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Commissioner Of Wealth-Tax v. Prakashi Talkies Pvt. Ltd.
Summary of Legal Opinion: K. Shivashankar Bhat, J.
Factual and Procedural Background
The Bench considered two questions referred under the Wealth-tax Act, 1957 in relation to wealth-tax assessments for the assessment years 1984–85 and 1985–86. The questions were (1) whether the Tribunal was correct in holding that the cinema theatre owned by the assessee should be treated as "plant" or "office premises" for the purpose of section 40(3)(vi) of the Finance Act, 1983; and (2) whether the amendment to section 40(3)(vi) by the Finance Act, 1988 was declaratory of the law as it always was and therefore had retrospective operation for the assessments in question.
The Bench referred to a prior decision in I.T.R.C Nos. 184 to 187 of 1982 — Santosh Enterprises v. CIT ([1993] 200 ITR 353) — where a Bench of this court held that a cinema theatre is "plant" for the purposes of the Income-tax Act, 1961; the court noted that the same reasoning would apply under the Wealth-tax Act. The Appellate Tribunal had accepted the assessee's contention that the 1988 amendment was declaratory and retrospective and thereby excluded the cinema theatre from taxable assets. The court answered both questions in the affirmative and against the Revenue.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cinema theatre, owned by the assessee, should be treated as "plant" or "office premises" for the purpose of section 40(3)(vi), Finance Act, 1983?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amendment to section 40(3)(vi), Finance Act, 1983, by the Finance Act, 1988, was declaratory of the law as it always was and that it had retrospective operation for the assessment pertaining to 1984–85 and 1985–86?
Arguments of the Parties
Assessee's Arguments
- The amendment effected by the Finance Act, 1988 substituting clause (vi) of section 40(3) was curative or declaratory in character and therefore should be given retrospective effect to cover the assessment years 1984–85 and 1985–86.
- By virtue of the amendment, a cinema house is specifically excluded from the definition of "building" (that is part of the net wealth) and thus should not be treated as a taxable asset for the years in question.
- It was argued (as stated for the assessee) that even under the original clause (vi) a liberal interpretation of terms such as "factory" or "office" could include a cinema house (for example, a cinema as an office for the purposes of the cinema business), which would place the cinema outside taxable assets even before the amendment.
The opinion does not contain a detailed account of specific arguments advanced by the Revenue in opposition in the text provided.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Santosh Enterprises v. CIT, (1993) 200 ITR 353 | Held that a cinema theatre is "plant" for the purposes of the Income-tax Act, 1961. | The court applied the same reasoning under the Wealth-tax Act and accepted that the cinema theatre should be treated as "plant" or "office premises" for section 40(3)(vi), answering the first question in the affirmative and against the Revenue. |
| Channan Singh v. Smt. Jai Kaur, (1969) 2 SCC 429 : AIR 1970 SC 349 | Principle that where a statute is curative or declaratory, retroactive operation can properly be ascribed to it rather than treating it as prejudicially affecting past rights and transactions. | The court relied on this principle to support the conclusion that the 1988 amendment could be declared declaratory and given retrospective effect since no past rights would be prejudicially affected. |
| Sha Chunnilal Sohanraj v. T. Gurushantappa, (1972) 1 Mys. L.J 327 | When an amending Act substitutes an old subsection with a new subsection, an inference can be drawn that the Legislature intended the substituted provision to be deemed part of the Act from its inception. | The court invoked this authority to support the view that the amended provision should be treated as if it had always formed part of the statute, reinforcing the declaration of retroactivity for the amendment. |
Court's Reasoning and Analysis
The court proceeded in two main steps corresponding to the two referred questions:
- On the first question the court accepted the view in Santosh Enterprises v. CIT that a cinema theatre is "plant" under Income-tax law. The court held that the same reasoning applies to the Wealth-tax Act and therefore the Tribunal was right to treat the cinema theatre as "plant" or "office premises" for the purposes of section 40(3)(vi). This meant that the cinema was not to be treated as a taxable "building" under that provision.
-
On the second question the court examined the original formulation of clause (vi) of section 40(3) in the Finance Act, 1983 and the effect of the substitution made by the Finance Act, 1988 which explicitly excluded a number of specified uses, including "cinema house", from the buildings that form part of net wealth.
- The court referenced the Memorandum explaining the 1988 amendment which indicated that the amendment aimed to remove unintended hardship and to exclude certain productive or business-related uses (including cinema houses) from the scope of taxable assets.
- The court emphasized the object of section 40(3) as being the taxation of unproductive assets (as reflected in the Finance Minister's speech) and noted that the exclusion of productive uses such as factories, godowns, etc., was consistent with that object.
- The court observed that the term "factory" was not defined and that a liberal interpretation might include a cinema house, which would have led to exclusion even under the earlier wording.
