Commissioner of Wealth Tax vs Vasantkumar Govindji Kotak

Sugla, J.—The Tribunal has at the instance of the Commissioner, referred to this Court the following question of law:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of sub-clause (ii) of section 2(m) of the Wealth-tax Act, 1957, was not applicable to the assessee''s case for assessment years 1970-71 and 1971-72 ?"

The facts are in a narrow compass and are not in dispute. The assessee owned a plot of land at Vile Parle. He constructed a house thereon during the previous year relevant to the assessment year 1970-71 by spending Rs. 1,43,789 which he withdrew from the partnership firm. Vasant Kotak & Bros, in which he was a partner. This amount appeared as a debit balance in his name in the books of partnership firm. In the next year, the assessee, it appears, spent more amount on the construction of the house. Like the earlier year the amount was also withdrawn from the partnership firm. At the end of that year, the debit balance in his name in the books of the firm stood at Rs. 1,57,489. However, the value of the said ''property'' as on the two valuation dates was estimated by the WTO at Rs. 1,85,000 and Rs. 1,99,000 respectively.

The assessee claimed that the debit balance in his name in the books of the firm on the two valuation dates at Rs. 1,43,789 and Rs. 1,57,489 should be allowed as debt in the computation of his net wealth. The WTO held that the debt was incurred in relation to property the value of which was exempt to the extent of Rs. 1 lakh u/s 5(1)(iv) of the Act. Therefore, to that extent the debt was in relation to an asset not chargeable to wealth-tax, was hit by section 2(m)(ii) and could not be allowed as such.

It was reiterated before the AAC that even after availing of exemption u/s 5(1)(iv) ''property'' was charged to wealth-tax in value to the extent of Rs. 85,000 for the assessment year 1970-71 and Rs. 99,000 for the assessment year 1971-72. The debt, it was contended, did not fall within the ambit of section 2(m)(ii). It was pointed out that on the valuation date for the assessment year 1970-71 the assessee had two accounts in the books of the firm. As against debit balance in one account, there was credit balance of Rs. 71,467 in the other account. The A AC accepted the assessee''s claim that the debt was incurred in relation to the ''property'' which was chargeable and charged to wealth-tax and, therefore, the provisions of section 2(m)(ii) were not applicable in the case. For the assessment year 1971-72 the A AC followed his order for the assessment year 1970-71. Agreeing with the orders of the A AC the Tribunal dismissed the departmental appeals.

The disallowance out of debit balance in the assessee''s account in the books of the partnership firm was made by the WTO u/s 2(m)(ii) to the extent of the amount of exemption, i.e., Rs. 1 lakh in both the years. The AAC and the Tribunal, on the other hand, held that the provisions of section 2(m)(ii) were not attracted in this case. It is, therefore, necessary to refer to the provisions of section 2(m)(ii):

"Definitions. - In this Act, unless the context otherwise requires,-(a) to (l) ****

(m) ''net wealth'' means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than-

(i) ****

(ii) debts which are secured on, or which have been incurred in relation to, any property in respect of which wealth-tax is not chargeable under this Act; and"

[Emphasis supplied]

The debt was incurred in relation to the residential house which, to the extent of Rs. 1 lakh in value, was exempt from wealth-tax u/s 5(1)(iv). It is, therefore, desirable to refer to the provision also :

"Exemptions in respect of certain assets. - (1) Subject to the provisions of sub-section (1A), wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee-

(i) to (iii) ****

(iv) one house or part of a house belonging to the assessee;"

The moot question is whether the debt herein, i.e., the amount standing to the debit of the assessee in the books of the partnership firm on the two valuation dates which was admittedly incurred in relation to the construction of the ''property'' (a residential house), is hit by the provisions of section 2(m)(ii). The manner in which the provisions of section 2(m)(ii) are worded, the answer will depend upon whether or not the said property is not chargeable to wealth-tax. For this purpose it is necessary to bear in mind that the value of the property as on the two valuation dates was estimated at Rs. 1,85,000 and Rs. 1,99,000 respectively. The exemption available u/s 5(1)(iv) at the material time was to the extent of Rs. 1 lakh. The property was, thus, charged to wealth- tax in respect of its value to the extent of Rs. 85,000 for the assessment year 1970-71 and Rs. 99,000 for the assessment year 1971-72.

