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G.N. Ghorpade Vs. Wealth-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Judge
Reported in(1984)9ITD842(Pune.)
AppellantG.N. Ghorpade
RespondentWealth-tax Officer
Excerpt:
.....of an adverse judgment of the high court. what the awardee, i.e., the huf, did was to take out a fixed deposit for the amount of rs. 2,44,989 with the bank of india pune, placing it as a pledge with the bank, on the security of which the bank in turn furnished guarantee as required by the district judge, pune. subsequently, there was a partial partition of the huf whereby the aforesaid fixed deposit of rs. 2,44,989 was allotted as his share to the assessee. it was the assessee's case before the wto that in the circumstances narrated as above, the fixed deposit was encumbered inasmuch as it was pledged with the bank as security for the bank guarantee and, therefore, the market price on the respective valuation dates for the three years under appeal could only be ascertained by.....
Judgment:
1. to 6. [These paras are not reproduced here as they involve minor issues].

7. The next contention raised in the appeals is in regard to the addition of the enhanced compensation of Rs. 2,44,989 as an asset in the determination of the net wealth. The facts are that the assessee was a member of the HUF of the same name who was the owner of a piece of land at R.S. 45, Parvati, Pune. This land was acquired by the Government and the compensation for the acquisition awarded by the Land Acquisition Officer (LAO) amounted to Rs. 1,14,000. The owner-HUF of the land filed an appeal against this award disputing the quantum of compensation as inadequate ; in the appeal proceedings before the District Judge, enhanced compensation for the acquisition was determined at Rs. 2,44,989 and this amount was paid to the HUF. At the same time since the Government filed an appeal against the order of the District Judge to the High Court, the awardee was required in terms of the Court's order to furnish a bank guarantee for refunding the amount of the enhanced compensation in the event of an adverse judgment of the High Court. What the awardee, i.e., the HUF, did was to take out a fixed deposit for the amount of Rs. 2,44,989 with the Bank of India Pune, placing it as a pledge with the bank, on the security of which the bank in turn furnished guarantee as required by the District Judge, Pune. Subsequently, there was a partial partition of the HUF whereby the aforesaid fixed deposit of Rs. 2,44,989 was allotted as his share to the assessee. It was the assessee's case before the WTO that in the circumstances narrated as above, the fixed deposit was encumbered inasmuch as it was pledged with the bank as security for the bank guarantee and, therefore, the market price on the respective valuation dates for the three years under appeal could only be ascertained by discounting the liability on account of the encumbrance. If that were done, it was the assessee's case before both the WTO as well as the Commissioner (Appeals) that the market price would be reduced to nil since the value of the liability was equal to the amount of fixed deposit. The WTO negatived the contentions put forward by the assessee.

His reasoning was that in the first instance the amount of the compensation had become due to the HUF as per the order of the District Judge and had been collected by the HUF, so that the mere circumstance that the order of the District Judge was disputed in the High Court would not in any way create any liability on the valuation dates.

Secondly, the real question, according to him, was whether the amount of compensation lying to the credit of the HUF in the bank by way of fixed deposit belonged to the HUF or not and the ownership of the asset by the HUF was in no way affected by the mere contingency that the amount of the compensation would require to be refunded in the event of an adverse judgment of the High Court. Thirdly, the WTO held that in any case so far as the assessee was concerned, he had received fixed deposit as his share on a partial partition effected in his HUF and that the encumbrance or burden created by the pledge could not be said to be a liability of the assessee, but was that of the HUF. In this view the WTO included the full value of the fixed deposit as an asset of the assessee in the computation of his net wealth. The Commissioner (Appeals) confirmed this inclusion and appears to have been particularly impressed with the last argument advanced by the WTO for the inclusion.

8. The assessee's case before us is that the authorities below have failed to appreciate the facts of the case and the legal consequences flowing from lodgment of the fixed deposit by way of pledge with the bank to obtain the guarantee. On behalf of the department, it is urged that apart from the reasons advanced by the WTO and confirmed by the Commissioner (Appeals), the liability, if any, for refunding the amount in the event of an adverse judgment of the High Court would not affect the market value of the fixed deposit as on the valuation date because the pledge would be redeemable only upon the sale of the security, i.e., the fixed deposit receipt, and in determining the sale price as on the valuation date, any liability or expenditure referable to a point of time subsequent to the sale was not to be taken into consideration in the determination of the market value of the asset as on the valuation date. For this proposition, Shri K.A. Sathe seeks to rely on a ruling of the Madras High Court in the case of T.S. Srinivasa Iyer v. CWT [1976] 104 ITR 625 and a decision of this Bench in the case of Aphali Pharmaceuticals Ltd. v. ITO [IT Appeal Nos. 48 to 50 (Pune) of 1982, dated 28-6-1983].

