IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR MONDAY, THE 25TH FEBRUARY 2008 / 6TH PHALGUNA 1929 WTA.No. 1 of 2004() ------------------------------ WTA.12/COCH/2001- Assmt. year 1987- 88 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: ------------------- M/S. DARRAGH SMAIL & CO.(P) LTD., WILLINGDON ISLAND, COCHIN-682 003. BY ADV. SRI.JOSEPH MARKOSE (SR.) SRI.MITHUN MARKOS RESPONDENT: RESPONDENT: ------------------------- THE ASST.COMMISSIONER OF WEALTH TAX, CO.CIR.I,DIVISON I, ERNAKULAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT THIS WEALTH TAX APPEAL HAVING BEEN FINALLY HEARD ON 25/02/2008, ALONG WITH WTA NO. 2 OF 2004 AND CONNECTED CASES THE COURT ON THE SAME DAY PASSED THE FOLLOWING: C.N. Ramachandran Nair & T.R. Ramachandran Nair, JJ. - - - - - - - - - - - - - - - - - - - - - - - - W.T.A.NOs.1 to 4 of 2004 & 1 to 5 of 2005 - - - - -- - - - - - - - - - - - - - - - - - - - - Dated this the 25th day of February, 2008. JUDGMENT C.N. Ramachandran Nair, J. These are Wealth Tax Appeals filed by the assessee under Section 27-A of the Wealth Tax Act challenging the orders of the Income Tax Appellate Tribunal disposing of Wealth Tax appeals for the assessment years 1984-85 to 1992-93. The question raised pertains to valuation of the godown building constructed by the assessee on leasehold land belonging to Cochin Port Trust. The lease deeds for the two items of properties were executed on 28.10.1957 and 20.6.1961 for a period of 30 years with an option to the assessee/lessee to renew the lease. However, the Government of India, in exercise of their powers under the Major Port Trust Act, revoked the provision giving option to the lessee to renew the lease beyond 30 years by order dated 8.7.1986. Admittedly, the assessee constructed the office- cum-godown buildings in the two items of properties taken on lease from the Cochin Port Trust and the buildings were given on rent to tenants. Based on the rental income from the said leased buildings returned by the WTA 1/04, etc. -2- assessee for income tax purpose, the Wealth Tax Officer initiated proceedings for valuation of the buildings for wealth tax assessments. There is no dispute that the assessee is liable to pay wealth tax on the value of the buildings. However, the assessee disputed the proposal for valuation of the buildings constructed on leasehold property under Rule 3 of Schedule III of the Wealth Tax Act by contending that as on the relevant valuation date for all the assessment years, the assessee had less than 50 years lease and the deed of lease did not contain an option to the assessee/lessee for renewal of the lease. However, when the assessments were taken up, lease period was already over but the assessee was continuing the lease on same terms and conditions, though without formal agreement for renewal of lease for any specific period. Therefore, the assessing officer overruled assessee's objections and valued the buildings on rent capitalisation method as provided under Rule 3(b) of Schedule III of the Act. The assessee's contention is that when the assessee was not continuing, the lease, Rule 3 is not applicable and the valuation for assessment has, therefore, to be made under Rule 8(c) r/w Rule 20 of Schedule III of the Act. The assessment orders were contested by the assessee in two stages of appeals but without success. It is against the orders of the Appellate Tribunal, the assessee has come forward with this batch of appeals contending that valuation of the buildings in the leasehold WTA 1/04, etc. -3- property should be made applying rule 8(c) r/w. Rule 20 of Schedule III of the Act. Even though Schedule III was introduced to the Act with effect from 1.4.1989 by Direct Tax Laws (Amendment) Act, 1989, neither the assessee nor the departmental authorities including the Tribunal took note of it, but proceeded to dispose of the case assuming that Rule 3 applies for all the assessment years commencing from 1984-95. Since the assessee is not contesting the application of Rule 3 and the assessment got confirmed by the orders upto the Tribunal's level, we do not think we should take up this issue suo-motu. We therefore proceed to decide the sole question raised in the appeals which is re-framed by us as follows: “Whether in the facts and circumstances of the case, the appellate tribunal was justified in holding that the buildings constructed by the assessee in the property taken on lease from Cochin Port Trust should be valued under Rules 3 and 4 of Schedule III of the Wealth Tax Act and not under Rule 8(c) r/w. Rule 20 of Schedule III contained therein.” 