THE SPECIAL. LAND ACQUISITION OFFICER, DAVANGERE v. P. VEERABHADARAPPA ETC. ETC. .B January 9; J984

A 386 I . • THE SPECIAL. LAND ACQUISITION OFFICER, DAVANGERE v. • P. VEERABHADARAPPA ETC. ETC. .B January 9; J984 [A. P. SEN AND E. S. VsNKATARAMIAH]

Land Acquisitio11 1894 .(/ of 1894) S. 23

Acquisition· of agricUlturaf lands in 1971 and 1972-paynient of C(Jmpensation- c Market value fixed ~n basii of capitalisation Principl?-Multiplier to be adopted- •. explained. •

Co1np~l1!J'{ltion-ckten11ination of-1nethod of capitalisation_:..whe1t w Qe resorted to. .

t [n the.Y:ears 1971 and 1972, several "thousand acres of agflcriltural lands in D ·two villages were acquired by ~he State Governn1ent pursua1'tt to different notifica- • tiOns issued ~nder section 4(1) of the Land Acquisition Act 1894. In response to notices ·under section 9(2), the respondents appeared ·before the Special Land. Acciuisition Officer and claimed co1npensation Varying between Rs.. 15,000 to Rs.25. 000.per acre for dry and wet lands ctePending. up~n the natu~e.and the quality of t.h.e soil, and the ·]~come derived therefron1. In some cases -compensation .was . 0

· ·claim:ed at ·more than Rs. 1 lakh Per acre for arecai1ut .garden lands. . . The Special L;ihd Acquisition Officer, by his various awards ·adopted a multiple of fifteen and a Warded compensation.at a flat rate of'Rs 3,300 per acre for dry agricu~tural lands and Rs 5 000.per.acre for we_t agri~ul~ural land_s.

F. On feferences undc; section 18, the Civil ,Tudge adopted a.1nultiple of fiftee times the net annu1T profits as there was no other method of determinillg the market valm: of the land, and enhanced the amount o( comp"ensatiOn to Rs. 19,500 per acre for wet agricul tur•a"t lands and Rs 1,10,000 for arecanut garden lands." - On appeals b.Y ·the Special Land· Acquisition Officer,.the ·High Court also adOpted the capitalised value at JS years'. purchase of the net ann~al·profits bu~ ~educed the amount of 9Jmpensation to Rs. 15,000 pet acre. for ~t agricultural lands an4 Rs.· 25,000 per acre for arecanut gar£1.en lands. . .

G · In the appeals to this Court. by the Special Land Acquisition Officer. it Was contended relying ·on the unreported 'dccisioi1 of the High Court dated November 21, 1977 in MFA Nos. ssi·-4/76 : . . . I The Special Land Acquisition Officer, [Javangere v. B. Basavarajappa & ()rs thiit the proper.· multipIC for computation o( the capitalized Value should be 12!, H 8.nd that the High Court was wr-ong in adopting the multiple of· _15 when the rate of return in the years 197l_and 1972 was~8 per cent per a:nnum:. · · .'

LAND ACQN. OFFICER V. P. VEERABHADARAPPA 387

.. A • Allowing the Appeafs;

2Copy pinpoint2. The method 'Of-capitalising the actual or inunediately prospective profits or the rent of a nun1ber of years' purchase should nofbe reso,rted to if there is _evidence of comparable sales or other evidence for computation of the mafket Value-.. It can be resorted to only" when no other_ n1ethod is available;. · [392 E] C 3·. · The ~caqing to be placed upon the phrase·"Market Value"' of the land under s.23 of the Act, is ~he 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 an 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. D. Its valbe is ineasured by a consideration of the prices that have been obtained9in the past for lands of similar quality and in similar positi_ons ... [394 H; 392 B·C)

4Copy pinpoint4. In Va·Iuing land or an· interest in Land for piJrposes of land acquisition procOOdings, the rule as to nun1ber of years' purch~se is not a theoretical or legal rule but depends ·upon economic factors such as the prevailing rate o_f retu_rn_ which ' a· prlldent investor in the class of properti_cs in. questjon would expect. The return E- which an inv~stor w_in expect from investn1ent will depend upon the characteristic of income as com·pared to that of idle security. The niost important of such eco· 'nomic 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 a~certain the gi-oss .incofti~ from the acquired property. The next·steP should ·be ascertain· the net income. Having_ asckrtained the net annual in.come, it mu~t be capitalized by cornputin'g the number of years' purchase. • [395 B-C] · .

