ORDER
M. Mahajan, A. M.
1. These five appeals pertaining to assessment years 1984-85 to 1988-89 have been filed by the Revenue against the consolidated order of the learned Commissioner of Wealth-tax (Appeals), which is dated 27-01-1992. As the common issues are involved in all the appeals, they are consolidated and disposed of by a single order for the sake of convenience. Common issues raised in all the appeals are as under :-
“On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 17,00,000 representing the value of the building on the valuation date by ignoring the fact that –
(i) the debt secured from Bank is not related to the asset belonging to the assessee.
(ii) No charge has been created in respect of said property in terms of provision of Indian Registration Act, 1908.”
2. Shri G. C. Sharma represented the assessee and Shri B. K. Haldhar appeared on behalf of the Department.
3. The facts in brief are that the assessee is a private limited company. It filed its returns for assessment years 1984-85 to 1988-89 declaring following net wealth and additions made were as under :-
Net Wealth declared Addition made A.Y. 1984-85 2,00,000 17,00,000 1985-86 85,000 17,00,000 1986-87 77,500 17,00,000 1987-88 24,09,761 1,72,54,739 1988-89 46,34,400 1,76,79,142
The WTO found that in addition to other assets, the assessee owned a property known as ‘Pratap Building’ at N-Block, Connaught Circus, New Delhi. The property was partly used for assessee’s own business and was partly let out. Since as per Registered Valuer’s Report, the liabilities exceeded the value of the building, the value of the aforesaid property was not shown in the net wealth for the purposes of levy of wealth-tax. On examination of the facts the WTO found that loans were secured against hypothecation/pledge of stocks, furniture, bills for collection, raw-material and import of Tractors and Motor Cycles, etc. The property known as ‘Pratap Building’ was only offered as a collateral and not primary or direct security. As the loans were held to be not incurred in relation of the said asset, viz., Pratap Building, additions for all the years, as stated in para 3, were made. The learned Commissioner of Wealth-tax (A) deleted the additions so made after accepting the assessee’s stand.
4. At the outset, Shri G. C. Sharma, the learned authorised representative clarified that it was only for assessment years 1984-85 and 1985-86 that the asset, viz., Pratap Building was reflected under the head ‘Collateral security’. This was not so for the other assessment years. The user of the expression ‘Collateral’ in any case would make no difference as the security was there for all intent and purposes. There was an equitable mortgage of the asset in question. The expression ‘collateral’ as understood in common parlance is nothing but an additional security. Charge has been created in regard to the entire building which has been registered with the Registrar of the Company, Delhi and Haryana. The transfer of interest in the property by way of equitable mortgage could require no registration under section 59 of the Transfer of Property Act. No distinction can be made between different types of securities, hence the question of priority amongst various types of securities does not arise. Then it is the choice of the Bank to proceed against any one of the securities offered for realisation of loans/advances given to the party.
5. According to the learned D. R., on the other hand, there has to be a direct nexus between the debt incurred and the asset, the value of which is to be brought to tax for the purposes of levy of wealth-tax. The aforesaid nexus has to be a close one. Since in the case of the assessee, this was not so and the security offered was one amongst many and that too to cover the overall facilities, the same could not be considered for the purposes of being a direct charge against the asset, viz., ‘Pratap Building’. Drawing our attention to the provisions of section 40 of the Finance Act, 1983, it was argued that since a part of the asset was taxable it is only the proportionate debt, if at all, which has to be considered against the value of the property. He also emphasised that lack of registration of the document is another reason for not accepting the assessee’s stand.
