Tax Case (Appeals) against the order of the Income Tax Appellate Tribunal, Madras ‘D’ Bench, dated 3.12.2002 in WTA. Nos. 3 & 4.Mds/2002 for assessment years 1996-97 and 1997-98.

COMMON JUDGMENT

(Judgment of the Court was made by CHITRA VENKATARAMAN, J)

The Revenue is on appeal against the order of the Tribunal arising under the Wealth Tax Act. The following substantial question of law was raised for consideration:

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that a land on which the foundation is laid for building a hotel should be treated as a business asset not exigible to Wealth Tax under Section 40A(3) of the Finance Act?”

2. The assessment years under consideration are 1996-97 and 1997-98. The assessee is a company carrying on hotel business. It is seen from the facts that the assessee purchased lands during 1993-94 followed by further addition during the subsequent year viz., 1996-97. It had obtained permission for construction from Madras Metropolitan Development Authority, who issued the same on 30.3.1995 The assessee is stated to have commenced the construction work during January, 1996. In support of the construction work, the assessee also filed necessary evidence from its contractor. Till the end of March 1998, the construction was going on and in fact, during the assessment year 1998-99, the construction was almost over. It is seen from the order of assessment that since the assessee had already commenced the construction of a hotel, the assessee filed NIL return for the assessment year 1995-96, claiming that the land acquired for its hotel project at Saidapet, Chennai, was not to be treated as a taxable asset under Section 2(ea) of the Wealth Tax Act. The Assessing Officer, however, determined the net wealth of Rs. 16,84,600/- before giving basic exemption of Rs. 15,00,000/-. The Assessing Officer held that considering the fact that the assessee had acquired land during the previous year relating to valuation date 31.3.1993 and till the date of passing of the assessment order, the assessee had not completed its hotel construction, it could not claim that the building was “put to use” so as to claim benefit of exclusion from the definition of ‘asset’ and the commencement of construction could not be considered as completion of construction. Having regard to the fact that tax holiday was allowed under the Wealth Tax Act only for two years in respect of urban land and that the lands acquired upto 31.3.1994 were not put to use till 31.3.1996, in the absence of any revenue generation out of the lands acquired, the lands could not be held to have been put to use. Consequently, the value of the lands were required to be included in the chargeable wealth. Aggrieved by the assessment, the assessee went on appeal before the Commissioner of Wealth Tax (Appeals), who held that except for the year ending 31.3.1998, the assessee was not entitled to claim that the asset had been put to use. Hence, the Commissioner of Wealth Tax (Appeals) dismissed the appeals pertaining to the assessment years 1995-96, 1996-97 and 1997-98, but allowed the appeal only as regards the assessment year 1998-99, thereby excluded the asset from the purview of the Wealth Tax Act. Aggrieved by the order in respect of assessment years 1996-97 and 1997-98, the assessee went on appeal before the Income Tax Appellate Tribunal.

3. The Tribunal held that since the assessee had admittedly commenced construction even before the valuation date 31.3.1996 and 31.3.1997 and the assessee had invested substantial amount for construction, the assessee was entitled to have the benefit of exclusion clause as per the definition of “asset” given under Section 2(ea) of the Wealth Tax Act. Aggrieved by this, the Revenue is on appeal before this Court.

4. Learned Standing counsel for the Revenue pointed out that when the idea of omitting Section 40A(3) of the Finance Act, 1983 and the introduction of amendment to Section 2(ea) of the Wealth Tax Act with effect from 1.4.1993 was to restrict the exclusion only to those cases where the land has been put to productive use and on the admitted facts herein, the assessee having failed to construct the hotel complex within the period allowed under the definition of “Urban Land” under Section 2(ea) viz., two years, the assessee was not entitled to claim the benefit of the exclusion clause in the definition of ‘asset’. In other words, when the assessee had not used the building for its commercial purpose, the land in question is an ‘asset’ as prescribed under Section 2(ea) of the Wealth Tax Act, attracting the charge under the provisions of the Wealth Tax Act.

5. Learned Standing counsel for the Revenue placed reliance on the decisions reported in [2010] 325 ITR 223 - CWT v. GIRIDHAR G. YADALAM, [2009] 329 ITR 81 - CWT v. HOTEL ORNATE (NILGIRI) P. LTD, [2010] 328 ITR 334 - CWT v. SYNTHITE INDUSTRIAL CHEMICALS LIMITED, [2009] 316 ITR 94 - ANAND ESTATE PVT. LTD v. DEPUTY CIT and [2008] 305 ITR 299 - REMNORD RESEARCH LABORATORIES P. LTD v. WTO and submitted that on the admitted facts herein, the assessee had not completed the construction within the time specified under the Act and going by the definition of Section 2(ea) of the Wealth Tax Act, the chargeablilty to the Wealth Tax Act stood attracted. In the circumstances, he submitted that the Tribunal committed a serious error in ignoring the definition given under Section 2(ea) of the Wealth Tax Act to include urban land as chargeable to the provisions of the Wealth Tax Act.

