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But it is well settled that these factors are to be considered from the point of view of a normal, prudent businessman. Ratio |
The reasonableness of the payment with reference to those factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. Ratio |
Let us see whether the amount of commission paid to Saheb Dayal and Gurditta Mal in the present case can be said to be reasonable from this stand point. Ratio |
It is clear from the order of the Tribunal that reliance was placed by the Tribunal mainly and substantially on the fact that the nature of the work done by Saheb Dayal and Gurditra Mal remained unchanged in the relevant accounting year and there was nothing to show that the increase in the turnover during the relevant... |
But, as al ready pointed out above the commission aid to an employee cannot be branded as unreasonable merely because the employ ee has done m the relevant accounting year the same work which he was doing in the earlier years. Ratio |
Even where the nature of the work has remained the same, commercial expedi ency may require payment of commission to an employee. Ratio |
Here, Saheb Dayal and Gurditta (1) 536 Mal were each receiving a salary of Rs. 1000/ per month and besides this salary, there were admittedly no other perqui sites given to them. Ratio |
They were the persons attending to the business of the assessee and in fact Gurditta Mal was an experienced and seasoned businessman and it was he who was advising OCM in regard to designs etc.and he and Saheb Dayal were primarily responsible for the flourishing state of the business. Ratio |
The turnover of the sales of the assessee steadily rose from 1960 61 and in the relevant accounting year, it reached the exciting figure of Rs. 54.28 lacs. Ratio |
So also the overriding commission which started with the modest figure of Rs. 35,964/ in the accounting year relevant to the assessment year 1960 61 went on steadily increasing from year to year until it reached the figure of Rs. 1,13,449/ in the relevant accounting year. Ratio |
The assessee, therefore, felt that in view of the tremendous progress in the business which was largely the result of the services rendered by Saheb Dayal and Gurditta Mal, apart of the overriding commission should be paid to them, so than they may carry a sense of satisfaction that their efforts have been suitably rew... |
It may be noted that the overriding commission of the assessee during the relevant accounting year was Rs. 1,13,449/ and the total profit was Rs. 3,08,034/ and if out of this total profit of Rs. 3,08,034/ , an aggregate sum of Rs. 45,380/ was paid to Saheb Dayal and Gurditta Mal as commission, it is difficult to see ho... |
It is true that there was no obligation on the assessee to make payment of this commission to Saheb Dayal and Gurditta Mal, but it is now well settled that the mere fact that commission is paid ex gratia would not necessarily mean that it is unreasonable. Ratio |
Commercial expediency does not mean that an employer should not make any payment to all employee unless the employee is entitled to it under a contract. Ratio |
Even where there is no contract, an employer may pay commission to an employee if he thinks that it would be in the interest of his business to do so. Ratio |
It is obvious that no business can prosper unless the employees engaged in it are satisfied and contented and they feel a sense of involvement and identifi cation and this can be best secured by giving them a stake in the business and allowing them to share in the profits. Ratio |
It would indeed be a wise step on the part of an employer to offer incentive to his employees by sharing a part of his profits with them. Ratio |
This would not only be good business but also good ethics. Ratio |
It would be in consonance with Gandhian concept as also modern socialistic thought which, with its deeply rooted faith in social and economic democracy, regards; the employees as much as the employer as co sharers in the business. Ratio |
If an employer earns profits to which the employees have necessarily contributed by putting in their labour, there is no reason why the employer should not share a part of these profits with the employees. Ratio |
That is the demand of social justice today and it is high time that the administration of our tax law recog nised it and encouraged sharing of profits by employers with employees by adopting a progressive and liberal approach in the applicability of section 36, sub section (1), clause (ii) What is the requirement of co... |
We are, there fore, of the view that the sum of R.s. 45,380/ paid by the assessee to Saheb Dayal and Gurditta Mal by way of commission during the relevant accounting year was reasona ble having regard to all the circumstances of the case and it ought to have been allowed as a deductible expenditure under section 36, su... |
We accordingly allow the appeal, set aside the judgment of the High Court and answer the question referred by the Tribunal in the affirmative in favour of the assessee. RPC |
The Commissioner will pay the costs of the appeal as also of the reference to the assessee. RPC |
