APPOLLO TYRES LIMITED, KOCHI vs. THE ASSITANT COMMISSIONER OF KOCHI

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN MONDAY, THE 7TH DECEMBER 2009 / 16TH AGRAHAYANA 1931 WTA.No. 197 of 2009() --------------------- AGAINST THE ORDER DATED 28/11/2008 IN COCH IN WTA.78/COCH/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT: -------------------- APOLLO TYRES LTD., KOCHI. PA NO. AAACA 6990Q BY ADV. SRI.K.VINOD CHANDRAN RESPONDENT(S): --------------- THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), ERNAKULAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS WEALTH TAX APPEAL HAVING BEEN FINALLY HEARD ON 07/12/2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

C.R. C .N. RAMACHANDRAN NAIR & V.K. MOHANAN, JJ. -------------------------------------------- W. T. A. No. 197 OF 2009 -------------------------------------------- Dated this the 7th day of December, 2009 JUDGMENT Ramachandran Nair, J. This Wealth Tax Appeal is filed by the assessee challenging the order of the Tribunal upholding wealth tax assessment on the value of the land on which a commercial building was under construction as on the valuation date. The appellant-assessee is a public limited company engaged in production and sale of automotive tyres. It was allotted a plot in Gurgaon earmarked for institutions by the Haryana Urban Development Authority on 29.12.1995. The appellant commenced construction of a commercial building in the plot in November, 1997, completed construction of a four storied building with basement and started occupying it from 29.3.2000. After completion of construction of the building, the land and building are granted exemption from wealth tax as the said asset falls under the exempted category. However, in the course of assessment for the assessment year 1998-99,

2 the Wealth Tax Officer assessed the value of the land treating it as urban land under clause (v) of Section 2(ea) under which "assets" are defined. Even though the assessee contended that construction of building was in progress on the valuation date, that is, 31.3.1998, and so much so the land cannot be treated as urban land under Explanation (b) to clause (vi) of Section 2(ea) of the Act and the first appellate authority upheld the claim of exemption to the assessee, the Tribunal on second appeal by the department, reversed the order of the first appellate authority and upheld the assessment by relying on the decision of the Karnataka High Court in COMMISSIONER OF WEALTH TAX V. GIRIDHAR G. YADALAM, (2007) 211 CRT (Kar.) 43. We have heard senior counsel Sri. G. Sarangan along with Sri. Vinod Chandran appearing for the appellant and senior counsel Sri. P.K.R Menon along with Sri. Jose Joseph, appearing for the respondent. 2. Since the question involved is on the interpretation of meaning of the term "urban land" as defined under the Act, we have necessarily to refer to the definition clause and for easy reference the relevant portions of the definition clause is extracted hereunder:

3 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 twenty-five kilometres from the 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) ...... ........... (3) any house which the assessee may occupy for the purposes of any business or profession carried on by him; .......... (v) urban land; ............. Explanation.-- (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

4 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) in any area within such distance, not being more than eight kilometres from the local limits of any municipality or cantonment board referred to in sub- clause (i), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette, but does not include land on which construction of a building is not permissible under any law for the time being in force in the area in which such land is situated or the land occupied by any building which has been constructed with the approval of the appropriate authority or any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition by him or any land held by the assessee as stock in trade for a period of five years from the date of its acquisition by him; 3. Senior counsel Sri. Sarangan appearing for the appellant submitted that Karnataka High Court judgment has no application to the facts of this case because the building involved in that case was a flat complex and what the Karnataka High Court held was that urban land on which building was constructed does not qualify for exemption until the building is fully constructed. However, in this case,

5 admittedly the urban land allotted to the appellant under the category "institutional allotment" was used by them for construction of a commercial building which when completed qualifies for wealth tax exemption. The contention of the assessee is that the land allotted to the assessee is for commercial purpose, that is for industrial use, and under the exemption clause contained in the definition of "urban land" all the unutilised industrial land qualifies for exemption for two years from the date of acquisition by the assessee. The contention of the assessee is that exemption ceases to be available only if after two years, the land is continuously kept vacant without utilising it for construction of building for industrial or commercial purposes. Senior counsel for the revenue on the other hand contended that the intention of the Legislature in limiting the exemption for vacant land upto two years is only to ensure that if the assessee wants to get exemption beyond two years, assessee should have completed construction of the building in the course of two years and used the building for industrial purposes. Of course, vacant urban land could be used for industrial purpose without even construction, if it is used for purposes like storage. However, in this case, admittedly the assessee started

6 construction of a commercial building as on the valuation date and in the course of two years thereafter the assessee completed constructed and started using the building which is no longer assessed by the Wealth Tax Officer as the building qualifies for exemption. 4. A Division Bench of this Court had occasion to consider the scope of drastic amendment introduced to the Wealth Tax Act with effect from 1.4.1995 based on Dr. Raja Chelliah Committee's recommendations. The provisions of the Wealth Tax Act until amendment provided for levy of wealth tax on all assets except those items which were specifically exempted from wealth tax. However, after the amendment only specified assets are subjected to charge towards tax and all other assets are outside the tax net. For the purpose of levy, assets are classified as two categories, one as productive and the other as non-productive. Under the provisions of the amended Act, tax is levied only on the non-productive assets such as residential house, urban land, jewellery, bullion, motor cars, etc. It is useful to refer to the Finance Minister's Speech while introducing the amendment to the Wealth Tax Act by Finance Bill 1992 which is as follows:

