Citation Codes

Equivalent Citations

citation codes

Case Number

Wealth-tax Reference No. 113 of 1976

Judges

Sujata Manohar
T.D Sugla, JJ.

Acts

provisions of section 2(m)(ii) read with section 5(1)(iv) of the Wealth-tax Act.
provision also:5. (1) Subject to the provisions of sub-section (1A),
provisions of section 2(m)(ii) of the Wealth-tax Act:(m)
provisions of sub-clause (ii) of section 2(m)
Section 2(m) of the Wealth-tax Act, 1957,
section 5(1)(iv) of the Wealth-tax Act.
section 2(m)(ii) of the Wealth-tax Act
section 2(m)(ii), the general rule
provisions of section 2(m)(ii).
section 5(1)(iv)
Section 2(m)(ii)

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Smart Summary

Summary of Opinion — T.D. Sugla, J.

Factual and Procedural Background

The Tribunal referred the following question of law to this Court at the instance of the Commissioner:

“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) were not applicable to the assessee's case for the assessment years 1970-71 and 1971-72?”

The undisputed facts were narrow. The assessee owned a plot at Vile Parle and constructed a house thereon during the previous year relevant to assessment year 1970-71 by spending Rs. 1,43,789 withdrawn from the partnership firm Messrs. Vasant Kotak and Brothers (a debit balance in his name). In the next year he again withdrew further amounts for further construction; the debit balance in his name at the end of that year was Rs. 1,57,489. The Wealth-tax Officer (WTO) estimated the value of the property on the two valuation dates at Rs. 1,85,000 and Rs. 1,99,000 respectively.

The assessee claimed that the debit balances (Rs. 1,43,789 and Rs. 1,57,489) should be allowed as debts in computing net wealth. The WTO disallowed part of those debit balances on the ground that the debt was incurred in relation to a property the value of which was exempt to the extent of Rs. 1,00,000 under section 5(1)(iv) of the Wealth-tax Act, and therefore that portion of the debt was in relation to an asset not chargeable to wealth-tax and was hit by Section 2(m)(ii). The Appellate Assistant Commissioner accepted the assessee's contention for 1970-71 (pointing to offsetting credit balance in another account) and applied the same approach for 1971-72. The Tribunal dismissed the departmental appeals, agreeing with the Appellate Assistant Commissioner. The Commissioner referred the legal question to this Court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the provisions of sub-clause (ii) of section 2(m) of the Wealth-tax Act were applicable to the assessee's case for the assessment years 1970-71 and 1971-72 (i.e., whether the debts in question were "debts ... incurred in relation to any property in respect of which wealth-tax is not chargeable" and therefore not allowable in computing net wealth)?

Arguments of the Parties

Revenue / Wealth-tax Officer's Position

The WTO disallowed the portion of the debit balance to the extent of the exemption (Rs. 1,00,000) under section 5(1)(iv), reasoning that the debt was incurred in relation to the residential property the value of which was exempt to that extent and therefore that part of the debt related to an asset not chargeable to wealth-tax and was hit by Section 2(m)(ii).

Assessee's Position

The assessee claimed the entire debit balances (Rs. 1,43,789 and Rs. 1,57,489) as debts in computation of net wealth. He contended that even after availing the Rs. 1,00,000 exemption under section 5(1)(iv), the property remained chargeable to wealth-tax to the extent of Rs. 85,000 (1970-71) and Rs. 99,000 (1971-72), and therefore the debts did not fall within the ambit of Section 2(m)(ii).
For the 1970-71 valuation date the assessee pointed out offsetting entries in the firm's books (a credit balance of Rs. 71,467 in another account) to support deductibility.