- The court treated the 1988 substitution as a curative amendment intended to obviate an unintended omission and to clarify the legislative intent. Applying the principles from Channan Singh and Sha Chunnilal, the court accepted that the amendment could be regarded as declaratory of the law as it always was and therefore retrospective insofar as it did not prejudicially affect existing rights.
- Given that no prejudicial effect on rights was identified, the court agreed with the Appellate Tribunal's acceptance of the assessee's contention and answered the second question in the affirmative and against the Revenue.
Holding and Implications
Holding:
Both references were answered in the affirmative and against the Revenue.
Specifically:
- The Tribunal was right in holding that the cinema theatre owned by the assessee should be treated as "plant" or "office premises" for the purposes of section 40(3)(vi) of the Finance Act, 1983.
- The Tribunal was right in holding that the amendment to section 40(3)(vi) by the Finance Act, 1988 was declaratory/curative and could be given retrospective operation for the assessment years 1984–85 and 1985–86.
Implications:
- Direct effect on the parties: The cinema theatre was excluded from the taxable assets for the relevant assessment years; the decision goes against the Revenue and in favour of the assessee.
- The opinion relies on existing authorities and principles to characterize the 1988 amendment as declaratory/curative but does not purport in the text provided to establish a novel principle of law beyond applying those authorities to the facts; the immediate consequence is the exclusion of the cinema house from net wealth for the assessment years in question.
References answered accordingly.
K. Shivashankar Bhat, J.:— Under the provisions of the Wealth-tax Act, 1957, the following two questions have been referred for our consideration:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cinema theatre, owned by the assessee, should be treated as ‘plant’ or ‘office premises’ for the purpose of section 40(3)(vi), Finance Act, 1983?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amendment to section 40(3)(vi), Finance Act, 1983, by the Finance Act, 1988, was declaratory of the law as it always was and that it had retrospective operation for the assessment pertaining to 1984–85 and 1985–86?”
2. The questions arise in connection with the wealth-tax assessment for the assessment years 1984–85 and 1985–86. In I.T.R.C Nos. 184 to 187 of 1982 -Santosh Enterprises v. CIT, [1993] 200 ITR 353, decided on September 29, 1988, a Bench of this court held that a cinema theatre is plant for the purpose of the Income-tax Act, 1961. The same reasoning would govern the case under the provisions of the Wealth-tax Act also. Consequently, the first question is answered in the affirmative and against the Revenue. The second question arose under the following circumstances:
Under section 40 of the Finance Act, 1983, provision was made to levy wealth-tax on certain companies. The purpose of the provision was stated by the Finance Minister in his introduction to the Bill thus (see [1983] 140 ITR (St.) 32):
“It has come to my notice that some persons have been trying to avoid personal wealth-tax liability by forming closely held companies to which they transfer many items of their wealth, particularly, jewellery, bullion and real estate. As companies are not chargeable to wealth-tax, and the value of the shares of such companies does not also reflect the real worth of the assets of the company, those who hold such unproductive assets in closely held companies are able to successfully reduce their wealth-tax liability to a substantial extent. With a view to circumventing tax avoidance by such persons, I propose to revive the levy of wealth-tax in a limited way in the case of closely held companies. Accordingly, I am proposing the levy of wealth-tax in the case of closely held companies at the rate of two per cent on the net wealth represented by the value of specified assets, such as, jewellery, gold, bullion, buildings and lands owned by such companies. Buildings used by the company as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its low paid employees will be excluded from net wealth.”
3. The relevant section (as it appeared in the Finance Bill, 1983) is as follows (see [1983] 140 ITR (St.) 71):
“(3) The assets referred to in sub-section (2) shall be the following, namely:
(i) gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals;
(ii) precious or semi-precious stones whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
(iv) utensils made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals;
(v) land other than agricultural land;
(vi) building or land appurtenant thereto, other than building or part thereof used by the assessee as factory, godown, warehouse, hotel or office for the purposes of its business or as residential accommodation for its employees whose income chargeable under the head ‘Salaries’ is ten thousand rupees or less;
(vii) motor cars; and
(viii) any other asset which is acquired or represented by a debt secured on any one or more of the assets referred to in clause (i) to clause (vii).”
