Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of sub- cl. (ii) of s. 2(m) were not applicable to the assessees case for the assessment years 1970-71 and 1971-72 ?

T. D. SUGLA, J.:

The Tribunal has, at the instance of the CIT, 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- cl. (ii) of s. 2(m) were not applicable to the assessees case for the assessment years 1970-71 and 1971-72 ?”

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 asst. yr. 1970-71 by spending Rs. 1,43,789 which he withdrew from the partnership firm, M/s 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 Like in the earlier year, the amount was also withdrawn from the partnership firm.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 WTO 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 WTO 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 s. 5(1)(iv) of the WT Act. Therefore, to that extent, the debt was in relation to an asset not chargeable to wealth-tax and was hit by s. 2(m)(ii) and could not be allowed as such.

It was reiterated before the AAC that, even after availing of the exemption under s. 5(1)(iv) of the WT Act, “property” was charged to wealth-tax in value to the extent of Rs. 85,000 for the asst. yr. 1970-71 and Rs. 99,000 for the assessment year 1971-72. The debt, it was contended, did not fall within the ambit of s. 2(m)(ii). It was pointed out that, on the valuation date relevant to the asst. yr. 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 AAC 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 s. 2(m)(ii) were not applicable in the case. For the asst. yr. 1971-72, the AAC followed his order for the asst. yr. 1970-71. Agreeing with the orders of the AAC, the Tribunal dismissed the Departmental appeals.

The disallowance out of the debit balance in the assessee’s account in the books of the partnership firm was made by the WTO under s. 2(m)(ii) of the WT Act to the extent of the amount of exemption, i.e., Rs. 1,00,000 in both the years. The AAC and the Tribunal, on the other hand, held that the provisions of s. 2(m)(ii) were not attracted in this case. It is, therefore, necessary to refer to the provisions of s. 2(m)(ii) of the WT 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) 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 s. 5(1)(iv) of the WT Act. It is, therefore, desirable to refer to that provision also : “5. (1) Subject to the provisions of sub-s. (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” 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 s. 2 (m) (ii). From the manner in which the provisions of s. 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 s. 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 asst. yr. 1970-71 and Rs 99,000 for the asst. yr. 197172.

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 vs. CWT (1967) 66 ITR 338, the Gujarat High Court in the case of Apoorva Shantilal (HUF) vs. CWT (1982) 135 ITR 182, the Madras High Court in the case of T. V. Srinivasan vs. CWT (1980) 123 ITR 464, the Madhya Pradesh High Court in the case of CWT vs. Premnarayan Garg (1982) 134 ITR 315 which was followed by the same Court in the case of CWT vs. Narayandas J. Hemani (1983) 143 ITR 87 and in the case of Rajkumar Singh Kasliwal vs. CWT (1983) 143 ITR 597 (MP) and the Andhra Pradesh High Court in the case of Mohd. Ashroff Khan vs. 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 s. 5(1)(vi), the debt secured thereon was hit by the provisions of s. 2(m)(ii). In some cases, a view was canvassed that, by the amendment w.e.f. 1st April, 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 (supra) 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.

The issue arising in the present case precisely came up for consideration before the Madras High Court in the case of T. V. Srinivasan vs. CWT (supra). 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 s. 2(m)(ii) r/w s. 5(1)(iv) of the WT Act. When a similar question again came up for consideration before the Madras High Court in the case of CIT vs. 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 s. 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 s. 2(m)(ii). The Madras High Court followed its above decision in its subsequent decision in CWT vs. 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 vs. CWT (supra) on the one side and CIT vs. M. N. Rajam (1982) 133 ITR 75 (Mad) and CWT vs. Ch. Satish (1982) 133 ITR 834 (Mad), on the other. The Full Bench, in the case of CIT vs. 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-ta 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. Sec. 2(m) of the WT 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. Sec. 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 WT Act.” Balasubrahmanyan J., in his dissenting judgment, however, held (head-note) :

“Sec. 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 s. 2(m)(ii), the connected debts go out of the reckoning. But if the properties are not comprehended by s. 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. Sec. 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 s. 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.”

We have carefully considered the judgments referred to above. In our judgment, the language of the provisions, i.e., s. 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 s. 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 dissent-ing judgment in the Full Bench case of the Madras High Court in CIT vs. K. S. Vaidyanathan (supra) and the views expressed by that Court in its earlier two decisions in CIT vs. M. N. Rajam (1982) 133 ITR 75 (Mad) and CWT vs. 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 vs. Sanwarmal Shivkumar (1988) 171 ITR 377. It was held therein that the Department was bound to follow the circulars issued by the CBDT and that the Tribunal’s order was in conformity with Circular No. 1070 dt. 28th June, 1977, issued by the CBDT. 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 s. 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.

No order as to costs.

[Citation :186 ITR 91]