2. Shri Joseph Markose, learned Senior Counsel appearing for the assessee contended that since as on the valuation date for all the assessment years, the lease was for a period not exceeding 15 years and since the lease deed did not contain a clause giving option to the lessee for renewal of lease, the valuation of the property has to be made under Rule 8(c) r/w. Rule 20 of the valuation rules contained in Schedule III of the Act. On the other hand, Shri P.K.R. Menon, learned Senior Standing Counsel appearing for WTA 1/04, etc. -4- the Revenue supported the order of the Tribunal by stating that by the time the Tribunal passed the order, the assessee had already got extension of lease of over 30 years and since the assessee continued the lease even thereafter, the valuation made under Rule 3(b) of Schedule III of the Act was rightly upheld by the Tribunal. In order to appreciate the contentions raised by both sides, we have to refer to Rules 3 and 8 of Schedule III of the Act which are extracted hereunder: “3. Valuation of immovable property: Subject to the provisions of rules 4, 5, 6, 7 and 8, for the purposes of sub-section (1) of section 7, the value of any immovable property, being a building or land appurtenant thereto, or part thereof, shall be the amount arrived at by multiplying the net maintainable rent by the figure 12.5: Provided that in relation to any such property which is constructed on leasehold land, this rule shall have effect as if for the figure 12.5-- (a) where the unexpired period of the lease of such land is fifty years or more, the figure 10.0 had been substituted; and (b) where the unexpired period of the lease of such land is less than fifty years, the figure 8.0 had been substituted. 8. Rule 3 not to apply in certain cases Nothing contained in rule 3 shall apply -- (a) where, having regard to the facts and circumstances of the case, the Assessing Officer with the previous approval of the Deputy Commissioner, is of opinion that it is not practicable to apply the provisions of the said rule to such a case; or WTA 1/04, etc. -5- (b) where the difference between the unbuilt area and the specified area exceeds twenty per cent of the aggregate area; or © where the property is constructed on leasehold land and the lease expires within a period not exceeding fifteen years from the relevant valuation date and the deed of lease does not give an option to the lessee for the renewal of the lease, and in any case referred to in clause (a) or clause (b) or clause ©, the value of the property shall be determined in the manner laid down in rule 20.” In the normal course, the buildings constructed by the assessee on leasehold land of the Cochin Port Trust, is assessable under Rule 3 of Schedule III of the Act, because the method of valuation of building with or without uppertenant land should be on rent capitalisation method provided therein. However, Rule 8 is an exception to Rule 3 and it provides for assessment based on market value as on the valuation date as provided under Rule 20, if the lease is for a period not exceeding 15 years from the relevant valuation date and the deed of lease does not give an option to the assessee/lessee for the renewal of lease. We feel the law applicable for valuation of the buildings of the assessee will be different for different assessment years for the following reasons. Admittedly the original lease contained a provision giving an option to the assessee/lessee to renew the lease on expiry of the original lease period of 30 years. However, this clause got revoked by Government of India's Order dated 8.7.1986 issued in exercise of the powers under the Major Port Trust Act. Therefore, for WTA 1/04, etc. -6- the assessments for the first three years, viz. 1984-85, 1985-86 and 1986-87 provisions of Rule 8 are not applicable, because though with reference to the corresponding valuation date, the lease was expiring within 15 years, the deed contained a provision for renewal of the lease at the option of the lessee and so much so, the assessee was not entitled to valuation under Rule 8 of the Rules. Since Rule 8 was not applicable for these years, the assessment ought to have and rightly made under Rule 3(b) of Schedule III of the Act. In view of this position, we uphold the order of the Tribunal confirming valuation under Rule 3 for the assessment years 1984-85, 1985- 86 and 1986-87 and consequently dismiss the appeals for these years. 3. So far as the assessment years from 1987-88 to 1992-93 are concerned, we find the position is different, because after the Government Order above referred, the provision in the lease deed giving option to the assessee to renew the lease stands revoked. Even though the Cochin Port Trust allowed the assessee to continue the lease, they did not renew the lease for any specific period. The question therefore to be considered is whether for the later assessment years, viz. from 1987-88 to 1992-93, the lease was to expire within a period of not exceeding 15 years as stated in Rule 3 of Schedule III of the Act. Law on lease is governed by the Transfer of Property Act, 1882. Sections 106 and 116 are the relevant provisions which recognises the tenure of the lease, the continuation of the WTA 1/04, etc. -7- lease by holding over and the duration of the lease so continued. For easy reference, Sections 106 and 116 of the Transfer of Property Act are extracted below: “106. Duration of certain leases in absence of written contract or local usage. In the absence of a contract or local law or usage to the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or lessee, by six months' notice expiring with the end of a year of the tenancy; and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by fifteen days' notice expiring with the end of a month of the tenancy. Every notice under this section must be in writing, signed by or on behalf of the person giving it, and either be sent by post to the party who is intended to be bound by it or be tendered or delivered personally to such party, or to one of his family or servants at his residence, or (if such tender or delivery is not practicable) affixed to a conspicuous part of the property. 