Vyricherla Narayana Gajapatiraju v. Revenue Divfaiona/ Officer, Vizagapatnam, LR (193'9)66 JA 104; R11sto111 Cavasjee Cooper v. Union .Or India, 1970] ·3 SC!\. 530; F

·Oriental Gas CO. Ltd & Ors v. ·state.of West Bengal, [1979] 1 SCR:617; Uni(Jn. of india & Aur v. S1nt. Shanti De1•i e_tc etc AIR [19~3J SC 1190; referred .to.

5 In regard to investn1ent in agricultural 1ands there are many impon.d~ra· -. bles inasmuch as the inVestor runs a much greater risk than the risk that he run~ . G in· investment in housing which corisists in vagarieS of wePther and other uricer- tainties. There is no security of principal, no liquidity· of investntent nor any cCr- ..ta_inty 9f income. Th~ appreciation of princip"I or in-come is also. uncertain. The reasons for these is th?.{ agricultUral lands are not rea<;lily transferable under the various l'!-nd refcirms legisJation, ex. laws relating to ceiling-on agricultural holding H and tc!iancy laws. Jn evalu?ting the rate Or r~turn which would ordinarily satisfy a.11 investor in such a property, the risk factor ~;:is further to be- eValuated. There·

• . 388 SUPREME COURT REPORTS . [1984] 2 s.c.R. ·

ffiay. be total of partial fallure of crops throUgh the fai1Ure of rain o~ dr~~ght, o~ r,i1:u1dequate ~r excessive rainfall:. There may be: failure of ctops on' account Of locusts, . insectS , or Pests, The cost jnputs ' such as seeds, water, fertiHzer . etc. var:Y · from year to year. The fluctuations in price of agricultural pfoduce introduce a gteat deal of uncertainty. in ~egard ·to "incorrie. In ·vieW of the~e considerations, . . an investor ·wo~ld expect a .much higher rate of return so.~that the risk factor· is . · pr?perly discounted. [ 399 B-El : • B. ' In the instant. case-s, when the rate .of rettlri1 On ·investment· was s:2s. pCr ce;nt · .in the yea.rs 1971and1972, a petson investing'.his capita.I iQ.. ~gric;ultu_ral lands would', ordinarily.accept .2 Pei cent tO 3 per cent more than What he could obtain from. £:ilt-edged securities or. other .forms of Safe investmeitt lnci 'therefore the proper multiplier to be applied ·for· tl¥: purpose of capitalization could not i~ any .event· - exceeded· "ten", but.since· the State Government in these cases contends that proper c multiple for cover sho~ld be .12f: [399 F-Gl .

6Copy pinpoint6. the multiple of l2l s"hould be ai)pi~ed in comPµta'tion of the capitaliied value oflandS. The judgments and.-CrW of the High COurt are modified. The 'comp~nsation awa.rded for <lcquisition· of land reduced by one-siXth v.'he~ever the · amount. of .coffiPenstion had. been· determined .by the method of capitalization. The. rcspqndentS 'shalJ. get solatiuin 15 % on the Compensation comPuted as afore~. D · said1a.nd also interest. [399 ·H; 400 A-BJ ·· · - . · CIVIL APPEllLATE JURISDICTION : Civil Appe11Js Nos. 290·348, 729-746, 802-805(N) oll980, 2328-31 &)!350~2388 of 1981. . ; .·

• (Appeals by· Special leave from· the ·Judgmetit ·and decree.s of. . E .·the· Karnataka High Courl daied 12.7.79, 30.10.79, 4.6.81, 22.8.80; ,..( · 4.7.80, 10.7.80, 7.8.80, 24.9,SO, 21.8.79,. 27.7.79, 28.5.80, 13.6.so.. 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-.l-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, 1~8-149/78, 8-16/79, 936-943/77, 567/7'7, 222·234/78, 256/78- F · 259/78, 444-44&/78, ·. 458/78, 705~707/77, 211-217/78, 736-737/78, 923-24/77, 130-131/78; .443/78, 1313,1314,1311/79, 735f?8, 481, 482,. j-.

