1. For the assessment year 1972-73, the following question has been referred to this court under. s. 27(1) of the W.T. Act :
'Whether, on the facts and circumstances of the case, the debt of Rs. 36,000 owing by the assessee to the Life Insurance Corporation of India, as on the relevant valuation date, was one which was not to be deducted from the aggregate value of the assets of the assessee for computing the net taxable wealth for the assessment year 1972-73 ?'
For the assessment year 1973-74, the question referred runs as follows :
'Whether, on the facts and circumstances of the case, the debt of Rs. 56,485 owing by the assessee to the Life Insurance Corporation of India, as on the relevant valuation date, was one which was not to be deducted from the aggregate value of the assets of the assessee for computing the net taxable wealth for the assessment year 1973-74 ?'
2. We shall first take up for consideration the reference for the assessment year 1972-73. The assessee borrowed Rs. 40,000 from the Life Insurance Corporation of India on March 10, 1971, on the security of his house bearing door No 3, Ganesh Street, Gopalapuram, Madras, where he was residing. He invested Rs. 30,000 out of the said amount of Rs. 40,000 in fixed deposit with Canara Bank for a period of one year on March 12, 1971. The deposit was repayable on March 12, 1972. In the meantime, he borrowed moneys from the said bank on the security of the said fixed deposit and the borrowed amount were utilised as follows :
(1) Rs. 5,600 was utilised in purchasing a plot at Ambattur.
(2) Rs. 17,500 was advanced as loan to the firm in which he was a partner.
(3) Rs. 6,000 advanced as loan to the company in which be was a director.
(4) Rs. 500 deposited with the Industries Department of the Government of Madras.
3. The amounts due in respect of these loans were adjusted as against the fixed deposit when it matured.
4. The assessee filed a return in which he deducted the sum of Rs. 36,000 being the amount owed to the LIC of India on the valuation date, he having repaid a sum of Rs. 4,000 prior to the said date. The WTO valued the residential house at Rs. 80,000, and after deducting the sum of Rs. 36,000 being the amount due by the assessee to the LIC of India the balance of Rs. 44,000 representing the value of the house was left out of account under s. 5(1)(iv) of the W.T. Act. The WTO did not accept the contention of the assessee that the debt of Rs. 36,000 was to be deducted in ascertaining the taxable net wealth.
5. The assessee appealed to the AAC who held that once it was seen that the debt in question had been secured by the mortgage of the residential house which was exempted under s. 5(1)(iv), the debt could not be allowed as a deduction under s. 2(m)(ii) of the W.T. Act, 1957.
6. The assessee appealed to the Tribunal. It held by reference to s. 2(m)(ii) that though the assessee had utilised the money borrowed from the LIC for acquiring certain taxable assets the debt in question was one secured by the mortgage of the residential house and continued to be so and that since such residential house was not chargeable to tax under s. 5(1)(iv) the debt could not be allowed under s. 2(m)(ii) of the Act. The assessee has challenged this conclusion of the Tribunal in the present reference.
7. Section 3 of the W.T. Act provides for a charge in respect of the net wealth for every assessment year, on the corresponding valuation date of every individual and HUF. Section 4 provides for the inclusion of certain assets as belonging to the individual in computing his net wealth. Section 5 provides for exemptions in respect of certain assets, and, to the extent relevant, it runs as follows :
'5. (1) Subject to the provisions of sub-section (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 house belonging to the assessee........'
8. In the provision as it was in force prior to the amendment by the Finance (No 2) Act, 1971, with effect from April 1, 1972, there were certain further words in clause (iv) of s. 5(1) and those words were 'and exclusively used by him for residential purposes'. These words were omitted with the result that the assessee gets an exemption with reference to one house or part of a house belonging to him. Section 2(m) defines 'net wealth' and it runs to the extent relevant as follows :
'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.'
9. It is unnecessary to refer to the rest of the provisions. Clause (ii) of s. 2(m) previously read is as follows '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'. At the time, when the amendment was made in 1964 by the W. T. (Amend.) Act, 1964, the memorandum accompanying the Bill stated that the amendment was formal and was intended to make the exclusion more precise. The result of these provisions in the present case is to exempt the value of the net asset, namely, the house property valued at Rs. 80,000. Section 2(m)(ii) provides for the exclusion of the debts secured on, or incurred in relation to, any property in respect of which wealth-tax is not chargeable under the Act. In the present case, the house property valued at Rs. 80,000 was not chargeable to wealth-tax and the debt which was secured on the said property is not liable to be allowed as deduction. The assessee in submitting the return did not include the house property in No. 3, Ganesh Street, Gopalapuram, on the ground that the property was below one lakh of rupees as provided under s. 5(1)(iv) of the W.T. Act. Therefore, on a proper reading of s. 2(m)(ii) of the W.T. Act, it would be clear that the assessee would not be eligible for the deduction claimed with reference to the debt which was secured on the exempted property.
