The Special Land Acquisition Officer,
Davangere Vs. P. Veerabhadarappa [1984] INSC 8 (9 January 1984)
SEN, A.P. (J) SEN, A.P. (J) VENKATARAMIAH,
E.S. (J)
CITATION: 1984 AIR 774 1984 SCR (2) 386 1984
SCC (2) 120 1984 SCALE (1)37
CITATOR INFO :
R 1986 SC1466 (11) RF 1991 SC2027 (4)
ACT:
Land Acquisition 1894 (I of 1894) S. 23
Acquisition of agricultural lands in 1971 and 1972- payment of
compensation-Market value fixed on basis of capitalisation principle-Multiplier
to be adopted-explained.
Compensation-determination of-method of
capitalisation- when to be resorted to.
HEADNOTE:
In the years 1971 and 1972, several thousand
acres of agricultural lands in two villages were acquired by the State
Government 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 per acre for dry and wet
lands depending upon the nature and the quality of the soil, and the income
derived there from.
In some cases compensation was 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 fifty times the net annual profits as there was no
other method of determining the market value of the land, and enhanced the
amount of compensation to Rs. 19,500 per acre for wet agricultural 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:
The Special Land Acquisition officer,
Davangere v. B. Basavarajappa & Ors that the proper multiple for
computation of the capitalized value should be 12/1/2 and that the High Court
was wrong in adopting the multiple of 15 when the rate of return in the years
1971 and 1972 was 8 per cent per annum.
387 Allowing the Appeals;
HELD: 1. The function of the Court in
awarding compensation under the Land Acquisition Act 1894 is to ascertain the
"market value" of the 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) The price paid within 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
lands acquired. [392 D-E]
2. The method of capitalising 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 sold 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 legal rule but depends upon economic 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 economic factors is the
prevailing rate of interest at the relevant time i.e. on the date of the
notification under s.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 IA 104; Rustom Cavasjee
Cooper v. Union of India, 1970] 3 SCR 530; Oriental Gas Co. Ltd & Ors v.
State of West Bengal, [1979] 1 SCR 617; Union of India & Anr v. Smt. Shanti
Devi etc. etc AIR [1983] SC 1190; referred to.
5. In regard to investment in agricultural
lands there are many imponderables inasmuch as the investor runs a much greater
risk than the risk that he 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 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 land reforms legislation, ex. laws
relating to ceiling on agricultural holding and tenancy laws. 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 388 may be total of partial
failure of crops through the failure of rain or drought, or inadequate or
excessive rainfall.
There may be failure of crops on account of
locusts, insects or pests. The cost inputs such as seeds, water, fertilizer
etc. vary from year to year. The fluctuations in price of agricultural produce
introduce a great deal of uncertainty in regard to income. In view of these
considerations, an investor would expect a much higher rate of return so that
the risk factor is properly discounted. [399 B-E] In 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 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 exceeded "ten", but since the State Government in these cases
contends that proper multiple for cover should be 12 1/2 [399 F-G]
6. The multiple of 12 1/2 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 compensation had been determined by
the method of capitalization. The respondents shall get solatium 15% on the
compensation computed as aforesaid and also interest. [399 H; 400A-B]
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 290-348, 729-746, 802-805(N) of 1980, 2328-31 & 2350-2388 of 1981.
