REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 6873-6881 OF 2005 SRI S.N. WADIYAR (DEAD) THROUGH LR .....APPELLANT(S) VERSUS COMMISSIONER OF WEALTH TAX, .....RESPONDENT(S) KARNATAKA WITH CIVIL APPEAL NO. 6882 OF 2005 CIVIL APPEAL NO. 1338 OF 2006 CIVIL APPEAL NO. 7251 OF 2015 (ARISING OUT OF SLP (C) NO. 18960 OF 2006) AND CIVIL APPEAL NOS. 7377-7378 OF 2005 JUDGMENT A.K. SIKRI, J. Leave granted in SLP(C) No. 18960 of 2006. Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 1 of 30 Page 1 2. question of law that falls for determination is common to all these appeals, which is following: Whether, for purposes of Wealth Tax Act (hereinafter referred to as 'Act'), market value of vacant land belonging to assessee should be taken at price which is maximum compensation payable to assessee under Urban Land Ceiling Act, 1962? 3. For purposes of understanding circumstances under which this question has arisen, we are taking note of facts of Civil Appeal Nos. 6873-6881/2005: appellant herein is assessed to wealth tax under Act. Assessment Years in these appeals are 1977-1978 to 1986-1987. valuation of property which is subject matter of wealth tax under Act is urban land appurtenant to Bangalore Palace (hereinafter referred to as 'Property'). total extent of property is 554 acres or 1837365.36 sq. mtr. It comprises of residential units, non-residential units and land appurtenant thereto, roads and masonary structures along contour and vacant land. vacant land measures 11,66,377.34 sq. mtr. aforesaid Property was private Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 2 of 30 Page 2 property of late Sri Jaychamarajendra Wodeyar, former ruler of princely state of Mysore. He died on 23.09.1974. There were disputes with regard to wealth tax assessments pertaining to Assessment Years 1967-1968 to 1976-1977. After death of Sri Jayachamarajendra Wodeyar, his son Sri Srikantadatta Wodeyar, assessee applied to Settlement Commission to get dispute settled with regard to valuation of Property and lands appurtenant thereto for Assessment Years 1967-1968 to 1976-1977. While this application was still pending, Urban Land (Ceiling and Regulation) Act, 1976 (hereinafter referred to as 'Ceiling Act') came into force w.e.f. 17.02.1976. It was adopted by State of Karnataka. property area is within Bangalore Urban Agglomeration, hence fell within purview of Act. assessee filed statement as required under Section 6(1) of Ceiling Act on 10.09.1976. On 16.09.1976, he filed application under Section 20 of Act for exemption of his lands under Ceiling Act to State Government. 4. From aforesaid, it is clear that Property in question, namely, Bangalore Palace came within purview of Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 3 of 30 Page 3 Ceiling Act. 5. application of assessee before Settlement Commission for Assessment Years 1967-1968 to 1976-1977 was disposed of on 29.09.1988, laying down norms for valuation of property. Wealth Tax Officer adopted value as per Settlement Commission for Assessment Years 1976-1977, 1977-1978 and 1978-1979 at Rs.13.18 crores (for both land and buildings). For Assessment Year 1979-1980, since there was no report of Valuation Officer, Commissioner of Appeals worked out value of Property at Rs.19.96 crores for Assessment Year 1979-1980, which was adopted by Wealth Tax Officer for Assessment Year 1980-1981 as well. For Assessment Years 1981-1982, 1982-1983 and 1983-1984, Wealth Tax Officer fixed value of land and building at Rs.18.78 crores, Rs.29.85 crores and Rs.29.85 crores respectively. For Assessment Year 1984-1985, Wealth Tax Officer took value at Rs.31.22 crores on basis of order passed by Commissioner (Appeals) for earlier years. 6. On other hand, in proceedings under Ceiling Act, Competent Authority passed order No.ULC(A)(Z) 440/85-86 Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 4 of 30 Page 4 dated 27.07.1989 determining vacant land in excess of ceiling limits, and ordered action be taken to acquire excess land under Karnataka Town & Country Planning Act, 1961. In accordance with Section 30 of Ceiling Act, declaration dated back to 17.02.1976 on which date Ceiling Act was promulgated in Karnataka. Bangalore Development Authority prepared master plan and planning report for development of District No.1 in which property area is included. As per this proposal no part of vacant area could be commercially exploited nor colonised for residential purposes. vacant land area was also not transferable under Act. Any sale was null and void. As per Section 11(6) of Urban Land Ceiling Act, maximum compensation that could be received by assessee was Rs.2 lakhs. 7. Before any Notification could be issued under Section 10(1) of Ceiling Act, assessee questioned aforesaid order passed by Competent Authority under Sections 8 and 9 of Ceiling Act before Karnataka Appellate Tribunal. 