B.K. Mehta J.
1. A short but interesting problem which has been posed before us is : what is the valuation of encumbered urban asset for purposes of levy of additional wealth-tax under Paragraph C of the Schedule to the wealth-tax Act. The problem arises in the following circumstances :
The relevant assessment years are 1965-66 and 1966-67. The assessee, Smt. Shirinbanoo, Sherali, was the owner of immovable property situated at Carmichael Road, Bombay, known as 'Rushila building'. The building is situated on a leasehold land with leasehold rights for a period of 999 years commencing from October 1, 1954. The ground rent for the land is Rs. 15, 600 per annum. The plot of land over which this building is constructed admeasures about 1,400 sq. metres. The building has six floors with a ground floor which is being used as a basement while the remaining five floors have two residential flats on each floor. The assessee disclosed the valuation of the building at Rs. 9,00,000 (Rupees nine lakhs). The Wealth-tax Officer was of the opinion that the value of the plot of land as assessed by him on the basis of the ground rent was Rs. 4,00,000 (Rupees four lakhs). Though the total of the valuation of the land plus the valuation of the building works out to Rs. 13,00,000 (Rupees thirteen lakhs), the Wealth-tax Officer has valued the immovable property at Rs. 13,25,000. No explanation has been given to us why there was an addition of Rs. 25,000 in the valuation of the property in question. The assessee took the matter in appeal before the Appellate Assistant commissioner, where the same contention was urged on behalf of the assessee that no separate valuation for the land should be taken inasmuch as the entire building was rented out by the assessee and the property valuation should be made with reference to the rental value thereof. The Appellate Assistant commissioner, however, reduced the valuation of the land from Rs. 4,00,000 to Rs. 2,50,000, thereby allowing a reduction of Rs. 1,50,000. It was also contended before the Appellate Assistant Commissioner that a proper reduction of the amount for which the building was mortgaged by the assessee with the Life Insurance Corporation of India should be allowed. The Appellate Assistant Commissioner noted that the loan taken from the Life Insurance Corporation by mortgaging the building was utilised for the purchase of shares and not for purposes of acquisition, repair or improvement of the property. He, therefore, disallowed the claim of the assessee on that count and held that the amount of Rs. 4,00,000 should not be allowed to be deducted from the valuation of 'Rushila building' under clause (c) of Paragraph A read with rule 1 of Paragraph B of Part I to the Schedule of the Wealth-tax Act. The Appellate Assistant Commissioner, therefore, partially allowed the appeal of the assessee by deducting the amount of Rs. 1,50,000 from the valuation of the land on which the building in question is standing. Both the parties, therefore, went in appeal before the Appellate Tribunal from the order of the Appellate Assistant Commissioner. The contention on behalf of the assessee before the Tribunal was that as against the valuation of Rs. 9,00,000 on account of the building, a deduction of Rs. 4,00,000, being the amount of mortgage debt, should be allowed. On behalf of the revenue the contention was that the Appellate Assistant commissioner was in error in allowing the deduction of Rs. 1,50,000 in the valuation of the land. There were other contentions also on behalf of the assessee before the Tribunal with which we are not concerned in this reference. The Tribunal considered that the original amount of the mortgage debt was Rs. 4,00,000 in the assessment year 1964-65, but it was reduced to Rs. 3,60,000 and Rs. 3,20,000 on the valuation dates relevant to assessment years 1965-66 and 1966-67, respectively. The Tribunal noted the fact that in the case before it, the mortgage was for securing payment of amount advanced by way of loan to the assessee and since the property was subject to the mortgage, a part of the value of the interest of the assessee in the property was transferred to the mortgagee and, therefore, to that extent the value of the assessee's interest in the property had decreased. The Tribunal was of the opinion that the quantum of mortgage debt can reasonably be taken as a measure of reduction in the value of the assessee's interest in the property. The Tribunal rejected the contention urged on behalf of the revenue that the mortgage amount was not utilised by the assessee for purposes of acquisition, repair or improvement of the building on the ground that it would not detract from the factual position that there has been a diminution in the assessee's interest in the property because there was a mortgage on it. The Tribunal, therefore, was of the opinion that, in the circumstances, the assessee was justified in claiming that for purposes of determining the value of the assessee's interest in the building in question on the relevant valuation date, the amount of mortgage debt should be deducted from the value of the property as a whole. The Tribunal, therefore, accepted the assessee's claim that the amount of the respective mortgage debts be deducted from the value of the property determined at Rs. 9,00,000 for finding out the value of the building for purposes of additional wealth-tax on urban asset under clause (c) of Paragraph A read with rule 1 of Paragraph B of Part 1 to the Schedule of the Wealth-tax Act. In that view of the matter, the Tribunal allowed the appeal of the assessee and dismissed the appeal of the revenue. At the instance of the Commissioner of Wealth-tax, the following question has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the assessee was entitled to reduction of mortgage debt of -
(i) Rs. 3,60,000 for the assessment year 1965-66, and
(ii) Rs. 3,20,000 for the assessment year 1966-67
from the value of 'Rushila Building' for the purposes of charging tax under the provisions of clause (c) of Paragraph A read with rule 1 of Paragraph B of Part 1 of the schedule to the Wealth-tax Act, 1957, in addition to the wealth-tax chargeable under paragraph A of Part I of the said Schedule ?'