7 67. The Wealth-tax Act, 1957, has far too many exemptions making it's administration enormously complicated. The valuation of certain assets such as shares also presents problems, since very high market values reflecting speculative activity can lead to a heavy burden on shareholders who are long-term investors. There is also no distinction at present between productive and non- productive assets. The Chelliah Committee has suggested that, in order to encourage the tax payers to invest in productive assets such as shares, securities, bonds, bank deposits, etc., and also to promote investments through Mutual Funds, these financial assets should be exempted from wealth-tax. Wealth-tax should be levied on individuals, Hindu undivided families and all companies only in respect of non-productive assets such as residential houses, including farm houses and urban land, jewellery, bullion, motor cars, planes, boats and yachts which are not used for commercial purposes. The Committee has further suggested that such tax should be at the rate of one per cent with a basic exemption of Rs. 15 lakhs. I propose to accept the recommendation and I hope this change will encourage investments in productive assets and discourage investments in ostentatious non-productive wealth. 5. We feel, for interpreting the provisions of the amended statute, we have to keep in mind the recommendations of Dr. Raja Chelliah Committee report based on which the Wealth Tax Act is recast. Admittedly the assessee utilised the urban land for construction of a commercial building which qualifies for exemption from wealth tax. The department has no case that after construction of the commercial

8 building urban land on which the building was constructed can be separately assessed. On the other hand, once the land is utilised for construction of a commercial building the value of the land and building enjoy exemption as a productive asset specifically covered by sub-clause (3) of Section 2(ea)(i). No doubt urban land is specifically covered by definition clause of "asset" and is subject to wealth tax. However, urban land acquired for industrial purpose enjoys tax holiday from wealth tax for two years from the date of acquisition by the assessee. If the land is not utilised for industrial purpose within two years, the value of such urban land will be subject to wealth tax from the year following. The controversy is whether commencement of construction of the building for commercial or industrial purpose is use of the land for such purpose qualifying for exemption or whether exemption is available only on completion of construction of the building, and after building is put to use for industrial purpose. While the contention of the assessee is that commencement of construction of the building on the urban land itself is use of the building for industrial purpose, the contention of the revenue on the other hand is that unless the building is constructed and put to use for industrial purpose the

9 land cannot be said to have been used for industrial purpose. In other words, according to revenue, 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. We are unable to agree with the contention of the revenue because in our view urban land that is subject to tax under the definition of "assets" generally covers only vacant land. In fact, under the exception clause " the land occupied by any building which has been constructed with the approval of the appropriate authority" is exempt from the purview of tax. This provision makes it clear that when urban land is utilised for construction of a building with the approval of the prescribed authority, then the land ceases to be identifiable as urban land. What the Section contemplates is that if an illegal construction is made on an urban land, that is construction without approval by the appropriate authority, then such land will still be treated as urban land no matter building is illegally constructed thereon. However, if a building is constructed with the approval of the prescribed authority, then such land goes out of the meaning of "urban land" and what is assessable is obviously the building which in this

10 case on completion falls within the exception clause. Now the question to be considered is whether during the period of construction of the building, the urban land on which such construction is made could be assessed to wealth tax. In our view, once the land is utilised for construction purposes, the land ceases to have it's identity as vacant land and it cannot be independently valued and considering the value of the building under construction the land value may be insignificant. It is pertinent to note that building under construction which is work- in-progress is not brought within the definition of "assets" for the purpose of levy of wealth tax. Department does not dispute the fact that as and when construction of building is complete on the urban land, there can be no separate assessment of urban land, but assessment is only on the value of the building, if it is not exempted from tax. In this case, admittedly commercial building constructed by the appellant- assessee falls within the exemption clause as commercial building and so much so it is not subject to wealth tax. There is no dispute that the land was allotted for commercial purpose which covers industrial use as well. Without construction of the building, the land cannot be used for the purpose for which it was allotted and in our view, the

11 commencement of construction is use of the land for industrial purpose. However, 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. However, admittedly in this case, the assessee progressively completed construction of a four storied building with basement and started using it within the course of two years from the valuation date. The assessee cannot be expected to complete construction of a four storied massive building in the course of two years which is the period provided in Explanation (b) to Section 2(ea). Keeping in mind the exemption available to productive assets we feel, there is 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 is converted to a productive asset like a building which qualifies for exemption, then the assessee can start availing exemption even during the period of conversion of such non-productive asset to productive asset. We therefore declare the eligibility of the assessee for exemption

12 for urban land on which they were constructing a commercial building on the valuation date. Consequently we allow the appeal reversing the order of the Tribunal and restoring that of the first appellate authority. (C.N.RAMACHANDRAN NAIR) Judge. (V.K. MOHANAN) Judge. kk