6. We have considered the rival submissions. As per scheme of section 40 of the Finance Act, 1983, the net wealth of the assessee is to be computed after taking into account the aggregate value of all assets as specified in sub-section (3) of section 40 of the Finance Act, 1983, after deducting therefrom the debts owed, which are secured on or which have been incurred in relation to such assets. Clause (vi) of sub-section (3) of section 40 of the Finance Act, 1983 specifies following asset :-
“(vi) building or land appurtenant thereto, other than building or part thereof used by the assessee as factory, godown, warehouse, cinema house, hotel or office for the purposes of its business or as a hospital creche, school, canteen, library, recreational centre, shelter, rest-room or lunch room mainly used for the welfare of its employees or used as residential accommodation, except as provided in clauses (via) and (vib), and the land appurtenant to such building or part;”
6.1 The property in question is Pratap Building which has also been offered as a security termed as ‘collateral security’ in the concerned letters but only for assessment years 1984-85 and 1985-86, which fact has not been disputed the learned D. R. The security of Pratap building is in addition to the securities of other assets, namely, stocks, furniture, tractors and motor-cycles, bills for collection, raw-material; against which the specified limits of loans have also been mentioned. The offers made to the assessee by the concerned Bank is by way of letters spelling out the terms and conditions of loans advanced and securities to offered. In addition to the specified securities against individual limits of loans, there are other securities mentioned under two heads, for example, as per contents of letter dated 16th February, 1983 (other letters are also stated to be on the same pattern, following securities were specified) :
Security
1. Limit of Rs. 35 lakhs Hypothecation over the assets
namely, future stocks of imported
and locally manufactured engines,
motor cycles, scooters etc.
2. Rs. 7,30,000 Pledge of goods under bank’s
lock and key.
3. Rs. 25,00,000 Purchase of bills drawn on
company.
4. Rs. 40,00,000 Bills drawn thereunder for
tractors, Scooters, M. Cycles
etc. etc.
5. Rs. 35,00,000 For bills drawn for goods
other than mentioned in No.
4 above.
6. Rs. 3 lakhs Signing letters of Guarantee
in favour of Govt. and
Semi-Government authorities.
Securities for all the facilities.
(a) Pledge of Dividend paying quoted Marketable Shares, present market value INR 3,370,000.
(b) Equitable Mortgage of property at 6, Aurangzeb Road, New Delhi for INR 5,750,000.
(c) Equitable Mortgage of Factory Land, Building & Machinery at Naharwar Unit in Sahibabad (U. P.) for INR 2,500,000.
(d) Registered Letter of Hypothecation for INR 800,000 over movable plant and machinery, tools, implements belonging to the borrowers and stored or held at their factory known as Naharwar Engineering Works, Sahibabad.
Collateral security for all the facilities :
(i) Equitable Mortgage of property known as Pratap Building, N – Block, Connaught Circus, New Delhi for INR 15,350,000. …”
6.2 The agreements so drawn are made effective from the receipt of acceptance by the assessee. As is evident from the above, in addition to equitable mortgage of factory land and the property at Aurangzeb Road, New Delhi, there is an equitable mortgage of the property in question, namely, Pratap Building. Mortgage as defined in section 58 of the Transfer of Property Act reads as under :-
“58. “Mortgage”. A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”
Thus, the essence of a mortgage is the intention to create a security. Mortgage could be of different types, like :
(a) Simple mortgage;
(b) Mortgage by conditional sale;
(c) Usufructuary mortgage;
(d) English mortgage;
(e) Mortgage by deposit of title-deed; and
(f) Anomalous mortgage.
6.3 It is the mortgage by Title-Deed which is termed as equitable mortgage. As per provisions of section 96 of the Transfer of Property Act, which reads as under, all the provisions which apply to Simple Mortgage apply to mortgage by deposit of title-deeds :-
“96. Mortgage by deposit of title-deeds –
The provisions hereinbefore contained which apply to a simple mortgage shall so far as may be, apply to a mortgage by deposit of title-deeds.”
Thus, under the Transfer of Property Act mortgage by deposit of Title-Deed is one of the forms whereby the transfer of interest in specific immovable property is made for the purpose of securing payment of money advanced or to be advanced by way of loan. ‘Security’ in turn defined in Stroud’s Judicial Dictionary, Vol. 4, 3rd Edition at page 2697 is as follows :-
‘”SECURITY” speaking generally is anything that makes the money more assured in its payment or more readily recoverable, as distinguished from, e.g., a mere I.O.U. which is only evidence of a debt.’
