Gujarat High Court
Commissioner Of Wealth Tax vs Cadmach Machinery Co. Pvt. Ltd. on 5 October, 2006
Equivalent citations: (2007)212CTR(GUJ)285
Author: D.H. Waghela
Bench: R.S. Garg, D.H. Waghela
JUDGMENT D.H. Waghela, J.
1. The Income Tax Appellate Tribunal, Ahmedabad Bench 'B' has, at the instance of the Revenue, referred, under Section 27(1) of the Wealth Tax Act, 1957, the following questions of law arising out of its order dated 22.12.1995 in WTA No. 2589/Ahd/1991 in respect of assessment year 1986-87.
(1) Whether the appellate Tribunal is right in law and on facts in deleting the value of the factory building and research building which were under construction and not in actual use for the purpose of business as contemplated under the provisions of Section 40(3)(vi) of the Finance Act, 1983?
(2) Whether, by allowing the claim of the assessee, the appellate Tribunal has not caused violation to the plain and simple language used in Section 40(3)(vi) of the Finance Act, 1983?
2. The facts stated are that the factory and research buildings were under the process of construction during the year under consideration. The assessee claimed exemption from wealth tax on the buildings under construction as per Clause (vi) of Sub-section (3) of Section 40 of the Finance Act, 1983. The assessing officer took the view that buildings under construction as on the valuation date could not be held to have been used for the purpose of business. He noted the fact that the assessee itself had offered the value of both the buildings under construction for taxation in the preceding assessment year 1985-86. Accordingly, he added the value of factory and research buildings under construction in the total wealth of the assessee company. The first appellate authority, relying upon the decision of the Tribunal in Nutan Electricals Industries Pvt. Ltd. v. IAC 36 ITD 448 and appreciating the provisions of Section 40 of the Finance Act, 1983, allowed the claim of the assessee for the year under consideration. Upon the matter being carried to the Tribunal by the revenue, the order of the first appellate authority was confirmed.
2.1 In Nutan Electricals (supra), the Tribunal had held that unfinished factory building along with appurtenant land would not fall either in item (v) or in the exception in item (vi) of Section 40(3) and, therefore, not liable to tax under Section 40 of the Finance Act, 1983. In that case, the subsequent amendment made by the introduction of the proviso to item (v) with effect from 1.4.1989 was taken into consideration; which proviso was to the effect that nothing in that clause shall apply to any unused land held by the assessee for industrial purpose for a period of two years from the date of its acquisition by him. The Tribunal had taken the view in that case that, though the proviso is prospective in nature-applicable for and from the assessment year 1989-90, the proviso clarifies the meaning of the expression 'land other than agricultural land' as 'vacant land lying unused'. Since there was a building under construction, the said 'vacant land' could not be said to be 'land lying unused' and, similarly, unfinished building could not fall under item (vi).
2.2 The Tribunal has noted in its order the fact that the buildings involved were under construction as on the valuation date and they were meant for use as factory and research buildings on completion of construction, they were put to that use and, therefore, they were meant for productive use. And, following the ratio of other decisions of the Tribunal, it adopted the view that buildings under construction meant for business-use were not chargeable to wealth tax under Section 40 of the Finance Act, 1983.
3. Under Section 40 of the Finance Act, 1983, provision was made to levy wealth tax on the net wealth of certain companies. The purpose of the provision as stated by the Finance Minister in his introduction to the Bill was:
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.
4. The relevant part of the section as it appeared in the Finance Act, 1983 is as follows:
40 Revival of levy of wealth-tax in the case of closely-held companies.
(1) ...
(2) ...
(3) The assets referred to in sub-section (2) shall be the following, namely:
(i) ...
(ii) ...
(iii) ...
(iv) ...
(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:
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, as far as it is relevant, reads thus:
87. Amendment of Act (11 of 1983)- In Section 40 of the Finance Act, 1983,
(i) ...