687. & 688/78, · 1432-35/79, 377-388/7-8, io87J80, 1352/79, rn67/78~ 77/SQ, 4156-98/78, 71J/77, 925/77. 622/80,:. 765/80 1702/79,' 717.-18/77, . 184/79, 260-61/78, 657/77 & 914-915/77) . .

G ·1 For the Appellants· • s.N. Ka'cker, and Swaraj Kaushal

For the Respondent; : H • S.S.· Jdvali, B.P. Singh and Mr. RanJit Kumar

LAND ACQN.- OFFICER v. P. VEE~AB~ADARAPP/I (Sen, J.) • 389

S.L. Be~dikar, and K.C. Dua P.R. Ramaseslz K.R. Nagaraja, A Naresh Kaushal and B. Krishna Prasad, Girish Chandra,A.V.-Rangdm . •and G. Gopa/akri.;h~an · •. The Judgment ofthe Comt was delivered by·

SEN, J. The short qii.esiio~ .involved in this appeal by special B leave and.the further appeals under s.54. of the Land Acquisitiqn Act, • •.' 1894 ('Act' for·short) direct.ed against the judgment and decrees of the . Karnataka High Court dated January ·24, 1979 and in the connect,ed ~. appeals i~ whether there has been any error i.11 principle or in law in the. illeth~d of valuation arrived at by .the courts below in adcpting c .J. \ 'fifteen' to be the multiple fo[ computation of capitalized ·value cf certain .agricultural lands acquired in the. years J97J and 1972. · .Jn t.he' connected itppeals although t~e point was n~t ?r,ecifically taken · before the High Court, but the parties were given notice that that was the real question to be determined. These appeals have accor.dingly ·been heard together as they involve common question. The .issue . · involved is as to t.he proper muitiplier to be applied in determii1ing the capitalized. value of the lands 'acquired. and thar depends on the rate of return on investments .in 1971 and 1972. •· · ·

In these appeals thejudgments were rendered by the High Court on. appeals being preferred by the SpecfaJ Land Acqbisition Officer, Davangere ·against the appellate judgments and decrees of the District·· E Judge, Chitradurga· and of· the Civil Judge, Davangere on vanous references made under s.18 of the Act.

• The facts. giving ris.e ·to these appeals are more or Jess simi)ar, and the essential factsmily be shortly stated. Due to ·the construction . of D.B. Kere Pick-up Project, several thousand. acres of agricultural F land in two villaoes in the State of Karnataka videlicet Budibar village in Harihar t';,luq· and SiraganahaH1>' ·vill~ge ;;, Pavangere taluq l. got submerged and" were accordingly acquired by the State Govern, ment ·pursuantto different notiJkations issued ·u1tdn s.4(lj-0f the Act ·.published on divers<; dates. in the years 1971 and 1972 followed by .... : the usual 11oiifications .under S·.6. In response "to noticesissmd under s.9(2) of the. Act, the respondents appeared before . the Spceial .Land . . . Acquisition. OfllGer, Dayangei·e and. cl~in1cd comper1,s2ti·Gn - between. R.s. 15,000 per acre to Rs: 25,000 per acre for dry and wet va·rying .

lands depending Upon the. quality of the soil, the nafore of the yield . and-the income derived· thcrefrO:ru. In soine cases they also claimed· ·H . I . . ~ . • . compensation at more t[lan rupees 011e lakh per acre for ·arecanut . •

390 SUPRBME COURT REPORTS. [19~4) 2 S.C.R.

A . . garden hinds. The Special Land Acquisition Officer however by his . .various awards adopted a multiple of fifteen and awarded compensa- · tion' at a. fiat rate of Rs. 3,300 per care for dry agricultural lands and· R,s. 1,ooo per acre for wet agricultural lands. On reference under ' s.• I 8 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 B agricultural lands and Rs. I, JG,000 for are.., nut garden lands. There was common evidence adduced by the parties in all these cases and the evidence disclosed that the acquired lanps were more or less similar Q in. n~ture and contiguously situated. ·On a considerntion of t.he ~.·· evidence the Jearnecf Judge came to the conclusion t11at the lands affected were capable of yii°elding two crops· in a year· with assured c facility, the first being o( pad.dy and the second of jowar, irrigation -groundnut, chillies etc. As there was no other methcd of determin.ing the market .value of .the land;the learned Civil Judge applied a multiple of 1.5 time_s. the net ,annual profits.. On appeal by the Special Lar.d' Acquisition Officer, the High Ccurt also adopted the e2pitalizccl value at 15 years' purchase of the net annual profits but reduced the amom1t . D of compensation to Rs. 15,000per acre for wet agricultural lands and · · Rs. 25,000 ·per acr~ fat arecanut garden lands i.e. depending upon the·natiire 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 computaticn of the capitaliZ<d value of the· lands acquired for the purpose. of determining the amount of com- pens<ition payable for ·acquisiticn· thereof; t · . . '