6.4 Similarly, in Penguine Business Dictionary by Michael Greener at page 387, New Edition the expressions ‘Security’ and ‘collateral security’ read as under :-
‘”SECURITIES” At one time a security was essentially something given or guaranteed by a borrower to safeguard a loan. In banking and money lending this remains the case, a security being given in the form of property or rights over that property, e.g., a charge by way of mortgage, to the tender as collateral for the money lent.
In more recent times the term securities has become the generic term for virtually all stocks, shares, bonds, etc., traded on Stock Exchange including derivatives such as futures and options. Government issues are afforded the accolade of gilt-edged securities as they are supposedly risk free – a quality which tends to ignore the real losses that can result from the ravages of inflation.’
‘”COLLATERAL SECURITY” – Security given for a loan. It is often additional security given over and above assets on which the loan is charged.’
6.5 Reading them together it is clear that in essence collateral security is nothing but a security. In present era of development of trade and commerce, where banking transactions have assumed significance the need for various types of securities have surfaced. Merely terming it as a collateral security does not take away from it the basic characteristics of the security as such. The expression ‘Secured on’ refers to security in general sense and is not restricted to either a particular type of security or security exclusive to a particular asset. Intention of the parties whether charge has been created is to be gathered from the essence of the agreement and not the form.
7. As to the contention relating to the provisions of Registration Act, we find that the aforesaid ground has never been the basis for rejecting the assessee’s stand by the Wealth-tax Officer. This has also not been considered by the learned Commissioner of Wealth-tax (A), as rightly maintained by Shri G. C. Sharma. In this context we, however, find that as per the provisions of section 59 of the Transfer of Property Act, which reads as under, the registration in respect of the mortgage by title-deed, is not required :-
“Section 59. Mortgage when to be by assurance –
Where the principle money secured is one hundred rupees or upwards, a mortgage other than a mortgage by deposit of title-deeds can be effected only by a registered instrument signed by the mortgagor and attested by at least two witnesses.
Where the principal money secured is less than one hundred rupees, a mortgage may be effected either by a registered instrument signed and attested as aforesaid, or (except in the case of a simple mortgage) by delivery of the property.”
7.1 In the case of mortgage by title-deed : on the other hand as held by their Lordships of Hon’ble Justice K. Subba Rao and Hon’ble Justice S. R. Mudholkar in K. J. Nathan v. S. V. Maruthi Rao AIR 1965 SC 430 (at page 635 of the Commentary of S. N. Gupta on Banking Law, Theory & Practice, 2nd Edition) there are three requisite conditions for such a mortgage. These are (i) Debt; (ii) Deposit by title-deed; and (iii) an intention that the deed shall be security for the debt. The essence of this form of mortgage is that the deposit by title-deed operate as contract between the parties to create a mortgage. Whenever a person delivers to a creditor or his agent documents of the transaction mortgage by deposit of title-deed is created. Intention to create a charge is to be gathered from the document. No material was placed before us to show that no such intention to create a charge was there on the part of the assessee. Thus on the facts a valid debt has been created on the property, viz., Pratap Building and as such the deduction claimed is allowable. Admittedly, there is a close nexus between the debt and the asset, the value of which is chargeable under the Wealth-tax Act for the purpose of section 40 of Finance Act, 1983. As regards the proportionate deduction of liabilities which are charged or secured on chargeable asset, there is no dispute between the parties as admitted before us. Hence there being no dispute on this account no comments are required to be offered.
8. Thus, for the reasons as discussed above, we uphold the order of the learned Commissioner of Wealth-tax (Appeals) for all the years in appeal.
9. In the result, the appeals filed by the Revenue are dismissed.