1.2 One of the exceptions
contained in the said definition excludes an urban land occupied by any building
which has been constructed with the approval of the appropriate authority or an
unused land held by the assessee for industrial purposes for a period of two
years from the sate of its acquisition.
1.3 We intend to examine
here, the liability to wealth tax in a case where the work for construction of
an industrial building has begun in pursuance of the approval by appropriate
authority, but is not completed within the period of two years or a case where
work for construction of a residential building has begun in pursuance of the
approval by appropriate authority, but is not completed. The case of the
taxpayers for exemption from levy of the wealth tax rests on the contention that
once the work of construction of a building has commenced, the structure even
though incomplete should be recognised as ‘building’ nonetheless, and in the
alternative a land on which the work of constructing a building is in progress,
ceases to be a ‘land’. It is argued that since the building is being
constructed, the same is exempt for the purpose of wealth tax in terms of the
meaning to be given to urban land more importantly on account of the objective
behind the levy of tax. The Revenue, on the other side is of the view that such
a land on which the building is under construction continues to be a land and
therefore liable to wealth tax. The conflicting decisions, available on the
subject, of the High Court highlight the importance of the issue that requires
consideration. The Karnataka and the Gujarat High Courts are of the view that
the land under discussion is liable to wealth tax, while the Kerala and Punjab &
Haryana High Courts hold that no wealth tax is chargeable once the work of
construction has begun.
2.
Giridhar G. Yadalam’s case, 325 ITR 223 (Karn.) :
2.1 Recently the Karnataka
High Court examined this issue in the case of CWT v. Girdhar G. Yadlam.
The assessee in that case was assessed in the status of a Hindu undivided family
and the assessment year in question was 2000-01. The assessee owned a plot of
land which was given to a developer for construction of residential flats in the
year 1995-96, so however the ownership of the same was retained by him as
contended by him in the income-tax proceedings. The assessee had claimed, in the
income-tax proceedings, that it had retained ownership of the land until flats
were fully constructed and possession of the assessee’s share was handed over.
It had contended that the development agreement constituted only permissive
possession for the limited purpose of construction of flats. The assessee
contended that it continued to be the owner of the land till the flats were
sold. A notice u/s.17 of the Wealth-tax Act was issued to the assessee for
bringing to tax the said land under development. On due consideration of the
facts, the Assessing Officer treated the said land as an urban land and brought
it to tax. An appeal was filed against such an order was allowed by the CWT
(Appeals) whose order was confirmed by the Tribunal following its decision in
WTA Nos. 4-5/Bang./2003, dated March 22, 2004.
2.2 Aggrieved by the order
of the Tribunal the Revenue filed an appeal before the Karnataka High Court
raising the following questions of law :
(a) Whether the Tribunal
was correct in holding that the value of properties held by the assessee at
Adugodi and Koramangala is not chargeable to wealth tax, as the same are not
urban land but land with superstructure and cannot form part of the wealth
as defined u/s.2(ea) of the Act ?
(b) Whether the
properties of the assessee cannot be brought to wealth tax assessment ?
2.3 The High Court on appreciation of the opposing contention observed that what was excluded was the land occupied by any building which had been constructed; admittedly, in the case on hand, the building was not fully constructed, but was in the process of construction and hence could not be understood as a building which had been constructed. It held that the Courts had to interpret any definition in a reasonable manner for the purpose of fulfilling the object of the Act and the Courts. It held that the term ‘constructed’ had its own meaning and would mean ‘fully constructed’ as understood in the common parlance.
2.4 The Court further observed that the Tribunal had chosen to blindly follow its earlier order, without noticing the intention of the Legislature and the specific wording in the Section and neither the owner nor the builder nor the occupant would pay any tax to the Government in terms of the Wealth-tax Act, if the order of the Tribunal was accepted. The ‘land occupied by any building which has been constructed’, should be interpreted in a manner that would fulfil the intention of the Legislature.
