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F.
THE SPECIAL LAND ACQUISITION OFFICER, DAVANGERE »
-. P, VEERABHADARAPPA ETC. ETC. January 9, 1984 {A. P. Sen AND E, S. VENKATARAMIAH] a
Land Acquisition 1894 (I of 1894) S. 23
Acquisition of agr ictltural lands in 1971 and 1972—payment of compensation— Market value fixed on basis of capitalisation principl>—Multiplier to be adopted. explained. .
Compensation—aetermination “of method of capitalisation—when to be resorted to,
In the years 4971 and 1972, several ‘thousand acres of agtictltural lands in.
* wo villages were acquired by the State Govérnment pursuant to different notifications issued under section 4(1) of the Land Acquisition Act 1894, In response to notices ‘under section 9(2), the respondents appeared ‘before the Special Land Acquisition Officer and claimed compensation varying between Rs. 15,000 to Rs. 25,000 peracre for dry and wet lands depending. upon the naturé.and the quality of the soil, and the ‘income derived therefrom. “claimed at’ more than Rs. 1 lakh per acre “for arecanut garden lands.
« The Special Land Acquisition Officer, by his various awards | adopted a multiple of fifteen and awarded compensation at a flat rate of Rs 3,300 per acre for “dry agricultural lands and Rs 5 000.per.acre for wet agricultural lands. -
‘On references under section 18, the Civil Judge adopted a. multiple of fiftee © times the net annual profits as there was no other method of determining the market _ valus of the land, and enhanced the amount of compensation to Rs. 19,500 per acre for wet agricul tufal lands and Rs 1,10,000 for arecanut garden lands.
On appeals by the Special Land Acquisition Officer, ‘the High Court also adopted the capitalised value at 15 years’ purchase of the net annual profits but
. reduced the amount of compensation to Rs. 15,000 per acre for wet agricultural lands and Rs,-25,000 per acre for arecanut garden lands, |
‘- In the appeals to this Court, by the Special Land Acquisition Officer, it was
' contended relying ‘on the unreported ‘decision of the High Court dated November 21, 1977 in MFA Nos. 881-4/76 : a oo
The Special Land Acquisition Officer, Davangere v. B. Basavarajappa & Ors that the proper’ multiple for computation of the capitalized value should be 12}, and that the High Court was wrong in adopting the multiple of 45 when t ‘the rate of return it in the years 1971 and 1972 was 8 per cent per annum, :
»
In some cases -compensation. was a me “ ~~ ok
LAND ACOQN. OFFICER ¥. P, VEERABHADARAPPA: 387
Allowing the A ppeals; ;
HELD : 1. The function of the Court in awarding compensation under |
’ the Land Acquisitién Act 1894 is to ascertain the “market value” of tht land at the date of the notification under section 4(1) of the Act, and the methods of valuation may . be; (1) Opinion of experts (2), Tne price paid withifi.a reasonable time in-bona fide transactions of purchase or sale of the lands acquired, or of the lands adjacent to these acquired and possessing similar advantages, and (3) a number of years’ purchase of the actual or immediately’ prospective Profits of the Jands acquired. [392 D-E] ‘ a ‘
2 The method ‘ofacapitalising the actual or immediately prospective profits or the rent of a number of years’ purchase should not-be resorted to if there is evidence of comparable sales or other evidence for computation of the market . value. It can be resorted to only when no other method is available. : [392 E]
3. The meaning to be placed upon the phrase"*Market Value” of the land under s.23 of the Act, is the price the land acquired could actually be soid at the relevant time i.e. on the date of the notification under s 4(1). The owner is entitled to the value of the property in its actual condition at the time of*expropriation,
- with all its advantages and with all its possibilities, excluding any advantage due to the carrying out-of the scheme for the purpose for which the property is acquired. Its value is measured by a consideration of the prices that have been obtained‘in the past for lands of similar quality and in similar positions... [394 H; 392 B-C)
4, ‘In valuing land or an interest in Land for purposes of land acquisition proceedings, the rule as to number of years’ purchase is not a theoretical or legat rule but depends upon gconomic factors such as the prevailing rate of return which a' prudent investor in the class of properties in. question would expect. The return which an investor will expect from investment will depend upon the characteristic of income as compared to that of idle security.. The most important of such eco- - nomic factors is the prevailing rate of interest at the relevant iime i.e. on the date of the notification under $.4(1).. It is first necessary to ascertain the gross income from the acquired property, The next: step should be ascertain: the net income. Having ascertained the net annual income, it must be capitalized by computing the number of years’ purchase. * (395 B-C]
’ Vyricherla Narayana Gajapatiraju v. Revenue Divisional Officer , Vizagapatnam,
- LR (1939)66 TA 104 ; Rustom Cavasjee Cooper vy. Union of India, 1970] 3 SCR 530; ” Oriental Gas Co. Lid & Ors v. State of West Bengal, [1979] 1 SCR:617; Union of
India & Aur y. Smt. Shanti Devi etc etc AIR {1983} SC 1190; referred to. .
