(2012) 245 KLR 287

 IN THE HIGH COURT OF KERALA AT ERNAKULAM 

PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HON'BLE MR. JUSTICE BABU MATHEW P.JOSEPH 

THURSDAY, THE 1ST DAY OF MARCH 2012/11TH PHALGUNA 1933 

WTA.No. 10 of 2009 ( ) 

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WTA.136/COCH//2005 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH 

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APPELLANT(S)/RESPONDENT/REVENUE: 

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THE COMMISSIONER OF WEALTH TAX, THIRUVANANTHAPURAM. 

BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, INCOME TAX SRI.GEORGE K. GEORGE, SC, INCOME TEX 

RESPONDENT(S)/APPELLANT/ASSESSEE: 

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ASSOCIATED INDUSTRIES (P) LTD., KOLLAM. BY ADVS.SRI.E.K.NANDAKUMAR SRI.A.K.JAYASANKAR NAMBIAR SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS SRI.ANIL D. NAIR 

THIS WEALTH TAX APPEAL HAVING BEEN FINALLY HEARD ON 01-03-2012, ALONG WITH WTA. 22/200 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Kss WTA.NO.10/2009 

APPENDIX 

APPELLANT'S ANNEXURES: 

• ANNEX.A: COPY OF THE ORDER OF THE ASSESSING OFFICER DTD.3/2/2004. 
• ANNEX.B: COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DTD. 29/03/2005. 
• ANNEX.C: COPY OF THE ORDER OF THE APPELLATE TRIBUNAL DTD.25/8/2006. 

RESPONDENT'S ANNEXURES: 

• N I L 

/TRUE COPY/ P.S.TO JUDGE Kss 

C.R. 

C.N. RAMACHANDRAN NAIR & BABU MATHEW P. JOSEPH, JJ. 

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W.T.Appeal Nos. 10, 22, 25, 27, 32 & 38 of 2009 

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Dated this the 1st day of March, 2012 

Head Note:-

Wealth Tax Act, 1957 - Section 2(m) - Net wealth - Deduction - Funds borrowed by the Company from the directors for releasing mortgage - Held, the debt incurred "in relation to the asset" in the definition clause of "net wealth" should enjoy a wide meaning to cover all debts incurred for acquiring, securing and retaining the property free of charge. What the assessee company had done by borrowing funds from the directors and by settling mortgage debt is to release the property and thereby to protect the property and retain it to the assessee. So much so, the debt incurred directly for releasing the mortgage over the property can safely be treated as debt incurred in relation to the property.  

Wealth Tax Act, 1957 - Section 2(m) - Net wealth - Deduction -  Major portion of the land belonging to the assessee was urban land and 160 cents was within the Panchayat area - Held, The deduction called for is only the amounts used from out of borrowed funds for releasing the mortgage over an extent of land within the urban area, which was only brought to wealth tax. In other words, whatever portion of the debt availed from the directors by the assessee which was used proportionately for releasing the mortgage over the land outside the urban area cannot be allowed as a deduction. 

Ramachandran Nair, J. 

The short question arising for consideration in these connected appeals is whether the funds borrowed by the respondent Company from the directors for releasing mortgage which the bank had over the assessee's property is allowable deduction in the determination of net wealth under 2(m) of the Wealth Tax Act. We have heard Senior Counsel Sri.P.K.R.Menon appearing for the revenue and M/s. Menon & Pai, represented by Adv. Mr.A.K. Jayasanker Nambiar, for respondent assessee. 

2. The respondent company owned 540 cents of land with buildings wherein they were running a tile and bricks factory. However, on account of financial difficulties, the factory remained defunct for several years. Major portion of the said land belonging to the assessee was urban land and 160 cents was within the Panchayat area. In the course of time, the company had borrowed funds for the purpose of working capital from the Bank against a mortgage executed in respect of its landed property. When the mortgage debt with interest went upto Rs.86,00,373/- the Bank offered one time settlement for settling the liability for Rs.40,72,924/-. The assessee company borrowed loans from the directors for the purpose of discharging bank loans and releasing mortgage over the property. Accordingly, in February, 1995, with the funds borrowed from directors, the assessee settled the bank loan and lifted the mortgage on the property. In the wealth tax returns filed for assessment years 1996-96 to 2001-02, the assessee claimed deduction for the amount borrowed from the directors for settling the mortgage debt due to the bank as a deduction in the computation of net wealth. The Assessing Officer disallowed it stating that the debt which the assessee owed to directors are not incurred in relation to the land and so much so the same is not allowable. Even though the first appellate authority confirmed the disallowance, on second appeal, the Tribunal by giving a wide meaning to Section 2(m) allowed the claim against which revenue has filed these appeals. 

