Capital gain – Valuation — Mauritius — Appellant lessee receiving payments on sale of building plots – Appellant failing to include payments in income tax returns for relevant years – Respondent raising tax assessments valuing land using comparables method – Whether valuer erring in law by adopting comparables method of valuation — Appeal dismissed
The deceased appellant owned the residue of a lease of 75 arpents (just over 75 acres) of development land in Mauritius and entered into a scheme with a developer and the landowner whereby the developer incurred expenditure to develop the land so that it could be sold to individual purchasers in building plots (the “morcellement” of the land). The appellant took some of the sums received when the plots were sold but did not include the morcellement receipts in his tax returns for the relevant years.
The respondent revenue authority raised six assessments for those years, treating the sums received as taxable income and making no deduction in respect of the capital value of the land before the development scheme was implemented. The appellant appealed against the assessments and the Privy Council decided that the Tax Appeals Tribunal had erred in law by treating section 11(1)(h) of the Income Tax Act 1974 (Mauritius) as taxing all the appellant’s receipts, rather than his gain, from the development: De Maroussem v Commissioner of Income Tax [2004] UKPC 43; [2005] STC 125.
The matter was remitted to the Supreme Court of Mauritius and a revised assessment was made, but the appellant disputed the open market value of the land immediately prior to the start of the morcellement. The government valuer reached his valuation by looking at “comparable” transactions, considering the value per arpent each transaction produced and making an adjustment so as to allow for differences in the characteristics of the land and the date of the transaction. The higher the value, the lower was the figure for the tax payable.
The appellant argued that the correct approach was to value the land using the “residual method”, which was guided by the actual amount received for the sale of the land in plots. From that, the actual cost of the infrastructure, land transfer tax and the developer’s profit was deducted. The appellant appealed to the Privy Council against the decision of the Supreme Court upholding a ruling of the Assessment Review Committee in favour of the respondent, on the basis that the comparables method of valuation was irrational. Held: The appeal was dismissed.
The Supreme Court’s decision had shown no error of law since no case of irrationality had been made out. In the light of the comparables, the government valuer’s valuation had been generous towards the appellant.
The use of comparables was the usual method of valuing land. In assessing the open market value, the best evidence was comparison with figures from other sales of comparable property. Where there were no comparable sales, the residual value method might be used, however, that should be reserved for exceptional cases and would not be applied where the open market value could be ascertained by such assessments and a spot valuation based on experiences of the market that was more likely to be right than calculations that depended on many assumptions and forecasts: Mon Tresor & Mon Desert Ltd v Ministry of Housing and Lands [2008] UKPC 31; [2008] 3 EGLR 13; [2008] 38 EG 140 applied.
A comparable could rarely be used without making some adjustments to allow for differences between the transaction used as a comparable and the subject land. Location, size, ease of development, potential development and date of the transaction require adjustment to the values of the comparables. However, that did not justify rejecting the comparable method. In the instant case, the government valuer had used comparable transactions from close to the date required for valuing the subject land. Those transactions were of large areas and the sites were in the same part of the island. Those characteristics rendered those transactions appropriate as comparables.
The residual method of valuation had been regarded generally as being less appropriate than the “comparables” method since it usually required more speculation about future events than the latter method. If one was to use the residual method to ascertain what a willing vendor and purchaser would have agreed as the price of land at a given date, assuming that the land had development potential, an estimate had to be made of many factors, including gross receipts after the sale or development, the timing of those receipts, the cost of the project, the developer’s profit and any tax payable on the project. Hence, the method was used when the use of the land being valued was one for which open market comparables were not available, such as a public use for which no open market existed. That was not the situation in the instant case, where comparable transactions existed, albeit requiring some adjustments.
It was wrong to overcome the inherent uncertainties in the residual method by making using the actual receipts and costs of the project that had been available to the valuer at a later date. The hypothetical vendor and purchaser before the start of the morcellement would not have known about the information used by the appellant’s valuer. They would have had to estimate the receipts and costs. They could not have attributed to them the knowledge of subsequent events, such as the sale prices fetched, the speed of sale of the parcels and the costs of the scheme. The fact that the appellant’s valuer had resorted to that improper application of the residual method emphasised the difficulties inherent in that method and the absence of any irrationality in the assessment committee’s decision to reject it.
Desire Basset, SC, and Nandras Patten (instructed by Blake Lapthorn) appeared for the appellant; Patrick Way and Karuna Gunesh-Balaghee (instructed by Carrington & Associates) appeared for the respondent.
Eileen O’Grady, barrister
