taxability of farm house as per wealth tax act

TAXABILITY OF FARM HOUSE

                                                                                    

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nder wealth – tax , before taxing any person, it must be shown that the person sought to be taxed falls within the ambit of the charging section by the words used in that section not merely by implication.

Wealth-tax is charged for every assessment year in respect of net wealth of the corresponding valuation date of every individual, HUF and Company, at the rate of 1 per cent of the amount by which net wealth exceeds Rs. 15 lacs. (Now 30 Lakhs)

Section 2(ea) of the wealth-tax Act, 1957 defines the assets that are chargeable to wealth-tax. One of assets chargeable to wealth-tax is guest house, residential house or commercial building which includes:

(i)            Any building or land appurtenant thereto whether used for commercial or residential purposes or for the purpose of guest house.

(ii)          A farm house situated within 25 kilometers from the local limits of any municipality or a cantonment board.

In order to understand the chargeability of Farm House. It is necessary to understand the following term:-

FARM HOUSE

Here the term “Farm House” is a subjective evaluation and depends upon a particular situation. The term farm house is not defined in wealth-tax Act, 1957 but in general a farm house is a type ofbuilding or house which serves a residential purpose in a rural or agricultural setting. Most often, the surrounding environment will be a farm.

URBAN LAND

Urban land is another asset which is chargeable to wealth-tax. The term “Urban Land” is defined in Explanation (1)(b) to Section 2(ea) which means a land which is situated in any area within 8 kilometers from the local limit of any municipality or any area which is comprised within the jurisdiction of municipality or a cantonment board and which has population of not less than 10000 according to latest preceeding census.

AGRICULTURAL LAND

There is no definition of ‘agricultural land’ in wealth-tax Act. The word ‘agricultural land’ should, however, be interpreted to mean land for agricultural purposes. As per Circular: No. 2(WT) of 1968, dated 16.3.1968 a land may be treated as agricultural land if the following conditions are satisfied:

(a)          land / revenue / agricultural cess is paid,

(b)         agricultural operations have been carried on from year to year, and

(c)          it is not been put to non-agricultural use.

The agricultural land is not an asset chargeable to wealth-tax because section 2(ea) is an exclusive definition and it does not include agricultural land.

SUMMARY OF TAXABILITY

URBAN LAND AGRICULTURAL LAND FARM HOUSE

FARM HOUSE

Situated within 9-25 KM of local limits ofmunicipality

URBAN LAND AGRICULTURELAND

TAXABLE

EXEMPT

Not Situated within 25 KM of local limits ofmunicipality

URBAN LAND AGRICULTURAL LAND FARM HOUSE

EXEMPT

TAXABL E

Situated within 8  KM of local limits ofmunicipality

Definition of urban land includes a term i.e. ‘the land in any area’. This word can be interpreted as it includes agricultural land also. It means if an agricultural land comes in to the area of local limits of municipality, it will be treated as urban land and will be taxable accordingly.

ISSUES DESK

(i)            As per section 2(ea)(i), farm house is taxable if it is situated within 25 km from the local limits of any municipality, but if any building is constructed on that land and which is used by assessee for his residential purposes, then whether the assessee can get exemption for such farm house as he has no another house for residence?

(ii)          If in the above (i) situation such farm house is qualify for exemption then in this situation the whole area of such farm house will be exempt or the area on which such building is constructed, will be exempt?

(iii)         If in the above (ii) situation only the area on which such building is constructed is exempt from wealth-tax then whether the assessee can get exemption for other space (excluding on which building is situated) as this is agricultural land?

           In the (i) situation, if the assessee uses the farm house as his residence and he has no another house for his residence then he can get exemption for such farm house under section 5(vi). But he has to evidencing the same that he is using it as his residence.

           The (ii) situation is very crucial and it depends upon case to case.

           In the (ii) situation, if only the area on which such house is constructed is exempt, then there are two other different situation arises under situation (iii) i.e. such farm house is situated within 8 km or within 25 km from the local limits of any municipality. If such farm house is situated within 8 km then the assessee can not get the exemption for such balance space because it may be treated as urban land and taxable accordingly and if such farm house is situated within 25 km but away from 8 km then the assessee can get the exemption for such balance space as it may be treated as agricultural land and exempt accordingly.

The above interpretation is not at all clear; the taxing authorities can also take a view that even the construction at farm house can be treated as residential house if he has not other residential house but the balance space still may be treated as farm house. In this situation, out of the total area under question the value of the constructed area well stand exempted and the Balance will be taxable as value of the farm house. The reason behind to include a Farm House in a chargeable of Wealth Tax may be the posh farm house which is situated in the vicinity of Urban Land like in Jaipur city