5 In regard to investment in agricultural lands there are many impondera-
-.bles inasmuch as the investor runs a much greater risk than the risk that he runs in investment in housing which corisists in vagaries of weether and other urcertainties. There is no security of principal, no liquidity of investment nor any cer-
‘tainty of income. The appreciation of principal or in-come is also uncertain. The reasons for these is that agricultiral lands are not readily transferable under the various land reforms legislation, ex, laws relating to ceiling-on agricultural holding and téhancy laws. In evalueting the rate of return which would ordinarily satisfy an investor in such a property, the risk factor has further to be evaluated. There’
< - locusts, i ingects or pests, The cost inputs. such as seeds, water, fertilizer etc. vary © from year "to year. The fluctuations i in price of agricultural produce introduce a_ gieat deal of. -uncertainty. in regard ‘to ‘Income. In view of these considerations, -
_an investor ‘would expect a.much higher rat of return so- “that the risk factor: is ‘Properly discounted. _ (399 B-E] ° ‘ :
23,10,80 & 13.7.1979 in’ MFA. Nos. 678, 681-83, 686/78, 836-841 /77, © _ 150/78," 148-149/78, 8-16/79, 936-943/77,. 567/77, 222-234/78, 256/78-
_ For the Respondents :
388 a ae SURREME COURT REPORTS | -11984]2 sc.
may. be total of partial failure of crops s throtigh the failure of rain or drought, or "inadequate or excessive rainfall’: There may be: failure of ciops on account of
* e
Tn the instant cases, when the rate of return on investment: was 8. 25 per cent” .in the years 1971 and 1972, a person investing ‘his capital in.agricultural lands would , ordinarily accept -2 per cent to 3 per cent more than what. he could obtain from a)
gilt-edged securities or, other forms of Safe investment dnd ‘therefore the proper: ‘multiplier to be applied-for- the purpose of capitalization could not in any event.
multiple for cover should be D4 B99 F-G]
6. The multiple of 12h should be applied in computation of the capitalized value of lands. The judgments and-crees of the High Court are modified. The
‘compensation awarded for acquisition of land reduced by one-sixth wherever the | ‘amount. of compenstion had been determined by the method of capitalization. _ The, respondents ‘shal get solatium 15° on the compensation computed as afores » said sand also interest. (399° H; 400 A-B] 7
- Civ APPELLATE JURISDICTION : - Civil ‘Appeals Nos. 290-348, 729- 746,
802- -805(N) | of 1980, 2528- 31 & 2350-2388. of 1981.
xo
"Appeals by ‘Special leave ‘from the “Iudgment. and decrees of,
_- the’ Karnataka High Court.dated 12.7.79, 30.10.79, 4.6.81, 22.8.80;
~ exceeded: “ten”, but-since the State Government in these cases contends that proper
4.7.80, 10.7.80, 7.8,80, 24.9,80, -21.8.79,. 27.7.79, 28.5.80, 13.6.80,,
5.2.80, 10.12.79, 9.8.79, 20.8.79, 8.8.79, 11.4.79, 26.3.79, 9.4.79, 24-1-79,..