2. The pertinent question which, therefore, arises in this reference is : how an encumbered asset situated in the scheduled urban area should be valued for purposes of charging additional wealth-tax on the said urban asset
3. On behalf of the revenue, it was urged that the real question is, when does the concept of debt enter into the computation of net wealth Does it enter at the first stage of the valuation of the asset or at the stage of deduction of the debt for purposes of computation of the net wealth In the submission of the learned advocate for the revenue, the secured debt could not figure at the first stage when the valuation of an asset is to be made for purposes of levy of additional wealth-tax on an urban asset under clause (c), Paragraph A, of the Schedule to the Wealth-tax Act, 1957. It was urged on behalf of the revenue that having regard to the scheme adopted in the assessment year 1971-72 for the first time, for purposes of evaluating urban asset, a provision of deduction on account of a secured debt was made. Since no such deduction was permissible in the relevant assessment years, namely, 1965-66 and 1966-67, the Tribunal was clearly in error in allowing such a deduction for purposes of evaluating the urban asset.
4. On behalf of the assessee these contentions were sought to repelled by urging that what is to be evaluated in the latest case is the encumbered assest or more precisely the right or interest of the assessee in such assest. In other words, the valuation which is to be made either for purposes of wealth-tax on the net wealth of the assessee or for; lapse is the calculation of a part of interest of an assessee in the encumbered assest. Such valuation of the assest in question, according to the learned advocate of the assessee is to be made having regard to the provisions contained in section 7 of the Wealth-tax Act. According to the learned advocate of the assessee in the hands of the mortgagor the asset is to be regarded as subject to the charge and it should valued at first ascertaining the market value of the said property, as if it were free ascertaining the market value of the encumbrance and then deduction the amount of encumbrance the balance would be the value of encumbered asset. As far as the mortgage is concerned, the asset would be includible in his net wealth would be the outstanding principle mount under the mortgage transaction.
5. In order that we may be able to appreciate the rival contentions in proper perspective it would be necessary to advert to a few relevant provision which have a bearing on the question.
6. Section 3 of the Wealth-tax Act is the charging section, which provides that subject to the other provisions contained in the Wealth tax Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule to the Wealth-tax Act. What is 'net wealth' has been defined in section 2(m) of the said Act. The relevant portion reads as under :
''Net wealth' means the amount 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 the 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.'
7. The term 'assets' has been defined in section 2(e) as to include property of every description, movable or immovable, but does not include those which have been enumerated in sub-clauses (1) and (2) of the said clause (c). How the value of an asset is to be determined is provided in section 7 of the Wealth-tax Act. The value of any asset other than cash is to be estimated for purposes of the said Act as the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date subject to any rules made in this behalf. Clause (c) of Paragraph A of the Schedule prescribes rates of additional wealth-tax on an urban asset. It reads as under :
'(c) In addition, in the case of every individual and Hindu undivided family, where the net wealth of the individual or Hindu undivided family includes the value of any assets, being building or land (other than business premises), or any right in such building or land, situated in any area falling in category A or category B or category C or category D specified in rule 2 of Paragraph B, tax at the following rate or rates computed with reference to the value of such assets determined in accordance with rule 1 of the said Paragraph B.'
