The Commissioner of Wealth Tax vs Travancore Textiles (P) Ltd.

N.V. Balasubramanian, J.—The Income Tax Appellate Tribunal, u/s 27(1) of the Wealth Tax Act, 1957, has stated a case and has referred

the following question of law for our consideration:

Whether on the facts and in the circumstances of the case, the value of the residential house at 22, Haddows Road partly used by the Managing

Director is includible in the net wealth of the assessee u/s 40(3)(vib) of the Finance Act, 1983?

The assessment years involved in this case are 1989-90 and 1990-91.

The assessee is a private limited company having its registered office at No. 22, Haddows Road, Chennai. The building belongs to the assessee

Company and it was partly used as a residence by the Managing Director of the Company and the remaining portion was used by the Company as

its registered office. The Wealth Tax Officer, in both the assessment years in question, brought to wealth tax that part of the value of the building

occupied by the Managing Director of the Company as his residence u/s 40 of the Finance Act,1983 (hereinafter referred to as ''the Act'').

The assessee company challenged the order before the Commissioner of Wealth Tax (Appeals) and the Commissioner of Wealth Tax

(Appeals) rejected the contention of the assessee that the property was exempt under Clause (vib) to sub-section (3) of Section 40 of the Act, and

held that the claim for exemption of wealth tax was not sustainable.

The assessee company carried the matter in appeal before the Income Tax Appellate Tribunal. The Tribunal held that the assessee is entitled for

exemption on the ground that for the earlier assessment years exemption was not granted on the basis of the proviso to Section 40(3)(vi) of the

Act and since the proviso has been deleted from 01.04.1989, the earlier orders of the Tribunal holding that the assessee was not eligible for

exemption u/s 40(3)(vi) of the Act would not be applicable for the assessment years in question. The Tribunal was also of the view that the

exemption is not taken away if a part of the building is used as a residential accommodation. It is in this view, the Tribunal held that the assessee

company is entitled for exemption of the building and the land occupied by the Managing Director u/s 40(3)(vi) of the Act.

The Revenue has challenged the said order of the Tribunal before this Court and the Tribunal has stated a case and referred the question of law

set out earlier.

The assessee company has been served, but there is no representation on its behalf. However, in view of the importance of the question of law

raised, we requested Mr. P.P.S. Janardhanaraja, learned advocate to act as amicus curiae to assist the court. He readily agreed and assisted the

Court. We place on record our appreciation for the service rendered by him.

We heard Mrs. Pushya Sitaraman, learned Senior Standing Counsel for the Revenue and Mr. P.P.S. Janardhanaraja, appearing as amicus

curiae for the assessee.

We are of the view that the order of the Tribunal is not sustainable as it fell into error in interpretation of Section 40(3) of the Act. Section 40

provides for revival of levy of wealth-tax in the case of closely-held companies, in which public are not substantially interested in respect of the net

wealth owned by the said company. Section 40(3) of the Act specifies the assets which are chargeable to Wealth Tax under that section. We are

concerned with Section 40(3)(vi) and 40(3)(vib) of the Act, which read as under :

S.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) .....

(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, cr�che, school, canteen, library, recreational center, 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.

(via) ....

(vib) any building and the land appurtenant to such building used as residential accommodation by any director, manager, secretary or any other

employee of the assessee, such employee holding not less than one per cent of the equity share of the assessee or by any relative of any person

who holds not less than one per cent of the equity share of the assessee.

A close reading of Section 40(3)(vi) of the Act shows that the buildings and lands belonging to the company in which public are not substantially

interested, are liable for wealth tax u/s 40 of the Act. The said sub-clause also provides for the grant of certain exemption in respect of the building

or part thereof used by the said Company as factory, godown, etc., and so far as the residential properties are concerned, it also grants exemption

as the sub-clauses uses the words ""used as residential accommodation"", if the building is used as such. Had it stopped with that clause, then there

would not have been any difficulty for the assessee, but from the exempted category of the assets certain exceptions are carved out from the

exemption clause and those exemptions are taken away and they are indicated in clauses (via) and (vib) of subsection (3) to section 40 of the Act.

Hence, the building or part thereof which has been used as a residential accommodation would be normally exempt, but if it falls within the scope

of (via) and (vib) of sub-section (3) to Section 40 of the Act, then those assets do not enjoy the exemption, but they are liable to be brought to

wealth tax u/s 40 of the Act.

Section 40(3)(vib) of the Act provides that if building or land appurtenant thereto, has been used as a residential accommodation by any

Director, Manager or by any Secretary or any other employee of the Company, holding more than the prescribed percentage of shares in the said

company, then the asset, namely, building and land appurtenant to the building is also liable to be brought to tax. Admittedly, the building and the

land appurtenant to that building has been used as a residential accommodation by the Managing Director of the Company and the Managing

Director is a Director for the purposes of Clause 40(3)(vib) of the Act. Since a part of the building is used by him for his residential purpose, to

that extent it is in his use for his residence or the portion occupied by him for his residential use, that part of the building is liable to be included as

part of the net wealth of the company for the purposes of the levy of wealth-tax u/s 40 of the Act.

The Tribunal has held that while Section 40(3)(vi) of the Act uses the words ""building or part thereof"", but the expression ""part thereof"" is not

employed and absent in section 40(3)(vib) of the Act, and hence if a part of the building is used as residence, that part of the building is not liable

to be brought to tax. We are unable to sustain the reasoning of the Tribunal for the reason that Section 40(3)(vi) of the Act provides for levy of

wealth tax on buildings and lands appurtenant thereto or part thereof belonging to the company and certain exceptions are carved out from

exemption u/s 40(3)(vi) and those exceptions are found in clauses (via) and (vib) of sub-section (3) to Section 40 of the Act. Hence, the view that

the entire building should be used for residential accommodation of a director, etc., for levy of wealth tax is not sustainable as Sections 40(3)(vi)

and 40(3)(vib) have to be read together and if so read, the expression ''any building'' in Section 40(3)(vib) would encompass not only the entire

building, but also a part of the building as well used as a residential accommodation by the director, and the section is not restricted in its

application only if the entire building of the Company is used by the director for his residence.

In so far as the amendment referred to by the appellate Tribunal is concerned, the amendment has no relevance at all, as the Section has been

amended in the year 1989 and the language of the Section is different from the old provision, and the question whether the asset is liable to be so

included for the purpose of wealth tax has to be considered with reference to the provision that prevails during the relevant previous year and the

said provision cannot be construed with reference to the previous provision which was in existence in the prior assessment years.

We hold that the case squarely falls within the scope and ambit of Section 40(3)(vi) read with (vib) of the Act, and hence that part of the

building which was used by the Managing Director for his residential accommodation and the land appurtenant thereto are also liable to be

included as part of the net wealth of the assessee company. We hold that the order of the Tribunal is not sustainable. Accordingly, we answer the

question referred to us in favour of the Revenue and against the assessee. No costs.