S.R. Appeal allowed. RPC |
Appeal No. 1174 of 1974. FAC |
(From the Judgment and Order dated the 4 4 1974 of the Delhi High Court in Wealth Tax Ref. FAC |
No. 5 of 1972). FAC |
R.M. Mehta and, P.L. Juneja, for the appellant. FAC |
G.C. Sharma, M.L. Khanna, Anup Sharma, Miss Jaswal K.K. and K.R. Jagaraja and D.K. Jain, for the respondent. FAC |
The Judgment of the, Court was delivered by BHAGWATI, J. FAC |
This appeal raises a rather difficult but interesting question of law relating to valuation for the purpose of the Wealth Tax Act, 1957 of leasehold interest in land, when, there is, a covenant in the lease that the lessee shall not be entitled to assign the leasehold inter est without obtaining the prior approval in w... |
13 436SCI/77 420 The controversy in this appeal, relates to the assess ment year 1968 69, the relevant valuation date being 31st December, 1967. Ratio |
The assessee is assessed to wealth tax as an individual. FAC |
His net wealth on the valuation date included a property situate on plot No. 12, Block 39, Kauti lya Marg, Chanakyapuri. FAC |
the property consisted of leasehold interest in the land together with a house built upon it. FAC |
The land belonged to the President of India and it was leased by the President of India to one Vashesharan Devi on the terms and conditions set out in an agreement of lease dated 30th December, 1954 and the leasehold interest was acquired from Vashesharan Devi by the assessee. FAC |
The premium for the grant of the lease was Rs. 24,400/ and the annual rent was fixed at Rs. 610/ , subject to certain variations. FAC |
The terms and conditions of the lease are a little important and, so far material, they may be reproduced as follows: "13.the lessee shall before any assign ment or transfer of the said premises hereby demised or any part thereof obtain from the lessor or such officer or body as the lessor may authorise in this behalf ... |
Provided also that the lessor be enti tled to claim and recover a portion of the unearned increase (i.e. the difference between the premium already paid and current market value) in the value of land at the time of transfer (whether such transfer is an entire site or only a part thereof), the amount to be recovered bei... |
The Lessor shall have a pre emptive right to the property after deducting 50 per cent of the unearned (torn) said. FAC |
" The assessee constructed a large building on the land and the question arose as to how the leasehold interest of the assessee in the land together with the building should be valued. FAC |
This property had been valued in the past assess ment years at Rs. 6,00,000/ and the assessee had accepted this valuation and not challenged it. FAC |
But in the assessment for the assessment year. FAC |
1968 69 the assessee valued this property in its return of net wealth at Rs. 4,52,000/ on the. FAC |
basis of a certificate obtained from M/s Anand Apte and Jhabvala, Architects who, are approved valuers recog nised by the Department. FAC |
The Architects estimated the value of the property at Rs. 5,82,268/and from this figure, they deducted a sum of Rs. 1,30,000/ representing 50 per cent of the: unearned increase in the value of the land, which under the terms and conditions of the lease. FAC |
belonged to the lessor and arrived at the value of Rs. 4,52,000/ . FAC |
The Wealth Tax Officer did not accept the estimate of the valua tion made by the Architects and taking the annual rent of Rs. 30,000/ fetched by the property as the basis, computed the net annual rent at Rs. 82,956/ 421 and arrived at the figure of Rs. 8,29,560/ as the value of the property by applying the multiple of ... |
to the annual rental value of Rs. 82,956/ . FAC |
The Wealth Tax Officer rejected the claim of the assessee to deduct from the value of the property 50 per cent of the unearned increase in the value of the land on the ground that this claim was based "merely on hypothetical presumptions" but reduced the value off the property from Rs. 8,29,560/ to Rs. 6,00,000/ , sinc... |
The assessee challenged the valua tion made by the Wealth Tax Officer in an appeal preferred before the Appellate Assistant Commissioner, but the appeal was unsuccessful as the Appellate Assistant Commis sioner took the same view as the Wealth Tax Officer. FAC |
The Tribunal also, in further appeal, affirmed the same view holding that "the fact that the assessee might have to Pay 50 per cent of the unearned increase to the lessor does not affect the valuation of the property under section 7 of the Wealth 'Tax Act" and the words used in that section "make it clear that the esti... |
The Tribunal also upheld the rental method of valuation of the property and finding that the valuation of Rs. 6,00,000/ adopted by the Wealth Tax Officer was even less than eight times the annual rental value of Rs. 82,956/ , the Tribunal declined to interfere with the valuation made by the Wealth Tax Officer. RLC |
The assessee thereupon applied to the Tribunal for making a reference to the High Court and on the application of the assessee, the following question of law was referred by the Tribunal for the opinion of the High Court: "Whether on the facts and in the circum stances of the case, the Tribunal was justi fied in law in... |