2.5 The Court did not approve the theory of openness of the land for the purpose of taxation accepted by the Tribunal as in its opinion the Tribunal had failed to notice the principle that each word in taxing status had its own significance for the purpose of taxation. The Court observed that the words ‘land on which the building is constructed’ had not been properly appreciated/ considered by the Tribunal.
2.6 The Court further observed that the interpretation of any word would depend upon the wording in a particular context and the object of the Act as understood in law and therefore, was not prepared to blindly accept the meaning given to the term ‘building’ in the Law Lexicon. That the use of the words ‘building constructed’ in the Act made all the difference for the purpose of interpretation.
2.7 The Court took note of its own judgment in the case of Vysya Bank Ltd. v. DCWT, 299 ITR 335 (Karn.) to buttress its findings in favour of the Revenue. It also distinguished the judgment of the Orissa High Court in CWT v. K. B. Pradhan, 130 ITR 393 (Orissa) which examined the meaning of the term ‘house’ for the propose of the Wealth-tax Act as in the said case, the Court was considering only the word ‘house’ and not ‘building constructed’ as in the case before it.
2.9 The Court further observed that it could not forget that the Parliament in its wisdom had chosen to provide an exemption only under certain circumstances which could not be extended without any legal compulsion in terms of the Act. The Court finally held that a land on which completed building stood, such land alone would qualify for exemption. The Court accordingly accepted the appeal of the Revenue.
Apollo Tyres Ltd.’s case, 325 ITR 528 (Ker.):
3.1 The Kerala High Court was appraised of the same issue in the case of Apollo Tyres Ltd. v. CWT, 325 ITR 528 (Ker.). In that case, the assessee, a public limited company was engaged in production and sale of automotive tyres. It was allotted a plot in Gurgaon on December 29, 1995 on which it commenced construction of a commercial building in November, 1997, and completed construction of a four-storeyed building with basement and started occupying it from March 29, 2000. After completion of the construction of the building, the land and building were granted exemption from wealth tax as the said assets fell under the exempted category. However, in the course of assessment for the A.Y. 1998-99, the Wealth-tax Officer assessed the value of the land treating it as urban land u/s.2(ea) rejecting the assessee’s contention that construction of building was in progress on the valuation date, that is, March 31, 1998, and as such the land could not be treated as urban land under Explanation 1(b) to S. 2(ea) of the Act. The first Appellate Authority upheld the claim of exemption of the assessee, but the Tribunal on appeal by the Department, reversed the order of the first Appellate Authority and upheld the assessment order by relying on the decision of the Karnataka High Court in the case of CWT v. Giridhar G. Yadalam (supra).
3.2 The appellant company submitted that the exemption ceased to be available only where, after two years of acquisition, the land was continuously kept vacant without utilising it for construction of building for industrial or commercial purposes. It was highlighted that the assessee had started construction of a commercial building as on the valuation date and in the course of two years and thereafter the assessee had completed the construction of the building and had started using the building which was no longer assessed by the Wealth-tax Officer as the building qualified for exemption. It contended that commencement of construction of the building on the urban land itself was use of the building for industrial purpose.
3.3 The Revenue on the other hand contended that the intention of the Legislature in limiting the exemption for vacant land up to two years was only to ensure that if the assessee wanted to get exemption beyond two years, the assessee should have completed construction of the building in the course of two years and used the building for industrial purposes. It further contended that unless the building was constructed and put to use for industrial purpose, before the year end, the land could not be said to have been used for industrial purpose. In other words, the value of urban land could be assessed to wealth tax until completion of construction of the building and until commencement of use of such building for commercial or industrial purpose.
3.4 The Kerala High Court held that the urban land that was subjected to tax under the definition of ‘asset’ generally covered vacant land, only. It noted the fact that under the exception clause ‘the land occupied by any building which has been constructed with the approval of the appropriate authority’ was exempt from the purview of tax which according to the Court clarified that when an urban land was utilised for construction of a building with the approval of the prescribed authority, then the land ceased to be identifiable as urban land; that the section contemplated for taxing such a land on which an illegal construction was made without approval by the appropriate authority and that it was only in such a case that such land would still be treated as urban land, no matter building was constructed thereon; that however, if a building was constructed with the approval of the prescribed authority, then such land went out of the meaning of ‘urban land’.