12.4.79, 4.6:79, 1.12.78, 6.6.79, 13.6.79, 18.6:79, 20.6.79, 26.7.79,
259/78, 444-448/78, | 458/78, 705-707/77,. 211-217/78, 736-737/78,
77/80, 486-98/78, 711/77, 925/77, 622/80, 765/80 1702/79, 717-18/77,
184/79, 260-61/78, 67/77 & 914-915/77) |
: For the Appellants -
. > a
S.N. ’Kacker, and Swaraj Kaushal a . ., . 8.8. 5. Java BP.’ “Singh and Mr. Ranjit’ Kumar - a
_ 923- 24/77, 130- 131/78; 443/78, 1313,1314,1311/79, 735/78, 481, 482,. — " 687.& 688/78, 1432-35/79, 377-388/78; 1087/80, 1352/79, 1267/78, -
LAND ACQNe OFFICER ¥. P. VEERABHADARAPPA (Sen, J). 389
- S.L. Bendikar, and K.C. Dua P.R. Ramasesh. K.R. Nagaraja, . _ Naresh Kaushal and B. Krishna Prasad, Girish Chandra, AY. “Rangam . "and G. Gopalakrishnan ,
* on *
“The ® Judgment of | the Cointt was delivered by oo
SEN, J. The short question involved in this appeal by special leave and.the further appeals under s.54. of the Land Acquisition Act,
1894 (‘Act’ for short) directed against the judgment and decrees of the. Karnataka High Court dated January 24, 1979 and in the connected » appeals i$ whether there has been any error in principle or in Jaw in
' the. method of valuation arrived at by the courts below in adopting | ~
‘fifteen’ to be: the multiple for computation of capitalized ‘value cf.
certain agricultural Jands acquired in the years 197] and 1972. In .
the connected appeals although the point was ngt Specifically taken.
before the High Court, but the parties were given notice that that was the real question to be détermined, These appeals have accordingly: been heard together as they involve common question, The issue
~ involved is as to the proper multiplier to be applied in determining the capitalized value of the lands ‘acquired and that’ depends on the rate of return on investments in. 1971 ‘and 1972. ; we.
Tn these appeals the-jud eménts were rendered by the High Court on, appeals. being preferred by the Special Land Acqiisition Officer;
Davangere against the appellate judgments and decrees of the District
Judge, Chitradurga” and of the Civil Judge, Davangere on various references made under : s. 18 of the Act. oo.
* ~The facts eiving » rise ‘to these appeals are more or less similar, and the essential facts'may be shortly stated.’ Due to ‘the construction
-of. D.B. Kere Pick-up Project, several thousand. acres of agricultural © land in tw6- Villages in the State of Karnataka videlicet Budihar - » village’ in Harihar taluq and Siraganahally ‘village in Davangere taluq .
got submerged and’ were accordingly acquired by the State Govern-
- ment pursuant to different notifications issued uitder s.4(1) of the Act . published on diverse dates.in the years 1971 and 1972 followéd by the usual notifications under s.6. In response te notices issued under s.9(2) of the. Act, the respondents appeared before .the Special Land | ~ Acquisition Officer, Davangere_ and claimed compensation’ varying between, Rs. 15 005 per acre to Rs: 25,000 per acre fordry and wet © lands depending upon the quality of the soil, the nature of the yield cand the income derived therefrom. ‘In some cases they also claimed -compensation at more than rupees one lakh per acre for ‘arecanut
“390 _. SUPREME COURT REPORTS [1984] 2 s.c.r.
garden lands. The Special Land. Acquisition Officer however byt his .various awards adopted a. multiple of fifteen and awarded compensa- °tion at a.flat rate of Rs. 3,300 per care for dry agricultural lands and’ — Rs. 5,000 per acre for wet agricultural lands. On reference under’. - s.«18 of the Act in each of these cases,.the Civil Judge’ Davangere enhanced. the amount of compensation to Rs. 19,500 per acre for wet agricultural lands and Rs. 1,106,000 for areganut garden lands. There was common evidence adduced by the parties in all these cases and .
the evidence disclosed that the acquired lands were more or less similar in nature and contiguously situated.-On a consideration of the evidence the learned”. Judge came to the conclusion that the lands affected were capable of yielding two crops’ in a year with assured facility, the first being of paddy and the second of jowar, irrigation “groundnut, chillies ete. As there was no other methed of determining the market value of the Jand,-the learned Civil Judge applied a multiple of 15 times. the net annual profits. On appeal by the Special Lard’ Acquisition Officer, the High Court also adopted the cepitalized value . at 15 years’ purchase of the net annual profits but reduced the amount of compénsation to Rs, 15 000 per acre for wet agricultural Jands and ~
Rs. 25,000 per acre fot arecanut garden. lands i€. depending upon the-nattite of the lands acquired.. It would therefore appear that the
High Court and the courts below have both adopted fifteen to be the proper multiplier for computation of the capitalized value of the’. lands acquired for the purpose of detérmining the amount of com- - pensation payable: for acquisiticn’ thereof: rz
. Shri Kacker, learned counsel appearing on behalf of the appellant:
contends that the High Court was wrong in adopting the: multiple of 15 of the actual or immediately prospective net annual profits of the lands acquired to be the capitalized value thereof when the rate of “return inthe years 1971 and 1972 was 8% per annum. According to the learned counsel, there is an error in principle or in jaw jn the method employed and he draws our attention to the unreported decision of.the High Court in The Special Land Acquisition Officer .Davangere v. B. Basavarajappa & Ors." laying down.that the proper multiple for computation of the capitalized value should be 124 having tegard to the rate of return af the relevant time i.e. on the date of the notifica- .