9. In our view, the question which arises for consideration in order to determine whether the asset constituted by the fixed deposit receipt was liable to be included in the net wealth of the assessee and if so, at what amount, are : firstly, what was the nature and quality of the encumbrance or burden created by the pledge Was this encumbrance or burden created on the property itself, i.e., the fixed deposit receipt If so, did the assessee acquire the asset, i.e., the fixed deposit receipt subject to the encumbrance We have, therefore, to consider in the first instance as to what are the legal consequences of property which is given over as pledge. We may refer with advantage to the concept and meaning of 'pledge' in law to Prem's Judicial Dictionary, Vol. III, 1964 edition : Pledge is a delivery of goods to the creditor as security for his debt and the right to the property vests in the creditor so far as is necessary, to secure a debt ... A pledge, in the ordinary sense of the term, is a case in which money is advanced on goods or chattels which are given into the possession of the person who advances money on them ... In order that there should be a valid pledge there must be (a) a contract in relation to an identified chattel to be delivered to the pledgee as security, (b) actual delivery of possession of the identified chattel in pursuance of the contract.

Therefore, when the HUF pledged the fixed deposit receipt with the bank, the possession and control over the asset was transferred to the bank to provide security for the guarantee given by the bank to the District Court for repayment of the additional compensation in the event of an adverse judgment of the High Court. What, therefore, remained of this asset with the HUF Obviously the title of ownership did remain but what would be the value of this title when the property itself stood transferred to the bank In our view, in these circumstances, there could hardly be any value or price ascribable to such a property, if it were put to sale in the open market. It needs to be emphasised that the encumbrance or burden was created by reason of the pledge of the property, i.e., the fixed deposit itself, and it was not a personal obligation or liability of the pledgor-HUF. The assessee's case, in our view, is clearly comparable to the case of an encumbered leasehold interest, as was the subject-matter of decision by the Supreme Court in the case of CWT v. P.N. Sikand [1977] 107 ITR 922.

Respectfully following the principles laid down by the Supreme Court in that case, namely, that market price as on the valuation date of property which is subject to an encumbrance or burden can only be determined after discounting the value of such encumbrance or burden, we hold that the authorities below were in error to ignore the fact that the fixed deposit receipt in question could be valued without discounting the encumbrance which lay upon it by reason of the pledge.

10. We may now examine the contention put forth by Shri Sathe that the liability for redemption of the pledge would not affect its sale price since that liability would have arisen only if the fixed deposit receipt was sold or transferred. We find no substance whatsoever in this contention. This is not a case of a liability arising on the sale of an asset or property such as a liability for tax on capital gains as was considered in the ruling of the Madras High Court in T.S. Srinivasa Iyer's case (supra) on which Shri Sathe places reliance nor is it a case of accrual of income by way of interest on a fixed deposit where the fixed deposit was furnished by way of security on a bond, as was considered by the Tribunal in the order to which he refers. In the instant case, it. was the property itself which was encumbered by reason of the pledge and, therefore, its value could be determined only after discounting the value of such encumbrance or burden.

11. It now remains to consider whether the property claimed to be acquired by the assessee on the partial partition was free of the encumbrance. On the facts, it is amply clear that there was no question of the liability for refund of the compensation having been retained by the HUF while the fixed deposit was allotted free of the encumbrance to the assessee. What came to the hands of the assessee was the fixed deposit receipt itself and that lay pledged with the bank, as has been certified by the bank as per its certificate dated 6-12-1980. On the facts, therefore, we hold that the fixed deposit receipt was bereft of value were it to be sold as on the valuation dates under consideration in terms of Section 7(4) of the Wealth-tax Act, 1957. We, therefore, set aside the orders of the authorities below on this point and direct that the amount of Rs. 2,44,989 added on this account in the net wealth be deleted.


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