Shri Kacker, learned counsel appeerirg on behalf cf the appellant I contenas that the High Court was wrong in adopting the· multiple ,!-- of-) 5 of the actual or immediately pro.spcctive .net anirnal profits of the lands acquired to be the .capitalized value thereof when the rate of F ·return in the years 1971 and 1972 was 8% per annum. According to. the learned counsel, there is an error in pri~ciple or in law in the 1'· ... method employed and he draws-0ur attention to the unreported decision ) of the High Court i'n The Special Land Acquisition Ojfi'Ccr ,Davangere v. . I. B. Basavarajappa & Ors.< 1 l layi~1g down. that the proper multiple for G computation of the capitalized value should be 12t having r.egard to the rate of return afthe relevant time i.e. on the date of the notifica- tipn under s.4>(1) ·of the Act. The contention must., i.n our opinion, prevail. •. • H Tn. Basavara;appa's case, ·supra, a Division Bench of the High

.. (1) Misc. First Appeals Nos. 881:4/76 decided on 21.fl.19,77.

LAND A,CQN. OFFICER v. P. VEERABHADRAPPA (Sen, J.) 391' • • A Court while dealing with the determination of compensation payable for similar agricultural lands in the neighbourhood ·of the same two villages acquired at or about the same time adopted the multiple of 12t times the net annual profits for purposes of determining the . capitalized value thereof.· 11) c.oming to that conclusion, the. Hig~ Court observed :

"The rate of return from Government Security, which is Gilt-edged Security:, was around 6% ii1 the year 1971-72. • A person investing his capital in irrigated land would expect a return of about 2 %more than what he obtains from Gov- • ernment Securities. That ~cans, a return of 8 %would be the / - the normal return expected by an agriculturist investing in . .C .' ) purchase ofwet lands. If 8 %. was the return expected, the . nµmber of years' purchase value comes to l2t," · ·

We regret to find that in these cases the High Court instead of having adopted the multiple of 12t times observed that the decision in Basa.varajappa's case, supra, was not applicable because. the lands acquired in these cases were for superior for which there is no rational basis. If the lands acqt1ired were of a superior quality, the actual or immediately prospective net annual profits would be more and when multipled by the proper multiplier arrived at on the rate of return at the relevant time i.e. ·an the date of the notification under s.4(1) of the Act, the a'niount of compensation for acquisition of such lands would necessarily be more. The quality of the soil has no relevance . . to the proper"multiplier to be adopted in determining the· capitalized

- value.

In Vyricherla Narayana· Gajapatiraju v. .Revenue Divisional· Offiter; Vizagapatnam 11 > the Privy Council adopted ihe traditional legal definitfon of value as the pric.e at which. th~ property would F

sell "as between a willing buyer and a willing seller".· In its narrowest sense it is designed to preclude a valuation based on an assumed forced sale; the property must be appraised at what it would probably bring if the. owner allowed a r~asonab!e opportunity ·for negotiatiOQS. But the Courts have invoked a ·mythical willing buyer to justify a G valuation highe.r than any attainable sale price. According to the Privy Council, "market value" of the land within the meaning of s.i23 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- H· (1) LR [1939] 66 IA 104

# 392 SUPREME COURT REPORTS . [1984) 2 S.C.R. ~· . . .

cuiar purpose .. The owner: is. eutitled to. the value ·of the property A · . in its· actual condition at the time of expropriation, with all its ail van- tages and with all. its possibilities, excluding any advP;>tage due t~ . the ·.carrying out of the scheme for the purpose for which ihe propei:fy is acquired. It is not only realized possibilities but also the future possibilities that must .be taken into consideraiion. The Privy Coun: B. . c:il further observed that there is not in general ariy market for land in .the sense that_ one spoaks of market for shares or commercial g0ods. • · ·The v~I lie o( any such ar!icle at any particular time cari readily be ascertained by the prices being .obtained for. siinilar artiCles i11 the: • m~rket. . fo the case of land, its value can also be ruea$ured by a consideration of _the prices that have been obtained in the past for .lands of'similar quality ·and in similar positions; and that. is what· · must be 1fr,ant in g.eneral by the "1i:Jarket value" _in s.23. ·

