By TIOL News Service

KOLKATA, APRIL 18, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether 'freehold land' purchased for construction of office space & service centre, should not be construed as 'vacant land' liable to wealth tax u/s 2(ea), if construction of office building had commenced before expiry of two years from the date of acquisition. YES IS THE VERDICT.

Facts of the case:

The Assessee company is involved in the business of trading & exporting services in the field of power, and it is also engaged in after sale service in respect of power projects, which includes operation and maintenance of power plant and providing training to customer's personal for operation and maintenance. During the course of assessment proceedings, the AO observed that the assessee company's fixed assets comprised of 'freehold land' valued at Rs 22,84,28,928/- and motor car valued at Rs 7,94,700/- in the balance sheet. The assessee had not filed its wealth tax return for the Asst Year 2009-10. Hence a notice was served on the assessee company to show cause as to why notice u/s 17 should not be issued for non-filing of the return of wealth since the total wealth chargeable exceeds the threshold limit required for filing wealth tax returns. In response to the said notice, the assessee submitted that the freehold land in question was not an 'asset' u/s 2(ea) of the Act. The assessee has purchased the freehold land from West Bengal Housing Infrastructure Development Corporation Ltd exclusively for the purpose of setting up their office and service centre. Accordingly, in view of exemption as per clause (b) of Explanation 1 to section 2(ea) of the Act, that 'urban land' did not include any unused land held by the assessee for industrial purposes for a period of two years from the date of its acquisition.

However, the AO issued a notice u/s 17 opining that he had reasons to believe that net wealth chargeable to tax for the year under dispute had escaped assessment. The AO in the reasons recorded for reopening, stated that the land was not held for 'industrial purposes' as the assessee was not an 'industrialist' and nothing was there to manufacture. Therefore the subject land, which was purchased for setting up the office and service centre was not eligible for relief under sub-clause (ii) to clause (b) under Explanation 1 to section 2(ea) of the Act. In response, the assessee referred to the definition of the term 'industry' defined under the Industrial Disputes Act, and laid emphasis that the land in order to qualify for 'industrial purposes', there would be no need to carry on manufacturing activities. Retail business, trading business and services also qualify as 'industrial purposes'. Rejecting such contention, the AO brought the value of freehold land in the sum of Rs 22,84,28,928/- to wealth tax as a taxable asset in addition to value of motor cars in the sum of Rs 7,974,700/-, which was upheld by the FAA.

The Tribunal held that,

++ the short dispute to be adjudicated in this appeal is as to whether the freehold land held by the assessee as vacant as on the valuation date, on which the construction has been started for setting up of its office and service centre, could be stated to be used for 'industrial purposes', so as to fall within the ambit of definition of 'urban land' and consequential exemption from levy of wealth tax. In this regard, it is found that the expression 'industrial purposes' is not defined either in the Income Tax Act or in the Wealth Tax Act. The terms not defined in the statute may need to be understood in a manner which a person in business or in common parlance would generally understand it. Hence, from the definitions of the terms "industry" and "industrial establishment", it could be safely concluded that the expression 'industrial purposes' covers the activity of supply or distribution of goods and services and given that the assessee company's business is to provide services, the setting up of its office and service centre for the purpose of carrying out its business operations, satisfies the criteria as being for 'industrial purposes'. Moreover, the subject mentioned land cannot be used for any other purpose other than for setting up of an office and service centre. It is found that the term 'industrial purposes' in section 2(ea) of the Wealth Tax Act, 1957 will cover retail, trading and service activities as these activities do also represent occupration or business which is conducted in an organized manner by deploying the requisite resources;

++ it is seen that the Co-ordinate Bench of Cochin Tribunal in the case of Federal Bank ltd vs JCWT had held that vacant land which was acquired by the assessee for commercial puproses and on which construction of building was started could not be treated as urban vacant land liable to wealth tax u/s 2(ea) of the Act. The Tribunal also stated that wealth tax is leviable only in respect of non-productive assets and it does not apply to productive assets. Coming to the present case, the assessee company had purchased the land in financial year 2008-09 for industrial use only for setting up their office and service centre in conformity with the applicable rules and regulations and not for any other purpose. The same is evident from the agreement entered by the company with WBHIDCL, wherein it is specifically mentioned that the company can use the land for their business purposes only and not for any other purpose. Further the construction of office building and service centre on the said land had commenced before expiry of 2 years from the date of acquisition by the company. Hence, the constructive utilization of the vacant land was made by the assessee to convert the plot into a business asset. In the assessee's case, even though the freehold land was lying vacant as on the valuation date, yet it was in the process of being converted into a building complex meant for the purpose of accommodating the office of the assessee. Thus, the assets deployed for service activities are treated as productive assets and accordingly the construction / set up of office and service centre by the assessee and used as such for its business purposes would be outside the ambit of wealth tax in the same manner in which the factory structure or manufacturing establishment is excluded and the beneath land on which such structure to come should have the same wealth tax treatment. Hence, it stands proved that the assessee had used the land only for its business purposes by constructing a building in the subject mentioned land and is carrying on its regular business from the said premises, therefore, outside the ambit of wealth tax.

(See 2018-TIOL-567-ITAT-KOL)