6. Per contra, learned counsel for the assessee placed reliance on the decision of the Kerala High Court reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT., and the decision of the Punjab and Haryana High Court reported in [2011] 330 ITR 157 - CIT v. SMT. NEENA JAIN and submitted that given the fact that the assessee had commenced construction of the hotel building for its occupation, the ‘asset’ definitely answers the exclusion under sub clause (3) of Section 2(ea) of the Wealth Tax Act. He pointed out that it is not denied by the Revenue that the land in question was not a vacant land to fall under the definition of ‘urban land’. It is not denied by the Revenue that the assessee had already obtained planning permission for the purpose of construction and also commenced construction activity during the years under consideration. The Commissioner of Wealth Tax (Appeals), in his order, had also accepted that in respect of assessment year 1998-99, the asset in question was excluded from the purview of the chargeability under the Wealth Tax Act. Considering the fact that the assessee purchased the land and the whole building therein had to be demolished, it obtained necessary permission and commenced construction. Thus, the assessee does not answer the description of “urban land” or the substantial portion of Section 2(ea)(i) of the Wealth Tax Act. In the circumstances, taking support from the decision reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT, he submitted that the object of introduction of the amendment to Section 2(ea) was to tap unproductive assets only for the purpose of taxation. Hence, no exception could be taken to the order of the Tribunal.

7. Heard learned Standing Counsel for the Revenue as well as learned counsel for the assessee and perused the material papers on record.

8. Before going into the rival contentions, the relevant portion of the definition of “asset” as given under Section 2(ea)(i) and “urban land” in sub clause (b) to Explanation [1] needs to be seen.

“2(ea) ‘assets’, in relation to the assessment year commencing on the 1st day of April 1993, or any subsequent assessment year, means -

(i) any building or land appurtenant thereto (hereinafter referred to as ‘house’), whether used for residential or commercial purposes or for the purpose of maintaining a guest house or otherwise including a farm house situated within twentyfive kilometres from local limits of any municipality (whether known as Municipality, Municipal Corporation or by any other name) or a cantonment Board, but does not include -

(1) a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than five lakh rupees;

(2) any house for residential or commercial purposes which forms part of stock - in-trade;

(3) any house which the assessee may occupy for the purposes of any business or profession carried on by him.

(4) …

(5) … …….

Explanation [1] -

(a) ….

(b) ‘urban land’ means land situate -

(i) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the valuation date; or

(ii) ….” [Emphasis supplied]

9. In the decision reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT, the Kerala High Court considered the scope of Section 2(ea) in almost similar facts. The facts therein are that the assessee was allotted a plot on December 29, 1995 at Gurgaon earmarked for institutions by the Haryana Urban Development Authority. The assessee commenced construction of a commercial building in the said plot in November, 1997. It completed the construction of a four storeyed building with basement and started occupying it from March 29, 2000. In the course of assessment for the assessment year 1998-99, the Wealth Tax Officer assessed the value of the land treating it as “urban land” answering the said description of Section 2(ea)(5) of the Wealth Tax Act. In considering the said claim, the Kerala High Court pointed out that the object of the Wealth Tax Act under the Finance Bill, 1992 was in terms of recommendation of Dr. Raja Chelliah Committee. A reading of the Finance Minister's Speech while introducing the amendment would show the acceptance of Dr. Raja Chelliah Committee's report to have a distinction between productive and non productive assets for the purpose of wealth tax levy. Accordingly, the amendment sought to bring in those productive and non productive assets for the purpose of levy of wealth tax, thereby exempt productive assets, thereby encourage investments in productive assets such as shares, securities, bonds, bank deposits, etc. Noting the said amendment, the Kerala High Court pointed out that admittedly, the assessee had used the urban land for construction of commercial building. Thus, when the land is utilised for construction with the approval of the prescribed authority, then such land goes out of the meaning of ‘urban land’ and what is assessable is the building on completion. The Kerala High Court held that once the land is utilised for construction purposes, the land ceases to have its identity as vacant land. It further viewed that the commencement of construction is “use of the land for industrial purpose”. However, it added a caution that,

“………. this does not mean that part construction and abandoning further construction will entitle the assessee for exemption because part construction without completion of construction of the building cannot be said to be use of the land for commercial or industrial purpose. …………”

10. On the facts of the case, the High Court pointed out that the assessee progressively completed the four storeyed building with basement and started using it within the course of two years from the valuation date. The Kerala High Court held that the land in question did not answer the definition of “urban land” to bring it within the charging provision. The construction of the productive asset viz., the commercial building by using the urban land, hence, qualified for exclusion from the definition clause.