8. The said clause thereafter prescribes the different slabs of rates having regard to the total value of such asset. Now, the total value of be determined as the aggregate amount by which the value of such assets included in the net wealth of an individual or Hindu undivided family which are situated in any area falling in the category specified in column thereof exceeds the amount specified there against it in column 2. In rule 1 the category of area as well as the minimum value of the assets not liable to tax are mentioned. Category A includes the area, the population of which together with the population of the contiguous municipalities and cantonments according to the census held in the year 1961, exceeds sixteen lakhs of persons. The minimum amount of the value of the asset which is exempt from levy of this additional tax for category A is Rs. 5,00,000.
9. The net effect of clause (c) of Part I read with rules 1 and 2 of Paragraph B of the Schedule to the Wealth-tax Act is that where asset being building or land or any right in such building or land situated within the area of category A exceeds of the valuation of Rs. 5,00,000, the excess value thereof the is subjected to levy of additional wealth-tax at the rates prescribed for the respective slabs under clause (c) of the said Schedule.
10. It is against the background of these provisions that the revenue contends that the assessee was not entitled not was the Tribunal justified in allowing the deduction of the amount of mortgage debt outstanding on the respective valuation dates in the assessment years under reference for purposes of evaluation the encumbered asset in question. The main emphasis laid on behalf of the revenue was that section 7 of the Wealth-tax Act is merely a machinery provided for valuation of an asset. But it is really section 3, which is a charging section, which levies tax on the net wealth of an assessee. In computing the net which of an assessee what is to be borne in mind, according to the revenue, is only the amount by which the aggregate value computed in accordance with the provisions of the Act of all assets wherever situated is in excess of the aggregate value of all debts owed by the assessee on the said valuation dates and while aggregating the value of all debts of the assessee that debt which is secured on a property which is not chargeable to wealth-tax is to be excluded. It was, therefore, urged that while assessing an assessee to additional levy of wealth-tax on the nit wealth is defeated. We are afraid we cannot accede to this submission made on behalf of the revenue for the simple reason that when one computes the aggregate value of the net wealth, one deducts the value of all debts owed by the assessee on the valuation date from the value computed in accordance with the provisions of the Welath-tax Act of all the assets wherever situated. It, therefore, follows that if an asset is not brought to the charge of Wealth-tax, the debt which has been secured on such property cannot be included in the debts for the purpose of the computation of the computation of net wealth of an assessee. We have not been able to appreciate the contention which has been urged on behalf of the revenue that because a debt which is secured on a property cannot be included in the debts for purpose of computation of net wealth if such property is not brought to tax, it follows that while assessing the valuation of an urban asset, namely, a building or a land or a right in such building or land which is included in the net wealth, the amount of debt which is secured on that property cannot be excluded for purposes of valuation of such property.
11. The ambit of section 2(m) of the Wealth-tax Act had come for consideration in Spencer & Co. Ltd. v. Commissioner of Wealth-tax, where the Madras High Court was concerned with the question of deduction, under section 2(m) of the Wealth-tax Act, of Rs. 31,26,000, being the amount the assessee, Spencer & Company, agreed the pay by way of consideration for purchase of sundry assets of M/s. Keliner & Co. Ltd., whose majority shares also were formerly agreed to be acquired by the assessee-company. Since it was claied and adjusted against the cost of acquisition of shares in the liabilities side of its balance-sheet, the Madras High Court observed that the liability contemplated by sub-clause (ii) of the clause (m) of section 2 should be such as would not merely relate to the debt in respect of the property not chargeable to tax but goes further and charges and impounds said that the liability incurred in purchasing the assets in Keliners was secured on the shares in the sense that debt could be collected from or shares. This decision of the Madras High Court has been confirmed the Supreme Court in Commissioner of Wealth-tax v. Spencer & Co. Ltd. Mr. Kaji, the learned advocate on behalf of the revenue, therefore, attempted to persuade us that the exception in section 2(m) of the Wealth-tax Act indicates that debts even though secured would go in increase to aggregate value of the debts and not reduce the aggregate value of the assets. We are of the opinion that Mr. Kaji has while urging this contention lost sight of the pertinent point that what is to be