(ii) In Sub-section (3), with effect from the 1st day of April, 1989,
(a) ...
(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. In the memorandum explaining the provisions in Finance Bill, 1988, it was stated that, under the existing provisions, wealth-tax was levied even in cases where the assets specified in the section were held as "stock-in-trade" or were used for industrial purposes. With a view to remove the unintended hardship and provide incentive for growth and modernization, it was proposed to amend the section to provide that the following assets, inter alia, shall not form part of the net wealth for the purposes of levy of wealth tax.
(i) ...
(ii) Land other than agricultural land proposed to be utilized for industrial purposes, for a period of two years from the date of its acquisition;
(iii) ...
(iv) Gold, silver, platinum or other precious metals, precious and semi-precious stones and utensils made of gold, silver, platinum, buildings and motor-cars, if held as stock-in-trade. In the case of gold, silver, platinum or other metals, precious or semi-precious stones and buildings and land appurtenant thereto, on the question as to whether these items are held as investment or stock-in-trade, guidelines by way of general or specific order will be issued by the Board....
(v) ...
This amendment will take effect from 1st April, 1989 and will accordingly, apply in relation to the assessement year 1989-90 and subsequent years.
6. During the course of hearing of this reference, in absence of any representation from the assessee-respondent, we requested senior advocate Mr. S.N. Soparkar to assist the Court. He submitted that, though the amendment by way of Finance Act, 1988 was effected in the year 1988 and by the CBDT Circular No. 528 dated 16.12.1988 it was clarified that the proposed amendment to Sub-section (3) would take effect from 1.4.1989 and apply in relation to the assessment year 1989-90 and subsequent years and will not have retrospective effect, the rule of reasonable interpretation required that the provisions inserted to remedy the unintended consequences or the proviso which supplied an obvious omission were read into the section; and such amendments were required to be treated as retrospective in operation. Relying upon the judgment of the Supreme Court in Allied Motors Pvt. Ltd. v. CIT 220 ITR 677, he further submitted that the amendment, which was curative and explanatory, had to be treated as retrospective. He submitted that, in the facts of the present case, the land in question was in fact put to the use of constructing buildings in the assessment year 1986-87, within two years of purchase of the vacant land during the accounting year relevant to the assessment years 1983-84 and 1984-85. In the assessment year 1987-88, the buildings had been constructed on the land and both the factory building and the research building had been put to use for the purpose of business on which depreciation was claimed and allowed. And, the value of the constructed buildings was not included in the net wealth. Therefore, if the amendment brought about by the Finance Act, 1988 were given retrospective effect, an anomalous situation of the same asset being liable to wealth tax only during the period of construction would arise, according to the submission.
6.1 The learned senior advocate Mr. Soparkar also cited the judgment of a division bench of the Delhi High Court in Commissioner of Wealth Tax v. Prem Nath Motors Pvt. Ltd. 238 ITR 414 wherein investment by the assessee in an incomplete and unfinished factory building was sought to be included in the wealth of the assessee-company. The court declined to order a reference observing that, to attract the applicability of Clause (vi), the building must be capable of being used by the assessee.
7. Learned advocate Mr. M.R. Bhatt, appearing for the revenue, submitted that the reference was restricted to the issue arising in the assessment year 1986-87 and the subsequent amendment of Clause (v) of Sub-section (3) of Section 40 of the Finance Act, 1983 did not make any difference insofar as the issue was confined to interpretation and application of the provisions of Section 40(3)(vi) of the Finance Act, 1983. The plain reading of the provision would show that the assets referred to in Sub-section (2) of Section 40 were clearly defined to include, inter alia, "building or land appurtenant thereto" with the exclusion of building or part thereof used by the assessee as factory, godown etc. for the purpose of business. Therefore, the building or the land appurtenant thereto which was admittedly, as yet, not used by the assessee as factory or research buildings could not fall in the exception clause and it was incongruous and improper for the CIT (A) to hold that the land in question was not "vacant land" inasmuch as the factory building was under construction and, since the building was under construction, item (vi) was also not attracted inasmuch as incomplete building cannot be treated as a building at all.
