1977 (4) TMI 1 - SC - Wealth-tax

Valuation of leasehold interest and diversion of unearned increase: market value must be reduced to reflect lessor's share.

Valuation addresses whether a contractual obligation diverting a portion of an unearned increase in land value constitutes income of the assessee or ... Valuation - Diversion by Overriding Title - entitlement to claim and recover from the lessee a certain specified proportion of the unearned increase in the value of the land at the time of the assignment. - HELD THAT:- In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of another's income.' It is clear on the application of this test that in the present case, 50 per cent. of the unearned increase in the value of the land would be diverted to the lessor before it reaches the hands of the assessee as part of the price. The assessee holds the leasehold interest on condition that if he assigns it, 50 per cent. of the unearned increase in the value of the land will be payable to the lessor. That is the condition on which he has acquired the leasehold interest and hence 50 per cent. of the unearned increase in the value of the land must be held to belong to the lessor at the time when it is received by the assessee and it would not be part of the net realisable worth of the leasehold interest in the hands of the assessee. If a question is asked as to what is the real wealth of the assessee in terms of money so far as the leasehold interest is concerned, the answer would inevitably be that it is the price less 50 per cent. of the unearned increase in the value of the land. It is difficult to see how 50 per cent. of the unearned increase in the value of the land which belongs to the lessor can be regarded as part of the wealth of the assessee. We are, therefore, of the view that the question referred by the Tribunal must be answered in the negative and it must be held that in determining the value of the leasehold interest of the assessee in the land for the purpose of assessment to wealth-tax, the price which the leasehold interest would fetch in the open market were it not encumbered or affected by the burden or restriction contained in clause (13) of the lease deed, would have to be reduced by 50 per cent. of the unearned increase in the value of the land on the basis of the hypothetical sale on the valuation date. The appeal, accordingly, fails and must be dismissed with costs. Issues Involved:1. Valuation of leasehold interest in land for Wealth-tax purposes.2. Impact of covenant restricting assignment of leasehold interest.3. Deductibility of 50% unearned increase payable to the lessor.Issue-wise Detailed Analysis:1. Valuation of Leasehold Interest in Land for Wealth-tax Purposes:The primary issue in this case revolves around the valuation of leasehold interest in land for the purpose of the Wealth-tax Act, 1957. The controversy pertains to the assessment year 1968-69, with the relevant valuation date being December 31, 1967. The assessee's net wealth included a property consisting of leasehold interest in land and a house built upon it. The land, leased by the President of India, had terms that included a covenant restricting assignment without prior approval and entitling the lessor to claim 50% of the unearned increase in the land's value at the time of assignment.The Wealth-tax Officer initially valued the property based on its rental income, arriving at a figure of Rs. 8,29,560 but reduced it to Rs. 6,00,000, a value accepted in past assessments. The assessee's appeal against this valuation was unsuccessful at the Appellate Assistant Commissioner and the Tribunal, which upheld the view that the unearned increase was not deductible in computing the property's value under section 7 of the Wealth-tax Act.2. Impact of Covenant Restricting Assignment of Leasehold Interest:Clause (13) of the lease deed, which restricts assignment of the leasehold interest without prior approval and mandates payment of 50% of the unearned increase to the lessor, significantly impacts the valuation. The High Court held that this liability was a disadvantage attached to the leasehold interest, thus deductible from the property's value when calculating the assessee's net wealth. The Supreme Court agreed, emphasizing that the covenant runs with the land and binds any assignee, thereby depressing the leasehold interest's market value.The Supreme Court highlighted that ignoring this burden in valuation would result in assessing an asset different from what the assessee actually owns. The principle applied was similar to the one in Corrie v. MacDermott, where restrictions on land use affected its valuation.3. Deductibility of 50% Unearned Increase Payable to the Lessor:The Supreme Court examined whether the 50% unearned increase payable to the lessor should be deducted from the leasehold interest's value. The Court noted that this payment is not merely an application of income but a diversion by paramount title. The assessee collects this amount on behalf of the lessor, and it does not form part of the assessee's net realisable worth. The Court distinguished this from cases where payments are made from income after it reaches the assessee, such as brokerage or commission expenses, which are not deductible.The Court concluded that the leasehold interest must be valued by deducting 50% of the unearned increase from its market value, reflecting the true net wealth of the assessee. The Tribunal's question was answered in the negative, affirming that the 50% unearned increase is deductible in determining the leasehold interest's value for wealth-tax purposes.Conclusion:The Supreme Court dismissed the appeal, holding that the leasehold interest's value must be reduced by 50% of the unearned increase in the land's value, reflecting the burden imposed by the lease covenant. This judgment underscores the importance of considering all encumbrances and restrictions in asset valuation for wealth-tax assessments.