ORDER
Per Shri D. S. Meenakshisundaram, Judicial Member – This appeal arises out of the wealth-tax assessment of Shri R. Ratnam, the appellant herein, who is assessed in the status of a “Smaller HUF”. The assessment year is 1984-85 for which the valuation date was 31-3-1984.
2. We have heard Shri S. A. Balasubramaniam, the learned counsel for the appellant, and Shri G. Natarajan, the learned Departmental Representative, and carefully considered their submissions in the light of the authorities relied on by them.
3. The first objection is to the inclusion of the Compulsory Deposit made by the appellant amounting to Rs. 1,17,840 in his net wealth for this year. The WTO included the said amount of Compulsory Deposit as he was of the view that such amount was not exempt from wealth-tax. On appeal, the CWT (A) relied on the Compulsory Deposit Act which had been retrospectively amended with the introduction of section 7A with effect from 1-4-1975. He pointed out that as per the amended provision, the amount of Compulsory Deposit should be deemed to be a deposit with a banking company. The CWT (A), therefore, directed the WTO to allow exemption on the Compulsory Deposit subject to the ceiling limit under section 5(1A) of the Wealth-tax Act.
4. Before us, the learned counsel for the appellant, urged that the Compulsory Deposit was made by the appellant under a statutory compulsion and was not an annuity purchased by the assessee and that the terms and conditions relating to the Compulsory Deposit precluded the commutation of any portion into a lump sum. He, therefore, contended that the value of this Compulsory Deposit ought to have been excluded from the net wealth of the appellant. The learned Departmental Representative relied on section 7A of the Compulsory Deposit Act which has been inserted in the statute with retrospective effect from 1-4-1975 by the Finance (No. 2) Act, 1980. He submitted that in view of this provision of law, the direction given by the CWT (A) was correct and that the appellant was not entitled to any further relief on this count.
5. Under section 7A of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, the amount of compulsory deposit is deemed to be a deposit with a banking company to which the Banking Regulation Act, 1949 applies for the purpose of exemption under section 5 of the Wealth-tax Act, 1957. This section has been inserted by the Finance (No. 2) Act of 1980 with retrospective effect from 1-4-1975. In view of this statutory provision contained in the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, the direction given by the CWT (A) is correct and the appellant is not entitled to any further relief as claimed by him. Accordingly, we reject this objection of the appellant.
6. The only other objection in the appeal is to the disallowance of the appellants claim for deduction of a sum of Rs. 5 lakhs owed by him to Shri Balu Alagannan as a debt owed on the valuation date in computing his net wealth, under section 2(m) of the Wealth-tax Act. The WTO held that as this sum of Rs. 5 lakhs due to Shri Balu Alagannan was a liability incurred in purchasing capital investment bonds and since the said asset was not assessed to wealth-tax and that as it was not also existing on the valuation date, the appellant was not entitled to the deduction of the corresponding liability. He, therefore, disallowed the appellants claim for this deduction of Rs. 5 lakhs in the computation of his wealth.
7. When the matter went before the CWT (A), it was submitted that the liability in question was incurred in relation to capital investment bonds which was gifted by the appellant to Thriyug Trust on 26-2-1984 and in that sense the said assets were not available with the appellant as on the valuation date. It was contended that the fact that the assets were not available with the appellant could not be a ground for disallowing the liability which was still outstanding on the valuation date. It was pointed out that what was liable to be taxed under the Wealth-tax Act was the net wealth of the assessee which would mean the total value of the assets minus liabilities of the assessee and that when the liability was still outstanding, there was no justification for disallowing the same. It was also submitted that the assessment made by the WTO gave only a distorted picture of the appellants net wealth and, therefore, such an assessment would not be legally correct. In support of these submissions reliance was placed on the provisions of the charging section in section 3 and the definition of “net wealth” in section 2(m) of the Act.
8. The CWT (Appeals), after adverting to section 2(m) (ii) of the Act, held that evidently debts which are incurred in relation to any property in respect of which wealth-tax is not chargeable, are not to be included in the aggregate value of the debts owed by the assessee on the valuation date. He further held that it was not disputed that the debt was incurred in relation to capital investment bonds which are assets not chargeable under the Wealth-tax Act and that once this position was accepted, there could be no doubt that the liability incurred in relation to such assets was not deductible in computing the net wealth. The CWT (A) also held that the fact that the assets were not available with the appellant on account of the gift prior to the valuation date would not make any different to that position. He was of the view that the appellant was not entitled to deduct the sum of Rs. 5 lakhs being a liability incurred in relation to an asset not chargeable under the Wealth-tax Act and that, therefore, the WTO was justified in disallowing the claim for deduction of the amount. This is being objected to by the appellant before us.
