2013 (4) TMI 50 - HC - Wealth-tax

Deduction under 2(m) of the Wealth Tax Act - The assessee company borrowed loans from the directors for the purpose of discharging bank loans and releasing mortgage over the land - Held that - On going through the provision of the definition clause of net wealth above - We are of the view that the debt incurred in relation to the asset should enjoy a wide meaning to cover all debts incurred for acquiring, securing and retaining the property free of charge. If the assesee had not borrowed funds from the directors and released the mortgage over the property the bank was absolutely free to attach and sell the property in exercise of it s mortgage right and recover the arrears which was more than double the actual amount paid under one time settlement to release the charge. So much so, the debt incurred directly for releasing the mortgage over the property can safely be treated as debt incurred in relation to the property. We, therefore allowed the deduction and uphold the finding of the Tribunal in this regard - The Revenue s appeal is dismised .

Summary

Issues:
1. Whether funds borrowed by the company from directors for releasing mortgage over the property are allowable as a deduction in the determination of net wealth under the Wealth Tax Act.

Analysis:

The judgment in question involved a consideration of whether funds borrowed by a company from its directors for releasing a mortgage over its property could be claimed as a deduction in the computation of net wealth under the Wealth Tax Act. The company owned land with buildings where a tile and bricks factory operated, but financial difficulties led to the factory being defunct for years. The company borrowed funds to settle a bank loan and lift the mortgage on the property. The Assessing Officer disallowed the deduction, stating it was not incurred in relation to the land. The Tribunal allowed the claim, leading to the appeals by the Revenue.

The Court noted that the Wealth Tax Act was amended in 1992, focusing on non-productive assets like urban land for wealth tax assessment. The dispute centered on whether the borrowed funds for releasing the mortgage over the land could be considered a deduction in net wealth under Section 2(m) of the Act. The Court examined the definition of "net wealth" under Section 2(m) and emphasized the aggregate value of assets exceeding debts incurred in relation to those assets.

The Revenue argued that the debt was for working capital, not acquiring land. However, the Court distinguished previous decisions under the Income Tax Act, stating they did not apply to the Wealth Tax Act's scope. The borrowed funds were used to discharge the mortgage debt, leading to the property's release. The Tribunal found the debt was incurred in relation to the asset, as it facilitated the property's retention by releasing the mortgage.

The Court held that the debt incurred for releasing the mortgage over the property should be considered in relation to the asset, as it protected and retained the property for the assessee. The borrowed funds prevented the bank from attaching and selling the property to recover arrears. The Court upheld the Tribunal's decision, allowing the deduction for funds used to release the mortgage over the urban land brought under wealth tax, excluding portions related to land outside the urban area.

In conclusion, the Court dismissed the Revenue's appeals, affirming that the funds borrowed from directors and utilized to release the mortgage over the urban land were deductible in the computation of net wealth under the Wealth Tax Act, emphasizing the debt's relation to the asset's protection and retention.