The question involving the first part of the clause, namely, debts secured on property in respect of which wealth-tax is not chargeable, came up for consideration before the Allahabad High Court in the case of JIWAN LAL VIRMANI Vs. COMMISSIONER OF WEALTH-TAX, U. P., , the Gujarat High Court in the case of APOORVA SHANTILAL (HUF) (WTR NO. 7 OF 1980) ARUN K. PARIKH (WTR NO. 19 OF 1980) ASHOK K. PARIKH (WTR NO. 20 OF 1980) AJIT K. PARIKH (WTR NO. 21 OF 1980) SMT. KAMAL K. PARIKH (WTR NO. 26 OF 1980) Vs. COMMISSIONER OF WEALTH-TAX., , the Madras High Court in the case of T.V. Srinivasan Vs. Commissioner of Wealth-tax, , the Madhya Pradesh High Court in the case of CWT v. Premnarayan Garg [1981] 6 Taxman 388 [1982] 134 ITR 315 which was followed by the same Court in the cases of Commissioner of Wealth-tax Vs. Narayandas J. Hemani, and Raj Kumar Singh Kasliwal Vs. Commissioner of Wealth-tax, and the Andhra Pradesh High Court in the case of Mohd. Ashroff Khan v. CWT [1985] 154 ITR 830/20Taxman 160. The property in all these cases was life insurance policies. It was uniformally held that the value of the LJC policies being totally exempt u/s 5(1)(vi), the debt secured thereon was hit by the provisions of section 2(m)(ii). In some cases a view was canvassed that by the amendment with effect from 1-4-1965 the word ''chargeable'' was substituted for the word ''payable'' in the clause, that the Allahabad High Court decision in Jiwan Lal Virmani''s case (supra) was rendered when the word obtaining in the clause was ''payable'' and not ''chargeable'' and that the two words were materially and conceptually different. The view canvassed, however, did not find approval and it was held that there was no material difference between the words ''payable'' and ''chargeable''. In the present case this aspect of the matter is not material.

The issue arising in the present case precisely came up for consideration before the Madras High Court in the case of T.V. Srinivasan (supra). In that case an owner occupied house valued at Rs. 85,000 had a subsisting mortgage on it which stood at Rs. 36,000 on the valuation date. It was held that the assessee''s claim for reduction in respect of the debt went counter to the specific provisions of section 2(m)(ii) read with section 5(1)(iv). When a similar question again came up for consideration before the Madras High Court in the case of CIT v. MM. Rajam [1932] 133 ITR 75, however, a contrary view was taken. The assessee had in that case raised a mortgage loan in that case of Rs. 40,403 on the security of a residential property. The value of the property was Rs. 1,23,000 out of which the value to the extent of Rs. 61,500was exempt u/s 5(1)(iv). The case was, thus, of a property the value of which was partly exempt but the property as such was chargeable to wealth-tax as in the case before us. It was held that since it was impossible to answer the question, without fear of contradiction, that it was a property in respect of which wealth-tax was not chargeable, the debt was not hit by the prohibitory provisions of section 2(m)(ii). The Madras High Court followed its above decision in its subsequent decision in Commissioner of Wealth-tax, Tamil Nadu-I Vs. Satish, . A similar question again came up for consideration. Reference was then made to a Full Bench by reason of the conflicting views expressed by the Court in T.V. Srinivasan''s case (supra) on one side and M.N. Rajam''s case (supra) and Ch. Satish''s case (supra) on the other. The Full Bench, in the case of CIT v. K.S. Vaidyanathan [1985] 153 ITR 11/ 23 Taxman 169 (Mad.), by majority of two to one, held:

"...that when a debt is secured on several items of properties one of which alone is exempted from wealth-tax, that portion of the debt which is attributable to the value of the property exempted from wealth-tax cannot be deducted in the computation of the net wealth of the assessee. Similarly, when a debt is secured or acquired in relation to a property which is only partially exempted from wealth-tax, that portion of the debt which is attributable to the portion of the property exempted from wealth-tax cannot be deducted in the computation of the net wealth of the assessee.