9. Shri S. A. Balasubramaniam, the learned counsel for the appellant, challenged the decision of the CWT (Appeals) and argued that his reasoning and conclusion ran counter to the provisions of section 3 and section 2(m) of the Wealth-tax Act. The learned counsel pointed out that under section 3, the charge of wealth-tax was on the net wealth of an assessee as on the valuation date and that net wealth was defined in section 2(m) of the Act, according to which, all debts owed by the assessee as on the valuation date should be deducted from the total of the assets belonging to the appellant as on the valuation date. The learned counsel argued that there can hardly be any dispute that as on the valuation date, the sum of Rs. 5 lakhs represented debt owed by the appellant to Shri Balu Alagannan and that this debt did not fall within the mischief of the exclusion clause contained in section 2(m) (ii) of the Act, relied on by the departmental authorities. The learned counsel pointed out that this debt was not secured on any exempted asset and, therefore, the first limb of section 2(m) (ii) would not apply. Even with regard to the second limb of section 2(m) (ii), the learned counsel pointed out that the property should belong to the appellant as on the valuation date in order to hold that such property was not chargeable under the Wealth-tax Act and to reach the further conclusion that the debt was incurred in relation to such exempted property as contemplated in the second limb of section 2(m) (ii). The learned counsel contended that when the property was gifted away before the valuation date, it could not be held that such property was not chargeable in the hands of the appellant even though it did not belong to him as on the valuation date. The learned counsel argued that the gifting away of the bonds by the appellant before the valuation date would not mean that the appellants liability for the debt owed by him to Shri Balu Alagannan in the amount of Rs. 5 lakhs borrowed by him would be wiped out. He contended that this debt which was due and owing by the appellant on the valuation date would not fall within the mischief of section 2(m) (ii) or any of the other exclusion clauses of section 2(m) and that, therefore, should be allowed as an admissible deduction in computing the net wealth of the appellant. In support of his submissions, the learned counsel relied on the decision of the Madras High Court in A. & F. Harvey Ltd. v. CWT [1977] 107 ITR 326 at pages 333,334,339 bottom and 340 top. The learned counsel submitted that the object and purpose of the exclusion clause contained in section 2(m) (ii) was that an assessee should not get a double deduction or a double advantage, one of exemption for an asset or property under section 5 of the Wealth-tax Act and the other by ways of deduction of the corresponding debt incurred in relation to such exempted property under section 2(m) of the Act but that in the present case, there was no such double advantage or deduction claimed by the appellant and that, therefore, the appellant would be entitled to this deduction of the debt under the main provision of section 2(m) of the Act.
10. Shri G. Natarajan, the learned departmental representative relied on the findings of the CWT (Appeals) and contended that the appellants claim for deduction of this debt under section 2(m) was rightly negatived as the debt in question was hit by the exclusion clause contained in section 2(m) (ii) of the Act. He, therefore, submitted that the order of the CWT (Appeals) should be confirmed on this point also. Shri Natarajan relied on the decision of the Full Bench of the Madras High Court in CIT v. K. S. Vaidyanathan [1985] 153 ITR 11 in support of his contentions. He further pointed out that in this case the earlier decisions of the Madras High Court in M. L. Rajams case and in the case of CWT v. Satish were overruled.
11. Shri S. A. Balasubramaniam, the learned counsel for the appellant submitted in his reply that the Full Bench decision of the Madras High Court in Vaidynathans case (supra) relied on by the revenue is not authority for the position, that a debt in a case of the present type is not allowable by virtue of the exclusion clause contained in section 2(m) (ii) of the Act. Shri Balasubramaniam pointed out that the debt of Rs. 5 lakhs incurred by the assessee does not fall within the exclusion clause under section 2(m) (ii) of the Act and, therefore, cannot be excluded while computing the net wealth of the assessee, as done by the departmental authorities. In this connection, Shri Balasubramaniam relied on the decision of the Madras High Court in Spencer & Co. Ltd. v. CWT [1969] 72 ITR 33, where the scope of section 2(m) (ii) has been analysed by Their Lordships of the Madras High Court at page 39 of the reports. He further pointed out that this decision of the Madras High Court has been affirmed by the Supreme Court in CWT v. Spencer & Co. Ltd. [1973] 88 ITR 429. The learned counsel, therefore, argued that in the light of these two authorities of the Supreme Court and the Madras High Court it should be held that the assessee is entitled to the deduction of the sum of Rs. 5 lakhs claimed by him as a debt owed by him as on the valuation date within the meaning of section 2(m) of the Act, in computing his net wealth for this year.