Appellate Assistant Commissioner / Tribunal

The Appellate Assistant Commissioner accepted the assessee's claim for 1970-71, and for 1971-72 followed the same view. The Tribunal agreed with those orders and dismissed the departmental appeals.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jiwan Lal Virmani v. CWT, [1967] 66 ITR 338 (Allahabad High Court)	Authority on debts secured on life insurance policies which were treated as totally exempt under section 5(1)(vi); debts secured thereon held hit by Section 2(m)(ii).	Cited as part of a group of authorities establishing that where an asset is totally exempt, debts secured on it are excluded by Section 2(m)(ii).
Apoorva Shantilal (HUF) v. CWT, [1982] 135 ITR 182 (Gujarat High Court)	Same principle as Jiwan Lal Virmani regarding totally exempt life insurance policies and debts secured thereon.	Grouped with other decisions holding that debts secured on totally exempt LIC policies are hit by Section 2(m)(ii).
T.V. Srinivasan v. CWT, [1980] 123 ITR 464 (Madras High Court)	Held that an assessee's claim for reduction of debt was contrary to the specific provisions of Section 2(m)(ii) read with section 5(1)(iv) (case involved an owner-occupied house where part of the question concerned exemption).	Presented as authority supporting the view that Section 2(m)(ii) precludes deduction in certain situations involving exempt portions of residential property.
CWT v. Premnarayan Garg, [1982] 134 ITR 315 (Madhya Pradesh High Court)	Part of the group of cases dealing with totally exempt life insurance policies and the effect on debts secured thereon.	Used to show consistent treatment by several High Courts that debts on totally exempt LIC policies are hit by Section 2(m)(ii).
CWT v. Narayandas J. Hemani, [1983] 143 ITR 87 (Madhya Pradesh High Court)	Same subject-matter as Premnarayan Garg — treatment of debts on totally exempt policies.	Followed the view that debts secured on totally exempt policies fall within Section 2(m)(ii).
Rajkumar Singh Kasliwal v. CWT, [1983] 143 ITR 597 (Madhya Pradesh High Court)	Also part of the line of authorities on debts secured on totally exempt life insurance policies.	Cited as further evidence of consistent rulings where the asset was totally exempt.
Mohd. Ashroff Khan v. CWT, [1985] 154 ITR 830 (Andhra Pradesh High Court)	Similar principle regarding totally exempt life insurance policies and impact on debts secured thereon.	Included among High Court decisions uniformly holding that debts secured on totally exempt policies are hit by Section 2(m)(ii).
CIT v. M.N. Rajam, [1982] 133 ITR 75 (Madras High Court)	Held that where a residential property was partly exempt but nevertheless the property as such was chargeable, it was impossible to assert that it was a property in respect of which wealth-tax was not chargeable — therefore the debt was not hit by Section 2(m)(ii).	Presented as a contrary authority to T.V. Srinivasan; the present Court referred to and agreed with this view when relevant.
CWT v. Ch. Satish, [1982] 133 ITR 834 (Madras High Court)	Followed the approach of CIT v. M.N. Rajam (i.e., that debts may not be hit when property is only partly exempt but generally chargeable).	Cited as supportive of the view that partial exemption does not necessarily bring the debt within Section 2(m)(ii).
CIT v. K.S. Vaidyanathan, [1985] 153 ITR 11 (Madras Full Bench)	Full Bench (majority) headnote: when a debt is secured on several items one of which alone is exempt, the portion of debt attributable to the exempt portion cannot be deducted; likewise for a partially exempt property; Section 2(m) is not a charging section and a purposive construction should be applied rather than strict construction.	Discussed at length. The Court noted the majority headnote but ultimately aligned with the contrary (dissenting) view in its reasoning in the present case.
Dissent of Balasubrahmanyan J. in CIT v. K.S. Vaidyanathan (Full Bench)	Held that Section 2(m)(ii) refers to property in respect of which wealth-tax is "not at all chargeable" and that the clause does not provide for partial apportionment; if the secured property is one on which wealth-tax is chargeable, the whole secured debt is deductible.	The present Court expressly found itself in agreement with this dissenting view and applied that reasoning to reach its decision in favour of the assessee.
CWT v. Sanwarmal Shiv-kumar, [1988] 171 ITR 377 (Rajasthan High Court)	Held that the Department was bound to follow circulars issued by the Central Board of Direct Taxes; Tribunal's order conformed with Circular No. 1070 dated June 28, 1977. The court was not called upon to decide whether the debt was hit by Section 2(m)(ii).	Cited to show that, in some contexts, the dispute was about pro rata disallowance vs. Board circulars; the present Court stated that this aspect need not be considered given its view on Section 2(m)(ii).