The function of the Court. in awarding compensation. under the Act is to ascertain the .market value of the Iarid at the date of the · notification under s.4(1) of the Act and the methods·. of vnluation D • ·may be : (I) Opinion of experts.' (2) The prices pi\i.d within a reaso- "'- · ·nable time in bona fide transactions of purchase or ·sale of the. lands. acquired or of the lands adjacent to those acquired ·and possessing siniilar advantages. . And (3) A number of years•· purchase of the actual of immediately prospective ·profits of ihe lands acquired-.. _Nor- . · · mally; the inethod.of capitalizing the actual or-immediately prospective E 1 · profits or the rent ofll ;lU•nber of years' purchase should not.be resorted to if there is evidence of comparable sales or othe!' evidence for compu- tation of·the market value: ·It can be tesorted·to ~nly when no other method is available. . .

Itds axiomatic· that the best evidence to prove what a willing F. p11rchaser would pay for .the la1id under . acquisition would be the evidence of sales of comparable .properties, proxi1riate in time to •the date of acquisition,· .similarly ·situate, and possessing the same or l .. similar adva~tages a~d sUbject t·o· tlie Same or sim_ilar disadvantages. ~hrket value is the price the property may fetch in the open market G, if so.Id by a willing seller un~tfected by ·the special need.sofa particular • purchase. Wh¢re definite material is not forthcomi~g either m tl.e . shape of sales of similar. lands in the nei_ghbourhood at .of abo_ut the· date qf notification under s.4(l) or oiherwise, the Court has no oth~! alternative but to fall back on the method of valuation by cajJitaliza- ff. tion. Iii valuing land or an interest in land· for purposes of 1and · acquisition proceedings. the rule :as to number of years' purchase is \

LAND ACQN. _OFFICER v. P. VEERAB~ADRAPPA. (Sm, J.) . 393

not. a theoretical or legal .rule but depends upon economic !actors such as the prevailing rate .. of interest· in money invesiments. The return which an investor ·will expect from an investment wil!"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 incre~se; (4) cost of collection etc.· The most difficu)t· and yet the most important and crudal part cif ihe whole exercise is B the determination of the reasona~le rate of return in respect of invest- • ment in various types 9f properties. Or:ce. this rate of return and'. a·ccor<lingly the rate of -capitall~£tion are .determi~ed, there is- ·no. problem in valuation of the prape1iy.

- . l' The traditional concept of capitalizati"on was indicated by this Court in Rustom Cava<jee. Coopei .v. Un.ion of India. <1 >. It was· stated to be: • c

. "Capitalization of the _net annual profit ouf of the property at a rate equal in normal ·cases to ihe return from gilt edged securities: . Ordinarily value of the property may be D determined by capitalizing the net annual·value obtainable in ihe market at the date of the notice ·of acquisition." . .

.rt is thus clear from th'" " 11ne enunciation that the method of d'termining t)Oe value of the property by_ application of a multiplier to the. net annual income or profit should only ·be· adopted when. E there.is no evi<\ence of comparable sales of similar lands in or about the neighbourhood at the relevant time i.e. on the date ·of the notifica-

- -~ tion under. s.4(1) of the Aot. In certain circumstances ·however the ' Court h~~ no other alternative· but to ~all back on the ·capitalized value. ' F Alfred D. fahr in "Law of Emi1ient Domain" (1953 edn:) after a general discussion regarding the· valuation of ·property, sums up at· . pp. 100-101 . . .

"!t . is evident, therefore, from . the foregoing definitioi1s . as well as from numerous other definitions whkh may be G cited, that the fair market value of property taken by eminent d amain is the price that the property will bring. when offered for sale by ·one desiring, but riot .obliged, to sell; and pur- chased by one desiring to purch.ase but u11der no necessity H • (I) [1_9YO] 3 s·.c.R. 530.