12. We have carefully examined the contentions of the parties in the light of the authorities relied on by them. In the present case there is no dispute that the sum of Rs. 5 lakhs is a debt owed by the assessee to Shri Balu Alagannan as on the valuation date. The only question as a debt owed by the assessee in the computation of his net wealth under section 2(m) of the Act. The department relies on the exclusion clause in section 2(m) (ii) of the Act to exclude this debt for the purpose of computing the net wealth of the assessee. The reasoning of the department is that this debt was incurred by the assessee for the purpose of purchasing capital investment bonds which were not assessable to wealth-tax. The assessee meets this argument of the revenue by pointing out that as on the valuation date the said capital investment bons ceased to be his assets as it did not belong to him, as he had gifted them away to a trust on 26-2-1984, long before the valuation date 31-3-1984, but that the debt incurred by him continued to be a debt as on the valuation date which he owed to his creditor Balu Alagannan and therefore it would be an admissible deduction under section 2(m) of the Act. In our view, there is considerable force and substance in these submissions urged on behalf of the appellant. It is not in dispute that the capital investment bonds which were purchased by the assessee with the funds borrowed by him from Balu Alagannan have been gifted away on 26-2-1984 to a trust and that therefore those assets did not belong to the assessee as on the valuation date. It is for this reason the said asset is not included in the net wealth of the assessee under section 2(m) of the Act. What is excluded under section 2(m) (ii) is the debt which is secured or incurred in relation to any property which belongs to the assessee as on the valuation date and in respect of which wealth-tax is not chargeable by virtue of the provisions exempting such property from wealth-tax. In the present case, the capital investment bonds are not at all chargeable in the hands of the assessee for the simple reason that it did not belong to the assessee as on the valuation date, but belong to a third party to whom it has been gifted and not because of any exemption provision under the Wealth-tax Act. We are supported in our conclusion by the decisions of the Madras High Court in Spencer & Co. Ltd.s case (supra) and A. & F. Harvey Ltd.s case (supra).
3. In Spencer & Co. Ltd.s case (supra) at page 39, their Lordships of the Madras High Court have held as follows while construing the provisions of section 2(m) (ii) of the Act :-
“Everybody has proceeded on the assumption and quite rightly too, that it is a debt owed by the assessee but the divergence is on the question whether it is a debt within the scope of sub-clause (ii) of clause (m) of section 2. While the assessee would say that the liability is unrelated to the shares, the revenue would contradict and assert to the contrary. Sub-clause (ii), as it appears to us, presents no difficulty with regard to its scope and intendment. Having regard to the exclusion of certain kinds of property form the term “assets” and the exemption from tax in respect of certain other kinds of assets, sub-clause (ii) provided that if a debt has been incurred by an assessee in relation to any property which is not chargeable to wealth-tax or the repayment of which has been secured on such property, such a debt, and this is quite natural, will not be an allowable deduction from the aggregate value of the assets which go into the computation of net wealth. To illustrate, supposing an assessee purchase agricultural land with borrowed money or improve it with such fund, or the assessee, being a company, borrows and with the borrowed moneys purchases shares in another company, in neither case will the property to purchased or improved attract tax either because such property is excluded form the term “assets” for the purposes of the Act or is exempt from tax. If such liability is allowed to be deducted from the aggregate value of the assets, that would mean reduction of the value of the net assets to the extent of such liability which obviously cannot be permitted. That is because the debt is not related to or secured on property which is itself liable to wealth-tax. Any liability which has nothing to do with property chargeable to tax is, therefore, disregarded in ascertaining the net wealth. That precisely, in our opinion, is the scope and intention of sub-clause (ii) of clause (m) of section 2″.