8. Simultaneously, orders of Wealth Tax Officer passed under Act fixing value of land for different Assessment Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 5 of 30 Page 5 Years for purpose of Act was also challenged by assessee before Commissioner (Appeals). In these appeals, contention of assessee was that value of property was covered by Ceiling Act for which maximum compensation that could be received by assessee was only Rs.2 lakhs. appeals filed for Assessment Years, namely, 1980-1981, 1982-1983 and 1983-1984 were disposed off by Commissioner of Income Tax (Appeals) by common order dated 09.01.1990 in which he made slight modifications to value adopted for Assessment Years 1981-1982 and confirmed valuation of Wealth Tax Officer for Assessment Years 1982-1983 and 1983-1984. However, in respect of appeals relating to Assessment Years 1977-1978 to 1980-1981, Commissioner (Appeals) passed orders dated 31.07.1990 accepting that urban land appurtenant to Property be valued at Rs.2,00,000/-. Similar orders came to be passed by Commissioner of Income Tax (Appeals) for Assessment Years 1984-1985 and 1985-1986 also. Against these orders of Commissioner (Appeals) dated 09.06.1990, 31.07.1990 and 14.08.1990, both assessee as well as Revenue/Department went up in appeals before Income Tax Appellate Tribunal, Bangalore Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 6 of 30 Page 6 Bench, Bangalore. appeals filed by assessee and Revenue Department were heard together by Tribunal. 9. issue before Income Tax Appellate Tribunal was only with regard to valuation of vacant land attached to Property, since assessee had accepted valuation in regard to residential and non-residential structures within said property area and appurtenant land thereto. 10. Income Tax Appellate Tribunal, Bangalore passed order dated 02.11.1993 directing vacant land be valued at Rs.2 lakhs for each year from Assessment Years 1977-1978 to 1985-1986. Its reasoning was that Competent Authority under Ceiling Act had passed order determining that vacant land was in excess of ceiling limit, and had ordered that action be taken to acquire excess land under Karnataka Town and Country Planning Act, 1901. And under Land Ceiling Act, embargo was placed on assessee to sell subject land and exercise full rights. assessee was only eligible to maximum compensation of Rs.2 lakhs under Ceiling Act. Hence given these facts and circumstances subject land could only be valued at Rs.2 lakhs for wealth tax Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 7 of 30 Page 7 purposes on valuation date for Assessment Years 1977-1978 to 1985-1986. 11. Against order of Tribunal, Commissioner of Wealth Tax sought reference before Karnataka High Court in respect of Assessment Years, namely, 1977-1978 to 1985-1986 arising out of consolidated order of Tribunal in WTA Nos.315 to 317 and 485 to 490/1990 dated 02.11.1993. Tribunal made Statement for reference to High Court. question that was raised for adjudication before High Court was whether on facts and in circumstances of case, Tribunal was right in holding that value of vacant land, appurtenant to Property, should be taken at Rs.2 lakhs for purpose of wealth tax assessment for years in question, as having regard to provisions of Urban Land Ceiling Act, maximum amount of compensation payable to assessee is only Rs.2 lakhs. 12. When aforesaid reference was pending adjudication by High Court, certain important developments took place in relation to proceedings under Ceiling Act. appeal which was filed by assessee before Karnataka Appellate Tribunal against order dated 27.07.1989 passed by Competent Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 8 of 30 Page 8 Authority under Ceiling Act was dismissed by Tribunal on 15.07.1998. assessee took up matter further before High Court in form of writ petition. In this writ petition, assessee also challenged constitutional validity of provisions of Ceiling Act and made interim prayer to effect that pending disposal of writ petition notification under Section 10(1) of Ceiling Act be not issued. Fact of matter is that such Notification was not issued by Government. When this writ petition was still pending, Ceiling Act was repealed by Legislature with enactment of Urban Land (Ceiling and Regulation) Repeal Act, 1999 (Act 15 of 1999). 