tion undef s.4(1) ‘of the Act. The contention must, in our opinion, prevail. ¥ °
‘a : a
In Basavarajonpa’ ‘s case, supra, a Division Bench of, the High
) Misc. First Appeals Nos. ggi- -4/76 decided on 21. 11. 1977.
(1) LR [1939} 66 IA 104
LAND ACQN, OFFICER v. P. VBERABHADRAPPA (Sen, J.) | 391
Court while dealing with the determination of compensation payable for similar agricultural lands in the neighbourhood of the same two’ villages acquired at or about the same time adopted the multiple of 12} times the net annual profits for purposes of determining the
- capitalized value thereof. In coming to that conclusion, the. Bieh ‘Court observed :
“The rate of return from Government Security, which — is Gilt-edged Security, was around 6% ih the year. 1971-72, A person investing his capital in irrigated Jand would expect . a return of about 2° more than what he obtains from Gov-ernment Securities. That means,a return of 8% would be the the normal return expected by an agriculturist investing in’ purchase of wet lands. If 8%,was the return expected, the | — number of years” purchase value comes to 123.”
*
We regret to find that in these cases the High Court instead of ~ having adopted the multiple of 124 times observed that the decision in Basavarajappa’s case, supra, was not applicable: because. the lands acquired in these cases were for superior for which there is no rational basis. If the lands acquired were of a superior quality, the actual or immediately prospective net annual profits would be more and when
_ multipled by the proper multiplier arrived at on the rate of return ..
at the relevant time i.e. on the date of the notification under s.4(1) of the Act, the amount of compensation for acquisition of such lands. would necessarily be more. The quality of the soil has no relevance | to the proper*multiplier to be adopted in determining the- capitalized . value. . ;
In Vyricherla Narayana Gajapatiraju v. Reventie Divisional. Offiter; Vizagapatnam”) the Privy Council adopted the traditional legal definition’ of value as the price at which. the property would sell “as between a willing buyer and a willing seller’. In its narrowest sense it is designed to preclude a valuation based on an assumed forced sale; the property must'be appraised at what it would probably bring if the. owner allowed a reasonable opportunity for negotiations. But the Courts have irivoked a -mythical willing buyer ‘to justify a valuation higher than any attainable sale price. According to the Privy Council, “‘market value” of the land within the meaning of s.23 of the Act is the price the property may fetch in the open market if sold by a willing vendor unaffected by the special needs of a parti-
*
«
- 392°. gupREME court REPORIS: “184 2 8.C.R.
ate cular purpose. ‘The’ owner’ is entitled to the vaiue of the -property
" jnvits’ actual condition at the time of expropriation, with all its advan- ‘tages and with all. its possibilities, excluding any advratage due to - the carrying out of the scheme for the purpose for which the property - is acquited, It is not only realized possibilities but also the future possibilities that must be taken into consideration. - The Privy Coun- | cil further’ ‘observed that there is not in general any: market for land in the sense that, ang speaks of market for shares or commercial gnods.
“<The value -of any such article at any particular time can readily be on -
- ascertained by the ‘prices being .obtained: for. sitnilar articles in the:
market. ‘In the case of land, its value can also be measured by a consideration of the prices. that have been obtained in the past for
Jands of*similar quality and in similar positions, and that. is what’ ‘ must be mzant in general bf the ‘ “tHarket value’’ in s,23,”
~ The function. of the Court in awarding compensation - under the
Act is to ascértain, the market value of the land at the date of the ‘notification under s.4(1) of the Act and the methods: of valuation “may be! (1) Opinion of experts. (2) The prices paid within a reasc- ‘nable time in bona fide transactions of purctiase or ‘sale of the Jands.
acquired’ or of thé lands adjacent to those’ acquired and possessing similar advantages. - And (3)-A number of years’ " purchase of the
— actual of immediately prospective -profits of the Jands acquired:. Nor-
“mally, the inethod of capitalizing the actual or-immediately prospective - ‘profits or the rent of a. number of years’ purchase should not.be resorted - to if there is evidencé of comparable. sales or other evidence for compu- tation of ‘the market value.’ It can be resorted: to only, when nO other
_method is available.
