflect the property's actual condition and marketability on the date of gift. A tenanted property cannot be treated as equivalent to vacant land or building because tenant occupation depresses market value. The choice of valuation method depends on the facts and available materials, and straight adoption of the capitalisation of rent method is not mandatory on every record. Where the land-and-building method is used, a reasonable allowance must still be made for tenant occupation; on the materials discussed, a 15% deduction was considered reasonable.

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Issues: Whether, in valuing a gifted property in the occupation of a tenant, the Tribunal was bound to adopt the capitalisation of rent method and whether it ought to have allowed a deduction for tenant occupation while fixing the market value.

Analysis: Under section 6 of the Gift-tax Act, the value of property gifted is to be estimated at the price it would fetch in the open market on the date of the gift. The choice of valuation method depends on the facts and available materials, and the record did not justify straight adoption of capitalisation of rent in the manner suggested. At the same time, a property in the occupation of a tenant cannot be treated as equivalent to a vacant property, because tenant occupation depresses its marketability and open market value. The Tribunal, while adopting the land and building method, failed to make any allowance for that factor. On the available materials, a deduction of 15% for tenant occupation was considered reasonable.

Conclusion: The Tribunal was in error in not allowing a deduction for tenant occupation. The question as reframed was answered in the negative and in favour of the assessee.

Ratio Decidendi: In valuing a gifted tenanted property under the open-market standard, the existence of a tenant must be factored into the valuation by making a reasonable allowance for the diminished market value caused by such occupation.

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