11. In contrast to this decision is the Karnataka High Court decision reported in [2010] 325 ITR 223 - CWT v. GIRIDHAR G. YADALAM. The Karnataka High Court held that the property owned by the assessee HUF was given for construction of residential flats under various agreements. The assessee claimed that it had retained ownership of the land until the flats were fully constructed and possession of the assessee's share in the built up area was handed over to it. In the return filed for the assessment year 1995-96, the assessee contended that it continued to be the owner of the land and in the subsequent years thereon till the sale of the flats took place. The Assessing Officer treated the property as urban land and assessed the assessee under the provisions of the Wealth Tax Act. The Karnataka High Court held that the building in the process of construction could not be understood as a building which has been fully constructed. Thus, when the building was in the process of construction half-way through, the same would not mean “fully constructed”. To exclude from the definition of “urban land”, the proper understanding of the words “lands occupied by any building which has been constructed, would mean ‘fully constructed’ as understood in the common parlance, which alone would fulfil the intention of the Legislature.

12. Referring to the decisions reported in [1981] 130 ITR 393 - CWT v. K.B PRADHAN as well as AIR 1996 SC 991 - STATE OF BOMBAY v. SARDAR VENKAT RAO KRISHNA RAO GUJAR, the word ‘buildings’ has to be given its literal meaning, thereby a completed building, the Karnataka High Court viewed that when the Parliament has chosen to provide an exemption under stated circumstances in respect of completed building, there could be no extension of exemption clause. In the absence of any other contemplation as in the definition of “asset”, only the completed building on the urban land would qualify for exemption. Consequently, the Karnataka High Court held against the assessee, thereby rejected its claim for exemption.

13. Learned Standing Counsel made reference to the decision of the Kerala High Court, which considered a similar question in the decision reported in [2010] 328 ITR 334 - CWT v. SYNTHITE INDUSTRIAL CHEMICALS LIMITED, wherein the assessee purchased the land in 1993. This was given to a promoter for construction of residential apartments. The assessee purchased 30 apartments to help the promoter company to tide over the financial crisis and also to enable the assessee to start a hotel business in the apartments. The assessee claimed exemption from the provisions of the Wealth Tax Act. The assessment in this case related to assessment year 1998-99. The Tribunal allowed the claim of the assessee as falling under sub clauses (4) and (5) of Section 2(ea)(i) of the Wealth Tax Act. On the question as to whether the assessee would be justified in its claim for exemption, the Kerala High Court pointed out that admittedly sub-clauses (1) to (3) of Section 2(ea)(i) of the Act had no application to the assessee's case. Sub clause (3) deals with “any house which the assessee may occupy for the purpose of any business or profession carried on by the assessee”. Sub clauses (4) and (5) came into force subsequent to the assessment in question. On the view thus taken, the Kerala High court pointed out that the plea raised by the assessee was based on sub clauses (4) and (5); thus having no application with reference to the assessment in question, the claim had to be rejected.

14. The above decision has to be seen in the light of the facts and circumstances of the case as to the applicability of the provisions under sub clauses (4) and (5). Hence, we do not think the decision reported in [2010] 328 ITR 334 - CWT v. SYNTHITE INDUSTRIAL CHEMICALS LIMITED would be of any assistance to the Revenue. For the reasons stated hereunder, we agree with the findings of the Kerala High Court reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT.

15. As far as the present case is concerned, admittedly the assessee is a hotelier. It had acquired the lands during 1993-94 and in the subsequent year, it had made some additions. Admittedly, the assessee commenced its construction in January, 1996, relevant to the assessment year 1996-97. Till that time, from the date of purchase, the assessee had not made any claim for exclusion of the said amount in the return. The construction was taken up from 1996 and substantial work was carried on thereafter. The Commissioner of Income Tax (Appeals) pointed out that since the work was almost nearing completion and the land had been put into use, the assessee was entitled to claim exemption in respect of assessment year 1998-99. As far as assessment years 1996-97 and 1997-98 were concerned, the Commissioner of Income Tax (Appeals) held that since foundation work had not been completed as evidenced from the amount spent, during the relevant valuation dates of 31.3.1996 and 31.3.1997, the assessee would not be entitled to enjoy any exemption from the levy of wealth tax. In order to bring the assets under the exclusion clause, the assessee must put the asset into use for business purpose. There is no denial of the fact that after obtaining the planning permission as on the valuation dates i.e on 31.3.1996 and 31.3.1997, the assessee had invested substantial amount for construction. The assessee admittedly started the commencement of the construction even as on the valuation date, namely, 31.3.1996 Further construction of the building was carried on thereafter. The Revenue does not deny the fact that once the construction work on the hotel building started, there was no abandoning of the work on contract and the land no longer remained a vacant land answering the description of urban land. Thus the asset being not just a vacant land and that the assessee had put the land in question in use for its business, it was qualified for exemption.