(Appeals by Special leave from the Judgment
and decrees of the Karnataka High Court dated 12.7.79, 30.10.79, 4.6.81,
22.8.80, 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, 23.10.80
& 13.7.1979 in M.F.A. 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, 259/78,
444-448/78, 458/78, 705-707/77, 211-217/78, 736-737/78, 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, 77/80, 486- 98/78, 711/77, 925/77,
622/80, 765/80 1702/79, 717-18/77, 184/79, 260-61/78, 657/77 & 914-915/77)
For the Appellants S.N. Kacker, and Swaraj Kaushal For the Respondents:
S.S. Javali, B.P. Singh and Mr. Ranjit Kumar
389 S.L. Bendikar, and K.C. Dua P.R. Ramasesh K.R. Nagaraja, Naresh Kaushal and
B. Krishna Prasad, Girish Chandra, A.V. Rangam and G. Gopalakrishnan The
Judgment of the Court was delivered by 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 is whether there has been any error in principle or in law in the
method of valuation arrived at by the courts below in adopting 'fifteen' to be
the multiple for computation of capitalized value of certain agricultural lands
acquired in the years 1971 and 1972. In the connected appeals although the
point was not specifically taken before the High Court, but the parties were
given notice that that was the real question to be determined. 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.
In these appeals the judgments were rendered
by the High Court of appeals being preferred by the Special Land Acquisition
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.
The facts giving 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 two 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 Government pursuant to
different notifications issued under s.4(1) of the Act published on diverse
dates in the years 1971 and 1972 followed by the usual notifications under s.6.
In response to 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. 15,000 per acre to Rs.
25,000 per acre for dry and wet lands depending upon the quality of the soil,
the nature of the yield and the income derived there from. In some cases they
also claimed compensation at more than rupees one lakh per acre for arecanut
390 garden lands. The Special Land Acquisition Officer however by his various
awards adopted a multiple of fifteen and awarded compensation 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. 1,10,000 for arecanut 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 etc. As there was no other method of
determining the market value of the land, the learned Civil Judge applied a
multiple of 15 times the net annual profits. On appeal by the Special Land'
Acquisition Officer, the High Court also adopted the capitalized 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 i.e. depending upon the nature 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 determining the
amount of compensation payable for acquisition thereof.
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
in the years 1971 and 1972 was 8% per annum. According to the learned counsel,
there is an error in principle or in law in 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 12 1/2 having regard to the rate
of return at the relevant time i.e. on the date of the notification under
s.4(1) of the Act. The contention must, in our opinion, prevail.
In Basavarajappa's case, supra, a Division
Bench of the High 391 Court while dealing with the determination of
compensation payable A for similar agricultural lands in the neighborhood of
the same two villages acquired at or about the- same time adopted the multiple
of 121/2 times the net annual profits for purposes of determining the
capitalized value thereof.
In coming to that conclusion, the High Court
observed:
"The rate of return from Government
Security, which is Gilt-edged Security, was around 6% in the year 1971-7?. A person
investing his capital in irrigated land would expect - a return of about 2%
more than what he obtains from Government Securities.. That means, a return of
8 % would be the normal return expected by an agriculturist investing in
purchase of wet land$. If 8% was the return expected, the number of years'
purchase value comes to 121/2." We regret to find that in these cases the
High Court instead of having adopted the multiple of 121/2 times observed that
the decision in Basavarajappa's case, supra, was not applicable because the
land's 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 multiple 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 land's 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 Gajpatiraju v. Revenue
Divisional Officer, 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". Tn 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 invoked 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 cular purpose.
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. lt is not only realized
possibilities but also the future possibilities that must be taken into
consideration.
The Privy Council further observed that there
is not in general any market for Indian the sense that one speaks of market for
shares or commercial goods. The value of any such article at any particular
time can readily be ascertained by the prices being obtained for similar
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 lands of
similar quantity and in similar positions, and that is what must be meant in
general by the "market value" in s.23.
The function of the Court in awarding
compensation under the Act is to ascertain 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 reasonable time in
bona fide transactions of purchase of sale of the lands acquired or of the
lands adjacent to those acquired and possessing the same or similar
disadvantages. And (3) A number of years purchase of the actual or immediately
prospective profits of the lands acquired. Normally, the methods 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 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.
It is axiomatic that the best evidence to
prove what a willing purchaser would pay for the land acquisition would be the
evidence of sales of comparable properties, proximate in time to the date of
acquisition, similarly situate, and possessing the same or similar advantages
ad subject to the same or similar disadvantages. Market value is the property
may fetch in the open market if sold by a willing seller unaffected by the
special needs of a particular purchase.