10. However, the learned counsel for the assessee contended that the exemption regarding the residential house is not exemption of an asset but only of an amount, and that if s. 5(1)(iv) is so construed, then it would be clear that there is no security on any exempted asset, as such in the present case. The contention appears to run counter to the specific provision of s. 2(m)(ii) read with s. 5(1)(iv) of the W.T. Act and s. 5(1)(iv) as already extracted provides for an exemption with reference to a house or part of a house belonging to the assessee. There is a proviso which runs as follows :
'Provided that, where the value of such house or part exceeds one hundred thousand rupees, the amount that shall not be included in the net wealth of the assessee under this clause shall be one hundred thousand rupees.'
11. The learned counsel contended that where the value of the house exceeds rupees one hundred thousand then what would be exempt would only be a sum of rupees one hundred thousand and that, therefore, what would be exempt would only be the amount and not any property as such. His further point was that s. 3 levies tax only on net wealth which under s. 2(m) meant only the amount by which the aggregate value of the assets exceeds the aggregate value of the debts.
12. We are not concerned with a case where the house property exceeds the sum of rupees one hundred thousand. However, as rightly pointed out by the learned counsel, the interpretation that we have to place on the section would have to be uniform so as to cover cases where the value of the property exceeds the sum of rupees one hundred thousand. Section 5(1)(iv) provides for a ceiling on the exemption upto a sum of rupees one hundred thousand, and what is exempted is the property but the exemption is taken away proportionately, where the value of the property exceeds rupees one lakh. If so understood, then even in a case where the debt is taken on the security of the house property which exceeds the sum of rupees one lakh, the assessee would not be eligible for the deduction of the debt, at any rate up to a limit of a lakh, as it would be secured on a property which was exempt from assessment to that extent.
13. Section 5(1) itself in its opening portion makes it clear that certain assets are not to be included in the net wealth of the assessee. Therefore, the exemption is either with reference to an asset as such or with reference to an amount as such. Looked at either way, wherever the debt is secured on such an asset, then the debt would have to be excluded from consideration under the provision of s. 2(m)(ii); there is no escape.
14. The Allahabad High Court had to consider a similar claim for deduction of a debt in Jiwan Lal Virmani v. CWT : 66ITR338(All) . In that case, the assessee had taken loan on the security of a life insurance policy. The life insurance policy was exempted from assessment under s. 5(1)(iv) of the W.T. Act. That section provided that the right or interest of the assessee in any policy of insurance before the moneys covered by the policies become due and payable to the assessee should not be included in the net wealth of the assessee. In construing s. 2(m)(ii) in relation to s. 5(1)(iv), the Allahabad High Court held that the loans secured on the insurance policies which were exempted, and utilised for acquiring taxable assets, were not deductible in computing the net wealth. Though the learned editor of the Income Tax Reports had added a footnote to this decision stating that the points involved required a deeper consideration, he has not stated as to how the point was not correctly decided or what other considerations had to be taken into account. At that time, the provision of s. 2(m)(ii) was slightly differently worded and as seen earlier instead of the word 'chargeable', the word 'payable' was used. In other words, the word 'chargeable' was substituted, for the word 'payable', by the amendment. We do not consider that there is any substantive change so as to give a different interpretation from what was placed on the provision by the Allahabad High Court in the decision cited above.
15. Even under the present law the opening words of s. 5(1) contain the expression 'payable' as would be clear from the following :
'Subject to the provisions of sub-section (1A) wealth-tax shall not be payable by an assessee in respect of the following assets.'
Section 2(m) even as amended uses the word 'chargeable'. The Legislature obviously considered that the words 'chargeable' and 'payable' are inter-changeable words.
