Full Judgment Text
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PETITIONER:
THE SPECIAL LAND ACQUISITION OFFICER, DAVANGERE
Vs.
RESPONDENT:
P. VEERABHADARAPPA ETC. ETC.
DATE OF JUDGMENT09/01/1984
BENCH:
SEN, A.P. (J)
BENCH:
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 therefrom.
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,
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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
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liquidity of investment nor any certainty of income. The
appreciation of principal or in come 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]
JUDGMENT:
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
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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 on 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 therefrom. 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
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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
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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.
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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. How ever, 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.
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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,
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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
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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
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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
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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
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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.
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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,
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N.V.K. Appeals allowed.
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