Where definite material is not forthcoming
either in the shapes of sales of similar lands i the neighbourhood at or about
the date of notification under s.4(1) or otherwise, the Court has no other
alternative but to fall back on the method of valuation by capitalization. In
valuing land or an interest in land for purposes of land acquisition
proceedings, the rule as to number of years' purchase is 393 not a theoretical
or legal rule but depends upon economic factors such as the prevailing rate of
interest in money investments. The return which all investor will expect from
an investment will depend upon the characteristic of income as compared to that
of idle security. The main features are:
(I) Security of the income; (2) fluctuation;
(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 investment in
various types of properties. Once this rate of return and accordingly the rate
of capitalization are determined, there is no problem in valuation of the
property.
The traditional concept of capitalization was
indicated by this Court in Rustom cavasjee cooper v. Union of India.
It was stated to be "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 the market at the
date of the notice of acquisition." It is thus clear from the above
enunciation that the method of determining the value of the property by
application of a multiplier to the net annual income or profit should only be
adopted when there is no evidence of comparable sales of similar lands in or
about the neighb- ourhood 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. 100-101 "lt is evident therefore, from the
foregoing definitions as well as from numerous other definitions which may be
cited, that the fair market value of properly taken by eminent domain is the
price that the property will bring when offered for sale by one desiring, but
not obliged, to sell; and purchased by one desiring to purchase but under no
necessity 394 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 property a market value." .
The learned author then deals with the
fixation of market value on the basis of rental income at pp. 226-229 and
states :
"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 . lease hold
rentals." Jahr then deals with the method of capitalization of income and
says at p. 230:
"It is quite evident from the formula
that the lower the rate of return applied, the higher the capitalized sum will
be. However, the rate of return on money invested is dependent upon many varied
factors; (1) safety of principal; (2) liquidity of investment; (3) certainty of
income; (4) possible market fluctuations; (S) 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 is that the basic factor in applying the method of
capitalization of income for ascertaining the market value of property is the
rate of return that an ordinary 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 Vyrricherla'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 395 sale is hot
to be assumed. The price at which the property would A 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 capitalization of the services or
income which actual 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 the prevailing rate of interest at the relevant time i.e.
in the date of the notification under s.4(1) of the Act. It is first necessary
to ascertain the gross income from the acquired 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.
During. the imperial days; investment in
gilt-edged 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
growth of commerce and trade. Due to growth of industries both in the public-
as well as in the private sector investment of capital such industries, if. not
any more secure, have come into the law merchant and such other alternative
available securities have attracted persons who are 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 be
adopted. The line of inquiry in such cases must therefore be . What was the
prevailing 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 practice 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, securities. 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 to the rate of interest on gilt-edged
securities at five percent per annum. It was, however, observed that with
respect to melwaram interest in a zamindari land or a vacant site, it was
difficult to accept 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 Landlord in such cases would not only expect to get a return on
the capital invested on the land but also something in addition to that as
compensation for this trouble in attending to the land and for the risks
involved in the cultivating of land., It was observed that although the tenants
might have agreed to pay him a fixed rent in money, yet if a full crop was not raised
on the land either through failure of rain or because of pests or for any other
reason, it was extremely difficult for the landlord to realise the rent. For
these reasons, 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 realization of the interest of which he 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 investment in fixed deposits with nationalized banks, National Savings
Certificates, Unit Trusts and other forms of Government securities 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 Government securities or deposits with scheduled
banks or Unit Trust or National Savings Certificates. The rate of interest on
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 interest on the Mysore State Development
Loans issued in the years 1967, 1968, 1969, 1970, 1971 and 1972 was uniformly
5.314% return.
The rate of interest on fixed deposits with
State, Bank of India for a period ranging from 3 years upto 5 years yielded 7%
while the rate on fixed deposits above S years was 7.25%.
