1995 (11) TMI 66 - HC - Wealth-tax

Summary

Issues:
1. Interpretation of section 2(m)(ii) of the Wealth-tax Act, 1957 regarding disallowance of loans raised against fixed deposits.
2. Application of Circular No. 1070 issued by the Board in determining taxing liability.

Analysis:
The case involved a reference at the instance of the Revenue regarding the correctness of disallowing liabilities on loans raised against fixed deposits under section 2(m)(ii) of the Wealth-tax Act, 1957. The assessees, co-sharers in a business, had claimed full deduction of liabilities in their wealth-tax assessment, which was initially reduced by the Wealth-tax Officer. The Commissioner of Wealth-tax (Appeals) allowed the full deduction, questioning the reduction made by the Wealth-tax Officer without providing reasons. The specific issue under consideration was the disallowance of loans raised against fixed deposits, separate from the liability pertaining to the business. The Tribunal held that the loans, being smaller in comparison and not wholly exempt assets, could not be disallowed under section 2(m)(ii) of the Act.

The Revenue relied on a decision by the Full Bench of the Madras High Court and a judgment by the High Court in a related matter. The Madras High Court's decision stated that only the portion of debt secured on partially exempted assets should be disallowed. On the other hand, the assessees' counsel referred to a decision of the Rajasthan High Court and Circular No. 1070 issued by the Board. The circular emphasized allowing deductions for debts secured on partially exempt assets in a manner beneficial to the assessee, illustrating with an example related to house property exemptions.

The Court acknowledged the relevance of the circular in determining taxing liability and held that the view taken by the Tribunal was partially incorrect. Following the circular's guidance, the Court directed that the taxing liability should be calculated in accordance with the circular's principles. Therefore, the reference was accepted, and the judgment was made in favor of the assessees based on the application of Circular No. 1070 issued by the Board.