1993 (7) TMI 42 - HC - Wealth-tax

Agricultural Land, Deduction, Exemptions, Firm, Net Wealth Of Firm For Determining Net Wealth Of Partner, Wealth Tax

Summary

Issues Involved:
1. Exemption under section 5(1)(iva) of the Wealth-tax Act.
2. Deduction of debt liability to the Federal Bank in computing the net wealth of a firm.
3. Applicability of section 2(m)(ii) of the Wealth-tax Act to debts secured on agricultural land.

Issue-wise Detailed Analysis:

Issue 1: Exemption under section 5(1)(iva) of the Wealth-tax Act
The first issue was whether the assessee is entitled to an exemption of Rs. 1,50,000 under section 5(1)(iva) of the Wealth-tax Act. The Tribunal had allowed this exemption, which was disputed by the Revenue. The court referred to the Full Bench decision in CWT v. Smt. Keathikamal Kumari Varma [1989] 179 ITR 543, which held that the value of a partner's share in agricultural lands is includible in the net wealth, and the assessee is entitled to exemption under section 5(1)(iva) up to Rs. 1,50,000. Therefore, the court answered this question in the affirmative and in favor of the assessee.

Issue 2: Deduction of Debt Liability to the Federal Bank in Computing the Net Wealth of a Firm
The second issue was whether the entire liability to the Federal Bank should be allowed against the net wealth of the firm in the computation under rule 2 of the Wealth-tax Rules. The court examined sections 3 and 4 of the Wealth-tax Act and rule 2 of the Wealth-tax Rules, which provide that the net wealth of the firm has to be determined by deducting all enforceable debts. The court noted that the firm is not the assessee; the net wealth of the firm is calculated to determine the value of a partner's interest. The court cited the Full Bench decision in CWT v. Smt. Keathikamal Kumari Varma, which held that all debts, including those excluded under section 2(m)(ii), must be considered in determining the net wealth of the firm. The court also referenced the Division Bench decision of the Allahabad High Court in CWT v. Padampat Singhania [1973] 90 ITR 418, which supported this view. Consequently, the court answered this question in the affirmative and in favor of the assessee.

Issue 3: Applicability of Section 2(m)(ii) of the Wealth-tax Act to Debts Secured on Agricultural Land
The third issue revolved around whether the loan taken by the firm from the Federal Bank, secured on agricultural land, should be excluded under section 2(m)(ii) of the Wealth-tax Act. Section 2(m)(ii) excludes debts secured on properties not chargeable to wealth-tax. The court discussed whether agricultural land is chargeable to wealth-tax. The court noted that agricultural land is chargeable to wealth-tax, but an exemption up to Rs. 1,50,000 is provided under section 5(1)(iva) read with section 5(1A). The court considered the Full Bench decision of the Madras High Court in CIT v. K. S. Vaidyanathan, which had differing views on partial exemption and the deductibility of debts. The court agreed with the dissenting opinion of Balasubrahmanyan J., which held that section 2(m)(ii) does not provide for partial abatement of debts. The court also agreed with the Bombay High Court's decision in CWT v. Vasantkumar Govindji Kotak [1990] 186 ITR 91, which supported the view that agricultural land is chargeable to wealth-tax. Therefore, the court concluded that the debt in question is not incurred in relation to a property not chargeable to wealth-tax and answered this question in the affirmative and in favor of the assessee.

Conclusion:
The court answered all three questions in the affirmative and in favor of the assessee. The judgment affirmed that the assessee is entitled to the exemption under section 5(1)(iva), the entire debt liability to the Federal Bank should be deducted in computing the net wealth of the firm, and the debt secured on agricultural land does not fall under section 2(m)(ii) of the Wealth-tax Act.