(The following post, which deals with a continuingly vexed question of law, has been contributed by Vinod Kothari and Nidhi Ladha of Vinod Kothari & Company. The authors can be contacted at vinod@vinodkothari.comand nidhiladha@vinodkothari.comrespectively)
At first glimpse, the question –what is an immovable property – sounds too basic to warrant any attention. Land and buildings are immovable properties. But that is not where the question is significant. The question becomes complicated when we extend the meaning of immovable property to include things which are embedded or fastened to earth, commonly known as “fixtures”. Fixtures may be done to civic structures - for example, doors or windows to buildings; fixtures may also arise in case of variety of plant, machinery, equipment, installations, such as furnaces, boilers, towers, and so on. To distinguish the latter from the former, we will call the latter “trade fixtures”. So, the question is, are trade fixtures immovable properties?
Goods and Properties:
Note the immense significance of the question, in light of the age-old distinction between “goods” (dealt with by Sale of Goods Act, 1930) and “properties” (dealt with by Transfer of Property Act, 1882). But more important than the branches of law that deal with them, there are immense tax implications of an asset being taken as a movable or immovable property. If the asset in question is “goods”, it is covered by Sales-tax/ value added tax (VAT) laws. If the asset manufactured is goods, there is a Central Excise implication. If the asset being sold is an immovable property, the question of sales-tax/VAT does not arise – however, there may be stamp duty applicable to the conveyance of immovable property. Transactions transferring interest in immovable property also require mandatory registration under Registration Act, 1908. Lease, mortgage or charges on immovable property may also bring in the implication of the Transfer of Property Act, conveyancing and registration requirements. Questions involving substantial sums of money continue to arise due to the fragmented nature of taxation laws in India, and the regime of control on immovable properties by civic authorities.
Immovable property is defined by Section 3(26) of the General Clauses Act, 1897 as including land, benefits arising out of land and things attached to the earth, or permanently fastened to anything attached to the earth. “Attached to earth” is defined in section 3 of the Transfer of Property Act as meaning (a) rooted in the earth, as in the case of trees and shrubs; (b) imbedded in the earth, as in the case of walls or buildings; or (c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
In case of trade fixtures, the rule is permanent attachment, that is, such attachment, whereby, removing the item in question will require demolition.
Intent and extent of annexation:
To ascertain whether the item is permanently attached to earth, English and Indian courts have consistently used two-fold tests – (i) the extent of annexation and (ii) the object of annexation. The extent of annexation means annexing the fixture or object ceases to be detachable. It would need to be demolished if one were to remove it. In considering whether the article is permanently annexed, the question is not the loss value – the question is – economically, is the asset what it was even after removal? That is, does it retain its commercial character, or the same gets lost in the process of removal?
The intent or object of annexation test may sound more intricate. The test lays down that where a movable property gets annexed with an immovable property, if the intent of annexation is of permanent beneficial enjoyment of the immovable property, then the fixture becomes an immovable property. If the intent of annexation is the beneficial enjoyment of the movable property, then the property still remains movable. The test may sound quite subjective: however, note that here also, the precondition is “permanent beneficial enjoyment”. There are two implications of the intent test – first, the annexation must only be such as is required for beneficial enjoyment of the movable property. For example, a machine is cemented to earth because that is the best way to use the machine. But if a storage tank is made of bricks and cement is built, one cannot say that the object of annexation is to use the storage tank. The tank has become such permanent part of the land that it is land which is being used by putting storage tank on it. The second implication, of course, goes back to the extent test – if something is permanently attached so as to make it permanent fixture on land or another immovable property, one cannot contend that the intent of so doing is to enjoy the fixture.
Thus, the determination of whether the property is movable or immovable becomes a facts-and-circumstances question. Needless to say, the question is as old law of properties – dating back to centuries.
Specific cases dealing with this question are discussed in a subsequent post.
- Vinod Kothari & Nidhi Ladha