Itsis axiomatic ‘that the best evidence to prove what a willing
‘. purchaser would pay for.the land under acquisition would be the evidence of sales of comparable . properties, proximate in time tothe
, date of acquisition, similarly ‘situate,. and possessing the same or similar advantages and’ subject to’ the same or similar disadvantages. Market value is the price the property may fetch in the open market if sold by a willing seller unaffected by the special needs of a particular purchase. Whére definite material is not forthcoming either in the __sliape of sales of similar. lands i in the neighbourhood. at .or about thie» _ date of notification under s.4(]) or otherwise, the Court has n° other. : ‘alternative but to fall back on the method of valuation by capitalization. In valuing land or an interest in land for purposes of jand- ' acquisition’ proceedings, the rule as to number ‘of years’ purchase ig - ye a
_ ©) 1970] 3 SCR. 530.
LAND ACQN. OFFICER-Y. P, VEERABHADRAPPA (Sen, J.) 393 not.a theoretical or legal -Tule but depends upon economic factors such: as the pfevailing rate.of interest. in money investments. The
> return which an investor will expect from an investment will depend ....
upon the characteristic of income as compared to that of idle security.
‘The main features. are: (1) Security of the income; (2) flietuation; . . —
(3) chances of increase; (4) cost of collection etc. - The most difficult:
_-and yet the most important and crucial part of the whole exercise is the determination of the reasonable rate of return in respect of invest-"
| ment in various types of properties. Once. this rate of return and”
accordingly the rate of capitalization are determined, there is) noproblem in valuation of the property, -
The traditional concept of capitalization was indicated by this Court in Rustom Cavasjee. Cooper - v. Union of India. (a) _ Tt was ‘Stated to be : - 4
“Capitalization of the net annual profit: out’ of the property at a rate equal in normal cases to the return from gilt edged securities: Ordinarily value of the property may be determined by capitalizing the net annual-value obtainable . in thé market at the date of the notice of acquisition.”
‘It is thus clear from the shove enunciation that the méthod of determining the value of the property by application of a multiplier oo to the'net annual income’ or profit shquld only be adopted when* there is no evidence of compatable sales of similar lands in or about the neighbourhood at the relevant time i. e. on the date ‘of the notification under s.4(1) of the Act. In certain circumstances -however the Court has no other alternative but to fall back on the: capitalized value.
Alfred D. Jahr in “Law of Eminent Domain” (1953 edn) after a general discussion regarding the valuation of ‘property, sums up at: - PP. 100- 10h
“It is evident, therefore, from the foregoing definitions "as well’as from numerous other definitions which. _may be cited, that the fair market value of property taken by eminent domain is the price that the property will bring when offered _for sale by -one desiring, but riot obliged, to sell; and pur~ : chased by ‘one desiring to purchase but under no. necessity
YD
394 - SUPREME COURT REPORTS 1984 25.C.R.
of buying. It is, the price which. a piece of property will
- bring in the market when offered for sale'and. purchased by another, taking into consideration all the elements of the availability of the property, its use, potential or prospective, and all other elements. which combine to give a piece of 7 property a market value.”
e
The learned author then deals with thé fixation of market value.
"on the basis of - rental income at pp. 226- a29 and states +
. “Tt is. far sounder practice to avoid the’ ‘use of rental value “capitalization, if better evidence of market value js available. ~ ‘In any event, the courts are inclined to give a greater weight _ to sales of similar properties i in the market than to evidence. of lease hold rentals.” .
Jahr then deals with the method of capitalization of. income .
and says at‘p. 230 : “Tt i is quite evident’ from, the formula that the lower ‘the _rate of return applied, the higher the capitalized sum will be. How ever, the rate of return on money invested is depend ent. , Upon many varied factors; (1) safety of principal; (2) liquidity ‘of investment; (3) certainty of income} (4) possible market - fluctuations; (5) appreciation of principal or income; and undoubtedly other elements too numerous. to mention. The interest rate current in the security market: must ‘be considered, as well as the investment rate to be obtained from high grade bonds or common stocks and commodities traded on the ‘several exchanges.”