16. As already pointed out to the definition of ‘asset’ under Section 2(ea) of the Wealth Tax Act, the exclusion of the asset from the purview of the Wealth Tax Act are given:

(1) a house meant exclusively for residential purposes and which is allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than five lakh rupees;

(2) any house for residential or commercial purposes which forms part of stock - in-trade;

(3) any house which the assessee may occupy for the purposes of any business or profession carried on by him. [Emphasis supplied]

17. As far as sub clauses (4) and (5) are concerned, the same were inserted by the Finance Act, 1992 with effect from 1.4.1993 As such, the same have no relevance to the facts of the case.

18. To construe the land as Urban Land to form part of the ‘asset’ as defined under Section 2(ea) of the Wealth Tax Act, sub clause (b) of Explanation [1] defines ‘urban land’. The said provision excludes the land on which construction of a building is not permissible under any law for the time being in force or the land occupied, which has been constructed with the approval of the Appropriate Authority. Apart from that, there are further exclusions from the said definition of urban land with which we are not concerned at present.

19. On the admitted fact that the land had been purchased and the construction activity is already on for a hotel complex to be built, it is difficult for us to fit the assessee's case under the definition of “urban land” as defined in sub clause (b) of Explanation [1]. Thus, when the definition of “urban land” defined it as a vacant land and excludes the land occupied by any building which has been constructed, it is difficult to hold that it seeks to exclude only those lands having a constructed building therein. We do not think, the definition of urban land requires a distinctive exclusion to be given as by way of land occupied by any building. The definition of “asset” starts with “any building or land appurtenant thereto, used for residential or commercial purpose. Having said so, it excluded a house which the assessee may occupy for residential purpose or commercial purpose, forming part of stock in trade or any house which the assessee may occupy for the purpose of any business or profession carried on by him. Thus when the definition on assets excluded certain assets with reference to the use, one has to necessarily give due weightage to the definition on “urban land” as a vacant land in contradistinction to a land which ceases to be so by reason of a construction activity carried thereon towards a particular end. Be it a completed building or in the process of completion, the intention and the steps taken as disclosed by the conduct of the assessee must weigh in the matter of considering whether there at all is an urban land lying vacant to qualify either for a charge or for exemption from the provisions of the Act. Given the nature and the extent of activity undertaken and the likelihood of its spilling over more than one year, one cannot take a very narrow view on the prescription of two years, as given under the definition of “Urban Land”. If there are materials to indicate that the land is no longer available to be treated as vacant urban land, and that the assessee had taken steps to construct thereon for putting the property for a gainful and productive use for their business, there can be no artificial restriction on the words “land occupied by any building which has been constructed.”

20. We do not think that the Revenue can successfully place the assessee's case under sub clause (5) of Section 2(ea) of the Act. The exclusion clause in Section 2(ea)(i) refers to sub clause (3) of Section 2(ea)(i) as any house which the assessee may occupy for the purpose of any business or profession carried on by him. Thus, in the substantive part of the definition, what is contemplated is the capability of occupation for business purpose is indicated by use of the term ‘may occupy’. Thus, going by the objects on the amendment under Finance Act, 1992, the asset in question does not fit in with the definition of ‘urban land’. In view of the construction activity thus going on, it is evident that the assessee being a hotelier, undertaking construction for use and occupation of the building for the purpose of his business, the asset in question falls only under sub clause (3) of Section 2(ea)(i) of the Wealth Tax Act and nowhere else.

21. As already pointed out, in the decision reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT, when the intention for bringing the asset under Section 2(ea) of the Wealth Tax Act is thus indicated, we fail to see any support in the contention of the Revenue that in the absence of actual occupation or the asset being ready for occupation, the exclusion clause would not operate in favour of the assessee. In the light of the object of the amendment and that there being no denial of fact that the assessee had, in fact, started constructing on the land purchased by them, rightly the assessee drew the support from the exclusion clause under Section 2(ea) of the Wealth Tax Act.

22. Going by the object clause introduced by way of amendment under Finance Act, 1992, while respectfully disagreeing with the decision reported in [2010] 325 ITR 223 - CWT v. GIRIDHAR G. YADALAM, we have no hesitation in agreeing with the decision of the Kerala High Court reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT, that the assessee is justified in its contention that the asset in question would stand excluded from the chargeability of the provisions of the Act.

23. In the circumstances, disagreeing with the view of the Karnataka High Court reported in [2010] 325 ITR 223 - CWT v. GIRIDHAR G. YADALAM and agreeing with the view of the Kerala High Court reported in [2010] 325 ITR 528 - APOLLO TYRES LTD. v. ASST. CIT, we confirm the order of the Tribunal, thereby rejected the Tax Case (Appeals) filed by the Revenue.

24. The above Tax Case (Appeals) are dismissed. No costs.