The rate of dividend payable on unit trusts
in 1972 was 8.25% per annum. National Savings Certificates, 7 years, 2nd 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.
In oriental Gas Co. Ltd. & Ors. v. State
of West Bengal this Court held for the acquisition of an industrial undertaking
in the State of West Bengal that if 12% of the capital invested was the annual
return, the adoption of multiplier of "eight" could not be unreasonable
in the year 1963. That contention based on the traditional view expressed by
Shah, J. in Cooper's case, supra, that the multiplier must be related to the
rate of interest on gilt- edged securities 397 was repelled by Chinnapa Reddy,
J. It was stated that the observations of Shah, J. in Coopers 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 all important methods
of determination of compensation, did not lay down a rule of law of universal
application was observed: .
"The very use of the Word
"normal" by Such, 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 glit-edged securities was to be the basis. That .
should depend on a variety of circumstances
such as the nature of the property, the normal return which may be C' expected
on like investment, the state of the capital market and several such
factors." In Union of India & Anr. v. Smt. Shanti Devi etc. etc.
this Court recently had occasion to lay down
the principle 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 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 (Venkatramiah
J.) observed:
"The number of years' purchase has
gradually decreased' as the prevailing rate of interest realisable from safe
investments has gradually increased. the higher the late of interest, the lower
the number of years' purchase. This method of valua- tion involves capitalizing
the net inclose that the property c an fairly be expected to produce and the
rate or capitalization is the percentage of return on his investment that a
willing buyer would expect from the property during the relevant period."
The Court explained that although alone 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
circumstances have now changed during the 398 recent years and deposits with
the State Bank of India and other nationalized banks and even in the share
market there arc many blue chips while command stability and other attendant
benefits such as issue of bonus shares et cetera, and added:
"A return of 10% per annum on such safe
investments is almost assured. Today nobody thinks of investing on land which
would yield a net income of just 5 % to 6 % per annum. 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 a willing under of
land would have paid 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 account: yield and appreciation possibilities,
the ability readily to dispose 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
investments evidenced by the yield or return that is produced in relation to
market price higher the quality, the lower the yield. Investors must take into
account various types of risks associated with different investment mediums and
therefore adopt a type of investment that is appropriate to their resources and
particular investment objectives As already stated, some 20 to 30 years back
i.e. till the early '50s, it was taken as. a 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 per
cent. 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. They rate of return expected therefore was 1.1/2% to 2.1/2% more than
what was expected from gilt-edged securities person investing. his. capital in
agricultural lands would ordinarily expect a return of 2% to 3% more than what
he could obtain from gilt-edged securities or other forms of safe investment
such as fixed deposits in scheduled banks. - National Savings' Certificates,
Unit Trusts at cetera, or on blue chips i.e. On stocks and 399 shares in the
public or private sector which yield a much greater return.
In regard to investment agricultural lands,
there are many imponderables in as much as the investor runs 'a much greater
risk than the risk that he 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 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 land 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 danger 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 failure of crops either through failure of rain or drought, or
inadequate or-excessive rainfall. There may be a failure of crops on account of
locust invasion or insects or pests. The cost inputs such as seeds, water
fertilizer, labour charges etc. would vary from year to year. 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 considerations,
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 return 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 he
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
12-1 in computation of-the capitalized value 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(1) of the Act. In view of this, it must be held that
the multiple of 121/2 should be applied in computation of the capitalized value
of the lands.
400 In the result, the appeals must succeed
and are allowed. The judgments and decrees of the High Court are modified by
directing that the compensation awarded for acquisition of land should be
reduced by one-sixth in these cases wherever the amount of compensation has
been determined by the method of capitalization. The respondents shall get
solatium @15.% on the compensation computed on the above basis and shall be
paid interest at the rate decreed by the courts below.
The costs shall be borne by the parties
throughout as incurred, N.V.K. Appeals allowed.
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