Wealth tax on vacant land

The Wealth Tax Act provides for exemption from levy of tax on unused land only in a case where it was held for industrial purposes and the outer limit is only two years. Alternatively vacant land intended for industrial use will be treated as a taxable asset if building/ sheds are not constructed for more than two years. The other exception is that it should be held as stock-in-trade.

In the parallel office or commercial buildings per se are exempt from wealth tax as per specific exclusion under sub-clause (3) of clause (i) of section 2(ea) of the Wealth Tax Act, 1957. And yet further the land held in this regard for construction of office building too would find exclusion vide decision of the Cochin bench in

Federal Bank Ltd. vs. Joint Commissioner of Wealth-tax (2007) 295ITR AT212/107ITD451/108TTJ416.

In Federal Bank case (supra) the assessee was contemplating the construction of its office building immediately after purchase of the plot of land, but could not proceed further in the light of a public interest litigation filed before the High Court by which the assessee-bank was restrained from proceeding further in the matter of construction. As soon as the matter was disposed of by the High Court in favour of the assessee-bank, the construction was resumed and the building was completed. The assessee claimed that in such circumstances, the land should be considered as meant for “industrial purpose”, and as per the provisions of law such land could not be treated as vacant land for the initial period of two years. The revenue’s point has been that the exemption would happen after the office building is completed.

The Tribunal however directed the assessing authority to exclude the value of the Marine Drive land of Rs. 7,93,65,120 from the net wealth of the assessee-bank as the subject land was held for construction of office building and it amounted to constructive utilisation of the vacant land by the assessee to convert the plot into a business asset.

In the first place the bench held a view that the scheme of the wealth-tax is to exclude all productive assets from the ambit of net wealth and to levy tax only on non-productive assets. In their view even though as on March 31, 1996, the particular land was lying physically vacant, it was in the process of being converted into a building complex meant for the purpose of accommodating the office of the assessee-bank and once the construction of the building is completed and the building has become functional, the dispute relating to the nature of the land should cease to exist.

Now in this case it was found that the building construction was held up for some dispute so that the important question were whether during the interregnum period when the building was not completed or construction was only to be started, what would be the position of the land, as far as its nature is concerned, for the purpose of wealth-tax ? The bench held that the construction of huge buildings could not be completed during a particular previous year and the construction activity may spill over a period of more than one previous year. Therefore, during such period when the building was under construction but could not be fully completed, it is not possible to hold that the land was vacant. It thus held a view that the land has already been utilised for business purposes even though the building proposed to be constructed did not become fully functional. According to it the utilisation of the land for commencing the construction and utilisation of the proposed building after construction has to be suitably differentiated. In their view the utilisation of the vacant land should not be confused with the ultimate enjoyment of the building proposed to be completed. Even though the building has not been completed, still the utilisation of the land has become complete. It thus deserted the argument of the Revenue that the nature of the land ceases to be vacant land only when the building has been fully constructed and become functional and found it both fallacious and against the spirit of law. The following observations deserve reading ( At pg 215-216):

“ The whole confusion is caused because of the fact that the distinction between utilisation of the land and completion of the construction of the building is not differentiated. So, theoretically speaking, even if a single brick is laid on the vacant land as initiation of the construction of the building and the building is constructed thereafter, the land ceases to be a vacant land from the date of laying down of the first brick on the land. The character of the land has ceased to be vacant land for the purpose of wealth-tax ; even though literally speaking, the physical character of the land could still be held as vacant land. When this distinction is borne in mind and the fact that the assessee-bank was constrained for a short period to stall the construction of its building, it is clear that the land acquired by the assessee-bank at Marine Drive, Ernakulam, was constructively used for the commercial purpose of the assessee-bank and, therefore, the said piece of land could not be treated as an urban vacant land liable to be taxed under the provisions of the Wealth-tax Act, 1957.” (Unquote)

Further in this case the bench found no necessity to further examine whether the assessee is an industrial undertaking, or the purpose for which the land was purchased was for industrial purposes as such discussion according to it would only become academic. Further even though the term “industrial purpose” is not defined under the Wealth-tax Act it would by necessary implication include lands held for utilisation for construction of office buildings. Therefore land held for construction of office/coomercial building can be held to have been constructively put to “productive use”, so as to take it outside the sweep of the definition “urban land”.