The principle deducible from the above passage js that the basic factor in applying the method of capitalization. of income for ascer- taining the market value of property is the rate of return that an ordi- nary investor would. reasonably get on his’ investment, having due | regard to all the relevant circumstances, ©
In the classical economic sense, as adopted by the Privy Council in Vyricherla’s case, supra, the meaning to be placed upon the phrase
‘market value” of the land under s.23 of the Act is the price at which.
the land acquired could actually be sold at the relevant time i.e. on the date of the notification under s.4(1) of the Act by a fictitious Willing . “buyer in a hypothetical market, with the qualification that a forced
.:
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~
LAND ACQN. OFFICER Y. P. VEERABHADRAPPA (Sen, J.) 395 ag
. sale is not to be assumed. The pricé at which the property would _sell “as between a willing buyer and a willing seller” raises the problem - of valuation. The value of any object of wealth is simply a capitaliza-
- tion of the services: or income which — actyal or potential owners of
' the property expect to derive from it i.e. earning power.as a. basis © of valuation. The'rule of number of years’ purchase is not a theoretical or legal rule, but depends upon the economic factors such as the. prevailing rate of return which a prudent investor in the class of properties in- question would expect. The most important of such | economic factors is thé prevailing rate of interest at the relevant time i.e. on ‘the date of the notification under s,4(1) of the Act. It
&- is first, necessary to ascertain the gross income from the acquired
’ 3
¥
'
"per annum. It was, however, observed that with respect to melwaram — property. The next step should be to ascertain the net income. Having | ascertained the net annual income, it must be capitalized by computing the number of years’ purchase.
Duting the Imperial days, investment in gilt-cdged securities | was looked upon as the only safe form of investment. But after: the attainment of independence, the country has taken long strides © in the growfh:of. commerce and trade. . Due to growth of industries both in the public as well as in the private sector investment of capi-
~ talin such industries, if not anymore secure, have come into the law merchant and such other alternative available securities have attrdcted persons who ate ‘inclined to invest, rather than gilt-edged securities:
alone, apart from making fixed deposits in' the scheduled banks. This accounts for the variation of the proper multiple to bé ‘adopted. * The line of inquiry in such cases must theréfore be : What was the prc- | vailing rate of interest on long term deposits with scheduled, banks
- or in the public or private sector ?
At the turn of the century, it was not uncommon for the Courts . “to adopt a rule of 20 years’ purchase for arriving at the capitalized value of agricultural lands. It had long been the practicé in the
Courts of the then Madras Presidency “to calculate the profits from any form of landed property as equal to‘the profits made by. investing of money in the gilt-edged secuyties.. Till the early 50’s, the Courts of the then Madras Presidency held that the capitalized value of agricultural lands should be arrived at 20° years’ purchase having regard t0 the rate of interest on gilt-edged securities at five per cent
_ interest ina zamindari land or a vacant site, it was difficult to actept - the current rate of interest on gilt-edged secutries as a safe guide to the.
multiple to be applied to the annual profits on ‘ryotwari land. The
“
: 396 . SUPREME couRT REPORTS — [9842508 oe landlord j in’ such’ cases would 1 not only expect to get a seturn on the . capital invested on the-land but also something in addition to that as comp2nsation for his trouble in attending to the land and for the risks
- ‘involved in the: cultivation of land. It was observed. ‘that although the tenants might have agreed to pay him a fixcd rent in money, yet
\ifa full crop was not raised on the land éither through failure of rain | + Or because of pests or for any other reason, it was extremely. difficult : - for the landlord to realizethe rent..For. thése rcasons, the landlord naturally expected an appreciably larger. return. than he would expect’
> from gilt-edged securities which he lefts in the bank and for the realiza-
‘tion, of the interest of which. he i is put to no > trouble “whatsoever,
It. Would. ‘be unrealistic to adhere to the traditional view of " capitalized value being linked with gilt-edged’ securities when invest- “ment in’ fixed deposits with nationalized banks, National Savings
Certificates, Unit Trusts and other forms of Government secutities : _and even in the share market in-the shape of blue chips. command. a much greater return. More secure the capital and regular the return, lesser the rate of interest. Most secured kind of investment is Govern-
" ment ‘securities or deposits with scheduled banks ge Unit Trust - of National Savings Certificates. The rate of interest of Government of India bonds for a period of 30 years in 1972 yielded 5.75% per
_ annum. As per the Government of Karnataka publication called . “Finance Accounts of 1972-73” the ‘rate of inferést on the Mysore . State Development Loans issued in the yéars 1967, 1968, 1969, 1970,
1971 and 1972 was uniformly 5.3/4% return. . The rate of interest
' on fixtd deposits with State Bank of India fora period ranging from .- 3 years upto 5 years yielded 7% while the rate on fixed déposits above , years was’7,25%. ' The rate of dividend payable.on unit trusts in, 1972 was 8.25°% per annum.,. National. Savings Certificates,’7 years,-, and issue yielded: tax-free interest at’ 6% on maturity, 7 years, 3rd issue 6% tax-free payable annually and 7 years, 4th issue 7, 5 % payable’
annually but subject to income-tax. e
“Tn Oriental Gas Co. Ltd. & Ors. vy. State of R West Bengal 2) this
Court held for the acquisition of an industrial undertaking. in- the
~ State of West Bengal that if 123% of. the capital invested was ‘the ‘annual return, ‘the: adoption of muliplier of ‘“‘eight’”’ could not be » | unreasonable in the year 1962. Thet contention based ‘on the tradi- 7
‘tional view expressed by Shah, J. in Cooper's case, supra, that the ‘ multiplier must be selated to the rate of interest on gilt-edged securities.