394 · SUPREME GOURT REPORTS [1984] 2 s.'c.R. • A· 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 . properti a market value." B • 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 twidence of market value is available. c 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 : D "It is quife evident 'from the formula that the lower the· . rate of return applied~ the higher the capitalized sum will be. Ho\v ever, the rate of return on .money invested is depend ent. , upon many varied factors; (!) safety of principal; (2) liquidity ·of investment; (3) certainty of income; (4) possible market E fluctuations; (5) appreciation of principal or income; and • undoubtedly other elements too numerous to mention. The interest rate current in the security market must 'be

F considered, as well as the fovestment rate to be obtained from high grade ·bonds .or common stocks and commodities traded on the ·several 'exchanges."

The principle ded.ucible from the above passage Is that the basic - factor in applying the method of capitalization of income for ascer- taining the market value of property is the rate of return that an ordi- nary investor would .. reasonably get. on his investment, having· due regard to all the relevant circumstances. G .In the classical economic sense, as adopted by the. :Privy Council in Vyricherla's case, supra, the meaning to be placed upon the phrase "market value" of the land under s..23 of the Act is the price at which the land acquired could actually be sold at the relevant time i.e ..on H 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 .. •

LAND ACQN. OFFICER v: p. YEERABHADl!.APPA (Sen, J.) 395

.sale is not to be assumed. The pric~ 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 capitaliza- tion of the· services· or income which.· act'!al 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 .iheore- tical.or legal rule, but depends upon the economk factors such as the. B prevailing rate of· return which a prudent il'vestor in the dass of properties. fo ·question would expect. · The most important of such economic factors is the prevailing rate of interest at the rele~ant time i.e. on "the· date .of the notification under s,4(1) of the Act. It

- is first. necessary to ascertain the gross income from th._. acquired . ' property. The next step should be, to ascertain the net income. Having c ascertained the net annual income, ·It inust 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 · D in the gro~I!!· of. commerce and trade .. Due to growth .of ind~stries both in the public as well as in the private sector investment of capi- tal in such industries, if not anymore secure, have cbmc into the law merchant and such other alternative available securities have attnfcted persons who ate 'inclined. to invest, rather"than gilt:edged securities alone, apart from m~king Jtxed deposits' ii1 the scheduled banks. This E accounts · for the variation of the ,proper multiple to .be;adopted. ' The

- line of inquiry in such ca&es must therefore be : What was the pre- . vailing rate of interes.t on long .term deposits with scheduled banks or in the public or private sector ?

". At !he turn of the century, it was not uncommon for the Courts ·to adopt a rule of .c.!O years' purehase for arriving at the capitalized F

value of agricultural lands. It· had long been the practice in the Courts of the then Madras Presidencrto calculate the profits J'rom any form of landed property as equal to :the profits made by investing of. money in the gilt-edged secu~ties.. Till the early SO's, the Coiirts Of the then Madras Presidency held that the capitalized value of G agricultural lands should be arrived at :20 years' purchase having regard · to the ·rate of interest on gilt-edged ,securities at five per cent per annum. It was, however, observed that with respect to mell)'aram interest in ·a zamindari land or a vacant sjte, it was dilliculno acl:ept ., the current rate of interest on gilt-edged secutries as a safe guide to the H_ multiple to be applied to ihe annual profits on 'ryotwari land. The

SUPREME COURT R,EPORTS \i984] 2 S.C.R.

landlord .in sue~cases would not on!) ~xpect to get a return on the capital invested on the. Jand but also something in a<ldition ·tci that as compensation for his tro,rible in attending to the land and for the risks involved in the·cultivation of land. It was observed. ttiat althou.gh .... the tenants might have ,af!;reed to pay him a· fix<d rent in mone.y, yet· if a full crop was not niised on the land either through failure of rain B or because .of pests or for any other 'reason, it was extremely difficult · for the landlord \o realize the rent.. For. these reasons.: the landlord naturally expected an appreciably lirger. return than he would expect froin gilt-edged securities which he lefts in the bank and for the realiza- tion of the interest of which h·' is put to .no trouble ·whatsoev~r.