The High Court took the view that the liability to pay 50 per cent of the unearned increase in the value Of the land to the lessor at the time of the assignment was a disadvan tage attached to the leasehold interest in the land and hence its value was liable to be deducted from the value of the property in arriving at ... |
This led to the filing of the present appeal by the 'Revenue after obtaining a certificate of fitness from the High Court. FAC |
It would be convenient ' at the outset to refer to the relevant provisions of the Wealth Tax Act, 1957 before we .address ourselves to the question which arises for determination in the appeal, The Wealth Tax Act, 1957 was passed by the Parliament in exercise of the legislative power conferred under Entry 86 of List I ... |
Section 3 is the charging section and it provides that, subject to the other provisions contained in the Act, there shah be charged for every assessment year commencing on and from the 1st day of April, 1957 a tax_in respect of the net wealth on the corre sponding valuation date of every individual, Hindu Undivided Fam... |
Thus, wealth tax is a tax on the net wealth of the assessee on the valuation date. Ratio |
Net wealth is de fined in section 2(m) to mean "the amount by which the aggregate value, computed in accordance with the provisions of this Act, of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included ' in his net wealth as on that date under this A... |
The word 'asset ' used in section 2(m) is of the widest Signifi cation and under section 2(e), it includes property of every description, movable or immovable, barring certain excep tions which are not material for our purpose. Ratio |
What is, therefore, necessary for the purpose of determining the net wealth of the assessee is., first to compute the aggregate value of all assets belonging to the assessee in accordance with the provisions of the Act and then to deduct from it the aggregate value of all the debts, and the resultant which is obtained ... |
section 7, sub section (1) lays down the mode of determination of the value of an asset for the purposes of the Act and it says that, subject to any rules made in this behalf, the value of any asset other than cash "shall be estimated to be the price which, in the opinion of the Wealth Tax Officer it would fetch if sol... |
Now, plainly one of the assets belonging to the assessee in the present case was the lease hold ' interest in the land together with the building upon it and for the purpose of computing the net wealth of the assessee, it was necessary to determine the value of this asset. Ratio |
The question which must, therefore, be asked in terms of section 7( 1 ) is: what would be the price which this asset would fetch if sold in the open market on the valuation date ? Ratio |
This question cannot be satisfactorily answered, unless we first determine what is the nature of this asset: what is the interest in property, qualitative as well as quantitative, which this asset represents ? The asset consists of leasehold interest of the asses see in the land together with the building constructed u... |
The building, of ' course, belongs to the assessee having been constructed by him and the determination of its value should not present any difficulty, because there are recognised methods of valuation of buildings. Ratio |
The diffi culty, however, arises in regard to valuation of the leasehold interest in the land. Ratio |
The leasehold interest is held by the assessee under a lease deed executed by the President of India and apart from (1) 423 clause (13), which we have reproduced above, it is an ordi nary leasedeed of the usual kind. Ratio |
Clause (13 ) of the lease deed provides that the assessee shall not be entitled to assign the leasehold interest in the land without obtain ing the prior approval in writing of the lessor and 50 per cent of the unearned in.crease in the value of the land at the time of the assignment shall be claimable by the lessor, a... |
Does this covenant merely impose a personal obligation on the lessee which ,arises on assignment of the leasehold interest or it is a covenant running with the land ? That is a question which has a direct bearing on the valuation of the leasehold, interest. Ratio |
Now, the last portion of the first paragraph of clause (13) provides that "all such assignees and transferees . shall be bound by all the covenants and conditions herein contained and be answerable in respect therefore". Ratio |
This means that whenever an assign ment of the leasehold interest is made by the lessee, the assignee would be bound by all the covenants contained in the lease deed and these would indisputably include the covenant in clause (13 ). Ratio |
Clause (13 ) would equally bind the assignee and if the assignee in his turn wants to assign his leasehold interest in the land, he would have to obtain the prior approval in writing of the lessor to such assignment and the lessor would be entitled to claim 50 per cent of the unearned increase in the Value of the land.... |
This indeed was not disputed on behalf of the Revenue. Ratio |