3.5 The question according to the Kerala High Court to be considered was whether during the period of construction of the building, the urban land on which such construction was made could be assessed to wealth tax. In the Court’s view, once the land was utilised for construction purposes, the land ceased to have its identity as vacant land and it could not be independently valued. The Court pertinently noted that the building under construction whose work was in progress was not brought within the definition of ‘asset’ for the purpose of levy of wealth tax. It also noted that there was no dispute that as and when construction of the building was completed, there could be no separate assessment of urban land and the assessment was thereafter only on the value of the building, if it was not exempted from tax. The commercial building constructed by the appellant assessee, the Court noted, fell within the exemption clause as commercial building was not subjected to wealth tax. The commencement of construction in the opinion of the Court amounted to the use of the land for industrial purpose as without construction of the building the land could not be used for the purpose for which it was allotted.
3.6 For removal of doubts the Court noted that part construction and abandoning further construction would not entitle the assessee for exemption, unless the assessee eventually completed construction of the building and used the building for commercial or industrial purpose. As in the case before the Court, the assessee progressively completed construction of a four-storeyed building with basement and started using it within the course of two years from the valuation date, the assessee was entitled to exemption; that the assessee could not be expected to complete the construction of
four-storeyed massive building in the course of two years which was the period provided in Explanation 1(b) of S. 2(ea). Keeping in mind the exemption available to productive assets, the Court felt that there was no scope for levy of tax during the period of construction of the productive asset, namely, commercial building by utilising the urban land. In other words, once the non-productive asset like urban land was converted to a productive asset like a building which qualified for exemption, then the assessee could start availing of exemption even during of conversion of such non-productive asset to productive asset. The Court confirmed the eligibility of the assessee for claim of exemption for urban land on which they were constructing a commercial building on the valuation date.
Observations:
4.1 The present scheme of the wealth tax primarily seeks to tax an unproductive asset and leaves un-taxed an asset, which is put to a productive use. This is amply clarified by the Finance Minister’ speech and the memorandum explaining the objects behind the introduction of the new scheme of wealth tax while moving the Finance Bill, 1992. Once an asset is shown to be a not non-productive asset, it ceases to be outside the ambit of the wealth tax. The activity of construction ensures that the land in question is a ‘productive asset’ and no wealth tax can be levied on an asset which is productive.
4.2 A land on being put to construction cannot be termed as an open land and even perhaps a ‘land.’ A land is a surface of the earth and once the surface is covered, it cannot be termed as the land, leave alone the urban land.
4.3 The decision in Giridhar G. Yadalam’s case under comment was discussed by the Kerala High Court in Apollo Tyres Ltd. v. ACIT, (supra), and only thereafter the Court did not subscribe to the view that construction should have been completed within two years. The Kerala High Court found that Giridhar Yadalam’s case was inapplicable, where the assessee constructed the building in stages though the full construction took four years.
4.4 The purpose and the objective behind introduction of the provision, brought in with effect from April 1, 1995, should be kept in mind. It was for bringing to tax an unutilised open land that the provision was introduced. Once a land is admitted to be put to use for the purposes of construction, it ceased to be a chargeable land and should not be subjected to tax if the construction of the building is eventually completed and is not used a subterfuge to avoid any tax. While there is no doubt that a land that is put to use for construction within two years, is exempt for two years from tax, for the period thereafter it is no longer a virgin land, so that it is not liable to tax.