c It.~ould· be unrea{is;ic to adh~re .to the traditional view of'""', · capitalized value being linked with gilt-edged securities when invest- . ment in fixed deposits with 11ationalized banks, Natio1ial :savings , Certificates, Unit Trusts and other fonils of Government secmities . and even in the share market in the shape of blue chips conimand a - ,mu~h greater return. More secure the capital and regular the return, lesser the rate of interest .. Most secured kind of investment is Govern- ment · securities or· deposits with scheduled banks ,, Unit Trust .. or National Savings Certificates. The rate ofinterest 6 · Government of India bonds for a period of JO years in 1972 yielded 5. 75 % per annum. As per the Governn1ent of Karnataka publication called . ·"Finance Accounts cif 1972-73" the rate of interest on the Mysore E . State Developniertt Loans issued in the ytiars 1967, 1968, 1969, 1970, 1971 and 1972 was uniformly 5.3/4 % return. The rate of interest on fix~d depoSits with State Ba11k. 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, .197~ was 8.25% per annum .. National Savings Certificates; ·7 years,.. F 2nd issue yielded tax-free interest af 6% on maturity, 7 years; 3rd · i'ssue 6% tax-free payable annually and 7 years, 4th issue 7.5% payable" j - annually but subject to income-tax. . ~ . ,. ..In Oriental Gas Co: Ltd. & Ors. v. State of West Bengal.'"·Jhis • .Ccmrt held for the acquisition of ii,n. industrial undertaking in ·:the G State of' West Beng!ll that if 12! % of the capital invested was the ·annual return; the· adoption of mu]iplier of "eight" could not be 'i

unreasonable in the year .1962. Thet cimtention based on the iradi- tional view ·expressed by Shah, J. in Cooper's case, supra, that the H . . . .. multiplier must be. ·related to the rate of interest on gilt-edged securities .. • (I) [19791 1 s.c.R. 6j.1.

. LAND ACQUN.. QFF!CER v. P. VEERAB!:IADARAPPA ( S!•n, J.)' 397

·was repelled by Chinnapa R~ddy, J. · H was stated .that the .observ.a- A. tions of Shah, J. in Cbopel"'s case that.'capifalization of the net annual · value of the property, at a ·rate <:qua! in normal cases .to the return· from gilt-edged securities' was all' important method of.determination of compensation, did not lay ddwn a rule of law of universal applica, tion.. It ·was observed : " of "'The·very use th.e word "normal" by Shah, J. indicates . that it was not intended to lay down any invar.iable rule .that whenever a method of capitalization of net.profit was adopted,· · the return from gilt-edged securities was to be thebasis .. ·Thai

.. should depend on a va~iety of circumstances such as the . nature of the pro,rty, the norn1al return which may be expected on like investment, the state .of the ca.pital market' .and several such factors.,, . • ' In Union of India· & A.nr. v, Smt. Sh.anti.Devi etc. etc. cv this Court recently had occasion to' lay down the<;!ijnciple as to the true' multiplier · · of "thirteen" applicable in determining the capitalized .value of about . D: • ' 70,000 acres of agricultural land located In .the Kangra ".alley in the. State of Himachal Pradesh where the notification under s.4(1) of the Act had bee1i. issued in the years 1962 and, 1963, and' where there was no eyidence 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 dec.isions, one of us (Venkata- E . ramiah J .) observed :

- , "The number of years' purchase has gradually decreased as'the prevailing rate of interest realisa):ile from safe investments has gradually increased-the ·higher the rate. of interest, the lower the number of years"purchase. This method of valua- F tion involves capitalizing the ·Ile! inco1ne that the property. · can. fairly· be expected to produce >Ind the rate of capitaliza- tion is the percentage ofreturn.~n.his investment that a.willing - JI.. ·buyer would expe.ct from the property during the relevant • period.'' ·

. The Couri explained that although at one time it was felt .th.at . interest on gilt-edged securities or Gover1lment bonds s!lould alone ·~. be taken into consideration, having regard to the safety .and liquidity of investment, but 'the circums.tances have now changed during the

(I) AIR 1983. SC IJ90

•. ,_. 398 (.1984) 2 s.C.R ..·

A recent years and deposits with the Stale ·Bank . of. India and hther . nationalized banks and even in the share market there are many blue \- chips which command stability ·and other attendant benefits such as issue of bonus ehares et cetera, and added : .

~· "A return of 10% per annum _on such safe investments is B. almost assured. Today nobody thinks of investing oii 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 ·1902 and 1963 an investor in agricultural -'land expected annual net return of at l~ast 8 %· It means that if the lai1d yielded a net annual income of Rs. 8 ·a c willing buyer· of land would have paffl for it Rs. 100 i.e."