“979 1 8.C.R. 637.
¥
\
_# a AIR 1983 sc 1190 o:
_ LAND ACQUN. OFFICER y. P. VEERARDADARAPEA( Sen, J. 'y 397 .
"was repelled by Chinnapa Reddy, J “Tt was stated. that the observa-"
_ tions of Shah, J. in Cooper's case that ‘capitalization of the net annual - "value of the property, at a rate equal in normal cases to- the return from gilt-edged securities’ was an important. method of,determination
’ of compensation, did not lay down a Tule of law of universal application. It-was observed : .
“The -very use of the word “normal” by Shab, J. indicates ° _ that it was not intended to lay down any invariable rule that whenever a method of capitalization of net.profit was adopted, the return from gilt-edged securitiés was to be the’basis. - That should depend. on a variety of. circumstances such as the nature of the progerty, the normal return which may be "- expected on like investment, the state of the capital’ market *- and several such factors. a
~In Union of India & Anr. v. Smt. Shanti. Devi etc. ete. 0.) this Court ° tecently had occasion to’ lay down: the-pginciple as to the true multiplier , " of “thirteen” applicable in determining the capitalized | value of about .. 70,000 acres of agricultural land located in the Kangra valley i in the. State of Himachal Pradesh where the notification under s.4(1) of the .
Act had been issued in the years 1962 and, 1963, and’ where there was no evidence of comparable sales of similar-lands in the Kangra valley.
After. referring to the judgment of this Court in “Oriental Gas Co™ Ltd.’s case,-supra, and several other. decisions, one of us (Venkata-
"- Tamiah J) observed :
; “The number of years’ purchase has gradually decreased as'the prevailing rate of interest realisaple from safe investments . has gradually increased—the higher -the rate. of interest, the — lower the number of years” purchase. This method of valuation involves capitalizing the net income that the property.” can fairly be expected to produce dnd the rate of capitalization is the percentage of return.on his investment that a willing. buyer would expect from the Property. during the relevant uo period. ”
; The Court explained that although | at one time it -was felt that _ interest on gilt-edged securities or Government bonds should alone be taken into consideration, having regard to the safety and liquidity of investment, ‘but the circhmstances have now changed during the
~D
398. =. . ss SUPREME COURT REPORTS - ; [1984] 2s.0R.. | recent years and deposits with the’ State ‘Bank of. India and other _nationalized banks and even in the sharé market there ate many blue chips which’ command stability and other attendant .bencfits such as .
issue of bonus shares et cetera, and added :
“A return of 10% per annum on such gale investments is almost assured. Today. nobody thinks of investing on land which would yield a net income of just’5 % to 6% perannum. A higher return of the order of 10% is usually anticipated. Even in‘ the years 1962 and 1963 an investor in agricultural “land expected annual net return of at-least 8°. It means that if the land yielded a net annual income of Rs. 8 4 + willing buyer of land would have pail for it Rs. 100 i.e. - a little more than 12 times the annual net income.’