4.5 Once land is married to a superstructure, it can no longer be treated as land simpliciter. It is also not a property capable of being occupied for use and be termed as a building. A building under construction is neither vacant land, nor can it be treated as a building prior to completion as is generally understood for municipal tax. The Supreme Court in Municipal Corporation of Greater Bombay v. Polychem Limited, AIR 1974 SC 1779 with regard to municipal tax had held that unfinished building would not justify any valuation, since it cannot be treated as a building. The Madras High Court in CWT v. S. Venugopala Konar, 109 ITR 52 has held that only the amount spent on construction would be the value of the property under construction. The Karnataka High Court referred to the decision in State of Bombay v. Sardar Venkat Rao Gujar, AIR 1966 SC 991, where it was held that a building in order for it to be con-sidered as a building should have walls and a room. The Supreme Court in that case had followed the decision in Moir v. Williams, (1892) 1 QB 264.
4.6 The Gujarat High Court, in CWT v. Cadmach Machinery Co. Pvt. Ltd., 295 ITR 307 (Guj.) found that the land on which construction had started would not be treated as building, so that the land value could be included under the law u/s.40(3)(vi) of the Finance Act, 1993 differing from the decision of the Delhi High Court in CWT v. Prem Nath Mo-tors P. Ltd., 238 ITR 414. Recently, in the case of CIT v. Smt. Neena Jain, WTA Nos. 17 to 20, dated 19-2-2010, the Punjab & Haryana High Court has upheld the view that a house under construction is not liable to WT and is not an urban land.
4.7 The Cochin Bench of the Tribunal in the cases of Mathew L. Chakola v. CWT, 9 SOT 617 (Cochin) and Meera Jacob v. WTO, 14 SOT 486 (Cochin), held that once construction activity started on an urban land, the land lost its character of an urban land and was outside purview of definition of the ‘urban land’. Similarly, in Federal Bank Ltd. v. JCIT, 295 ITR (AT) 212 (Cochin), it was held by the Tribunal that once the building was under construction, the land was no longer a vacant land so as to be made liable for wealth tax u/s.2(ea) of the Wealth-tax Act.
4.8 In the said case of Meera Jacob v. WTO, 14 SOT 486 (Cochin), the Tribunal has also upheld the alternative contention of the appellant that once a land was put to construction, it ceased to be an asset liable to wealth tax, as the activity of construction ensured that the land in ques-tion was a ‘productive asset’ and no wealth tax could be levied on an asset which was productive; wealth tax was chargeable only on such assets which were not productive. For supporting this proposition, the Cochin Bench followed its own decision in the case of Federal Bank Ltd. 295 ITR (AT) 212 (Cochin). The Cochin Bench in the said decision also held that once a land was subjected to construction, it ceased to be an open land; it is only an open land that could be treated as a land; a land was a surface of the earth and once the surface was covered, it ceased to be the land, leave alone the urban land.
4.9 It is exempt primarily for the reason that land on which construction is in progress is not an asset u/s.2(ea) as it has not been so listed. A land acquired for industrial use will be exempt for two years after its acquisition provided the construction starts during the third year. Once the construction has begun, as stated, the land ceases to be chargeable to wealth tax, subject to the condition that such construction eventually leads to completion of building. It needs to be appreciated that the exemption given for a land on which construction is in progress is in relaxation of levy of wealth tax on urban land.
4.10 In the case of Vysya Bank Ltd. v. DCWT 299ITR335 (Karnataka) the Bank had entered into an agreement for purchase of property on June 17, 1978 and was put in possession of the property. The Assessing Officer ruled that the assessee had become the owner of the property and was liable to wealth tax. On an appeal by the assessee to the Court, the Karnataka High Court examined the meaning of the terms ‘assets’ and ‘urban land’ and also the judgment of the Apex Court in CWT v. Bishwanath Chatterjee, (1976), 103 ITR 536 and ultimately ruled that the Assessing Authority was not justified in including the vacant land in the net wealth of the assessee for the purpose of computation of wealth as on the valuation date for the purpose of the Wealth-tax Act.
4.11 It is relevant to note that there are no rules for valuation of a property under construction. Neither there is a provision which state that such a property should be valued merely as land.
4.12 As noted by the Kerala High Court, the better view is that the decisions of the Karnataka High Court and the Gujarat High Court need review.
