1981 (1) TMI 281 - HC - Income Tax

Summary

Issues Involved:
1. Simultaneous application of Sections 5(1)(iv) and 2(m)(ii) of the Wealth-tax Act, 1957.
2. Exemption under Section 5(1)(iv) for a part of the house used for residential purposes.
3. Deductibility of mortgage debt under Section 2(m)(ii).

Detailed Analysis:

1. Simultaneous application of Sections 5(1)(iv) and 2(m)(ii) of the Wealth-tax Act, 1957:
The case revolves around the simultaneous application of Section 5(1)(iv) and Section 2(m)(ii) of the Wealth-tax Act, 1957, during the wealth-tax assessment for the year 1971-72. Section 5(1)(iv) exempts one house or part of a house used exclusively for residential purposes, subject to a monetary limit of Rs. 1,00,000. Section 2(m)(ii) specifies that debts secured on assets not chargeable to wealth-tax shall not be deducted in computing net wealth. The court clarified that the Wealth-tax Act taxes net wealth, not assets per se, meaning exemptions apply to the value of assets, not the assets themselves.

2. Exemption under Section 5(1)(iv) for a part of the house used for residential purposes:
The assessee owned a house, lived in one-half, and rented out the other half. The house was valued at Rs. 1,23,000, with a mortgage debt of Rs. 40,403. The Wealth-tax Officer (WTO) exempted the value of the residential half (Rs. 61,500) under Section 5(1)(iv). The court emphasized that the exemption under Section 5(1)(iv) applies to the value of the house or part thereof, not the physical asset itself. The court rejected the department's argument that the exemption attaches to the asset itself, irrespective of the quantum of exemption.

3. Deductibility of mortgage debt under Section 2(m)(ii):
The WTO bifurcated the mortgage debt, disallowing half (Rs. 20,202) under Section 2(m)(ii) and allowing the rest. The Tribunal ruled that the entire mortgage debt (Rs. 40,403) was deductible. The court agreed with the Tribunal, stating that Section 2(m)(ii) does not contemplate a debt secured on a partially exempt asset. The court reasoned that the legislative intent was to prevent double benefits-exemption of asset value and deduction of secured debt-but since the debt was secured on a house partially exempt and partially taxable, it did not fall neatly into the categories envisaged by Section 2(m)(ii).

The court concluded that the debt secured on a property, which is neither wholly taxable nor wholly exempt, is not clearly provided for in the statute. The court also rejected the argument that a debt must be disallowed in whole if secured on a partially exempt asset, emphasizing that the statute does not contemplate such a situation.

Conclusion:
The court answered the question of law in favor of the assessee, affirming that the entire mortgage loan on the property should be deducted, even though the loan was secured on a property half of which was exempted. The assessee was awarded costs, with counsel's fee set at Rs. 500.