. a little more than 1.2 times the annual net income.'.'. . . There are. certain "general considerations which· investors cif all - ·types take more or less into acccount : yield and appreciation possi- bilities, the ability .readily to di$ose of-the investment (marketability)' 'D and' safety.· Investments· differ ·with respect to assural)ce of income fl and safety· of principal. In the investment market, the quality of . investment is evidenced_ by the yield or return that is· produced in relation to market price higher the quality, the lower the yield. Invcs- . tors. must take in(o account various: types of risks associate'd with different investment 1nediums and therefore adopt a type of investment that is appropriate to their resources and particular investment objec- . tivcs.

As_ already stated, some. 20 to ·30 years back i.e .. tiJI the early '50s, it was taken as ·a settled rule of practice, that ·the capitalized value·. of agricultural ·(ands should· be arrived at 20 years' purchase .F having regard to the rate of interest on gifr: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 invest- ment in housing· was more secure. than· other forms of .Government securities in respect of safety of inves"tment. Investment in housing involves certainly" of l~bour and etfo~t such as maintenance, collection of ren\, payment of taxes et cetera. The rate of return expected therefore was 1.1/2% to 2.1/2% more than what was expected from i!Hdged securities. A person investing his capital in agricultural rands would ordinarily expect a return of 2 % to 3 % more tha~ what he could obtain froQJ. gilt-edged . secu_rities or other forms. of ~afe H· .nves t1ncn t .sue1t n.) °" fixed ·deposits in scheduled banks. Nat10nal Savmgs 1 · - • • k d Certific1tcs, Unit Trusts ·"' ·etera i!r on blue chips i.e. ~n stoc s an •

.. . - LAND ACQUN. OFFICER 1', p., VEERABHADARAPPA (Sen, J.) 399 .

shares in the public or private sector which )ield a much greater return.. A ~

Ia regard to investment in agricultural lands, there are many imponderables in as mucl:i as the.investor runs a much greater risk than the risk that He run.s 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. B The appreciation of Principal or income is aiso uncer~ain. The reaSons . [or these is that agricultural ·1ands 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. I which place restrictions on transfer of such lands with concomitant

- danger of effacement of the rights ~f the absentee-landlors and""ihe . creation of rights in the tillers of the soil. lri evaluating the rate. of return which would ordinarily satisfy ah investo1' in such a .Pr~perty, ·the risk factor has further to be evaluated. There may be total or partial f!iJure of crops either.tllfough failure of rain or drought,·or c • inadequate or excessive rainfall. Ther.e . may be a failure 'Of cr~s on account' of locust i)'ivasion or insects or pesis, The cost ·inputs such as seeds, water, ·fertilizer~ laboWI charges etc. would vary from year to yca,r. lf the,overall cost goes up, the income from agricultural produce would be comparatively Jess. The fluctuations in price of agricultural produce introduce a great deal of uncertainty in regard to the income that can be expected from the sale of the.produce.· If the yield· of the .crop in .other producing countries is large, ·or the market prices prevailing in such countries are low, the prices of such agricultural produce in India would go down. In view of these con- siderations, an investor 'would expect a much higher 'rate of return so that the. risk factor. is properly. discounted. . . • · • In the premises, when the· rate of return .on· investment was F· ··~ 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 capitaliiation 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 121, in computation of the capitilized value of the lands in these cases having regard to the rate <;if ·~.. ·return of 8 % at the relevant time i.e. on the date of the notification under s.4(1) of the Act. 1n view of this, it must be held ihat the multiple of 12i shouliJ be applied· in computation of the capitalized value of the lands. '

\.-. .. 400 SUPREME COURT REPOR.TS · [1984] 2 S.C.R.

A In the ·result,· the appeals must succeed a~d are .allowed, The judgments and decrees of the. High.' Court are modified by d.irecting that the compensation awarded for acquistion. of land should be reduced by one-si;x:th, in these cases wherever tl\e amount of com-· pensa:tion has been d.etermined by the method· of capitaiiiation: The respondents shall get solatium.@15%.o·n the compensation com. B puted on the above basis and shall be paid intere.st aHhe rate decreed . by the courts bel<?w·

j .. · · The costs shall be borne by tbe parties throughout as incurred.. ~

•• N.V.K. • ...' Appeals allowed. - • • .. .:.,r ' • • •