13. factual position which existed at time when reference cases were to be decided by High Court under Act is recapitulated below: (i) Assessment Years in respect of which question was to be determined were 1977-1978 to 1986-1987. (ii) Ceiling Act had come into force w.e.f. 17.02.1976 and was in operation during aforesaid Assessment Years. (iii) Competent Authority under Ceiling Act had passed orders to effect that as per Section 11(6) of Ceiling Act, Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 9 of 30 Page 9 maximum compensation that could be received by assessee was Rs.2 lakhs. In accordance with Section 30 of Ceiling Act, declaration dates back to 17.02.1976 on which date Ceiling Act was promulgated in Karnataka. (iv) order of Competent Authority was challenged by assessee by filing appeal before Karnataka Appellate Tribunal. This appeal was, however, dismissed on 15.07.1998. Against that order, writ petition was filed wherein provisions of Ceiling Act were also challenged. Because of pendency of these proceedings or due to some other reason, notification under Section 10(1) of Ceiling Act was not passed. (v) In year 1999, Ceiling Act was repealed. At that stage, writ petition filed by assessee was still pending. effect of this Repealing Act was that Property in question remained with assessee and was not taken over by Government. 14. We may remind ourselves that there is no dispute with regard to valuation in respect of residential and non-residential structures within said Property and appurtenant land thereto. assessee has paid wealth tax accepting valuation. dispute of valuation has arisen only with regard to valuation of Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 10 of 30 Page 10 vacant land attached to Property which had come within mischief of Ceiling Act. 15. In aforesaid factual background, reference was answered by High Court vide impugned order dated 13.06.2005 holding that although prohibition and restriction contained in Ceiling Act had effect of decreasing value of Property still value of land cannot be maximum compensation that is payable under provisions of Ceiling Act. Thus, question referred has been answered against assessee. 16. High Court, in its impugned order, took note of aforesaid facts and accepted position that Property in question which is within Bangalore urban agglomeration was covered by Ceiling Act and provisions of said Act applied to this Property. It also noted that by virtue of Section 4 of Repeal Act, all legal proceedings pending under Ceiling Act immediately before commencement of Repeal Act stood abated except those proceedings which are relatable to land possession whereof has been taken over by State Government or any person authorized by State Government or by Competent Authority. Since, in instant case, Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 11 of 30 Page 11 admittedly possession had not been taken, which remained with assessee for want of notification under Section 10, proceedings abated and said vacant land remained with assessee. Thereafter, High Court took note of certain relevant provisions of Act and we may also capture position contained in those provisions: Section 2(e) of Act defines meaning of expression 'asset' to include property of every description, both movable and immovable, except few kinds of property specified therein for purpose of ascertaining net wealth of individual. Section 2(m) of Act defines meaning of expression 'net wealth' to mean amount by which aggregate value computed in accordance with provisions of this Act of all assets, wherever located, belonging to assessee on valuation date. Section 2(q) of Act defines 'valuation date' in relation to any year for which assessment is to be made under this Act, means last day of previous year as defined in Section 3 of Income Tax Act, if assessment were to be made under that Act for that year. Section 3 of Act is charging Section which imposes Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 12 of 30 Page 12 liability to pay wealth tax on net wealth as on valuation date of every individual and Hindu Undivided Family. Section 7 of Act is machinery provision and lays down method of valuation of asset for purpose of computation of net wealth of assessee. Sub-sections (1) and (2) provide two methods of valuation of assets. To our purpose, provisions of sub-section (1) of Section 7 of Act is relevant and Section 7(1) of Act prior to its substitution by Direct Laws (Amendment) Act, 1989 w.e.f. 01.04.1989 was as under: Section 7: Value of assets how to be determined:-(1) Subject to any rules made in this behalf, value of any asset, other than cash, for purpose of this Act, shall be estimated to be price which in opinion of Assessing Officer, it would fetch if sold in open market on valuation date. Explanation to sub-section (1) was inserted by Finance (No.2) Act, 1980 w.e.f. 01.04.1980. explanation is as under: Explanation: For removal of doubts, it is hereby declared that price or other consideration for which any property may be acquired by or transferred to any person under terms of deed of trust or through or under any restrictive covenant in any instrument of transfer shall be ignored for purpose of determining price such property would