4. Subsequently, in the year 1988, under section 87 of the Finance Act, 1988, the above provision was amended. Section 87 of the Finance Act, 1988, so far as it is relevant reads thus (see [1988] 171 ITR (St.) 89):
“87. Amendment of Act (11 of 1983).— In section 40 of the Finance Act, 1983,—
(i) in sub-section (1), before the Explanation, the following proviso shall be inserted, namely:—
‘Provided that the amount of wealth-tax computed in accordance with the provisions of this sub-section shall, in relation to the assessment year commencing on the 1st day of April, 1988, be increased by a surcharge calculated at the rate of ten per cent: of such wealth-tax;’
(ii) in sub-section (3), with effect from the 1st day of April, 1989,—
(a) in clause (i), the words, ‘not being any such precious metal or alloy held for use as raw material in industrial production’ shall be inserted at the end;
(b) to clause (v), the following proviso shall be added, namely:—
‘Provided that nothing in this clause shall apply to any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him;’
(c) for clause (vi), the following clauses shall be substituted, namely:—
‘(vi) building or land appurtenant thereto, other than building or part thereof used by the assessee as factory, godown, warehouse, cinema house, hotel or office for the purposes of its, business or as a hospital, creche, school, canteen, library, recreational centre, shelter, rest-room or lunch room mainly used for the welfare of its employees or used as residential accommodation, except as provided in clauses (via) and (vib), and the land appurtenant to such building or part’;”
5. The Memorandum explaining the above provision extracted in the order of the Appellate Tribunal reads as follows (see [1988] 170 ITR (St.) 204):
“54. Under the existing provisions of section 40 of the Finance Act, 1983, wealth-tax is levied in respect of the net wealth of all closely held companies. For the purposes of determining the net wealth of the company, the value of only specified assets like building, land (other than agricultural land), gold, silver, platinum, ornaments or utensils made of gold, silver, etc., are taken into account.
6. The rationale underlying the revival of levy of wealth-tax on companies was to curb the tendency of avoidance of personal wealth-tax liability by forming closely held companies and transferring the unproductive assets like real estate, jewellery, etc., to such companies.
7. Under the existing provisions, wealth-tax is leviable even in cases, where the assets specified in the section are held as stock-in-trade or are used for industrial purposes.
8. With a view to remove this unintended hardship and provide incentive for growth and modernisation, it is proposed to amend this section to provide that the following assets shall not form part of the net wealth for the purposes of levy of wealth-tax under the section:
(i)….;
(ii)….;
(iii) cinema house;”
9. By virtue of the substitution of clause (vi), it is clear that a cinema house is excluded from “building” or land appurtenant thereto which is included for computation of wealth-tax. In other words, a cinema house is specifically excluded from being a constituent of the wealth by virtue of the amendment introduced under the Finance Act, 1988.
10. According to the assessee, this amendment was by way of substituting a new provision which itself is indicative of the provision being curative or declaratory of the existing law. The Appellate Tribunal has accepted this contention of the assessee. Consequently, the cinema theatre was excluded from the taxable assets. As per clause (vi) of sub-section (3) of section 40, which was enacted initially, any building or part thereof used by the assessee as factory, godown, warehouse, hotel or office for the purpose of the assessee's business, etc., were excluded while computing the wealth. The object of section 40(3) is to tax unproductive assets which is clear from the speech of the Finance Minister. The object is not to impose the tax on productive assets at all. That is also clear from the sub-clause (vi) which excludes factories, godowns, etc., from the concept of taxable assets. The term “factory” is not defined and, therefore, a liberal approach to the interpretation of this provision would permit that any entity which is governed by the Factories Act also could be treated as a factory. If so construed, even under the earlier provision under section 40(3), the cinema house would get excluded being a taxable asset. According to Mr. Ramabhadran, learned counsel for the assessee, it is also possible to take the view that a cinema house includes the office for the purpose of cinema business and, therefore, the same would not be a taxable asset.
11. There was an unintended omission to clarify the concept of “building or land” which are to be considered as taxable assets. This is clear from the Memorandum explaining the amended provision. To obviate unintended hardship Parliament amended the provision by substituting the amended provision of clause (vi), under which cinema house was specifically included along with factory, godown, warehouse, etc. This amendment certainly is a curative amendment and, therefore, normally it could be declared as declaratory of the existing law. In Channan Singh v. Smt. Jai Kaur, (1969) 2 SCC 429 : AIR 1970 SC 349, the principle stated by the Supreme Court at page 351 reads thus:
“…. It is well-settled that if a statute is curative or merely declares the previous law retroactive operation would be more rightly ascribed to it than the legislation which may prejudicially affect past rights and transactions.”
12. In the instant case, no right would be prejudicially affected by the interpretation which is sought to be attributed to the amended provision by the assessee.
13. In Sha Chunnilal Sohanraj… v. T. Gurushantappa…., [1972] 1 Mys. L.J 327, it was stated that, when an amending Act has stated that the old subsection has been substituted by the new sub-section, the inference is that the Legislature intended that the substituted provision should be deemed to have been part of the Act from the very inception. The above principle would certainly govern the present fact situation. Consequently, we are of the view that the Appellate Tribunal has rightly accepted the contention of the assessee. The second question is also answered in the affirmative and against the Revenue.
14. References are answered accordingly.
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