Court's Reasoning and Analysis

The Court's analysis proceeded from the statutory language. The relevant provisions were identified and quoted: Section 2(m)(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) and section 5(1)(iv) (exemption for one house or part of a house).

Key steps in the Court's reasoning (as stated in the opinion):

The textual question is whether the debt was "incurred in relation to" property "in respect of which wealth-tax is not chargeable" (i.e., whether the property was one in respect of which wealth-tax was not chargeable at all).
The admitted facts showed that only a part of the property's value was exempt (Rs. 1,00,000) and that the property as such remained chargeable to wealth-tax to the extent of Rs. 85,000 (1970-71) and Rs. 99,000 (1971-72).
Because the property as such was chargeable and was in fact charged to wealth-tax, it could not be said that the property was "not chargeable" under Section 2(m)(ii).
Accordingly, the condition in Section 2(m)(ii) that a debt be incurred in relation to property "in respect of which wealth-tax is not chargeable" was not satisfied; hence Section 2(m)(ii) did not apply to exclude the debt from deduction.
The Court examined the conflicting High Court authorities (Madras Full Bench and other High Courts) and expressly aligned with the view that where the property is chargeable (even though partly exempt) the debt is not hit by Section 2(m)(ii). The Court found the statutory language clear and unambiguous and adopted the position that if it cannot be answered in the affirmative that the property is not chargeable, then the debt is not excluded.
The Court therefore agreed with the dissenting view in the Madras Full Bench decision (Balasubrahmanyan J.) and with the earlier Madras decisions (CIT v. M.N. Rajam and CWT v. Satish) which reached the same conclusion.

The Court expressly noted that it was unnecessary to consider other aspects such as the question of pro rata disallowance or conformity with Board circulars (Circular No. 1070) in the light of its primary conclusion.

Holding and Implications

Holding: The Court answered the referred question in the affirmative and in favour of the assessee — i.e., it held that the provisions of Section 2(m)(ii) were not applicable to the assessee's case on the facts before the Court (the property was chargeable to wealth-tax despite the partial exemption, and therefore the debt was not hit by Section 2(m)(ii)).

Implications:

Direct effect on the parties: The Court's decision supports the Appellate Assistant Commissioner and the Tribunal in allowing the assessee's claimed debts (i.e., the debit balances) in the computation of net wealth for the assessment years in question because Section 2(m)(ii) did not apply.
Scope for wider application: The Court relied on the statutory language and aligned with authorities holding that where a property is chargeable (even if partially exempt) the debt incurred in relation to it is not excluded by Section 2(m)(ii). The Court therefore adopted the interpretive approach that the phrase "in respect of which wealth-tax is not chargeable" requires that the property be not chargeable at all; partial exemption does not make the property "not chargeable" for the purposes of Section 2(m)(ii).
On precedent: The Court expressly aligned with certain High Court decisions (including dissenting view in the Madras Full Bench) and distinguished or declined to follow the contrary majority view of that Full Bench; it did not make a broad pronouncement beyond the statutory interpretation applied to the facts before it.

No order as to costs was made in this opinion.

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Commissioner Of Wealth-Tax v. Vasantkumar Govindji Kotak. (Legal Heir Of Late Govindji Shamji Kotak)

T.D 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) were not applicable to the assessee's case for the assessment years 1970-71 and 1971-72?”

2. 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, Messrs. Vasant Kotak and Brothers, in which he was a partner. This amount appeared as a debit balance in his name in the books of the partnership firm. In the next year, the assessee, it appears, spent more amounts on the construction of the house. Like in 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 Wealth-tax Officer 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, respectively, should be allowed as a debt in the computation of his net wealth. The Wealth-tax Officer held that the debt was incurred in relation to property the value of which was exempt to the extent of Rs. 1,00,000 under section 5(1)(iv) of the Wealth-tax Act. Therefore, to that extent, the debt was in relation to an asset not chargeable to wealth-tax and was hit by Section 2(m)(ii) and could not be allowed as such.