We may point out that this decision of the Madras High Court has been affirmed by the Supreme Court in Spencer & Co. Ltd.s case (supra). While affirming the decision of the Madras High Court, the Supreme Court held that the mode of discharging a liability does not change its true character. Again, in A. & F. Harvey Ltd.s case (supra) at page 334 of the reports their Lordships of the Madras High Court have held as follows :-
“Consequently, the effect of section 3 read with section 2(m) and section 2(q) is that the wealth-tax is chargeable on the aggregate value of all the assets of a person as on the valuation date. Even though section 3 starts by saying that there shall be charged for every assessment year a tax in respect of the net wealth, still the wealth with reference to which charge has to be made has to be ascertained as on the valuation date. It may happen that a particular person may possess or own a certain wealth on the date immediately preceding the valuation date. It may happen that a particular person may possessor own a certain wealth on the date immediately preceding the valuation date, but he may lose that wealth on the valuation date, and if so, he cannot be made liable to any tax. Unlike the income-tax, which is in relation to income which is spread over a period in the form of accrual or receipt of income, the wealth-tax is in relation to the wealth quantified or crystallized with reference to a particular date, namely, the valuation date. Therefore, for a person to be liable to pay wealth-tax, he must be alive on the valuation date and must have the wealth which is liable to tax as provided in that section on that date. If he had died prior to the valuation date, then his wealth on the valuation date would not have belonged to him. If he died intestate it would belong to his heirs and if he died after executing a will, it would belong to the legatees and if executors or administrators had been appointed under the will, though the estate might vest in them for administration, still the ownership of the wealth would belong to the legatees under will. Therefore, purely as a matter of construction of the statutory provisions contained in section 3 read with section 2(m) and section 2(q), it will be clear that no dead man can be assessed to wealth-tax and if a man is to be assessed to wealth-tax in respect of his wealth as on the valuation date, he must be alive on that date and if he had died earlier, his wealth would belong to others and not to him, and, therefore, he could not be assessed to wealth-tax.”
Again at pages 339 and 340 the reports, their Lordships held as follows :-
“We may also point out that there can be no analogy of the provisions of the Income-tax Act with reference to the assessment under the Act. In the case of the Income-tax Act, a person, even if he died in the middle of an accounting year, might have earned taxable income during the course of that year before his death and, therefore, with reference to that income, he was liable to pay tax and assessment proceedings could be taken and tax could be recovered in the hands of his legal representatives out of the assets left behind by the deceased. But, as far as the Act is concerned, it is not an assessment inrespect of the wealth continuing over a period, but in respect of the wealth as available on a particular date, namely, the valuation date. Therefore, there cannot be any analogy, true or false, between the relevant provisions of the Income-tax Act and the Act in this behalf, in view of this basic and fundamental difference existing between the chargeable events themselves.
Under these circumstances, we are of the opinion that since Mr. Harvey was dead in the present case on March 28, 1957, and was not alive on March 31, 1957, which was the valuation date, his assets could not be taxed in the hands of the executors for the assessment year 1957-58, because immediately on the death of Mr. Harvey the assets ceased to belong to him and they belonged to the legatees for whom he had made provisions under the will executed by him”.
In the light of the aforesaid ratio of the two decisions of the Madras High Court, it is clear that the debt in question has not been incurred in relation to a property in respect of which wealth-tax is not chargeable under the Act, to fall within the mischief of section 2(m) (ii) of the Act to justify its exclusion.
14. The decision of the Full Bench of the Madras High Court in K. S. Vaidyanathans case (supra) relied on by the learned departmental representative turned on entirely different facts. On the contrary, the following observations at pages 27 of the reports support the assessees contention :-
“Further, section 2(m) makes it clear that the aggregate value of the assets belonging to the assessee has to be computed in accordance with the provisions of the Act.”
Again, at pages 36 and 37 of the reports, their Lordships have held as follows :-
“On the other hand, the reasonable and the purposive approach would warrant that in such a situation, section 2(m) (ii) has to be given a harmonious interpretation which would be consistent with the other sections of the Act. Viewed in this light, no violence would be done to the language of section 2(m) (ii) by holding that the debts referred to in that section can only refer to that portion of the debt which is secured on or which have been incurred in relation to that portion of the property in respect of which wealth-tax is not chargeable or payable under the Act. This conclusion will be in accord and in harmony with the scheme of the Act. The general rule as to a deduction of debts in section 2(m) is that all debts must come into the reckoning. Clauses (ii) excluded from the computation only debts which are secured on property in respect of which wealth-tax is not chargeable. Consequently, we have necessarily to see whether it can be said that it is property in respect of which wealth-tax is not chargeable. If in respect of an asset in entirety wealth-tax is not chargeable, then the debt secured on such asset, as we have already seen, has to be excluded from reckoning. 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 WT Act as contended for by both Mr. Rangaswami as well as Mr. Jayaraman”.
These observations, in our view, support the assessees contentions, rather that the departments contentions. Respectfully following these decisions of the Madras High Court, we hold that the appellant is entitled to the deduction of this sum of Rs. 5 lakhs as a debt owed on the valuation date in the computation of his net wealth under section 2(m) of the Act.
15. In the result, the appeal is partly allowed.