fetch if sold in open market on valuation date. 17. Section 3 of Act is charging Section, whereas Section 7 of Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 13 of 30 Page 13 Act is machinery provision which provides for procedure for determining value of assets that are subject to wealth tax. High Court observed that as per Section 7 of Act, value of asset shall be estimated to price, which in opinion of Wealth Tax Officer, asset would fetch if sold in open market on valuation date. words price it would fetch if sold in open market do not contemplate actual sale or actual state of market, but only enjoins that it should be assumed that there is open market and property can be sold in open market and, on that basis, value has to be found out. Court noted that though rules, namely, Wealth Tax Rules, 1957 were framed, they did not provide for valuation of urban land and, therefore, asset must be valued in ordinary way by determining what it would fetch if it were sold in assumed market and what willing purchaser would pay for it. Court also accepted that in view of Ceiling Act coming into force, restrictions and prohibitions contained in Ceiling Act would have effect of depressing value which lands would fetch if they were free from said restrictions and prohibitions. Thus, willing purchaser would definitely take these factors into account, which could affect price of such Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 14 of 30 Page 14 asset. Therefore, Wealth Tax Officer cannot ignore such restricted provisions contained in Ceiling Act and it is for him to find out what price asset would fetch if it is sold in open market on valuation date, keeping in view, certain restrictions in Ceiling Act which will have depressing effect on value of asset. 18. Having said so, which legal position even assessee accepts, High Court went on to observe that it would not mean that valuation has to be compensation which assessee would be getting inasmuch as valuation as per Section 7 has to be price which property would fetch if sold in open market. Significantly, High Court also noted effect of Ceiling Act in context of present case and legal proceedings which had been initiated pursuant thereto whereby orders passed by Competent Authority under Sections 8 and 9 were challenged and no Notification under Section 10 had been issued. In this regard, it observed as under: 29. It is not in dispute, that in present case, competent authority has neither issued any notification under Section 10(1) nor under Section 10(3) of Act. It is relevant at this stage itself to notice that between period of first notification under Section 10(1) of Act and second notification under Section 10(3) Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 15 of 30 Page 15 of Act, owner of land can neither alter use, nor transfer land, if any, and if it is done, same would be void. After publication of second notification, land is deemed to have been acquired by Government and what assessee owns is right to compensation and right to compensation will be assessed as movable asset and maximum compensation payable under Section 11(6) of Ceiling Act is Rs.2,00,000/- only. 19. It also categorically accepted that after coming into force of Ceiling Act, since vacant land was covered by said Act, it was not open to assessee to sell land in open market, and whenever there is any restriction on transfer of any land, it is common knowledge that value of property or land, as case may be, would normally be reduced. However, it did not accept that since it is not open to assessee to sell land, therefore, value of land could not be more than what Government was to offer to assessee under provisions of Ceiling Act. High Court concluded its answer in penultimate para as under: 36. Before we conclude, we once again emphasise that it sale of land or property is subject to restrictions under Central or State legislation's such as Urban Land Ceiling Act, Karnataka Land Reforms Act, etc., property or land has to be valued only after taking note of restrictions and prohibitions which will have effect of depressing value, which land would fetch if sold free from any restrictions and Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 16 of 30 Page 16 prohibitions, for reason, if there are such restrictions, value of property or land would be normally be reduced, but at same time, it cannot be said that it would fetch only maximum compensation payable under urban Land Ceiling Act. As stated earlier, Section 7 of Wealth Tax Act, assumes that there is hypothetical open market and there are hypothetical purchasers and hypothetical bids and hypothetical sale to person prepared to give highest value, subject to all such restrictions and prohibitions contained in Ceiling Act. 20. Challenging aforesaid approach of High