The Commissioner of Income Tax vs Shri Ch. Satish

Balasubrahmanyan, J.—The question for our decision in this wealth-tax reference is whether the Assessee would be entitled to deduction of

a debt in the computation of his taxable net wealth when the debt in question stands secured on two assets, one of which is, and the other is not,

exempted from wealth-tax. The answer to the question turns of the construction of Section 2(m)(ii) of the Wealth-tax Act, 1957.

A few facts will better illustrate the intricacy of the problem. The Assessee owns, among other assets, two houses. In one of which he lives. The

other he has let out to tenants. The latter house was built with the aid of a house building advance from the L.I.C. (the Life Insurance Corporation

of India). The advance was made on the security of two items. The very house under construction was mortgaged to the L.I.C. Besides, the

Assessee was required to take a life policy for the amount and assign that policy as additional security for the house building advance.

Under the Wealth-tax Act a life policy, not yet matured is an asset on which tax is not payable. [See Section 5(1)(vi),]. u/s 5(1)(iv) provision is

made for exemption of one house for each Assessee. But even under this provision, a house, per se, is not exempt. Apart from other conditions,

the house must be lived in by the Assessee as his exclusive residence. In this case, the Assessee got an exemption for the other house under his

own residence. But the horse which stood mortgaged to the L.I.C. was not in the Assessee''s occupation. It had been let out to some American

Organization. It thus came to pass that the Assessee''s outstanding debt to the L.I.C. stood secured, at one and the same time, both on an

exempted asset (the life policy) and a non-exempted asset (the house let out). The question of education of the debt had had to be considered in

this situation.

The assessing officer concentrated on one aspect of the debt and its security, namely, that it was secured on an exempted asset. He accordingly

disallowed the debt. He relied on the following words of exclusion in Section 2(m)(ii):

debts which are secured on...any property in respect of which wealth-tax is not chargeable.

As we have already seen, the life policy in this case is an item of property on which, u/s 5(1)(iv) wealth-tax is not payable. The wealth-tax

Officer stuck to this point. He did take cognizance of the other security for the debt, namely, the tenanted house which was by no means exempt

from wealth-tax. But he thought this circumstances made no difference to the position that the debt was secured on the life policy and the life policy

was property on which wealth-tax was not payable. He thought this was enough to bring Section 2(m)(ii) to operation and disallow the debt.

The Tribunal in appeal thought otherwise. Their mind moved differently. They laid stress on the fact that the debt was charged on an item of

house property which was liable to wealth-tax as part of the Assessee''s taxable net wealth. They held to be of no consequence the exempt nature

of the other security for the debt, namely, the life policy.

This is not the first time a situation of this kind comes up before this Court in connection with the application of Section 2(m)(ii) of the Wealth-

tax Act. There is an earlier decision of a Bench of this Court in which the facts were slightly different, but the problem was much the same. In that

case, Tax Case No. 538 of 1976, a house property was partially exempt from tax because half only of that house was the Assessee''s residence,

the other half being let out to tenants. But the whole house was under mortgage as security for a debt owed by the Assessee. The question was

whether the debt was deductible. The assessing officer in that case took a via media position and allowed one-half of the debt, disallowing the

other half. The Assessee appalled to the Tribunal, and got the balance of the delusion claimed for the entire debt. This Court, on reference, held

that the whole debt was deductible. It was observed that a debt of the kind which was secured on property which was assessable to wealth-tax as

to one part and exempt from wealth-tax as to the other part, was a debt which would not fall within the terms of Section 2(m)(ii) which spoke of

property in respect of which wealth-tax is not chargeable.

The problem in the present case is only slightly different. Instead of the single property which figured in that case, there is a plurality of securities

in the present case, one of which is exempt and the other of which is not exempt from wealth-tax. The inquiry, however, seems to us to be the

same-to see whether of this debt it could legitimately be said that it is secured on property in respect of which wealth-tax is not chargeable. The

answer to the question seems to us to be in no way different from that rendered in the earlier case cited.

Section 2(m)(ii) uses the singular and speaks of property in respect of which wealth-tax is not payable, It is a well-known rule of statutory

construction that the singular includes the plural Vide Section 13(2) of the General Clauses Act, 1897 (Central Act X of 1897). Thus where an

Assessee owes a debt which is secured on one item of property, there must be an equerry u/s 2(m)(ii) whether the property is an exempted or

non-exempted asset and disallowance can be made of the debt, if the property is exempt from tax, but not otherwise. Where however, the debt is

secured on two items (or three, or several), then the disallowance u/s 2(m)(ii) can apply only, if all the items in question are found to be exempted

assets. This is how the expression, property must be construed. For a situation of the kind we have in the present case, Section 2(m)(ii) cannot be

applied. As a general proposition it may be laid down that where a debt is secured and the security consists of several items of property one of

which alone is exempted from wealth-tax, then it cannot be said that all the properties on which the debt is secure are exempted from wealth-tax.

In such a case, it would follow that Section 2(m)(ii), with its reference to property construed in plural, cannot apply.

This conclusion of ours accords with the Tribunal''s decision. We must, however, point out that the Tribunal''s determination is not based on

any enunciation of the legal position. Their conclusion is summarised in the following passage.

In this case the loan is secured both on the house property and the policy, one is taxable and the other non-taxable wealth. The charge is on the

whole of the two properties and therefore does not admit of any apportionment. In such a situation we hold that the debts though inadmissible u/s

2(m)(ii) with reference to the life policy are admissible with reference to the house property. We would therefore allow the claim of the Assessee to

deduct these sums.