116. Effect of holding over If a lessee or underlessee of property remains in possession thereof after the determination of the lease granted to the lessee, and the lessor or his legal representative accepts rent from the lessee or underlessee, or otherwise assents to his continuing in possession, the lease is, in the absence of an agreement to the contrary, renewed from year to year, or from month to month, according to the purpose for which the property is leased, as specified in section 106. It is clear from Section 116 above referred that a lease will continue even after the expiry of the lease period if the lessee remains in possession even after the expiry of the lease period and the lessor either accepts the rent or WTA 1/04, etc. -8- otherwise assents to his continuing in possession. The holding over of the leased property by the lessee has the effect of renewal of lease if either the lessor accepts the rent or otherwise assents to the lessee's continuance in possession. In this case, admittedly the Cochin Port Trust allowed the assessee to continue to hold the lease and lease rentals were being accepted by them. Therefore, there was continuation of lease by holding over. 4. The next question is when such a lease that continues by the operation of the above statutory provision, terminates. This has to be found in Section 106 of the T.P. Act which specifically gives duration of lease. It is stated therein that in the absence of a contract or local law or usage to the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable, on the part of either lessor or lessee, by six months' notice expiring with the end of a year of the tenancy. It is further stated in the said section that a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by 15 days' notice expiring with the end of a month of the tenancy. Admittedly the appellant was not engaged in any agricultural or manufacturing purposes. Therefore, renewal of lease by virtue of Section 116 of the T.P. Act after expiry of the lease period, was a lease getting renewed by the statutory operation on a month to month basis. The effect of Sections 106 WTA 1/04, etc. -9- and 116 of the T.P. Act in this case is that if either party does not terminate the lease by notice in terms of Section 106 of the Act or renew the lease for any specified period under the contract, the lease will get renewed on a monthly basis. In other words, the necessary consequence is that the lease in this case expires every month and gets automatically renewed if the parties do not terminate by notice. Even though the department contended that the assessee did not terminate the lease by notice and on the other hand, applied for renewal of lease for long term, we do not think the same will make the lease a long term lease, because the lessor, viz. the Cochin Port Trust had the authority to terminate the lease in terms of Section 106 of the Act by giving 15 days notice. The period of lease and the expiry of the same in terms of Sections 106 and 116 of the T.P. Act squarely applies to Rule 8 of Schedule III of the Wealth Tax Act. Since the statutory scheme as explained by us above, results in renewal of lease every month, the period of lease should be taken as expiring within a period of 15 years as stated in clause © of Rule 8 of Schedule III of the Act. Further, since after the order of the Central Government dated 8.7.1986 the renewal clause of lease at the option of the assessee was not available, Rule 8(c) is applicable to the appellant's case. Therefore, for the assessment years 1987-88 to 1992-93 the assessments have to be completed based on valuation of buildings under Rule 8 of Schedule III of the Act. WTA 1/04, etc. -10- We, therefore, allow the appeals for the assessment years 1987-88 to 1992-93 by vacating the orders of the Tribunal and Commissioner of Income Tax (Appeals) with direction to the assessing officer to revise the assessments by revaluing the property under Rule 8(c) r/w. Rule 20 of Schedule III of the Wealth Tax Act. The appeals are disposed of as above. (C.N. Ramachandran Nair, Judge.) (T.R. Ramachandran Nair, Judge.) kav/ WTA 1/04, etc. -11- C.N. Ramachandran Nair & T.R. Ramachandran Nair, JJ. - - - - - - - - - - - - - - - - - - - - - - . No. - - - - - - - - - - - - - - - - - - - - - - JUDGMENT WTA 1/04, etc. -12- 6th February, 2008.