2025 (5) TMI 151 - HC - Wealth-tax

Land loses wealth tax exemption during construction period under Section 2(ea) - exemption only applies after completion

The Commissioner of Wealth Tax Chennai. Versus M/s. Express Infrastructure (P) Ltd.

The Commissioner of Wealth Tax Chennai. Versus M/s. Express Infrastructure (P) Ltd. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(i) Whether the land in question, on the relevant valuation date, remained vacant land liable to wealth tax under Section 2(ea) of the Wealth Tax Act, given that construction of the building was not completedRs.(ii) Whether the assessee is entitled to exemption under the Wealth Tax Act if the building construction is incomplete by the end of the relevant previous year but the building is under construction as a business assetRs.(iii) Whether only land with a completed building qualifies for exemption from wealth tax or whether land with a building under construction also qualifiesRs.(iv) Whether the Appellate Tribunal was correct in holding that the assessee's vacant urban land is not an asset liable to wealth tax under Section 2(ea) of the ActRs.(v) Whether a building under construction exempts the land from being assessed as vacant urban land under the Wealth Tax provisionsRs.2. ISSUE-WISE DETAILED ANALYSISIssue (i), (ii), (iii), (iv), and (v) - Interrelated Issues concerning classification of land and exemption under Section 2(ea) of the Wealth Tax ActRelevant legal framework and precedents:Section 2(ea) of the Wealth Tax Act defines 'assets' and includes 'urban land' as an asset liable to wealth tax. Explanation 1(b) to Section 2(ea) defines 'urban land' and excludes certain categories of land from being treated as urban land for wealth tax purposes. The exclusion includes:Land where construction of a building is not permissible under law;Land occupied by any building constructed with the approval of the appropriate authority;Unused land held for industrial purposes for two years from acquisition;Land held as stock-in-trade for ten years from acquisition.The key question was whether land with a building under construction (not fully constructed) qualifies for exemption under the exclusion clause as land 'occupied by any building which has been constructed with approval'.Earlier, the Madras High Court in the Rohini Hotels (Madras) Limited case held that even a building under construction alters the nature of the land to commercial property and exempts it from wealth tax as vacant urban land. This view was followed by the ITAT in the impugned orders.However, the Supreme Court in Giridhar G.Yadalam v. Commissioner of Wealth Tax overruled this position, holding that the exclusion applies only when the building 'has been constructed', i.e., fully constructed, with approval. The Supreme Court emphasized strict interpretation of taxing statutes and exemption clauses, rejecting purposive interpretation to extend exemption to buildings merely under construction.Court's interpretation and reasoning:The Court examined the language of Explanation 1(b) to Section 2(ea)(v) and noted the following conditions for exemption:The land must be occupied by a building;The building must have been constructed;The construction must be with approval of the appropriate authority.The Court held that a building 'under construction' does not satisfy the condition that the building 'has been constructed'. The land cannot be treated as occupied by a building if construction is incomplete. The Court rejected the assessee's argument that commencement of construction should qualify the land for exemption as it would lead to absurd results, such as exemption being granted even if construction is abandoned midway.The Court also considered the legislative intent behind the exclusion clause, which was to stimulate investment in productive assets but only after construction is complete. The Court emphasized that taxing statutes must be interpreted strictly and exemption clauses even more strictly in favor of the Revenue.Key evidence and findings:The facts showed that the assessee took the land on lease in January 2006, commenced construction by laying pile foundations, surrendered the lease and acquired the land by sale in March 2007, and completed construction only in May 2010 when the commercial complex was inaugurated.During the relevant assessment years (2007-08, 2008-09, 2009-10), construction was ongoing but not complete. The ITAT had earlier relied on the Madras High Court's Rohini Hotels decision to hold that the land was not vacant urban land liable to wealth tax. The Revenue challenged those orders relying on the Supreme Court's Giridhar G.Yadalam decision.Application of law to facts:Applying the Supreme Court's ruling, the Court found that since the building was not fully constructed on the valuation dates for the relevant assessment years, the land did not qualify for exemption under the exclusion clause. Therefore, it remained 'urban land' liable to wealth tax under Section 2(ea).The Court rejected the contention that the land was reserved for industrial purposes and thus exempt, noting the strict conditions for such exclusion and that the land was being used for commercial construction.Treatment of competing arguments:The assessee argued that construction activity commenced before the valuation date and continued thereafter, so the land was not vacant urban land. It relied on the earlier Madras High Court decision and the ITAT orders following it.The Revenue relied on the Supreme Court's decision in Giridhar G.Yadalam, which reversed the Madras High Court's view and held that only fully constructed buildings qualify for exemption.The Court accepted the Revenue's arguments, holding that the Supreme Court's ruling is binding and supersedes the earlier High Court decision. The Court also rejected the assessee's purposive interpretation of the exemption clause.Conclusions:The Court concluded that the land was liable to wealth tax as urban land under Section 2(ea) during the relevant assessment years because the building was not fully constructed on the valuation dates. The exclusion clause for land occupied by a building applies only when the building has been fully constructed with approval.The ITAT orders relying on the reversed Madras High Court decision were set aside, and the substantial questions of law were answered in favor of the Revenue and against the assessee.3. SIGNIFICANT HOLDINGSThe Court's key legal reasoning and holdings include:'The expression 'has been constructed' obviously cannot include within its sweep a building which is not fully constructed or in the process of construction. The opening words of clause (ii) also become important in this behalf, where it is stated that 'the land occupied by any building'. The land cannot be treated to be occupied by a building where it is still under construction.''Strict interpretation to the exemption provision is to be accorded... The Legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started.''If the argument of the assessee is accepted, it would lead to absurd results... for example, if construction is abandoned midway, exemption would have been granted in earlier years which is not permissible.''The orders of the ITAT which are impugned herein are set aside. The Questions of Law that have been framed in these cases are answered in favour of the Revenue and against the assessee.'Core principles established:For wealth tax exemption under Explanation 1(b) to Section 2(ea)(v), the building must be fully constructed with approval; buildings under construction do not qualify.Taxing statutes and exemption clauses must be strictly construed, with ambiguity resolved in favor of the Revenue.Commencement of construction does not alter the nature of urban land for wealth tax purposes until construction is complete.The legislative intent to stimulate productive assets applies only post-completion of construction.Final determinations on each issue:The land was liable to wealth tax as vacant urban land under Section 2(ea) during the relevant assessment years since the building was not fully constructed.The assessee was not entitled to exemption on the basis of building under construction.The ITAT's reliance on the earlier Madras High Court decision was incorrect after the Supreme Court's ruling.The appeals filed by the Revenue were allowed, and the impugned ITAT orders were set aside.