1988 (5) TMI 5 - SC - Wealth-tax

Whether the loan, Qua-Raza-E-Hasana is includible in assessee s net wealth - Whether Tribunal was justified in accepting that the amount of Rs. 4 lakhs was in the nature of Quaraza-e-Hasana - Whether, Tribunal was justified in holding that the amount of Rs. 4 lakhs cannot be included in the total assets of the assessee

Summary

Issues Involved:
1. Whether the amount of Rs. 4 lakhs can be included in the total assets of the assessee.
2. Whether the amount of Rs. 4 lakhs was in the nature of 'Quaraza-e-Hasana' despite Rs. 1,21,500 out of Rs. 4 lakhs being repaid.

Detailed Analysis:

Issue 1: Inclusion of Rs. 4 lakhs in Total Assets
The primary issue was whether the loan of Rs. 4 lakhs advanced by the assessee to Faizullabhai Mandlawala should be included in the assessee's total assets for wealth-tax purposes. The assessee initially included this amount in the net wealth but later sought its exclusion, claiming it was a "Quaraza-e-Hasana," a debt of good faith under Muslim law, which carried no legal obligation for repayment. The Wealth-tax Officer and Appellate Assistant Commissioner rejected this claim, bringing the sum to tax. However, the Income-tax Appellate Tribunal accepted the assessee's appeal, holding that the loan lacked legally enforceable repayment obligations. The High Court upheld this view, leading to the Revenue's appeal to the Supreme Court.

The Supreme Court found that no authoritative text or precedent in Muslim law was cited to establish the concept and incidents of "Quaraza-e-Hasana." The Court noted that the literature on Islamic banking does not support the non-repayment attribute attributed to "Quaraza-e-Hasana." The Court emphasized that the admitted existence of a debt implies an obligation to repay, and no legal bar to the remedy was pleaded. Therefore, the Court concluded that the loan should be included in the assessee's wealth.

Issue 2: Nature of 'Quaraza-e-Hasana'
The second issue was whether the loan could be considered 'Quaraza-e-Hasana,' especially given that Rs. 1,21,500 out of Rs. 4 lakhs had been repaid. The Tribunal and the High Court accepted the assessee's claim that the loan was a 'Quaraza-e-Hasana,' a debt of goodwill with no legal obligation for repayment. However, the Supreme Court found that the special incidents of 'Quaraza-e-Hasana' were not established by any tangible evidence or authoritative texts. The Court referred to Islamic banking literature, which describes 'Qard-Hasan' as an interest-free loan but does not exclude the obligation to repay.

The Court also rejected the High Court's reliance on the concept of "Hiba-ba-shart-ul-eiwaz," a form of gift with a stipulation for return, which implies a legal obligation for repayment. The Court concluded that the debt, though a "passive debt," required treatment as due and payable to the assessee. The Court emphasized that the burden was on the assessee to prove that the transaction excluded legal obligations, which was not established.

The Court also addressed an argument by the assessee's counsel that the transaction did not intend to create legal obligations, citing principles from "Chitty on Contracts" and various case laws. However, the Court found this argument unconvincing, noting that the transaction occurred in a commercial context, where the presumption is that legal obligations are intended.

Conclusion
The Supreme Court allowed the appeals, reversing the High Court's view. The Court answered the questions referred for opinion in the negative and in favor of the Revenue, implying that the loan should be included in the assessee's wealth for the relevant assessment years. The Court made no order as to costs.