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M.V. Subbiah Vs. Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1983)4ITD397(Mad.)
AppellantM.V. Subbiah
RespondentWealth-tax Officer
Excerpt:
.....taken by the assessee from the life insurance corporation (lic. the assessee was a co-owner of a house property valued at rs. 4,75,000. this property was mortgaged on 24-10-1973 and a loan of rs. 1 lakh was taken. since the assessee had a half share in the house and the value thereof at rs. 2,37,500 was taken into account in computing the net wealth, the assessee claimed that the sum of rs. 50,000 being his share of the liability outstanding should be deducted therefrom. the wto rejected the claim on the ground that the loan was secured on an exempted asset and, therefore, not deductible. on appeal, the aac relied on the decision of the madras high court in the case of t.v. srinivasan v. cwt [1980] 123 itr 464 to confirm the order of the wto.5. in the appeal before us, it was contended.....
Judgment:
1 to 3. [These paras are not reproduced here as they involve minor issues.] 4. The second point in dispute relates to the claim to deduct the liability of Rs. 50,000 which was the share of the loan taken by the assessee from the Life Insurance Corporation (LIC. The assessee was a co-owner of a house property valued at Rs. 4,75,000. This property was mortgaged on 24-10-1973 and a loan of Rs. 1 lakh was taken. Since the assessee had a half share in the house and the value thereof at Rs. 2,37,500 was taken into account in computing the net wealth, the assessee claimed that the sum of Rs. 50,000 being his share of the liability outstanding should be deducted therefrom. The WTO rejected the claim on the ground that the loan was secured on an exempted asset and, therefore, not deductible. On appeal, the AAC relied on the decision of the Madras High Court in the case of T.V. Srinivasan v. CWT [1980] 123 ITR 464 to confirm the order of the WTO.5. In the appeal before us, it was contended on behalf of the assessee that the value of the asset exceeding the exempted limit of Rs. 1 lakh, the liability should be deducted from the taxable portion or at any rate, proportionately from the value included in the net wealth. On the other hand, it was pointed out on behalf of the revenue that the assessee had also given the insurance policy as a collateral security and, therefore, the deduction could not be allowed in view of the provisions of Suction 2(m)(ii) of the Wealth-tax Act, 1957 ('the Act').

6. On a consideration of the rival submissions we are of the opinion that the assessee is entitled to succeed on this point also. Under Suction 2{m){ii), debts which are secured on or which have been incurred in relation to a property not chargeable to tax shall not be deducted in computing the net wealth. The debt of Rs. 50,000 was secured on the house property which was mortgaged to the LIC. The life insurance policy was given only as collateral security. It was pointed out by the Madras High Court in the case of Spencer & Co. Ltd. v. CWT [1969] 72 ITR 33 that the precise scope and intention of Suction 2(m)(ii) is only to exclude that liability which has nothing to do with property chargeable to tax. In the present case the liability has everything to do with the asset which is chargeable to tax because the liability was secured by mortgage of a house property which was charged to tax. Since the liability is thus inextricably attached to a chargeable asset, it is not possible to consider the same liability to be attached to another asset not liable to tax and thus, may that this liability has nothing to do with any property chargeable to tax (sic).

Factually, the liability goes to reduce directly the value of the asset which is chargeable to tax and that liability cannot, therefore, be excluded from the computation of net wealth. Even otherwise the life insurance policy offered as a collateral security cannot come within the scope of expression 'secured' in Suction 2(m)(i7). It is common ground that the policy has only been pledged to the LIC so that in case the assessee should make any default in the payment of the loan and the LIC is unable to recover the amount from the house property which is mortgaged, it can retain the policy as a collateral security. As explained by the Supreme Court in the case of Lallen Prasad v. Rahmat Ali 1967 AIR SC 1322, a contract to pawn a chattel even though money is advanced on the faith of it is not sufficient in itself to pass special property in the chattel to the pawnee. Delivery of the chattel pawned is a necessary element in making of a pawn. But delivery and advance need not be simultaneous and a pledge may be perfected by delivery after the advance is made. The satisfaction of the debt or engagement extinguishes the pawn and the pawnee on such satisfaction is bound to redeliver the property. The two ingredients of a pledge are : (i) that it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee ; and (ii) a pawnee has only a special property in the pledge but the general property therein remains in the pawner and wholly reverts to him on discharge of the debt. The right to property vests in the pledgee only so far as it is necessary to secure the debt. In this sense a pawn or pledge is an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed. From this it will be apparent that the life insurance policy remained the property of the assessee and the LIC had no immediate right in it. Moreover, since even the right to treat it as security could accrue to the LIC only in the case the mortgaged property was not sufficient to satisfy the debt, as on the valuation date, the LIC cannot be said to have even a special property in the policy pledged. Furthermore, Since the loan with the LIC was secured by a mortgage of the property, the LIC is bound to sue the assessee for the return of the loan on the basis of the mortgage and once the LIC exercises the option to sue, it will not be in a position to sell the policy as the policy pledged has to be retained as collateral security in view of the decision of the Supreme Court.

Therefore, not only is there no conveyance of any general interest in the property to the LIC but even the special property which may be conveyed, namely, the right to sell the thing pledged will be of no effect since the LIC is bound to sue on the mortgage. In the circumstances, the encumbrance created by the pledge of the policy is not only contingent but is of too remote a consequence to establish any inextricable nexus between the life insurance policy and the loan taken from the LIC within the scope of Suction 2(m)(ii). We are, therefore, of the opinion that the pledge of the life insurance policy as a collateral security could not make the loan given by the LIC as a liability secured on the Life Insurance Policy on the valuation date.

7. We must now confine the consideration of this liability with regard to the house property only. Admittedly, the house property is exempt only to the limit of Rs. 1 lakh and the balance of the value is liable to tax. Admittedly the liability exceeds the value of the property liable to tax. The question whether in such a situation the liability should be allowed as a deduction or not in the light of Suction 2{m)(ii) is not new to the department. By an Instruction No. 1070, dated 28-6-1977 the Central Board of Direct Taxes had already adopted the view that is beneficial to the assessee in the following terms : The Board have also examined the question as to how the deduction in respect of debts which are secured on or have been incurred in relation to any property which is partly exempt under Section 5(1) of the Act is to be allowed. The Board are of the view that in the absence of any clear indication in the Act, the deduction for such debts will have to be allowed in the manner which is most beneficial to the assessee. Accordingly if, for instance, a debt of Rs. 1 lakh has been secured on a house property the value of which is Rs. 1,50,000 and exemption of Rs. 1 lakh is allowed under Section 5(1)(iv) of the Act, the debt will have to be allowed to the extent of Rs. 50,000 being the value of the house property which is otherwise includible in the net wealth." It is argued by the department that this view may not be in conformity with the correct legal position as explained by the decisions of the High Courts. But it has been held by the Supreme Court in K.P. Varghese v. 1TO [1981] 131 ITR 597, that Board's circulars are binding on the department even if they deviate from the true legal position. Having held out to the assessees that a liability secured on a partly exempted asset would be deducted from the taxable value of the asset, it is not possible for the department to resile from that view. The department is, therefore, bound to carry out the assurance given to the assessees and the exemption has to be worked out on the basis of the instructions quoted above. We, therefore, deem it fit to set aside the orders of the authorities below on this point also and direct the WTO to recompute the net wealth. The appeal is treated as allowed.


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