8. The issues referred for our opinion are as to whether the value of the factory building and the research building under construction and not in actual use for business were liable to tax and whether by allowing the claim of the assessee, the appellate Tribunal had caused violation to the plain and simple language used in Section 40(3)(vi). Both the issues clearly referred to and were exclusively related with the provisions and language of Clause (vi) of Sub-section (3) of Section 40. Therefore, the application and amendment of Clause (v) are irrelevant. It requires no argument to hold that building cannot exist without land and value of the land is always included when building is to be assessed as an asset. The factory or the research building under construction, in the facts of the present case, was admittedly not used by the assessee for any purpose and, therefore, could not have fallen in the exception clause provided in Clause (vi) itself. Thus, the real question would be, whether the words "building or land appurtenant thereto" covered the land and the building under construction thereon. It must be noted here that, if the building under construction were not to be regarded as "building", then the land on which the construction is started will have to be included in the assets under Clause (v) because "land" mentioned therein does not carry any qualification or the adjective "vacant". Even otherwise, land does not lose its value as an asset simply because construction is started thereon and the building does not cease to be a "building" only because it is incomplete in some respect. Therefore, in short, land and building, complete or incomplete, never ceases to be a valuable asset in the hands of the holder. And, the clear legislative intention was to tax both land and building other than those used for specific purposes of business of the company. An incomplete building is not falling in the excluded category of buildings. Taking that view, we respectfully disagree with the view taken by the Delhi High Court in Prem Nath Motors (supra). It may be apposite to quote here the following observations of the Supreme Court in its Three Judge Bench decision in Ahmed G.H. Ariff and Ors. v. Commissioner of Wealth Tax, Calcutta :
...It was held that the definition of "assets" in Section 2(e) and that of 'net wealth' in Section 2(m) were comprehensive provisions and all assets were included in the net wealth by the very definition. Therefore, when Section 3 imposed the charge of wealth-tax on the net wealth it necessarily included in it every description of property of the assessee, movable and immovable, barring the exceptions stated in Section 2(e) and other provisions of the Act. We are in entire concurrence with that view. There is no reason or justification to give any restricted meaning to the word "asset" as defined by Section 2(e) of the Act when the language employed shows that it was intended to include property of every description.
8.1 Plain reading of Clause (vi) would clearly show that prospective or intended use of the building is irrelevant and the exception clause could be invoked only when the building or the land appurtenant thereto is already and actually used by the assessee for any of the specified purposes. Therefore, a building under construction can never fall under the exception clause. In that view of the matter, the view taken by the Tribunal on the basis that the buildings were "meant" for productive use was clearly erroneous and based upon irrelevant consideration of the purpose to which the building was slated to be put. If similar view was taken by the Tribunal in other matters on identical facts, it would not make the erroneous view on irrelevant consideration, correct, legal or binding. The assessing officer or the adjudicating authorities do not have the power, and there was no requirement in the context, to read or add adjectives like "vacant" before the word "land" and/or "fully built up" before the word "building". And, taking a reasonable view in light of the legislative intention of taxing unproductive assets in closely-held companies, such imaginative qualification of the plain words like "land" and "building" would defeat the purpose of levying wealth-tax on such assets.
9. Accordingly, we decide the reference in favour of the revenue with the opinion that the appellate Tribunal was in error in deleting the value of the factory and research buildings which were under construction and not in actual use for the purpose of business as contemplated under the provisions of Section 40(3)(vi) of the Finance Act, 1983 and that in allowing the claim of the assessee, the Tribunal had misread the plain and simple language of the said provisions. We place on record our appreciation of the able assistance rendered at our request by learned senior advocate Mr. S.N. Soparkar.