This passage is not marked by clarity of discussion. Little or no attempt has been made by the Tribunal to face the problem posed by Section

2(m)(ii) on the facts of the present case. Far from tackling the problem, the Tribunal have even shown a reference to adopt a view of the facts

which has the effect of by passing Section 2(m)(ii) altogether. Elsewhere in their order, the Tribunal observed that the Assessee had only an

enquiry of redemption in the house property in question and that was the only asset he owned. In that sense, it was said that Section 2(m)(ii) was

not in point at all, for no question of allowance or disallowance of a debt could properly arise in the evaluation of an equity of redemption.

We do not quarrel with the position that the Assessee''s interest in the property is the equity of redemption. We may even grant that the equity

of redemption might be regarded as an asset in itself, since it is, but an interest in property. But we hold that this view involves an over-

simplification of the conception of a mortgage even under the general law. While a mortgage is the transfer of an interest in the mortgaged property

from the mortgagor to the mortgagee, it is something more than that. It involves the charging of a debt, for its re-payment, on the security of the

property. Besides, even the interest transferred by the mortgagor to the mortgagee is not absolute. For the mortgage is liable to be redeemed, and

there can be no clogs on redemption. It a mortgage of any kind, so inextricably mixed are the two elements, the element of debt or obligation, and

the element of transfer of interest in the property. The law of mortgages emphasizes one element in one context, ad the other element in another

context, with the result that no clear cut position emerges in an situations. This is the reason why Maitland characterised a mortgage as one long

suppressio veri and suggestion fulsi (Equity page 182) and Lord Macnaghten declared that no one can by the light of nature understand an English

mortgage of real estate. Samuel v. Jarrah Timber and Wood Paving Corporation Ltd. [1904] A.C. 324. At any rate, for the special purposes of

computation of the net wealth of an Assessee u/s 2(m) of the Wealth tax Act, we think it would be necessary to keep the two elements in a

mortgage distinct For net wealth is the end result of comparing the aggregate value of all assets, on the one side, and the aggregate value of all

debts, on the other side. In the case of mortgaged property, therefore, it would be proper to bring into the reckoning, on the assets side, the gross

value of the mortgaged property, and, on the side of debits and liabilities, the value of the subsisting mortgage debt on the property. This way of

reckoning a mortgaged property as made up of proelements, both of which are components of the Assessee''s net wealth u/s 2(m)(ii) is important,

because he property mortgaged may or may not be an exempted assets, and different tax consequences would flow according as it is or is not an

exempted asset. The Tribunal was not, therefore justified in oversimplifying the problem and adopting a short cut solution to the present case by

saying that the Assessee''s only asset is the equity of redemption and the inquiry in the wealth tax assessment is limited to the valuation of this

interest and nothing else. We believe that even accepting, as we should, the nature of the Assessee''s interest as an equity of redemption, it would

still be necessary to find out whether the debt owed by the Assessee to the L.I.C, is not deductible u/s 2(m)(ii). The question has still to be faced,

because its relevance is in the context of its having been secured on the other item, namely, the life policy which is exempt from tax. In that context,

the idea of the Assessee having only an equity of redemption in the house property is not the last word on the subject of computation.

Another argument which figured before the Tribunal was that the value of the debt in question may be apportioned as in part deductible and in

part non deductible, referring one part to the security, of the house property and the other part to the security of the life policy. This argument was

also thrown out by the Tribunal. We uphold the action of the Tribunal on the ground that Section 2(m)(ii) provides for no via media. For a

disallowance to be made under this provision, the debt must be a enured on properties with reference to all of which it could be said that wealth

tax is not payable. If we cannot render such a finding as respects all the properties securing the debt, then the disallowance under the section will

not apply. If on the contrary, all the properties securing the debt are tax exempt, then the Wealth tax Officer would be justified in applying Section

2(m)(ii) and disallowing the debt. Thus, the position as respects a debt can only be one of two things:

either Section 2(m)(ii) applies, or it does not apply.

There are no intermediate position in between, according as one or some of the properties securing the debt are exempt, but not the others.

One other point raised by the Assessee at the appellate stage may be briefly considered. Before, the Tribunal it was urged that although, as

part of the terms of the house building advance the Assessee had assigned his life policy to the L.I.C, the one and only real security for the debt

was the regular mortgage executed by the Assessee in respect of the house under construction. It was further urged that the security for the debt, in

the proper sense of the expression, did not include the life policy. This argument was obviously advanced with a view to avoid going near Section

2(m) (ii). With that end in view, the Assessee called the life policy a mere collateral security. It was urged that the assignment of the life policy only

enabled the L.I.C. to set off against the Assessee''s debt the amount of the policy when it matured. In that sense it was urged that the policy was

not a security at all. The Tribunal did not deal with this point. We on our part, however have no doubt in our minds that even a so-called collateral

security is security of a sort, and has to be dealt with as such for purposes of Section 2(m)(ii) of the Wealth-tax Act.

The question of law which has been referred to us in this case is as follows:

Whether, on the facts and in the circumstances of the case, the sum of Rs. 94,250, Rs. 90,750 and Rs. 65,035 being loans from the Life Insurance

Corporation of India secured on the mortgage of house property at No. 3, Archbishop Mathias Avenue and Life Insurance Policies are liable to be

deducted for assessment years 1967-68, 1968-69 and 1969-70 respectively.

The format of the question would seem to suggest that in respect of each of the three assessment years in question, there was a debt by the

Assessee in favour of the L.I.C. That is not so. The Assessee raised only a single loan on the security of the house and the life policy. Owing to

part payment of the debt from time to time the actual figure of outstanding had become 1ess and less at each of the three valuation dates relevant to

the to the three assessment years in question. As to the material part of question itself, having regard to the considerations we have earlier

mentioned, the answer we reader is in the affirmative and in favour of the Assessee. There will, however, be not order as to costs.