Court, it was argued by learned senior counsel appearing for appellants in these appeals that once it is accepted that property is covered by Ceiling Act and it would depress value of property, then value could not be more than Rs.2 lakhs which was maximum compensation payable under Ceiling Act. It was also argued that provisions of Ceiling Act did not impose only 'restrictions' but there was categorical 'prohibition' from selling land. This land, therefore, had to be treated as not saleable on 'valuation date' and, therefore, as on that date, price it could fetch would not be more than Rs.2 lakhs. Learned senior counsel also referred extensively to orders passed by Commissioner (Appeals) under Act giving detailed reasons while accepting valuation of property at Rs.2 lakhs and Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 17 of 30 Page 17 submitted that there was no reason to take contrary view by High Court. 21. Learned counsel for Revenue, on other hand, emphasized reasons which have been given by High Court in support of its opinion and submitted that no case was made out to interfere with said proceedings. 22. We have considered respective submissions by giving our deep thoughts thereto with reference to record of case. It is clear that valuation of asset in question has to be in manner provided under Section 7 of Act. Such valuation has to be on valuation date which has reference to last day of previous year as defined under Section 3 of Income Tax Act if assessment was to be made under that Act for that year. In other words, it is 31st March immediately preceding assessment year. valuation arrived at as on that date of asset is valuation on which wealth tax is assessable. It is clear from reading of Section 7 of Act that Assessing Officer has to keep hypothetical situation in mind, namely, if asset in question is to be sold in open market, what price it would fetch. Assessing Officer has to form Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 18 of 30 Page 18 opinion about estimation of such price that is likely to be received if property were to be sold. There is no actual sale and only hypothetical situation of sale is to be contemplated by Assessing Officer. It is so held by this Court in Ahmed G.H. Ariff v. Commissioner of Wealth Tax1 in following words: ...it does not contemplate actual sale or actual state of market, but only enjoins that it should be assumed that there is open market and property can be sold in such market and, on that basis, value has to be found out. It is hypothetical case, which is contemplated, and Tax Officer must assume that there is open market in which asset can be sold. It is well settled that where legislature uses legal term, which has received judicial interpretation, Courts must assume that term has been used in sense, in which has been judicially interpreted. 23. Following guidelines provided in case of Commissioner of Wealth Tax v. Prince Muffkham Jah Bahadur Chamlijan2 also needs to be noted as it becomes very handy for our purposes: ...in absence of rule which can apply to valuation of particular asset, that asset must be valued in ordinary way, by determining what it would fetch if it were sold in assumed market, value being what assumed willing purchaser would pay for it. 1 76 ITR 471 2 247 ITR 351 Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 19 of 30 Page 19 24. Thus, Tax Officer has to form opinion about estimated price if asset were to be sold in assumed market and estimated price would be one which assumed willing purchaser would pay for it. On these reckoning, asset has to be valued in ordinary way. 25. High Court has accepted, and rightly so, that since Property in question came within mischief of Ceiling Act it would have depressing effect insofar as price which assumed willing purchaser would pay for such property. 26. However, question is as to what price willing purchaser would offer in such scenario? 27. In order to provide answer to this question, we may take note of certain relevant provisions of Ceiling Act, which, are even noticed by High Court. We will reproduce here Sections 3, 5, 10(1) and 10(3) and narrate scope of other relevant provisions without reproducing text thereof. 3. Persons not entitled to hold vacant land in excess of ceiling limit. Except as otherwise provided in this Act, on and from commencement of this Act, no person shall be entitled to hold any vacant land in excess of ceiling limit in territories to which this Act applies under sub-section (2) of section 1. Civil Appeal Nos. 6873-6881 of 2005 & Ors. Page 20 of 30 Page 20 5. Transfer of vacant land. (1) In any State to which this Act applies in first instance, where any person who had held vacant land in excess of ceiling limit S.N. Wadiyar (Dead) Through LR v. Commissioner of Wealth-tax, Karnataka