16. We bestowed some thought during the course of arguments, on why the Legislature after having used the word 'payable' in s. 5(1) thought it necessary to change the same word used in s. 2(m)(ii) and substitute it by 'chargeable'. The reason is not quite clear. We find that in the scheme of the Act, there is absolutely no significant difference between 'chargeable' and 'payable'. The word 'chargeable' is used in relation to an asset and the word 'payable' in connection with the assessee. Any asset with reference to which wealth-tax can be charged on it and no tax is 'payable' by an assessee on it. Section 5(1) brings within its fold two ways of granting exemptions. One is where wealth-tax is not payable by an assessee, and the other where the asset is to be excluded in the computation of 'net wealth'. In our opinion, the decision of the Allahabad High Court is not based on any peculiar significance attached to the word 'payable' and would apply even to the provision as amended. The fact that the decision had to interpret clause (vi) of s. 5(1) is not also material, because both sub-cls. (iv) as well as (vi) are designed for the same purpose.
17. Mr. Seetharaman, the learned counsel appearing for the assessee, submitted that the amount having been invested in a taxable asset, the debt in relation to it should be allowed to be deducted in the assessment. What he overlooked is that s. 2(m) had excluded the debt from consideration under the W.T. Act. There is no provision by which this excluded debt stages a comeback or re-entry for consideration again in the scheme of taxation. The scheme of the Act is to take the net wealth of assessee on the basis of the value of the assets after deducting all the debts other than certain debts which stand excluded by the provision. This is one such excluded debt.
18. The next submission of the learned counsel was that, r. 2E discloses the intention of the draftsman with reference to s. 2(m). In other words, the contention was that we must read s. 2(m) in the manner done in r. 2E. Rule 2E was notified as a rule by the W.T. (2nd Amend.) Rules, 1965. The rules were designed for the purpose of valuation of the assets of a business as a whole. Section 7(1) of the W.T. Act provides that any asset other than cash should be estimated to be the price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date. Sub-s 2(a) of s. 7 provides that :
'Notwithstanding anything contained in sub-section (1), -
(a) where the assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth-tax Officer may, instead of determining separately the value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date and making such adjustments therein as may be prescribed.'
19. The rules were framed with a view to make the prescription contemplated by s. 7(2)(a). Rule 2E provides that certain amounts shown as liabilities in the balance-sheet should not be taken into account for the purposes of r. 2E. Rule 2A provides that where the WTO determines, under s. 7(2)(a) the net value of the asset having regard to the balance-sheet of the business, he should make the adjustments specified in rr. 2B to 2G. Rule 2E provides that certain amounts shown as liabilities in the balance-sheet are not to be taken into account for the purpose of r. 2A. Clause (d) of the said rule provides that any debt owed by the assessee which has been specifically utilised for acquiring n asset in respect of which wealth-tax is not payable under the Act would be one of the items. This rule does not appear to run counter to the construction we are placing, or bring out of draftsman's intention to be different from what we have stated above.
20. The contention of the learned counsel is also contrary to the well-accepted rules of interpretation. It is well settled that a statute should not be understood by reference to the rules, as the rules are the creatures of statute. The rule making authority is the executive, and the intentions of the Legislature is not necessarily what is attributed to it by the executive.
21. Section 7(2) under which the rule relied on has been framed does not also say that the provision therein overrides every other provision of the Act, except sub-s (1). Therefore, the other provisions of the Act, would have to be taken into account and one such provision is s. 2(m). Implicit in the contention of the learned counsel is the suggestion that from the exclusion in r. 2E one has to read a positive right of inclusion of a debt for the purposes of deduction under s. 2(m). We do not consider that a rule can be so stretched as to mean the contrary of what it says and give an implied authority to allow a deduction of an item which does not fall to be considered by it. The result is that the question as framed for the assessment year 1972-73 is to be answered in the affirmative and in favour of revenue.
22. We shall now consider the reference relating to the assessment year 1973-74. For this year, the assessee claimed deduction of a sum of Rs. 56,485 being a loan due to the LIC; out of this amount a sum of Rs. 32,000 was secured by mortgage of the assessee's house property and the balance of Rs. 24,485 was secured against the life insurance policy taken by the assessee. The WTO disallowed the deduction and the AAC confirmed the said order. The Tribunal also rejected the claim relying on s. 2(m)(ii). As far as the debt on the security of the house property is concerned, the matter is concluded by our decision for the assessment year 1972-73. As far as the debt borrowed on the security of policy is concerned, the matter is governed by the decision of the Allahabad High Court in Jiwan Lal Virmani v. CWT : 66ITR338(All) which we have followed earlier in this judgment. The result is that the question referred for the second year has also to be answered in the affirmative and in favour of the revenue. The revenue will be entitled to its costs. Counsel's fee is Rs. 500 (one set).