3. It was reiterated before the Appellate Assistant Commissioner that, even after availing of the exemption under section 5(1)(iv) of the Wealth-tax Act, “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 relevant to the assessment year 1970-71, the assessee had two accounts in the books of the firm. As against the debit balance in one account, there was a credit balance of Rs. 71,467 in the other account. The Appellate Assistant Commissioner 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 Appellate Assistant Commissioner followed his order for the assessment year 1970-71. Agreeing with the orders of the Appellate Assistant Commissioner, the Tribunal dismissed the departmental appeals.

4. The disallowance out of the debit balance in the assessee's account in the books of the partnership firm was made by the Wealth-tax Officer under Section 2(m)(ii) of the Wealth-tax Act to the extent of the amount of exemption, i.e, Rs. 1,00,000 in both the years. The Appellate Assistant Commissioner 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) of the Wealth-tax Act:

“(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—…

(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”

(underlining* by us)

5. The debt was incurred in relation to the residential house which, to the extent of Rs. 1,00,000 in value, was exempt from wealth-tax under section 5(1)(iv) of the Wealth-tax Act. It is, therefore, desirable to refer to that provision also:

“5. (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—…

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

6. 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). From 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 under section 5(1)(iv) at the material time was to the extent of Rs. 1,00,000. 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.

7. 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 v. CWT, [1967] 66 ITR 338, the Gujarat High Court in the case of Apoorva Shantilal (HUF) v. CWT, [1982] 135 ITR 182, the Madras High Court in the case of T.V Srinivasan v. CWT, [1980] 123 ITR 464, the Madhya Pradesh High Court in the case of CWT v. Premnarayan Garg, [1982] 134 ITR 315 which was followed by the same court in the case of CWT v. Narayandas J. Hemani, [1983] 143 ITR 87 and in the case of Rajkumar Singh Kasliwal v. CWT, [1983] 143 ITR 597 (MP) and the Andhra Pradesh High Court in the case of Mohd. Ashroff Khan v. CWT, [1985] 154 ITR 830. The property in all these cases was life insurance policies. It was uniformly held that the value of the Life Insurance Corporation policies being totally exempt under section 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 April 1, 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, [1967] 66 ITR 338 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.

8. The issue arising in the present case precisely came up for consideration before the Madras High Court in the case of T.V Srinivasan v. CWT, [1980] 123 ITR 464. 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) of the Wealth-tax Act. When a similar question again came up for consideration before the Madras High Court in the case of CIT v. M.N Rajam, [1982] 133 ITR 75, however, a contrary view was taken. The assessee had in that case raised a mortgage loan 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. 61,500 was exempt under section 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 CWT v. Ch. Satish, [1982] 133 ITR 834. 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 v. CWT, [1980] 123 ITR 464 (Mad) on the one side and CIT v. M.N Rajam, [1982] 133 ITR 75 (Mad) and CWT v. Ch. Satish, [1982] 133 ITR 834 (Mad), on the other. The Full Bench, in the case of CIT v. K.S Vaidyanathan, [1985] 153 ITR 11 (Mad), by a majority of two to one, held (headnote):

“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.”

9. Balasubrahmanyan J., in his dissenting judgment, however, held (head-note):

“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.”

10. 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 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 case of the Madras High Court in CIT v. K.S Vaidyanathan, [1985] 153 ITR 11 and the views expressed by that court in its earlier two decisions in CIT v. M.N Rajam, [1982] 133 ITR 75 (Mad) and CWT v. Satish, [1982] 133 ITR 834 (Mad). A similar question in a different context came up for consideration before the Rajasthan High Court in the case of CWT v. Sanwarmal Shiv-kumar, [1988] 171 ITR 377. It was held therein that the Department was bound to follow the circulars issued by the Central Board of Direct Taxes and that the Tribunal's order was in conformity with Circular No. 1070 dated June 28, 1977, issued by the Central Board of Direct Taxes. 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.

11. No order as to costs.

Commissioner Of Weal... v. Vasantkumar Govindji...