3. We have considered the controversy in hand. It is worthwhile to note that by Finance Act, 1992, Wealth Tax Act was drastically amended with effect from assessment year 1993-94 providing for wealth tax only on non-productive assets like urban land and the liability on wealth tax itself was limited to individuals, Hindu undivided families and companies. There is no dispute that the land belonging to the assessee with the Quilon Corporation was assessable to wealth tax and assessee, in fact, included its value in the net wealth declared. 

4. However, the question that arises for consideration is whether the funds borrowed from the directors for releasing mortgage over the said land is allowable deduction in the computation of net wealth under Section 2(m) of the Act. Since the dispute is in respect of the scope of "net wealth" under Section 2(m), we extract below the said provision for easy reference as follows: 

"(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 which have been incurred in relation to the said assets." 

5. Relying on the decision of the Supreme Court in RM.Arunachalam v. Commissioner of Income Tax [227 ITR 222] and the decision of the Bombay High Court in CIT v. Roshanbabu Mohammed Hussein Merchant [275 ITR 235], the Senior Counsel for the Revenue contended that the debt incurred by the assessee to its directors is not a debt incurred in relation to the asset. However, on going though these decisions, we find these are rendered in the context of considering deduction under Section 48(i) of the IT Act for the purpose of computation of capital gains. In our view, these decisions have no application to consider the scope of Section 2(m) of the Wealth Tax Act. 

6. The position canvassed on behalf of the revenue is that debt was incurred for the purpose of arranging working capital and it is not for acquiring land for the purpose of retaining it. Admittedly, funds borrowed by the assessee from the directors was utilised to discharge mortgage debt in favour of the bank and, in February 1995, liability to bank was discharged by releasing the mortgage executed in favour of the bank. Since the debt was incurred for releasing charge over the property, the assessee claimed that the said debt created in favour of directors as a debt in relation to the property the mortgage over which was released by utilising borrowed funds. 

7. Since factual position is not in controversy the short question to be considered is whether borrowal from directors for releasing charge over the property in the form of mortgage is a debt incurred in relation to the asset. The Tribunal upheld assessee's contention by holding that when the funds borrowed from directors were utilised for discharging bank liability which led to lifting mortgage and release of the property the debt should be taken as incurred in relation to the asset. 

8. After hearing both sides and on going through the provision above stated, we are of the view that the debt incurred "in relation to the asset" in the definition clause of "net wealth" should enjoy a wide meaning to cover all debts incurred for acquiring, securing and retaining the property free of charge. If the assesee had not borrowed funds from the directors and released the mortgage over the property the bank was absolutely free to attach and sell the property in exercise of it's mortgage right and recover the arrears which was more than double the actual amount paid under one time settlement to release the charge. Therefore, what the assessee company had done by borrowing funds from the directors and by settling mortgage debt is to release the property and thereby to protect the property and retain it to the assessee. So much so, the debt incurred directly for releasing the mortgage over the property can safely be treated as debt incurred in relation to the property. We, therefore, uphold the finding of the Tribunal in this regard. However, it is needless to mention that the deduction called for is only the amounts used from out of borrowed funds for releasing the mortgage over an extent of land within the urban area, which was only brought to wealth tax. In other words, whatever portion of the debt availed from the directors by the assessee which was used proportionately for releasing the mortgage over the land outside the urban area cannot be allowed as a deduction. 

With this clarification, we dismiss the appeals filed by the Revenue. 

Sd/- C.N. RAMACHANDRAN NAIR, JUDGE 

Sd/- BABU MATHEW P. JOSEPH, JUDGE. 

krs.