There are. certain ‘general considerations which’ investors of all”
‘types take more or less into acccount : yield and appreciation possibilities, the ability readily to digSose of the investment (marketability) and’ safety.” Investments: differ ‘with respect to assurance of income and safety of principal. In the investment market, the quality of ©
.investment is evidenced by the yield or return that is produced. in relation to market price higher the quality, the lower the yield. Iives- "tors. must take into account various. types of risks associatéd with different investment mediu ms and therefore adopt a type of investment that is appropriate to their resources and t particular investment objec-
" tives,
As. already stated, some, 20 to "30 years back i.e. till the’ early °50s, it was taken asa settled rule of practice, that the capitalized value: of agricultural lands should’ be arrived at 20 years’ purchase - having regard to the rate of interest on gilt-edged securities at five - percent. That rule no longer can be adhered to in view of the changed economic situation. In the early-’70s, people believed that investment in housing was more secure than-other forms of .Government securities in respect of safety of investment. ‘Investment in housing involves certainly of labour.and effort such as maintenance, collection of rent, payment of taxes et cetera. The rate of return expected therefore was 1.1/2% to 2.1/2% more than what was expected from
> gilt-edged securities. A person investing his capital in “agricultural ;
Jands would ordinarily expect a return of 27% to 3% more thare what
H> he could obtain from gilt-edged . securities or other forms of safe investment such 25 fixed ‘deposits in scheduled banks.’ National Savings Certificates, Unit Trusts °* cetera or on blue chips i.e. on. stocks an
>
~~
LAND AGQUN. OFFICER Y, P.. VEERABHADARAPPA (Sen, J) 399 - shares in the public or private sector which yield a much greater re return. |
In regard to investment in agticultural lands, there are many imponderables in as much as the,investor runs a much greater risk than the risk that fe runs in.investment in housing which consists in vagaries of weather and other uncertainties. There is no security of principal, no liquidity of investment nor any certainty of i income.
The appreciation of principal « or income is also uncertain. The reasons for these is that agricultural"lands are not readily transferable under the. various Jand reform legislations e.g. laws ‘relating to ceiling on agricultural. holdings under the existing State laws and tenancy laws which place restrictions on transfer of such lands with concomitant dangér of effacement of the rights of the absentee-landlors and the
.creation of rights in the tillers of the soil. In evaluating the rate. of return which would ordinarily satisfy an investor in such a property,
‘the risk factor has further to be evaluated. There may be total or - partial ffilure of crops either through failure of rain or drought,-or_ inadequate or excessive rainfall. There _ may be a failure of créps on account of locust invasion or insects or pests. The cost ‘inputs ~ such as seeds, . water, ‘fertilizers labous charges etc. would vary from year to yeay. If the overall cost goes up, the income from agricultural
‘produce would be comparatively less. The fluctuations in price of agricultural produce introduce a great deal of uncertainty in regard
. to the income that can be expected from the sale of the. produce, If the yield of the crop in-other producing countries is large, or the
~ market prices prevailing in such countries are low, the prices of such agricultural produce in India would go down. In view of these con-
' siderations, an investor ‘would expect a much higher rate, of return | so > that the risk factor is properly. discounted. . *
In -the premises, when the- rate of returo on’ investment was
8.25% in the years 1971 and 1972, a person investing his capital in. . | agricultural lands would ordinarily expect 2% to 3% more than what the could obtain. from gilt-edged securities or other: forms of safe investment and therefore the proper multiplier to. be applied for the purpose of capitalization could not, in any event, exceed “‘ten”’. In the present case, the State Government however contends that the proper multiple to be.applied should be 123 in computation of the — capitalized vaiue of the lands in these cases having regard to the rate of return of 8% at the relevant time i.e. on the date of the notification under s,4(t) of the Act. In view of this, it must be held that the multiple of 124 should be applied ‘in computation of the capitalized value of the lands.
H.
400 ; ; : . __ SUPREME COURT REPORTS : 989 2 SCR.
.
Tn the ‘result, ‘the appeals must suicezed and are “allowed, The . " judgments and decrees of the High Court are ‘modified by directing -
"that. the compensation: awarded for acquistion of land should be
~ reduced by. one-sixth, in these cases wherever the ‘amount of com- pensation ‘has been determined by the method., of capitalization: ' The respondents shall get solatium @15%.on the compensation com- puted on the above basis and shall be paid interest at-the rate decreed
' .by the courts below. mo .
’ The costs shall be borne by the parties throughout as incurred.
N.V.K. ‘ | ¢ Ces ae . Appeals allowed.
Ma *