evaluated is not the assets simpliciter but the asset which is encumbered. In our opinion where an asset which has been brought to charge of wealth-tax is an encumbered asset, for purposes of determining the value of such asset, the amount of debt which is charged on that property has to be excluded for purposes of evaluating the said asset. It is no doubt true that net wealth, according to section 2(m) of the Act, is the amount by which the aggregate value of any assets of a person exceeds the aggregate value of his debts. However, the according the section 7 subject to any rules made in that behalf, the value of any asset, other than cash, would, for purposes of the Act, be the price which in the opinion of the Wealth-tax Officer it could fetch if sold in the open market on the valuation date. It is, therefore, clear to us that while which is to be estimated and in estimating such valuation what the taxing officers have to bear in mind is that price which such asset would fetch if sold in the open market on the valuation date. It is no doubt true that for purposes of determining the net wealth which is the basis of the liability of wealth-tax, the amount the by which is the aggregate value of debt is to be looked into. But none the less, while estimating the valuation of an encumbered asset, the price which such asset would fetch, if sold in the open market, is first to be ascertained and the only method of evaluating an encumbered asset is to consider the valuation of the asset less the valuation of encumbrance thereon. Mr. Kaji has drawn our attention to the Statement of Objects and Reasons of the amendment which has been brought in the scheme of additional wealth-tax on the urban asset from 1971. In rule 2 of Paragraph B what deductions are to be made for purposes of determining the value of an urban asset have been prescribed. Rule 2 provides :
'2. In determining, for the purposes of item (3) of Paragraph A, the value of any urban asset :-
(a) any debt (whether secured or not) incurred for the purpose of acquiring, improving, construction, repairing renewing of reconstructing such asset shall be deducted from the gross value of such asset :
(b) other debts which are deductible in computing the net wealth shall be deducted from the gross value of such asset (as reduced by the debts, if any, under clause (a) only, if and to the extent that, such debts exceed the aggregate gross value of assets other than urban assets.'
12. The argument on behalf of the revenue was that for purposes of levy of additional wealth-tax on an ascertained asset in the relevant years under reference, that is, 1965-66 and 1966-67, the principle of excluding any debt incurred for purposes of acquiring, improving, etc., any urban asset for purposes of evaluating such asset would not be relevant, inasmuch as no such provision was there in rule 1, Paragraph B, which determined the value of such asset in the relevant assessment year of 1965-66 and 1966-67. We do not think that this submission of Mr. Kaji is well founded. It is no doubt true that from the assessment year 1971-72 a clear provision has been made for exclusion of a debt incurred for purposes of acquiring, improving, etc., an urban asset while evaluating such asset. But that would not have any bearing on the question with which we are concerned in this reference as to what should be the valuation of an encumbered urban asset for purposes of determining levy of additional wealth-tax. On a plain reading of rule 2(a) of Paragraph B which has been made effective from the assessment year 1971-72 it is clear that it permits deduction of any debt incurred for purposes of acquiring, improving, constructing, renewing or reconstructing an urban asset while valuing such asset. It does not provide for the inclusion of any debt which is incurred for the above purposes irrespective of the fact whether it is charged on the property or not. In that view of the matter, therefore, the contention of the revenue that exclusion of a debt charged on the property is not permissible while evaluating an encumbered asset is not well founded. In our opinion, as observed above, while aggregating the value of all assets for purposes of computation of net wealth the value of a particular encumbered assest is the price which it would fetch if sold in the open market that is relevant valuation date, it cannot be said that the valuation of the as set free of encumbrance is the market value thereof. It is only after excluding the amounts of mortgage debt which is the valuation of the encumbrance that one get the valuation of an encumbered asset. In that view of the matter, therefore, we are of the opinion that the Tribunal was perfectly justified in reaching the conclusion that while estimating the value of encumbered asset with which it was concerned in the particular assessment years in reference, the assessee was entitled to claim deduction of the amount of the mortgage debt for purposes of evaluating the encumbered asset.
13. The result is that we answer the question referred to us in the affirmative and in favour of the assessee and against the revenue. The revenue shall pay costs of this reference to the assessee.
14. Question answered in the affirmative.