...The rule of strict construction applies only to charging sections and not to machinery sections. Section 2(m) of the Wealth-tax Act, 1957 is not a charging section and the rule of strict construction cannot be applied to it. The principle of ''purposive construction'' has to be applied. This is a construction which will promote the general legislative purpose underlying the provision. Section 2(m)(ii) speaks of debts which are secured on or which have been incurred in relation to any property in respect of which wealth-tax is not chargeable under the Act. In cases where an asset is only partially exempt from chargeability to wealth-tax, then it must necessarily follow that the portion of the debt secured on such portion of the asset or incurred in acquiring such portion of the asset has to be excluded from reckoning. This construction will be in harmony with the scheme and purpose of the Wealth-tax Act." (p. 12)

Balasubrahmanyan, J., in his dissenting judgment, however, held:

"Section 2(m)(ii) does not speak of exempted assets. It only refers to property in respect of which wealth-tax is not chargeable. This phrase must be understood as meaning ''property in respect of which wealth-tax is not at all chargeable*. ''Not at all'' is not a gloss. It is very much a part of the meaning. If the secured properties fit in with the meaning of section 2(m)(ii) the connected debts go out of the reckoning. But if the properties are not comprehended by section 2(m)(ii), the general rule of deductibility operates, and this general rule knows no restrictions. In other words, depending on its relation to the asset in question, a debt is either deductible or not deductible. Section 2(m)(ii) does not contain any provision for partial abatement, or apportionment, of a debt under which part of it is deductible and part of it is not. On the words of section 2(m)(ii), once an asset which secures the debt is treated as an asset on which wealth-tax is chargeable, even though a part of the value of the asset is exempt from tax, the whole of the secured debt must be deducted." (p. 12)

We have carefully considered the judgments referred to above. In our judgment, the language of the provisions, i.e., section 2(m)(ii), is clear and unambiguous. The question to be answered is whether the property in relation to which the debt is incurred is the one in respect of which wealth-tax is not chargeable. If the answer is in the affirmative, the debt must be held as hit by the provisions of section 2(m)(ii). On the other hand, if it is not possible to answer that question in the affirmative, the consequence must necessarily follow and it should be held that the debt is not hit. The admitted position is that only a part of the value of the property is exempt. The property as such is chargeable and is charged to wealth-tax. In the circumstances, we find it difficult to hold that the property is not chargeable to wealth-tax. The result must follow that the debt herein is not incurred in relation to a property which is not chargeable to wealth-tax. Since, the answer cannot be that the property is not chargeable to wealth-tax, we are inclined to answer the question referred to us in the affirmative and in favour of the assessee. With respect, we find ourselves in agreement with the view expressed by Balasubrahmanyan, J. in his dissenting judgment in the Full Bench of the Madras High Court in K.S. Vaidyanathan''s case (supra) and the views expressed by that Court in its earlier two decisions in M.M. Rajam'' s case (supra) and Ch. Satish''s case (supra). A similar question in a different context came up for consideration before the Rajasthan High Court in the case of CWT v. Sanwarmal Shivkumar [1987] 34 Taxman 492 [1988] 171 ITR 377. lt was held therein that the department was bound to follow the circulars issued by the Board and that the Tribunal''s order was in conformity with the Circular No. 1070 dated 28-6-1977 issued by the Board. The Rajasthan High Court, it appears, was not called upon to consider the question whether in a case like the one before us the debt was at all hit by the provisions of section 2(m)(ii). The controversy was limited to the question whether the disallowance out of the debt hit by the provisions should have been made on pro rata basis or in conformity with the circular of the Board. In the view we have taken of the provisions, it is not necessary to consider this aspect of the matter in this case.

No order as to costs.