The covenant in clause (13) is, therefore, clearly a cove nant running with the land and it would bind whosoever is the holder of the leasehold interest for the time being. Ratio |
It is a Constituent part of the rights and liabilities and advantages and disadvantages which go to make up the lease hold interest and it is an incident which is in the nature of burden on the leasehold interest. Ratio |
Plainly and indis putably it has the effect of depressing the value which the leasehold interest would fetch if were free from this burden or disadvantage. Ratio |
Therefore, when the leasehold inter est in the land has to be valued, this burden or disadvan tage attaching to the leasehold interest must be duly dis counted in estimating the price which the leasehold interest would fetch. Ratio |
To value the leasehold interest on the basis that this burden or disadvantage were to be ignored would be to value an asset different in content and quality from that actually owned by the assessee. Ratio |
This was the principle applied by the Judicial Committee in Corrie vs MacDemott,(1) an appeal from Australia, where the question arose as to how certain land granted by the Government of Queensland to the trustees of the Acclimatisation Society of Queensland to be used only for the purpose of the Society should be valu... |
The trustees had no general power of sale but they were by statute authorised to sell any part of the land to the local authority and to the National Agricultural and Industrial Association. Ratio |
It was held by the judicial Committe that in view of this restric tion on the nature of the interest of the trustees in the land, the trustees were not entitled, upon resumption of the land by the Government, to be paid unrestricted. Ratio |
free hold value of (1) 424 the land but only the value of the land to the trustees under the conditions upon which they held it. Ratio |
The Judicial Committee pointed out that if the owner holds the property subject to restrictions, "it is a necessary point of enquiry how far these restrictions affect the value" and the proper ty cannot be valued as if it were "unrestricted in any way". Ratio |
The burden or limitation attaching to the leasehold interest in the present case must, therefore, be taken into account in arriving at the value of the leasehold interest and it cannot be valued ignoring the burden or limitation. Ratio |
This problem can also be looked at from a slightly different angle and this approach too would throw some light on the true nature of the leasehold interest required to be valued. Ratio |
Let us approach the question from the point of view of the lessor. Ratio |
What is the nature of the lessor 's interest in the land ? The lessor has undoubtedly the reversion, but coupled with it is also the right to 50 per cent .of the unearned increase in the value of the land at the time of assignment of the leasehold interest by the lessee as also the pre emptive right to the land after d... |
This is the asset of the lessor which would have to be valued when the lessor is sought to be assessed to wealth tax. Ratio |
The right to 50 per cent of the unearned 'increase on assignment of the leasehold interest would certainly add to the value which the reversion would other wise fetch in the open market. Ratio |
Now, once it is granted that under the lease deed the lessor has a bundle of rights, which includes 'something ' more than the reversion, that 'something ' would necessarily be subtracted from the inter est of the lessee and to that extent, the interest of the 'lessee would stand reduced. Ratio |
The interest of the lessee would be the leasehold interest minus that 'something '. Ratio |
What goes to augment the interest of the lessor would corre spondingly reduce the interest of the lessee and it Cannot be taxed as the wealth of both the lessor and the lessee. Ratio |
It would be includable in the net wealth of the lessor and hence it cannot at the same time form part of the wealth of the lessee and must be subtracted in determining the nature and extent of the interest of the lessee. Ratio |
That takes us to the question as to how the leasehold interest of the assessee with the burden or limitation attaching under clause (13) of the lease deed should be valued. Ratio |
It is clear from the language of section 7, sub sectiOn (1 ) that what the Revenue is required to do for the purpose of determining the value of an asset is to assume that the asset which is to be valued is being sold in the open market and to fix its value for the purpose of wealth tax upon that hypothesis. Ratio |
Now, whenever the value of an asset has to be determined on the basis of a hypothetical_ sale, the court has necessarily to embark upon speculations which may be quite difficult and in 'some cases, even arti ficial. Ratio |
Here the asset to be valued is the leasehold inter est in the land with the burden or restriction contained in clause (13) of the lease deed and the inquiry has, there fore, to be directed to the question as to what is the price which this asset would fetch if sold in the open market. Ratio |
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